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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 September 30, 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
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TRADESTATION GROUP, INC.
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(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.)
8050 S.W. 10TH STREET, SUITE 4000, PLANTATION, FLORIDA 33324
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
954-652-7000
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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 NOVEMBER 7, 2002, THERE WERE 40,568,393 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
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TRADESTATION GROUP, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001................................. 3
Consolidated Statements of Operations
Three and nine months ended September 30, 2002 and 2001 (unaudited).................. 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 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................................................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 25
Item 4. Controls and Procedures................................................................. 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................... 26
Item 4. Submission of Matters to a Vote of Security Holders..................................... 26
Item 6. Exhibits and Reports on Form 8-K........................................................ 27
Signature ........................................................................................ 28
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ................................. 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS:
Cash and cash equivalents (Note 5) $ 20,015,710 $ 19,981,591
Receivables from clearing firms 901,713 255,146
Securities owned, at market value 61,710 415,928
Accounts receivable 201,267 330,300
Property and equipment, net 4,251,150 3,224,518
Intangible assets, net 362,728 1,748,096
Other assets 695,347 865,424
------------ ------------
Total assets $ 26,489,625 $ 26,821,003
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 1,805,549 $ 1,596,244
Accrued expenses 7,550,169 6,013,038
Capital lease obligations 1,799,274 1,406,872
Deferred revenue 112,437 347,336
------------ ------------
Total liabilities 11,267,429 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, 42,985,693 and 44,547,316
issued and outstanding at September 30, 2002 and
December 31, 2001, respectively 429,857 445,473
Additional paid-in capital 49,545,485 51,609,498
Accumulated deficit (34,713,456) (34,597,458)
Accumulated other comprehensive loss (39,690) --
------------ ------------
Total shareholders' equity 15,222,196 17,457,513
------------ ------------
Total liabilities and shareholders' equity $ 26,489,625 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Brokerage revenues $ 10,801,693 $ 3,936,895 $ 27,447,539 $ 13,129,729
Subscription fees 1,722,113 2,353,528 4,915,384 7,752,085
Other 577,706 2,884,780 2,640,567 10,994,020
------------ ------------ ------------ ------------
Total revenues 13,101,512 9,175,203 35,003,490 31,875,834
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Clearing and execution costs 3,426,669 1,075,674 7,796,104 4,011,869
Data center costs 1,303,731 1,410,603 3,726,927 4,086,284
Technology development 2,368,758 2,418,505 7,056,519 7,497,188
Sales and marketing 3,027,172 2,681,582 9,772,882 9,022,204
(Recovery of) provision for
insurance loss (1,250,000) 600,000 (1,250,000) 1,350,000
General and administrative 2,227,404 3,777,753 7,647,455 10,967,620
Amortization of intangibles 258,548 1,541,961 772,868 4,602,136
------------ ------------ ------------ ------------
Total operating expenses 11,362,282 13,506,078 35,522,755 41,537,301
------------ ------------ ------------ ------------
Income (loss) from operations 1,739,230 (4,330,875) (519,265) (9,661,467)
OTHER INCOME, net 62,144 83,007 410,441 484,248
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,801,374 (4,247,868) (108,824) (9,177,219)
INCOME TAX PROVISION (BENEFIT) 6,848 (9,233) 7,174 7,409
------------ ------------ ------------ ------------
Net income (loss) $ 1,794,526 $ (4,238,635) $ (115,998) $ (9,184,628)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.04 $ (0.10) $ (0.00) $ (0.21)
============ ============ ============ ============
Diluted $ 0.04 $ (0.10) $ (0.00) $ (0.21)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 43,698,342 44,520,498 44,261,471 44,437,688
============ ============ ============ ============
Diluted 43,791,189 44,520,498 44,261,471 44,437,688
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (115,998) $ (9,184,628)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,252,171 5,829,683
Provision for bad debts -- 714,286
Gain on sale of intangible assets (287,500) --
Compensation expense on stock option grants 37,692 112,770
(Increase) decrease in:
Receivables from clearing firms (646,567) 580,349
Accounts receivable 129,033 (640,186)
Other assets 170,077 (2,116,885)
Income tax receivable -- 8,542,413
Increase (decrease) in:
Accounts payable 209,305 (1,882,851)
Accrued expenses 1,537,131 2,066,092
Income tax payable -- (878,940)
Deferred revenue (234,899) (212,398)
------------ ------------
Net cash provided by operating activities 3,050,445 2,929,705
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,154,356) (515,071)
Purchases of securities owned -- (1,436,103)
Redemption of/proceeds from maturity of securities owned 314,528 1,059,528
Acquisition of data rights and other intangibles (100,000) (150,000)
Proceeds from sale of intangibles 1,000,000 --
------------ ------------
Net cash provided by (used in) investing activities 60,172 (1,041,646)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 21,860 74,461
Common stock repurchase (2,139,181) --
Repayment of capital lease obligations (959,177) (231,472)
------------ ------------
Net cash used in financing activities (3,076,498) (157,011)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 34,119 1,731,048
CASH AND CASH EQUIVALENTS, beginning of period 19,981,591 18,394,996
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 20,015,710 $ 20,126,044
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 171,472 $ 231,359
============ ============
Cash paid for income taxes $ -- $ 900,354
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 1,351,579 $ 1,296,123
============ ============
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 AND NINE MONTHS ENDED SEPTEMBER 30, 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 consolidated 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 consolidated financial position as of September 30, 2002, the consolidated
results of operations for the three and nine months ended September 30, 2002 and
2001, and the consolidated cash flows for the nine months ended September 30,
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) EARNINGS (LOSS) PER SHARE
Weighted average shares outstanding for the three and nine months ended
September 30, 2002 and 2001 are calculated as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares
outstanding (basic) 43,698,342 44,520,498 44,261,471 44,437,688
Impact of dilutive stock options after
applying the treasury stock method 92,847 -- -- --
---------- ---------- ---------- ----------
Weighted average shares
outstanding (diluted) 43,791,189 44,520,498 44,261,471 44,437,688
========== ========== ========== ==========
Stock options and warrants outstanding for the three and nine months ended
September 30, 2002 and 2001, which are not included in the calculation of
diluted earnings (loss) per share because their impact is antidilutive, are as
follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Stock options 5,706,593 5,923,756 6,322,283 5,923,756
========= ========= ========= =========
Warrants expiring June 2004 386,370 386,370 386,370 386,370
========= ========= ========= =========
During the three months ended September 30, 2002, under its stock
repurchase program announced in July 2002, the Company purchased and retired
1,582,700 shares. These shares are weighted for the portion of the three and
nine month periods for which they were outstanding. See Note 9, "Stock
Repurchase Program."
6
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.
(2) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (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.
Securities owned, at market value, currently consist of corporate stock,
which, prior to July 1, 2002, was not publicly traded. Effective July 1, 2002,
the stock became publicly traded and, accordingly, the Company has begun
recording related unrealized gains and losses that are excluded from earnings
and reported in other comprehensive income (loss), as required for
available-for-sale securities.
A reconciliation of net income (loss) to comprehensive income (loss) is as
follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) $ 1,794,526 $(4,238,635) $ (115,998) $(9,184,628)
Unrealized holding losses on
available-for-sale securities (39,690) -- (39,690) --
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 1,754,836 $(4,238,635) $ (155,688) $(9,184,628)
=========== =========== =========== ===========
(3) ACCRUED EXPENSES
Accrued expenses consist of the following as of September 30, 2002 and
December 31, 2001:
SEPTEMBER 30, DECEMBER 31,
2002 2001
---------- ----------
Payroll and related accruals $1,877,200 $1,216,440
Data and exchange fees 1,026,989 887,725
Deferred rent and related concessions 749,562 --
Estimated loss on sublease of facilities 681,807 380,000
Uninsured loss reserves 600,000 550,000
Consulting and professional fees 464,353 620,751
Returns 140,000 546,000
Other 2,010,258 1,812,122
---------- ----------
$7,550,169 $6,013,038
========== ==========
"Other" includes commissions to third parties, clearing deposits, event
termination fees, and other accrued expenses and reserves, none of which
individually exceeds 5% of total liabilities.
7
(4) INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following as of September 30, 2002
and December 31, 2001:
SEPTEMBER 30, 2002
----------------------------------------------
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
----------- ------------ -----------
Purchased technology $ 7,600,000 $(7,533,333) $ 66,667
Customer lists 936,901 (935,295) 1,606
Other 947,900 (653,445) 294,455
----------- ----------- -----------
Total intangible assets $ 9,484,801 $(9,122,073) $ 362,728
=========== =========== ===========
DECEMBER 31, 2001
----------------------------------------------
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
----------- ------------ -----------
Purchased technology $ 7,600,000 $(6,933,333) $ 666,667
Customer lists 2,631,240 (1,902,672) 728,568
Other 847,900 (495,039) 352,861
----------- ----------- -----------
Total intangible assets $11,079,140 $(9,331,044) $ 1,748,096
=========== =========== ===========
In December 2001, based upon its decision to sell brokerage accounts that
did not meet the requirements of its active and institutional trader business
model, the Company recorded a non-cash charge of $1.1 million for impairment of
certain intangible assets previously acquired from Newport Discount Brokerage,
Inc. ("Newport"), reducing the value of the intangible assets to their estimated
fair value of $712,500. During the second quarter of 2002, the Company sold
these intangible assets for $1.0 million in cash, and recorded a gain of
$287,500 on the sale.
The following reconciliation adjusts prior year periods' net loss to remove
amortization expense related to goodwill and workforce that is no longer
amortized effective January 1, 2002 under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2001
----------- -------------
Reported net loss $(4,238,635) $ (9,184,628)
Add back goodwill amortization 102,063 306,189
Add back workforce amortization 166,667 500,000
----------- -------------
Adjusted net loss $(3,969,905) $ (8,378,439)
=========== =============
Reported basic and diluted loss per share $ (0.10) $ (0.21)
Add back goodwill amortization -- 0.01
Add back workforce amortization 0.01 0.01
----------- -------------
Adjusted basic and diluted loss per share $ (0.09) $ (0.19)
=========== =============
(5) COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
As of September 30, 2002, the Company had approximately $3.4 million of
restricted cash, as follows: (i) $2.4 million of cash supporting a ten-year real
property lease agreement; (ii) $734,000 of cash securing a letter of credit,
which secures equipment leases; and (iii) $202,000 of cash securing a credit
card clearing agreement.
8
INSURANCE CLAIM
In June 2001, the Company made a claim of $2.7 million with its 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 in the consolidated balance sheet was fully reserved as of
December 31, 2001, $600,000 and $1,350,000 of which was recorded in the three
and nine months ended September 30, 2001, respectively. On July 25, 2002, the
Company entered into an agreement to settle this claim for $1.25 million,
payment of which was received in August 2002.
LITIGATION
The Company is engaged in routine litigation or other dispute resolution
proceedings, such as arbitration, incidental to, and part of the ordinary course
of, its business. The Company does not believe that the results of any such
pending litigation or proceedings will have a material adverse effect on its
consolidated financial position, results of operations or cash flows. The
Company decided, as of June 1, 2002, to no longer carry errors or omissions
insurance that covers third-party claims made by brokerage clients or software
subscribers as a result of alleged human or system errors, failures, acts or
omissions. This decision was made due to significant increases in premium rates,
deductibles and coinsurance amounts, reductions in available per occurrence and
aggregate coverage amounts, and the unavailability of policies that sufficiently
cover the types of risks that relate to the Company's business.
CAPITAL LEASE OBLIGATIONS, OPERATING LEASE COMMITMENTS & PURCHASE
OBLIGATIONS
A summary of the Company's capital and operating leases (net of subleases)
as well as its purchase obligations (relating to television advertising) as of
September 30, 2002 is as follows:
Capital Lease Operating Purchase
Year Obligations Leases Obligations Total
----- ------------- ------------ ------------- ------------
2002 (Q4) $ 417,010 $ 801,690 $ 317,985 $ 1,536,685
2003 1,188,260 3,136,748 -- 4,325,008
2004 186,484 2,818,291 -- 3,004,775
2005 7,520 2,237,551 -- 2,245,071
2006 -- 2,042,922 -- 2,042,922
Thereafter (cumulative) -- 9,876,490 -- 9,876,490
----------- ----------- ----------- -----------
Total $ 1,799,274 $20,913,692 $ 317,985 $23,030,951
=========== =========== =========== ===========
(6) NET CAPITAL REQUIREMENTS
TradeStation Securities is subject to the Securities and Exchange
Commission uniform net capital rule (Rule 15c3-1), which requires the
maintenance of minimal net capital and requires that the ratio of aggregate
indebtedness to net capital, both as defined, shall not exceed 15 to 1. As of
September 30, 2002, TradeStation Securities had net capital of $11.6 million,
which was $11.3 million in excess of its required net capital of $277,000, and a
ratio of aggregate indebtedness to net capital of .36 to 1.
(7) SEGMENT AND RELATED INFORMATION
For the three and nine months ended September 30, 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.
9
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- --------------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
Revenues:
Brokerage services $ 10,710,207 $ 3,936,895 $ 27,294,022 $ 13,129,729
Software products and services 5,181,305 5,238,308 14,052,668 18,746,105
Eliminations (2,790,000) -- (6,343,200) --
--------------- --------------- --------------- ----------------
$ 13,101,512 $ 9,175,203 $ 35,003,490 $ 31,875,834
=============== =============== =============== ================
Income (loss) from operations:
Brokerage services $ 390,847 $ (626,864) $ (8,730) $ 135,211
Software products and services 1,348,383(a) (3,704,011) (510,535)(a) (9,796,678)
---------------- --------------- --------------- ----------------
$ 1,739,230 $ (4,330,875) $ (519,265) $ (9,661,467)
=============== =============== =============== ================
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- ---------------
Identifiable assets:
Brokerage services $ 18,511,135 $ 20,144,278
Software products and services 7,978,490 6,676,725
--------------- ---------------
$ 26,489,625 $ 26,821,003
=============== ===============
-------------
(a) $1.25 million of this amount is from an insurance settlement described in
Note 5.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS
No. 146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS No. 146 nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION
BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING). SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company does not believe that the
adoption of SFAS No. 146 will have a material impact on its consolidated
financial position, results of operations or cash flows.
(9) STOCK REPURCHASE PROGRAM
In July 2002, the Company announced a stock repurchase program authorizing,
at the discretion of management, the use of available cash to purchase from time
to time up to 4 million shares of the Company's common stock in the open market
or through privately-negotiated transactions.
Through September 30, 2002, the Company had purchased and retired 1,582,700
shares at prices ranging from $1.35 to $1.3973 per share, for a total purchase
price of $2.1 million. This included the August 2002 purchase of 1.5 million
shares in a private transaction at a price of $1.35 per share from a former
principal shareholder of onlinetrading.com corp., a company acquired by
TradeStation Group in a December 2000 merger. See Note 10, "Subsequent Event."
(10) SUBSEQUENT EVENT
On October 18, 2002, the Company purchased and retired an additional
2,417,300 shares under its 4 million share repurchase program, thereby
completing the program. The shares were purchased in a private transaction at a
price of $1.40 per share, for a total purchase price of $3.4 million, from the
same former principal shareholder of onlinetrading.com corp. from whom the
Company purchased 1.5 million shares in August 2002.
10
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 are not necessarily indicative 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
SEPTEMBER 30, 2002 SEPTEMBER 30, 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 $ 10,708 $ -- $ 94 $ 10,802 $ 3,937 $ -- $ -- $ 3,937
Subscription fees -- 4,512 (2,790) 1,722 -- 2,353 -- 2,353
Other 2 669 (94) 577 -- 2,885 -- 2,885
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 10,710 5,181 (2,790) 13,101 3,937 5,238 -- 9,175
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Clearing and execution costs 3,427 -- -- 3,427 1,076 -- -- 1,076
Data center costs 2,827 1,267 (2,790) 1,304 -- 1,411 -- 1,411
Technology development 137 2,232 -- 2,369 99 2,319 -- 2,418
Sales and marketing 2,667 360 -- 3,027 1,990 691 -- 2,681
(Recovery of) provision for
insurance loss -- (1,250) -- (1,250) -- 600 -- 600
General and administrative 1,261 966 -- 2,227 1,247 2,531 -- 3,778
Amortization of intangibles -- 258 -- 258 152 1,390 -- 1,542
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 10,319 3,833 (2,790) 11,362 4,564 8,942 -- 13,506
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations $ 391 $ 1,348 $ -- $ 1,739 $ (627) $ (3,704) $ -- $ (4,331)
======== ======== ======== ======== ======== ======== ======== ========
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 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 $ 27,292 $ -- $ 156 $ 27,448 $13,130 $ -- $ -- $ 13,130
Subscription fees -- 11,259 (6,343) 4,916 -- 7,752 -- 7,752
Other 2 2,794 (156) 2,640 -- 10,994 -- 10,994
-------- -------- ------- -------- ------- -------- -------- --------
Total revenues 27,294 14,053 (6,343) 35,004 13,130 18,746 -- 31,876
-------- -------- ------- -------- ------- -------- -------- --------
Operating expenses:
Clearing and execution costs 7,796 -- -- 7,796 4,012 -- -- 4,012
Data center costs 6,380 3,690 (6,343) 3,727 -- 4,086 -- 4,086
Technology development 368 6,689 -- 7,057 126 7,371 -- 7,497
Sales and marketing 8,705 1,068 -- 9,773 5,383 3,639 -- 9,022
(Recovery of) provision for
insurance loss -- (1,250) -- (1,250) -- 1,350 -- 1,350
General and administrative 4,054 3,593 -- 7,647 3,019 7,949 -- 10,968
Amortization of intangibles -- 773 -- 773 455 4,147 -- 4,602
-------- -------- ------- -------- ------- -------- -------- --------
Total operating expenses 27,303 14,563 (6,343) 35,523 12,995 28,542 -- 41,537
-------- -------- ------- -------- ------- -------- -------- --------
(Loss) income from
operations $ (9) $ (510) $ -- $ (519) $ 135 $ (9,796) $ -- $ (9,661)
======== ======== ======= ======== ======= ======== ======== ========
11
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 the key component of our results
of operations and are comprised primarily of brokerage commissions and fees
earned from our clients' brokerage transactions and, to a lesser extent, data
fees earned from brokerage customers using the TRADESTATION 6 online trading
platform and interest earned from interest revenue sharing arrangements with the
brokerage's clearing firms. Brokerage commissions and fees and their related
clearing costs are recorded on a trade date basis as transactions occur. Data
fees and interest are recorded monthly, when earned.
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
income taxes. During the 2001 fourth quarter, we recorded a $4.8 million charge
establishing a full valuation allowance against our previously recorded deferred
income tax assets. As of September 30, 2002, we have approximately $12.1 million
of deferred income tax assets that have been fully reserved, the benefit of
which may be recorded in future periods should realization become more likely
than not.
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 in our consolidated balance sheet was fully
reserved as of December 31, 2001, $600,000 and $1,350,000 of which was recorded
in the three months and nine months ended September 30, 2001, respectively. On
July 25, 2002, we entered into an agreement to settle this claim for $1.25
million, payment of which was received in August 2002. The effect of this
settlement has been recorded in the third quarter of 2002. See "SOFTWARE
PRODUCTS AND SERVICES SEGMENT - OPERATING EXPENSES - (RECOVERY OF) PROVISION FOR
INSURANCE LOSS."
UNINSURED LOSS RESERVES. Each quarter, we continue to evaluate our accruals
for settlements related to pre-merger and legacy brokerage business operations
and claims. As of September 30, 2002, estimates of settlements for such
potential claims and related legal fees were $600,000 and $200,000,
respectively. The ultimate outcome of such potential claims may be substantially
different than our estimates. See "BROKERAGE SERVICES SEGMENT - OPERATING
EXPENSES - GENERAL AND ADMINISTRATIVE."
SUBLEASE OF FACILITIES. During the second quarter of 2002, we completed the
consolidation of our Florida operations to one location. 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 first half of 2002, we increased our estimated loss accrual
by $524,000 to a total of $904,000. During the third quarter of 2002, charges of
$222,000 were applied against this accrual, resulting in a balance of $682,000
as of September 30, 2002.
12
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
OVERALL
Total revenues were $13.1 million for the three months ended September 30,
2002, as compared to $9.2 million for the three months ended September 30, 2001,
an increase of $3.9 million, or 43%, due primarily to an increase in brokerage
revenues, partially offset by a decrease in other revenues (which relate
primarily to our legacy software business, which has been phased out) and, to a
lesser extent, a decrease in subscription fees.
Income from operations was $1.7 million for the three months ended
September 30, 2002, as compared to a loss from operations of $4.3 million for
the three months ended September 30, 2001, an improvement of $6.0 million, or
140%. This improvement related primarily to higher revenues, lower general and
administrative expenses, lower amortization of intangibles (resulting from a
2001 fourth quarter impairment charge that reduced intangibles to their
estimated fair value), and the $1.25 million insurance settlement in the 2002
third quarter related to a $2.7 million loss that had been fully reserved,
$600,000 of which had been reserved in the 2001 third quarter. See "SOFTWARE
PRODUCTS AND SERVICES SEGMENT - OPERATING EXPENSES - (RECOVERY OF) PROVISION FOR
INSURANCE LOSS." This improvement was partially offset by higher clearing and
execution costs associated with the higher revenues.
Other income, net consists primarily of interest income earned on our cash
and marketable securities, offset by interest expense related to capital lease
obligations, as well as other miscellaneous gains and losses. Other income, net
was $62,000 for the three months ended September 30, 2002, as compared to
$83,000 for the three months ended September 30, 2001, a decrease of $21,000, or
25%. This decrease was due primarily to a decrease in interest income related to
lower interest rates, partially offset by lower interest expense associated with
capital lease obligations.
BROKERAGE SERVICES SEGMENT
REVENUES
BROKERAGE REVENUES. Brokerage revenues are comprised primarily of brokerage
commissions and fees earned from our clients' brokerage transactions and, to a
lesser extent, data fees earned from brokerage customers using the TRADESTATION
6 online trading platform and interest earned from interest revenue sharing
arrangements with the brokerage's clearing firms. For the three months ended
September 30, 2002, brokerage revenues were $10.7 million, including brokerage
commissions and fees of $9.6 million, as compared to brokerage revenues of $3.9
million, including brokerage commissions and fees of $3.6 million, for the three
months ended September 30, 2001. This increase of $6.8 million, or 172%, is due
primarily to increased trading volume related to account growth of brokerage
clients who use the TRADESTATION 6 online trading platform. Since the June 27,
2001 launch of the TRADESTATION 6 online trading platform, substantially all new
brokerage customers are provided with access to that platform and use it to
place their trades. During the three months ended September 30, 2002, 95% of
total brokerage revenues were generated from clients using the TRADESTATION 6
online trading platform, as compared to 31% during the three months ended
September 30, 2001.
In April 2002, our new brokerage commission plan - one that charges traders
fees based solely upon the share volume of client trades as opposed to per
ticket charges - became effective. The new plan, as expected, significantly
reduced our commissions per trade. This reduction was partially offset by
charging more brokerage clients monthly data fees. In August 2002, we modified
our price per share plan by reducing the price per share. Additionally, as
compared to the first two quarters of 2002, media advertising expenditures were
reduced during the third quarter of 2002 and are expected to be further reduced
beginning January 2003. Continued price pressure on online brokerage commissions
and fees, as well as our ability to maintain or improve growth with reduced
advertising expenditures, are challenges we expect to face for the foreseeable
future.
13
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 $3.4 million for
the three months ended September 30, 2002, as compared to $1.1 million for the
three months ended September 30, 2001, an increase of $2.4 million, or 219%, due
primarily to increased trading volume related to account growth. Clearing and
execution costs as a percentage of brokerage revenues increased to 32% for the
three months ended September 30, 2002, from 27% for the three months ended
September 30, 2001, due to lower gross margins associated with our new per share
pricing structure, partially offset by improved clearing cost rates provided by
our clearing firms. This trend of reduced margins is expected to continue for
the foreseeable future as more customers convert to our new per share pricing
structure.
DATA CENTER COSTS. Data center costs represent primarily 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. See "TECHNOLOGY DEVELOPMENT" below. Data center
costs for the three months ended September 30, 2002 were $2.8 million. No data
center costs were charged to the brokerage segment during the three months ended
September 30, 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 clients. Technology
development expenses for the three months ended September 30, 2002 were
$137,000, as compared to $99,000 for the three months ended September 30, 2001,
an increase of $38,000, or 38%. Most of the technology costs required for our
brokerage firm to offer and operate a highly sophisticated online trading
platform are borne by its technology affiliate, which licenses that technology
to the brokerage firm pursuant to an intercompany agreement. See "SOFTWARE
PRODUCTS AND SERVICES SEGMENT - OPERATING EXPENSES - TECHNOLOGY DEVELOPMENT."
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel 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 $2.7 million for the
three months ended September 30, 2002, as compared to $2.0 million for the three
months ended September 30, 2001, an increase of $677,000, or 34%. This increase
was due primarily to increased advertising and promotional costs of $348,000 and
increased personnel and related costs of $293,000. However, in the second half
of 2002, we have significantly decreased our media advertising expenditures as
compared to the first half of 2002, and expect to further reduce these
expenditures substantially in 2003.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of costs for administrative personnel such as executive, human
resources, finance, compliance and information technology employees;
professional fees; telecommunications; rent; insurance; and other facility
expenses. General and administrative expenses were approximately $1.2 million
for both the three months ended September 30, 2002 and 2001. Increases in
personnel and related costs of $306,000, increases in telecommunication costs of
$127,000, and increases in facility costs of $108,000 were offset by a decrease
in provisions for uninsured losses of $577,000. See "CRITICAL ACCOUNTING
POLICIES AND ESTIMATES - UNINSURED LOSS RESERVES."
AMORTIZATION OF INTANGIBLES. Historically, amortization of intangible
assets was related to the December 1999 acquisition of certain brokerage
customer accounts, which was accounted for under the purchase method of
accounting. Based upon our decision made in December 2001 to sell those accounts
(as they did not meet the requirements of our active and institutional trader
business model), we
14
determined that these intangible assets were impaired and, therefore, they were
reduced to their estimated fair value. There was no amortization during 2002, as
these intangible assets were held for sale, and then sold during the second
quarter of 2002. Amortization of intangibles for the three months ended
September 30, 2001 was $152,000.
SOFTWARE PRODUCTS AND SERVICES SEGMENT
REVENUES
TOTAL REVENUES. Total revenues were approximately $5.2 million for both the
three months ended September 30, 2002 and 2001. This resulted from an increase
in subscription fees offset by a decrease in other revenues (which relate
primarily to our legacy software business, which has been phased out).
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 licensing to
TradeStation Securities the right to provide this software and data service to
the brokerage customers of TradeStation Securities ("Intercompany Subscription
Fees"). Subscription fees were $4.5 million for the three months ended September
30, 2002, as compared to $2.4 million for the three months ended September 30,
2001, an increase of $2.1 million, or 92%. This increase is due primarily to an
increase in brokerage accounts at TradeStation Securities that resulted in $2.8
million of Intercompany Subscription Fees. Excluding Intercompany Subscription
Fees, subscription fees decreased $631,000, or 27%, due to our December 2000
decision not to actively market subscription services, 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 direct sales of our legacy
client software products. Other revenues were $669,000 for the three months
ended September 30, 2002, as compared to $2.9 million for the three months ended
September 30, 2001, a decrease of $2.2 million, or 77%. 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 2000 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 September 30, 2002 were $1.3 million, as compared to $1.4 million for the
three months ended September 30, 2001, a decrease of $144,000, or 10%. The
decrease is due primarily to lower lease costs associated with the conversion of
certain operating leases to capital leases, partially offset by higher exchange
fees and facility costs.
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 September 30, 2002, as compared to $2.3
million for the three months ended September 30, 2001, a decrease of $87,000, or
4%.
15
SALES AND MARKETING. We no longer actively market software products and
services, the focus of our business being to continue to build an online
brokerage firm for active traders. Sales and marketing expenses have consisted
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 $360,000 for the three months ended September 30, 2002,
as compared to $691,000 for the three months ended September 30, 2001, a
decrease of $331,000, or 48%, due primarily to decreases in personnel and
related costs of $181,000, advertising and promotional costs of $84,000, and
facility costs of $69,000.
(RECOVERY OF) PROVISION FOR INSURANCE LOSS. 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. At that time, we estimated that a provision for
insurance loss should be recorded for $750,000. During the third quarter of
2001, based on ongoing correspondence with the insurance carrier, we increased
this provision for insurance loss by $600,000. In December 2001, the insurance
company formally denied this claim and, accordingly, the receivable recorded in
our consolidated balance sheet was fully reserved. On July 25, 2002, we entered
into an agreement with the insurance company to settle this claim for $1.25
million, payment of which was received in August 2002. Accordingly, we recorded
a recovery of insurance loss of $1.25 million during the third quarter of 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of administrative personnel such as executive, human resources,
finance and information technology employees; professional fees;
telecommunications; rent; other facility expenses; and insurance. General and
administrative expenses were $1.0 million for the three months ended September
30, 2002, as compared to $2.5 million for the three months ended September 30,
2001, a decrease of $1.5 million, or 62%, due primarily to decreases in
professional fees of $533,000, decreases in personnel and related costs of
$508,000, and decreases in facility costs of $500,000.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles includes,
primarily, amortization related to the October 1999 acquisition of Window On
WallStreet Inc., which was accounted for under the purchase method of
accounting, its assets being amortized over their estimated useful lives, which
range from three to four years. Amortization of intangibles also includes
amortization of data rights and other intangibles. Amortization of intangibles
was $258,000 for the three months ended September 30, 2002, as compared to $1.4
million for the three months ended September 30, 2001, a decrease of $1.1
million, or 81%. The decrease is due to a 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 estimated fair value. This
resulted from our decision, made and implemented in the fourth quarter of 2001,
to upgrade all WINDOWONWALLSTREET.COM subscribers to TRADESTATION 6.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
OVERALL
Total revenues were $35.0 million for the nine months ended September 30,
2002, as compared to $31.9 million for the nine months ended September 30, 2001,
an increase of $3.1 million, or 10%, due primarily to an increase in brokerage
revenues, partially offset by a decrease in other revenues, and, to a lesser
extent, a decrease in subscription fees.
Loss from operations was $519,000 for the nine months ended September 30,
2002, as compared to $9.7 million for the nine months ended September 30, 2001,
an improvement of $9.1 million, or 95%. This improvement related primarily to
lower amortization of intangibles (resulting from the 2001 fourth quarter
impairment charge that reduced intangibles to their estimated fair value), lower
general and administrative expenses, higher revenues, and a $1.25 million
insurance settlement in the 2002 third quarter relating to a $2.7 million loss
that had been fully reserved during the prior year, $1.35 million of which had
been reserved through September 30, 2001. See "SOFTWARE PRODUCTS AND SERVICES
SEGMENT - OPERATING EXPENSES - (RECOVERY OF) PROVISION FOR INSURANCE LOSS." This
improvement was partially offset by the higher clearing and execution costs
associated with higher brokerage revenues.
16
Other income, net was $410,000 for the nine months ended September 30,
2002, as compared to $484,000 for the nine months ended September 30, 2001, a
decrease of $74,000, or 15%, due primarily to a decrease in interest income as a
result of lower interest rates, partially offset by a gain of $287,500 recorded
on the sale of legacy customer accounts during the second quarter of 2002.
BROKERAGE SERVICES SEGMENT
REVENUES
BROKERAGE REVENUES. For the nine months ended September 30, 2002, brokerage
revenues were $27.3 million, including brokerage commissions and fees of $25.1
million, as compared to brokerage revenues of $13.1 million, including brokerage
commissions and fees of $12.1 million, for the nine months ended September 30,
2001. This increase of $14.2 million, or 108%, is due primarily to increased
trading volume related to customer account growth fueled by our June 27, 2001
launch of the TRADESTATION 6 online trading platform. During the nine months
ended September 30, 2002, 88% of total brokerage revenues were generated from
clients using the TRADESTATION 6 online trading platform, as compared to 10%
during the nine months ended September 30, 2001.
OPERATING EXPENSES
CLEARING AND EXECUTION COSTS. Clearing and execution costs were $7.8
million for the nine months ended September 30, 2002, as compared to $4.0
million for the nine months ended September 30, 2001, an increase of $3.8
million, or 94%, due primarily to increased trading volume related to account
growth. Clearing and execution costs as a percentage of brokerage revenues
decreased to 28% for the nine months ended September 30, 2002, from 31% for the
nine months ended September 30, 2001, due to improved clearing cost rates
provided by our clearing firms, partially offset by the lower gross margins that
resulted from our new per share pricing structure. Clearing costs as a
percentage of brokerage revenues are expected to increase for the foreseeable
future as more customers convert to our new per share pricing structure.
DATA CENTER COSTS. Data center costs for the nine months ended September
30, 2002 were $6.4 million. No data center costs were charged to the brokerage
segment during the nine months ended September 30, 2001. See "SOFTWARE PRODUCTS
AND SERVICES SEGMENT - REVENUES - SUBSCRIPTION FEES" AND "- OPERATING EXPENSES -
DATA CENTER COSTS."
TECHNOLOGY DEVELOPMENT. Technology development expenses for the nine months
ended September 30, 2002 were $368,000, as compared to $126,000 for the nine
months ended September 30, 2001, an increase of $242,000, or 191%. This increase
is because these expenses did not begin to be incurred until the end of the 2001
second quarter. See "SOFTWARE PRODUCTS AND SERVICES SEGMENT - OPERATING EXPENSES
- TECHNOLOGY DEVELOPMENT."
SALES AND MARKETING. Sales and marketing expenses were $8.7 million for the
nine months ended September 30, 2002, as compared to $5.4 million for the nine
months ended September 30, 2001, an increase of $3.3 million, or 62%. This
increase was due primarily to increased advertising and promotional costs of
$2.2 million and increased personnel and related costs of $1.1 million. However,
we have significantly decreased our media advertising expenditures in the second
half of 2002 as compared to the first half of 2002, and expect to further reduce
these expenditures substantially in 2003.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $4.0
million for the nine months ended September 30, 2002, as compared to $3.0
million for the nine months ended September 30, 2001, an increase of $1.0
million, or 34%. This change is due primarily to increases in personnel and
related costs of $935,000, increases in facility costs of $796,000 (related
mainly to an increase in the estimated loss on the sublease of facilities that
will no longer be occupied) and increases in communication costs of $317,000,
partially offset by a decrease in uninsured loss provisions of $800,000. See
"CRITICAL ACCOUNTING POLICIES AND ESTIMATES - UNINSURED LOSS RESERVES."
17
AMORTIZATION OF INTANGIBLES. Historically, amortization of intangible
assets was related to the December 1999 acquisition of certain customer
accounts, which was accounted for under the purchase method of accounting. Based
upon our decision made in December 2001 to sell those accounts (as they did not
meet the requirements of our active and institutional trader business model), we
determined that these intangible assets were impaired and, therefore, they were
reduced to their estimated fair value. There was no amortization during 2002, as
these intangible assets were held for sale, and then sold during the second
quarter of 2002. Amortization of intangibles for the nine months ended September
30, 2001 was $455,000.
SOFTWARE PRODUCTS AND SERVICES SEGMENT
REVENUES
TOTAL REVENUES. Total revenues were approximately $14.0 million for the
nine months ended September 30, 2002, as compared to $18.7 million for the same
period in 2001, a decrease of $4.7 million, or 25%, due primarily to a decrease
in other revenues, partially offset by an increase in subscription fees.
SUBSCRIPTION FEES. Subscription fees were $11.3 million for the nine months
ended September 30, 2002, as compared to $7.8 million for the nine months ended
September 30, 2001, an increase of $3.5 million, or 45%. This increase was due
primarily to $6.3 million of Intercompany Subscription Fees which resulted from
increased brokerage accounts at TradeStation Securities. Excluding Intercompany
Subscription Fees, subscription fees decreased $2.8 million, or 37%, due to our
December 2000 decision not to actively market subscription services, but rather
focus on the growth of our brokerage business.
OTHER REVENUES. Other revenues were $2.8 million for the nine months ended
September 30, 2002, as compared to $11.0 million for the nine months ended
September 30, 2001, a decrease of $8.2 million, or 75%. 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 2000 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 for the nine months ended September
30, 2002 were $3.7 million, as compared to $4.1 million for the nine months
ended September 30, 2001, a decrease of $396,000, or 10%. The decrease is due
primarily to lower lease costs associated with the conversion of certain
operating leases to capital leases, and lower data distribution fees resulting
from more favorable rates negotiated in the third quarter of 2001, partially
offset by higher facility costs and exchange fees.
TECHNOLOGY DEVELOPMENT. Technology development expenses were $6.7 million
for the nine months ended September 30, 2002, as compared to $7.4 million for
the nine months ended September 30, 2001, a decrease of $682,000, or 9%, due
primarily to lower personnel and related costs of $427,000 and lower facility
costs of $102,000.
SALES AND MARKETING. Sales and marketing expenses were $1.1 million for the
nine months ended September 30, 2002, as compared to $3.6 million for the nine
months ended September 30, 2001, a decrease of $2.5 million, or 71%, due
primarily to decreases in advertising and promotional costs of $1.2 million,
decreases in personnel and related costs of $1.1 million and, to a lesser
extent, decreases in facility costs of $200,000.
18
(RECOVERY OF) PROVISION FOR INSURANCE LOSS. 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. As of September 30, 2001, based on ongoing
correspondence with the insurance carrier, we estimated that a provision for
insurance loss should be recorded in the amount of $1.35 million. In December
2001, the insurance company formally denied this claim and, accordingly, the
receivable recorded in our consolidated balance sheet was fully reserved. On
July 25, 2002, we entered into an agreement with the insurance company to settle
this claim for $1.25 million, payment of which was received in August 2002.
Accordingly, we recorded a recovery of insurance loss of $1.25 million during
the third quarter of 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.6
million for the nine months ended September 30, 2002, as compared to $7.9
million for the nine months ended September 30, 2001, a decrease of $4.3
million, or 55%, due primarily to decreases in personnel and related costs of
$2.1 million, decreases in facility costs of $726,000, decreases in provision
for bad debts of $714,000, and decreases in professional fees of $561,000. The
2001 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 was $773,000 for
the nine months ended September 30, 2002, as compared to $4.1 million for the
nine months ended September 30, 2001, a decrease of $3.4 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 estimated fair value. This resulted from our
decision, made and implemented in the fourth quarter of 2001, to upgrade all
WINDOWONWALLSTREET.COM subscribers to TRADESTATION 6.
VARIABILITY OF QUARTERLY RESULTS
There are several factors that may cause fluctuations in our quarterly
operating results, which could result in significant volatility in our stock
price. Quarterly revenues and operating results of TradeStation Group and its
predecessor companies have fluctuated significantly in the past, and our
quarterly revenues and operating results are likely to fluctuate in the future.
Causes of such significant fluctuations may include, but are not limited to:
o the effect of our new commission pricing structure (which was
implemented in the 2002 second quarter and significantly modified in
the 2002 third quarter);
o market or competitive pressure to continue to lower commissions and
fees charged to customers;
o the quality and success of, and potential continuous changes in, sales
or marketing strategies (which have undergone significant change
recently and are expected to continue to evolve) and the costs
allocated to marketing campaigns and the timing of those campaigns,
particularly our recent decision to reduce advertising expenditures
during the second half of 2002 and further reduce advertising
expenditures during 2003;
o the appeal of our products and services to the institutional market
(given our limited experience selling to that market);
o variations from our expectations with respect to hiring and retention
of personnel, sales and marketing expenditures, product development,
customer account growth, customer trading activity and the share
volume of their trades, or other revenue or expense items;
o if revenues are lower than budgeted expectations, our inability to
make in a timely fashion commensurate expense reductions (as a large
amount of our expenses do not vary with revenues in the short term);
19
o the timing, completion, cost and effect of our development and launch
of planned enhancements to the TRADESTATION 6 online trading platform
(i.e., TRADESTATION 7 and other future versions);
o changes in demand for our products and services due to the rapid pace
at which new technology is offered to customers in our industry;
o general economic and market factors that affect active trading,
including market volume, market volatility, market direction, the
level of confidence and trust in the markets, and seasonality (summer
months and holiday seasons typically being slower periods);
o costs or adverse financial consequences that may occur with respect to
regulatory compliance or other regulatory issues, particularly
relating to laws, rules or regulations that may be enacted with a
focus on the active trader market;
o the size and frequency of any trading errors for which we ultimately
suffer the economic burden, in whole or in part (including losses from
third party claims that may arise from time to time - as of June 1,
2002, we have not carried errors or omissions insurance for third
party claims); and
o the issues, uncertainties and risks described later in this report
under the heading "Issues, Uncertainties and Risk Factors."
INCOME TAXES
For all periods presented, income taxes were provided only for certain
state and local income taxes where our net operating loss carryforwards could
not be utilized. For the three and nine months ended September 30, 2001, we
recorded an income tax benefit of $9,000 and an income tax expense of $7,000,
respectively. For the three and nine months ended September 30, 2002, we
recorded an income tax expense of $7,000. A valuation allowance was recorded to
offset the tax benefit of all deferred income tax assets (primarily resulting
from net operating losses) generated during the nine months ended September 30,
2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had cash and cash equivalents of approximately
$20.0 million, of which $3.4 million is restricted. Restricted cash supports a
facility lease, a stand-by letter 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.
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, replacing
certain operating leases. During the second quarter of 2002, in connection with
the relocation of our three Florida offices to one Florida location, we acquired
$492,000 of furniture and equipment under two capital lease obligations. During
the third quarter of 2002, we acquired $307,000 of additional equipment related
to our data server farms under two capital lease obligations. A summary of our
capital and operating leases (net of subleases) as well as our purchase
obligations (relating to television advertising) as of September 30, 2002 is as
follows:
Capital Lease Operating Purchase
Year Obligations Leases Obligations Total
----- ------------- ----------- ----------- -----------
2002 (Q4) $ 417,010 $ 801,690 $317,985 $ 1,536,685
2003 1,188,260 3,136,748 -- 4,325,008
2004 186,484 2,818,291 -- 3,004,775
2005 7,520 2,237,551 -- 2,245,071
2006 -- 2,042,922 -- 2,042,922
Thereafter (cumulative) -- 9,876,490 -- 9,876,490
---------- ----------- -------- -----------
Total $1,799,274 $20,913,692 $317,985 $23,030,951
========== =========== ======== ===========
20
We have no off balance sheet assets or liabilities.
We anticipate, in connection with the expected growth of our brokerage
business, capital expenditures of approximately $2.0 million through December
31, 2003, including $500,000 to $800,000 during the fourth quarter of 2002.
These expenditures are expected to be funded through operating cash flows,
capital leases, or a combination of the two.
In July 2002, we announced a stock repurchase program authorizing, at the
discretion of management, the use of available cash to purchase from time to
time up to 4 million shares of the Company's common stock in the open market or
through privately-negotiated transactions. Through September 30, 2002, we had
purchased and retired 1,582,700 shares at prices ranging from $1.35 to $1.3973
per share, for a total purchase price of $2.1 million. This included the August
2002 purchase of 1.5 million shares in a private transaction at a price of $1.35
per share from a former principal shareholder of onlinetrading.com corp., a
company acquired by TradeStation Group in a December 2000 merger. On October 18,
2002, we purchased and retired an additional 2,417,300 shares in a private
transaction at a price of $1.40 per share, for a total purchase price of $3.4
million, thereby completing the program. The shares were purchased from the same
former principal shareholder of onlinetrading.com corp. from whom we purchased
1.5 million shares in August 2002.
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 provided by operating activities during the nine months ended
September 30, 2002 totaled $3.1 million, compared to $2.9 million in the
comparable period of 2001. Net cash provided by operating activities during the
nine months ended September 30, 2002 was due primarily to improved operating
income, as adjusted for non-cash items, which includes $1.25 million received in
an insurance settlement, and an increase in accrued expenses, partially offset
by an increase in receivables from clearing firms. Net cash provided by
operating activities during the nine months ended September 30, 2001 was due
primarily to the receipt of income tax receivables of $8.5 million in April 2001
and increases in accrued expenses, partially offset by operating losses,
increases in other assets and decreases in merger and non-recurring accounts
payable and income taxes payable.
Investing activities provided cash of $60,000 during the nine months ended
September 30, 2002, including cash proceeds of $1.0 million from the sale of
certain legacy customer accounts during the second quarter of 2002 (see Note 4
of Notes to Consolidated Financial Statements - INTANGIBLE ASSETS, NET) and
$315,000 from the maturity of securities owned. These proceeds were offset by
capital expenditures of $1.2 million. Investing activities used cash of $1.0
million during the nine months ended September 30, 2001 related primarily to
purchases of securities, net of maturities, and capital expenditures.
Financing activities used cash of $3.1 million during the nine months ended
September 30, 2002 due primarily to $2.1 million of cash paid for the repurchase
of common stock and $1.0 million for repayment of capital lease obligations.
Financing activities used cash of $157,000 during the nine months ended
September 30, 2001, primarily for the repayment of capital lease obligations,
net of the issuance of common stock from the exercise of stock options under our
Incentive Stock Plan.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146
21
nullifies EITF Issue No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE
TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN
COSTS INCURRED IN A RESTRUCTURING). SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
believe that the adoption of SFAS No. 146 will have a material impact on its
consolidated financial position, results of operations or cash flows.
AUDIT COMMITTEE FINANCIAL EXPERTS
The Audit Committee of the Board of Directors of TradeStation Group has
three members, two of whom, Stephen C. Richards and Michael W. Fipps, we believe
are financial experts. Each is a certified public accountant. Mr. Richards is
currently the chief financial officer of a NYSE listed company and formerly
served as chief financial officer of a Nasdaq National Market listed company
which later became a NYSE listed company. Mr. Fipps previously served as chief
financial officer of an American Stock Exchange listed company.
ISSUES, UNCERTAINTIES AND RISK FACTORS
The Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations in this report should
be read and evaluated together with the issues, uncertainties and risk factors
relating to our business described below. While we have been and continue to be
confident in our business and business prospects, we believe it is very
important that anyone who reads this report consider the issues, uncertainties
and risk factors described below, which include business risks relevant both to
our industry and to us in particular. These issues, uncertainties and risk
factors are not intended to be exclusive. Issues, uncertainties and risk factors
are also included in other sections of this report, such as, for example, in
"Variability of Quarterly Results" and elsewhere when specifically relevant to a
statement we have made about our financial condition or results of operations.
This report also 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. 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,"
"plans," "estimates," "expects," "intends," "designed," "anticipates," "may,"
"will," "should," "could," "become," "upcoming," "potential," "pending," and
similar expressions, if and 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, including the risks and uncertainties described above in
"Variability of Results" and elsewhere in this report, and those described
below. 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 and uncertainties generally, include, but are not limited to, the
items described below, as well as in other sections of this report and in our
other public filings and our press releases.
CONDITIONS IN THE SECURITIES AND FINANCIAL MARKETS MAY AFFECT OUR RATES OF
CUSTOMER ACQUISITION, RETENTION AND TRADING ACTIVITY
Our products and services are, and will continue to be, for customers who
trade actively in the securities and financial markets. There has been for the
past 2 1/2 years, and continues to be, unfavorable conditions in the securities
and financial markets. To the extent that interest in active trading has
decreased or in the future decreases due to low trading volumes, lack of
volatility, or significant downward movement in the securities or financial
markets, such as has recently occurred, or future tax law changes, recessions,
depressions, wars, terrorism (including "cyberterrorism"), or otherwise, our
business, financial condition, results of operations and prospects could be
materially adversely affected. Also, unfavorable market conditions may result in
more losses for our clients, which could result in increases in quantity and
size of errors or omissions claims that may be made against us by frustrated
clients. We do not currently carry any errors or omissions insurance that might
cover, in part, some of those kinds of potential claims. See "THE NATURE OF OUR
BUSINESS RESULTS IN POTENTIAL LIABILITY TO CUSTOMERS" below.
22
OUR INDUSTRY IS INTENSELY COMPETITIVE, WHICH MAKES IT DIFFICULT TO ATTRACT
AND RETAIN CUSTOMERS
The markets for online brokerage services, client software and
Internet-based trading tools, and real-time market data services are intensely
competitive and rapidly evolving, and there has been substantial consolidation
of those three products and services occurring in the industry. We believe that
competition from large online brokerage firms and smaller brokerage firms
focused on active traders, as well as consolidation, will substantially increase
and intensify in the future. Competition may be further intensified by the size
of the active trader market, which is generally thought to be comprised of less
than 10% of all online brokerage accounts. We believe our ability to compete
will depend upon many factors both within and outside our control. These
include: price pressure; the timing and market acceptance of new products and
services and enhancements developed by us and our competitors; the development
and support of efficient, materially error-free Internet-based systems; product
and service functionality; data availability and cost; clearing costs; ease of
use; reliability; customer service and support; and sales and marketing
decisions and efforts.
SYSTEMS FAILURES MAY RESULT IN OUR INABILITY TO DELIVER ACCURATELY, ON
TIME, OR AT ALL, IMPORTANT AND TIME-SENSITIVE SERVICES TO OUR CUSTOMERS
The online trading platform we provide to our clients is based upon the
integration of our sophisticated front-end software technology with our equally
sophisticated Internet-based server farm technology. Our server farm technology
is the foundation upon which online trading clients receive real-time market
data and place buy and sell orders. However, in order for this technology to
provide a live, real-time trading platform, it requires integration with
real-time market data, which are currently provided by the systems of
independent third-party market data vendors (who obtain the data directly from
the exchanges), the electronic order book systems of ECNs and electronic systems
offered by the exchanges, and the clearing and back-office systems of the
clearing firms we currently use. Accordingly, our ability to offer a platform
that enables the development, testing and automation of trading strategies and
the placement and execution of buy and sell orders depends heavily on the
effectiveness, integrity, reliability and consistent performance of all of these
systems and technologies. In particular, the stress that is placed on these
systems during peak trading times could cause one or more of these systems to
operate too slowly or fail. We have experienced several delays and outages since
we launched our online trading platform, many of which related to data vendor,
exchange, clearing firm and ECN outages or issues, which are beyond our control.
In addition, a hardware or software failure, power or telecommunications
interruption or natural disaster could cause a systems failure. When systems in
the trading process slow down significantly or fail, even for a short time, our
brokerage customers could suffer delays in trading, or unintended results or
other problems, potentially causing losses and possibly subjecting us to claims
for such losses. Such failures or delays, depending upon how often they occur
and how serious they are, could also result in our clients and client prospects
losing or failing to gain confidence in our trading platform. Additionally, as a
general matter not applicable only to our company, the integrity of these types
of 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. Also, "cyberterrorism," should it occur, may
significantly affect people's willingness to use Internet-based services,
particularly ones that involve their personal or company's assets. During a
system outage, our brokerage 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. System delays, errors,
outages and failures, depending upon how serious and how often they occur, could
have a material adverse effect on our business, financial condition, results of
operations and prospects. See "THE NATURE OF OUR BUSINESS RESULTS IN POTENTIAL
LIABILITY TO CUSTOMERS" below.
23
DEPENDENCE UPON OUTSIDE DATA SOURCES AND CLEARING RELATIONSHIPS CREATES
RISKS OUTSIDE OF OUR CONTROL WHICH MAY AFFECT OUR ABILITY TO PROVIDE, AND OUR
COST TO PROVIDE, MARKET DATA AND CLEARING AND ACCOUNT SERVICES
Our business is currently dependent upon our ability to maintain contracts
with private market and news data vendors and clearing firms in order to provide
market data and news and clearing and account services, respectively, to our
customers. We obtain the market data and news pursuant to non-exclusive licenses
from private data vendors who in turn obtain the data from exchanges and news
sources, and the clearing and back-office account services are obtained from
large brokerage firms. The data contracts typically provide for royalties based
on usage or minimums, and the clearing contracts provide for transactional
clearing fees and charges. While we are not aware of any material data vendor or
clearing services contracts that are in jeopardy of being terminated or not
renewed, there can be no assurance that we will be able to renew or maintain our
current contracts or acceptable price levels. Further, if any of those
relationships become unfavorable or are terminated, and we decide to provide
data services directly from the exchanges, or self-clear client trades and carry
client accounts, we would face significant infrastructure expansion costs, and
would be engaging in business operations in which we have little or no prior
experience. These risks and uncertainties should be considered when evaluating
the potential cost-benefit and operational efficiency and quality that the
direct performance of such services could provide. As a general matter,
termination of our relationship with one or more of these third parties could
have a material adverse effect on our business, financial condition, results of
operations and prospects.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR PRESERVE OUR RIGHTS IN
INTELLECTUAL PROPERTY
Our success is and will continue to be heavily dependent on proprietary
technology, including existing trading-tool, Internet, Web-site and
order-execution technology, and those types of technology currently in
development. We view our technology as proprietary, and rely, 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 our proprietary rights. Policing unauthorized use of our products and
services is difficult, however, and we may be unable to prevent, or unsuccessful
in attempts to prevent, theft, copying or other unauthorized use or exploitation
of our product and service technologies. There can be no assurance that the
steps taken by us to protect (or defend) our proprietary rights will be adequate
or that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technologies or products and
services.
THE NATURE OF OUR BUSINESS RESULTS IN POTENTIAL LIABILITY TO CUSTOMERS
Many aspects of the securities brokerage business, including online 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. In particular, our
proprietary order routing technology is designed to automatically locate, with
immediacy, the best available price in the appropriate market in completing
execution of a trade triggered by programmed market entry and exit rules. There
are risks that the electronic communications and other systems upon which these
products and services rely, and will continue to rely, or our products and
services themselves, as a result of flaws or other imperfections in their
designs or performance, may operate too slowly, fail or cause confusion or
uncertainty to the user. Major failures of this kind may affect all customers
who are online simultaneously. Any such litigation could have a material adverse
effect on our business, financial condition, results of operations and
prospects. Additionally, our other non-brokerage products and services are 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 our trading tools or inaccurate assumptions made
by the trading tools regarding data, or inaccurate data. We do not currently
carry any errors or omissions insurance that might cover, in part, some of the
above-described risks. See "CONDITIONS IN THE SECURITIES AND FINANCIAL MARKETS
MAY AFFECT OUR RATES OF CUSTOMER ACQUISITION, RETENTION AND TRADING ACTIVITY,"
24
and "SYSTEMS FAILURES MAY RESULT IN OUR INABILITY TO DELIVER ACCURATELY, ON
TIME, OR AT ALL, IMPORTANT AND TIME-SENSITIVE SERVICES TO OUR CUSTOMERS" above.
WE DO NOT HAVE A LONG OPERATING HISTORY AS AN ONLINE BROKERAGE FIRM AND,
UNTIL VERY RECENTLY, HAVE NOT OPERATED PROFITABLY.
We launched the TRADESTATION 6 direct access online trading platform at the
end of the 2001 second quarter. Prior to that, our brokerage operations
consisted mainly of brokers taking phone calls from clients and then placing
those clients' orders via direct access order execution. Accordingly, the online
brokerage business, as currently conducted, has a very short operating history.
Further, the second and third quarters of 2002 were the first profitable
quarters (and even they are only slightly above breakeven) we have had since the
third quarter of 1999. This lack of operating history, and our lack of
historical profitable results over the last three years, should be taken into
account when evaluating our financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
On October 14, 2002, an evaluation was completed under the supervision and
with the participation of the Company's management, including the Co-Chief
Executive Officers and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
October 14, 2002 and as of and for the three months ended September 30, 2002.
Based on that evaluation, the Company's management, including the Co-Chief
Executive Officers and the Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as of October 14, 2002 and as
of and for the three months ended September 30, 2002. As of the date of this
report, there have been no significant changes subsequent to October 14, 2002 in
the Company's internal controls or in other factors that could significantly
affect internal controls.
25
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) SALES OF UNREGISTERED SECURITIES
During the three months ended September 30, 2002, we issued to two
nonemployee directors options to purchase an aggregate of 14,000 shares of
common stock. Such options vest ratably in annual increments over a three-year
period and are exercisable at a price of $1.46 per share, which was the fair
market value (as defined in our Nonemployee Director Stock Option Plan) of our
common stock on the date on which the options were granted. All of 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.
All the foregoing options were issued by us in reliance upon the exemption
from registration available under Section 4(2) of the Securities Act of 1933, as
amended. Other than as described above, we did not issue or sell any
unregistered securities during the third quarter of 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(A) MEETING
On September 6, 2002, TradeStation Group held its 2002 Annual Meeting of
Shareholders (the "Annual Meeting").
(B) ELECTION OF BOARD OF DIRECTORS
At the Annual Meeting, an election was held for the Board of Directors of
TradeStation Group. All six nominees to the Board of Directors were elected (all
six of whom were re-elected), receiving the number and percentage of votes for
election and abstentions as set forth next to the their respective names below:
FOR ELECTION ABSTENTIONS
-------------------------------------- -------------------------------------
NOMINEE FOR DIRECTOR NUMBER PERCENTAGE NUMBER PERCENTAGE
-------------------- ------------------ ------------------ ----------------- -----------------
Ralph L. Cruz 37,858,642 99.3% 273,496 0.7%
William R. Cruz 37,858,642 99.3% 273,496 0.7%
Michael W. Fipps 38,089,781 99.9% 42,357 0.1%
Stephen C. Richards 38,089,781 99.9% 42,357 0.1%
Salomon Sredni 37,858,642 99.3% 273,496 0.7%
Charles F. Wright 37,858,642 99.3% 273,496 0.7%
(C) OTHER VOTING MATTERS
The only other matter voted upon at the Annual Meeting was a proposal to
ratify the selection of Ernst & Young LLP as independent public accountants for
TradeStation Group for the fiscal year ending December 31, 2002. This proposal
was approved, receiving the votes of the holders of the number of shares of
common stock voted in person or by proxy at the Annual Meeting and the
percentage of total votes cast as indicated below:
FOR AGAINST ABSTENTION
------------------------------- ------------------------------- ------------------------------
38,081,371 13,316 37,451
99.9% 0.0% 0.1%
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
99.1 Certification of Co-Chief Executive Officers Under 18 U.S.C.
ss.1350.
99.2 Certification of Chief Financial Officer Under 18 U.S.C.ss.1350.
(B) REPORTS ON FORM 8-K
On July 25, 2002, we filed a Current Report on Form 8-K for an event
that occurred on July 25, 2002, reporting in Item 5 thereof that our Board
of Directors approved a stock repurchase program authorizing the repurchase
from time to time of up to 4 million shares of the Company's common stock
in the open market or through privately-negotiated transactions.
27
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
November 13, 2002 /s/ David H. Fleischman
----------------- --------------------------------------------
Date David H. Fleischman
Chief Financial Officer
Vice President of Finance and Treasurer
(Signing both in his capacity as duly
authorized officer and as Principal Financial
and Chief Accounting Officer of the Registrant)
28
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CO-CHIEF EXECUTIVE OFFICER
I, William R. Cruz, Co-Chairman of the Board and Co-Chief Executive Officer of
TradeStation Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TradeStation
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the periods covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 13, 2002 By: /s/ William R. Cruz
----------------- -----------------------------------
Date William R. Cruz
Co-Chairman of the Board
and Co-Chief Executive Officer
29
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CO-CHIEF EXECUTIVE OFFICER
I, Ralph L. Cruz, Co-Chairman of the Board and Co-Chief Executive Officer of
TradeStation Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TradeStation
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the periods covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 13, 2002 By: /s/ Ralph L. Cruz
----------------- --------------------------------
Date Ralph L. Cruz
Co-Chairman of the Board
and Co-Chief Executive Officer
30
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CHIEF FINANCIAL OFFICER
I, David H. Fleischman, Chief Financial Officer of TradeStation Group, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of TradeStation
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the periods covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 13, 2002 By: /s/ David H. Fleischman
----------------- ------------------------------------------
Date David H. Fleischman
Chief Financial Officer
Vice President of Finance and Treasurer
31
EXHIBIT INDEX
Exhibit No. Exhibit
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99.1 Certification of Co-Chief Executive Officers Under 18
U.S.C.ss.1350.
99.2 Certification of Chief Financial Officer Under 18
U.S.C.ss.1350.