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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 0-31049
TRADESTATION GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0977576
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8700 WEST FLAGLER STREET, MIAMI, FLORIDA 33174
(Address of principal executive offices) (Zip Code)
(305) 485-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT ON MARCH 1, 2002, BASED UPON THE CLOSING MARKET
PRICE OF THE REGISTRANT'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET ON MARCH 1,
2002, WAS APPROXIMATELY $15,607,000.
THE REGISTRANT HAD 44,547,816 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF MARCH 1, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS.................................................................1
OVERVIEW AND RECENT DEVELOPMENTS.........................................1
INDUSTRY BACKGROUND......................................................2
PRODUCTS AND SERVICES....................................................3
SALES AND MARKETING......................................................6
STRATEGIC RELATIONSHIPS..................................................6
TECHNOLOGY DEVELOPMENT...................................................7
CLIENT SERVICES AND SUPPORT AND TRAINING.................................8
COMPETITION..............................................................8
INTELLECTUAL PROPERTY...................................................10
GOVERNMENT REGULATION...................................................11
EMPLOYEES...............................................................13
ITEM 2. PROPERTIES..............................................................13
ITEM 3. LEGAL PROCEEDINGS.......................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.........................................15
COMMON STOCK INFORMATION................................................15
DIVIDEND POLICY.........................................................15
RECENT SALES OF UNREGISTERED SECURITIES.................................15
USE OF PROCEEDS.........................................................16
ITEM 6. SELECTED FINANCIAL DATA.................................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................17
OVERVIEW................................................................18
RESULTS OF OPERATIONS...................................................19
YEARS ENDED DECEMBER 31, 2001 AND 2000..................................20
YEARS ENDED DECEMBER 31, 2000 AND 1999..................................24
INCOME TAXES............................................................27
VARIABILITY OF RESULTS..................................................28
LIQUIDITY AND CAPITAL RESOURCES.........................................28
RECENTLY ISSUED ACCOUNTING STANDARDS....................................29
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS..............................30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.......................................................38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................39
ITEM 11. EXECUTIVE COMPENSATION..................................................42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..........................................................48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.....................................................51
SIGNATURES.........................................................................55
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PART I
ITEM 1. BUSINESS
OVERVIEW AND RECENT DEVELOPMENTS
TradeStation Group, Inc., 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. and TradeStation Technologies, Inc.
are TradeStation Group's two operating subsidiaries. See Note 3 of Notes to
Consolidated Financial Statements - BUSINESS COMBINATIONS.
Over the past two-and-one-half years we have taken a series of steps to
transform ourselves from a software company to an Internet-based securities
brokerage for institutional, professional and serious, active individual traders
- - a brokerage that offers an electronic trading platform which seamlessly
integrates powerful strategy trading tools, historical and streaming real-time
market data, and "intelligent" direct-access order-routing and execution.
Direct-access trading means, with respect to equity securities transactions,
direct Internet connections to electronic marketplaces, such as electronic
communication networks (ECN's), where anonymous buyers and sellers participating
on the network are matched. With respect to futures transactions, it means an
interface between TRADESTATION technology and the futures clearing firm's online
execution system which, depending upon the type of futures contract, either
sends the order directly to the trading pit or, for electronic futures markets,
implements an electronic order placement and execution.
The cornerstone of the company's transformation was created on June 27,
2001, the day we launched TRADESTATION 6. In July 2001, as a result of the
launch of TRADESTATION 6, TradeStation Securities was named the "No. 1 Direct
Access Broker" by BARRON'S magazine. In January 2002, TradeStation Securities
won the TECHNICAL ANALYSIS OF STOCKS AND COMMODITIES Reader's Choice Award for
best STOCKS DIRECT ACCESS BROKERAGE, and TRADESTATION 6 won the Reader's Choice
Award for best PROFESSIONAL PLATFORM. TRADESTATION 6 was also named as a
finalist in two CODIE EXCELLENCE IN SOFTWARE categories for 2002 (the winners
will be announced in April 2002). A formal patent application covering
TRADESTATION 6 was filed with the United States Patent and Trademark Office in
October 2001. Advertisement on CNBC of TradeStation Securities' online brokerage
services using TRADESTATION 6 was commenced in February 2002.
Under this new business model, we seek recurring revenues mainly by
offering, through TRADESTATION 6 (and its planned enhanced versions),
commission-based brokerage services. We expect to leverage our historical
success providing strategy trading tools, and the unique quality and
functionality of those tools, to build a high-quality brokerage customer base of
institutional, professional and serious, active individual traders. We also
intend to continue to provide via our technologies subsidiary, TradeStation
Technologies, subscription services for TRADESTATION 6 (and its planned enhanced
versions). The subscription version of TRADESTATION 6 is an
institutional-quality service that offers strategy trading software tools that
generate real-time buy and sell alerts based upon the subscriber's programmed
strategies, but does not include order execution. Subscribers are charged a
monthly subscription fee. Domestically, we no longer offer our traditional
software products, i.e., "client" software products delivered on disks.
Our principal executive offices are located at 8700 West Flagler Street,
Miami, Florida 33174, and our telephone number is (305) 485-7000. Our principal
executive offices are expected to be relocated in the summer of 2002 to 8050
S.W. 10th Street, Plantation, Florida 33324.
THIS REPORT (PARTICULARLY "ITEM 1. BUSINESS" AND "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS")
CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SEE "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING
STATEMENTS; BUSINESS RISKS."
INDUSTRY BACKGROUND
Over the past decade, the volume of trading in the world's major stock
markets has grown dramatically. For example, from January 1, 1990 to December
31, 2000, average daily trading volume in the Nasdaq market increased at a
compound annual rate of 26% from 132.7 million shares to 1.7 billion shares. As
of December 31, 2001, the average daily trading volume in the Nasdaq market for
the year was more than 1.8 billion shares. On the New York Stock Exchange
(NYSE), average daily trading volume increased from January 1, 1990 to December
31, 2000 at a compound annual rate of 18%, from 197.6 million shares to more
than 1.0 billion shares. As of December 31, 2001, average daily trading volume
in the NYSE for the year was more than 1.2 billion shares. NYSE and Nasdaq
market capitalization grew from approximately $2.3 trillion and $311.0 billion,
respectively, as of December 31, 1990, to approximately $12.4 trillion and $3.6
trillion, respectively, as of December 31, 2000.
Recently, even more dramatic than the growth in the stock markets, has been
the explosive growth of direct-access trading through ECN's and similar
electronic marketplaces. According to JPMorgan H&Q, during the fourth quarter of
2001, ECN's gained market share of Nasdaq share volume for the eighth
consecutive quarter. JPMorgan H&Q estimated that 51.2% of Nasdaq trades were
handled by ECN's in the 2001 fourth quarter. They described the fact that more
than one out of every two Nasdaq trades now occurs on an ECN as "astonishing."
One of the major reasons offered by JPMorgan H&Q for this explosive growth is
the growing presence of direct-access trading solutions. We consider this to be
a significant statement, as TradeStation Securities, by reason of the
TRADESTATION 6 trading platform, has been rated the best direct-access broker in
the United States in two major trading periodicals - BARRON'S and TECHNICAL
ANALYSIS OF STOCKS AND COMMODITIES. In these ratings, we were deemed superior to
the direct-access brokerage solutions recently acquired or developed by the
traditional, major online brokerage firms in the industry.
We believe that technological innovation, including development of
sophisticated trading software tools, increased use of and reliance upon the
Internet, proliferation of online financial market data and information, and
market acceptance of electronic brokerage services, including direct-access
brokerage services, will continue to stimulate increased online trading
activity. There are, according to JPMorgan H&Q, approximately 20 million online
brokerage accounts in the U.S. today, and we believe it to be inevitable that
over time almost all trading will be
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conducted electronically, in one form or another. It is equally clear that
direct access is expected to become the industry standard for online trading.
The recent acquisitions by virtually every major online brokerage of
direct-access technology underscores this reality.
However, not all accounts are alike. Analysts have estimated that daily
online equity trading volume is highly concentrated in the most actively-traded
online accounts. Robertson Stephens has estimated that fewer than 10% of all
online accounts conduct over 67% of all average daily trades. The design of
TRADESTATION 6 has been focused on this "active trader" market, as well as
professional and institutional traders, such as small- to mid-sized hedge fund
and money managers.
With the proliferation of online brokerage services (and, now, the more
powerful and efficient direct-access online brokerage services), the increased
accessibility to market data, and the rapidly-growing capabilities of the
Internet, we believe that serious, active traders, professional and
non-professional, are demanding powerful, Internet-based, real-time strategy
trading platforms that are seamlessly integrated with the best-available order
execution technology. We believe that these traders desire a complete,
institutional-quality, Internet-based, trading platform that includes analytical
tools which support the design and testing of custom trading strategies, the
automation of those strategies in real-time, and the instantaneous execution of
those strategies through state-of-the-art direct-access electronic order
execution systems. We do not believe there is any branded trading platform
available today that provides all of that, and that there exists a significant
opportunity for the first company that does. We believe we are that company.
PRODUCTS AND SERVICES
OVERVIEW -- TRADESTATION
Our main product/service offering is the TRADESTATION 6 trading platform,
complete with direct-access order execution services, for institutional,
professional and serious, active individual traders. A formal patent application
covering what we believe to be the unique, powerful technology of TRADESTATION 6
is pending. Historically, our products and services have consisted of
sophisticated brokerage services and real-time strategy trading tools, but not
in an integrated trading platform. TRADESTATION 6 changes that. TRADESTATION 6
does not provide investment or trading advice or recommendations, or recommend
the use of any particular strategy, but rather enables the user to design, test
and automate his own, custom trading strategies. TRADESTATION is a registered
trademark in the United States, Australia, Canada, the European Community,
Indonesia, Korea, Singapore, South Africa and Taiwan.
In addition to offering the TRADESTATION 6 trading platform to the
brokerage customers of our TradeStation Securities subsidiary, we offer, through
our TradeStation Technologies subsidiary, TRADESTATION 6 subscriptions. The only
difference between the TRADESTATION 6 trading platform and the TRADESTATION 6
subscription service is that the subscription service does not include order
execution capabilities.
TRADESTATION has, since its initial release as a strategy trading software
program in 1991, been our flagship product. For the past six years (until
October 2001) it was marketed worldwide to institutional traders on a monthly
subscription basis by Telerate, Inc. as a premium tool for the
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Telerate data feed service. It has also served as a strategy trading platform
for numerous third-party software applications. Its state-of-the-art technology
empowers the trader to design and develop a trading strategy based upon the
trader's objective rules and criteria, test the profitability of that trading
strategy against historical data, and then computer-automate it to monitor the
applicable market and alert the trader in real-time when the criteria of the
trading strategy have been met and an order should, therefore, be placed. The
principal features of TRADESTATION which enable the trader to design and develop
trading strategies are EASYLANGUAGE and the POWEREDITOR. EASYLANGUAGE is a
proprietary computer language we developed consisting of English-like statements
and trading terms which can be input by the trader to describe particular
objective rules and criteria. The POWEREDITOR is a compiler of EASYLANGUAGE
statements that provides the trader with considerable flexibility to modify and
combine different trading rules and criteria, which ultimately result in the
design of the trader's trading strategies. EASYLANGUAGE and POWEREDITOR are also
registered trademarks.
BROKERAGE SERVICES
TradeStation Securities' principal offering today is online brokerage
services, covering both equities and futures transactions, through the
TRADESTATION 6 trading platform. TradeStation Securities' targeted customer base
for equity securities and futures brokerage services includes active individual,
professional and institutional traders, including hedge fund and money managers.
In addition to providing direct-access online services through TRADESTATION 6,
the brokerage firm offers personal services by its registered representatives
who execute customers' orders through direct-access order execution systems.
Having a "direct-access" order execution system, whether accessed directly by
the brokerage client through TRADESTATION 6 or by a TradeStation Securities
broker on behalf of the brokerage client, means that both the online services
and the firm's trading desks are directly connected to stock and futures
exchanges and ECN's. ECN's, such as Archipelago, BRUT and Island, directly match
anonymous buyers and sellers participating on the network. This system often
results in the simplest, most direct and speediest execution of orders for
equity securities at the best available price. With respect to futures,
TRADESTATION 6 interfaces with the futures clearing firm's online execution
system which, depending on the type of futures contract, either sends the order
directly to the trading pit or, for electronic futures markets, implements an
electronic order placement and execution. In the case of telephone orders, the
brokerage's registered representatives are committed to using the firm's trading
desks and direct-access technology to obtain the fastest execution and best
possible price at the time the customers' equity securities orders are taken.
The TRADESTATION 6 trading platform offers brokerage customers a new level of
online trading empowerment by enabling them to design, test and automate simple
or complex trading strategies that instantaneously produce direct-access buy or
sell orders when the strategies' buy or sell conditions are triggered in the
markets.
Customer accounts for equity securities and futures are carried on a "fully
disclosed" basis by the brokerage's clearing firms, Bear, Stearns Securities
Corp. and Refco, LLC, respectively. TradeStation Securities executes its
customers' transactions on an agency basis only, as opposed to a principal
basis. That is, it acts as the agent for its clients directly in the market.
When brokerage firms perform transactions on a principal basis, they are
permitted to accept a customer's order to purchase, immediately purchase the
securities in the market for the brokerage firm, and then sell the securities to
the customer. TradeStation Securities does not mark-up its customers' equities
or futures transactions. It always charges only an agreed-upon
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commission and never earns income from marking up or marking down its customers'
equities or futures transactions.
For financial information concerning the brokerage services segment of our
operations, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS and Note 18 of Notes to Consolidated Financial Statements
- - SEGMENT AND RELATED INFORMATION.
SOFTWARE PRODUCTS AND SERVICES
In December 2000, we launched the TRADESTATION 6 subscription service (then
called TRADESTATION PRO). The TRADESTATION 6 subscription service includes our
award-winning strategy trading features and functions, streaming real-time
charts and quotes, streaming news, state-of-the-art analytical charting, Level
II data, time and sales data, quote lists, option chains, market leaders data,
Internet SmartSearch (a feature that enables the trader to access relevant
Internet research services), live ticker, portfolio management, profit/loss
tracking, and wireless access. During 2001, the TRADESTATION 6 subscription
service was offered at rates to new subscribers ranging from $195.95 to $299.95
per month, and to legacy customers (customers of our 2000I product line and
earlier versions) who "upgraded" at rates ranging from $79.95 to $99.95 per
month. We evaluate our approach to subscription fee pricing on an ongoing basis,
which has resulted and will likely continue to result in different price
offerings during 2002.
On January 25, 2000, we launched WINDOWONWALLSTREET.COM, an Internet
monthly subscription service that offered browser-based streaming real-time
charts and quotes, and streaming news, presented and powered by some of our
award-winning trading tools. This service was terminated in the fourth quarter
of 2001, with all subscribers being offered automatic upgrades to the
subscription version of TRADESTATION 6. The subscription price was $79.95 per
month. That same price was and is being offered to all subscribers that have
accepted the automatic upgrade to TRADESTATION 6 subscription services. See Note
2 of Notes to Consolidated Financial Statements - IMPAIRMENT OF GOODWILL AND
CERTAIN INTANGIBLES.
From our formation in 1982 until the end of 1999, our business consisted
mainly of the licensing of strategy trading software products produced and
distributed to end-user customers on disks. Our most recent version of these
client software products, the 2000I line, which includes TRADESTATION 2000I,
OPTIONSTATION 2000I, RADARSCREEN 2000I and PROSUITE 2000I (a combination of the
three), was released in February 1999. We discontinued active marketing efforts
of the 2000I line in May 2000 as we focused on the marketing of our then-new
Internet-based services, and the completion of our change in business model to a
direct-access online brokerage founded on our award-winning TradeStation
technology. The 2000I line is no longer available in the United States.
OPTIONSTATION 2000I, also an award-winning technology, is an options trading
analysis product for equities, index and futures options that enables traders to
explore options trading strategies. RADARSCREEN 2000I enables traders to scan up
to hundreds or thousands, depending upon the data service and computer hardware
used, of equities or other securities to identify potential buying or selling
opportunities based upon the traders' own trading strategies. It is presently
contemplated that both the RADARSCREEN and OPTIONSTATION technology will be
incorporated into a later version of the TRADESTATION 6 trading platform. For
each of our past three fiscal years, our software products and services
operations have been responsible for the majority of our revenues. In
particular, client software products have
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accounted for approximately 12%, 35% and 48% of our total revenues in 2001,
2000, and 1999, respectively. Commencing in 2002, and for the foreseeable
future, we expect our brokerage operations to produce the majority of our
revenues.
For financial information concerning the software products and services
segment of our operations, see MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS and Note 18 of Notes to Consolidated
Financial Statements - SEGMENT AND RELATED INFORMATION.
SALES AND MARKETING
In 2001, we substantially decreased and limited marketing efforts and
expenditures in order to focus on the completion of the TRADESTATION 6 trading
platform, to evaluate early reactions to TRADESTATION 6 by brokerage customers,
and to begin to build a licensed, trained sales force. While there were
occasional advertisements in periodicals and some limited outbound telemarketing
efforts in 2001, no significant marketing of the TRADESTATION 6 trading platform
was commenced until February 2002, when we began daily television advertising of
our brokerage services via TRADESTATION 6 on CNBC. We intend to continue to
market the TRADESTATION 6 trading platform to our software and subscription
customer bases, and to the broader institutional and active trader markets
generally. We also intend to advertise in periodicals that are focused on the
active trader market. With respect to our legacy software customers (customers
of our 2000I product line and earlier versions), marketing and sales is usually
a two-step process: The first step is to attempt to upgrade those customers to
the TRADESTATION 6 subscription service; then, once they have had the "hands-on"
opportunity to experience its power and value, the second step is to try to
convert them to brokerage customers who enjoy the full trading platform,
complete with direct-access order execution. The mix and use frequency of
television, print, Web-site, direct-mail and in-person marketing methods we use
to try to achieve results will likely be continually modified as we test such
methods and mixtures and analyze and interpret the results.
Less than 10% of our revenues were derived from customers outside of the
United States for the years ended December 31, 2001, 2000 and 1999.
International revenues are collected in U.S. dollars.
STRATEGIC RELATIONSHIPS
CLEARING SERVICES. Our brokerage's clearing services for equities and
equities options, and for futures and futures options, are currently provided by
Bear, Stearns Securities Corp. and Refco, LLC, respectively, pursuant to
industry-standard clearing agreements.
MARKET DATA SERVICES. The real-time market data included in TRADESTATION 6
are licensed from S&P ComStock, Inc.
TELERATE AGREEMENT. For the past six years our technology subsidiary was
party to an agreement with Telerate, Inc., a subsidiary of Bridge Information
Systems, Inc., under which we licensed to Telerate the right to market and
distribute TRADESTATION to Telerate's data subscribers worldwide, primarily
institutional traders. The agreement required Telerate to pay us minimum annual
royalties, which escalated each year of the agreement, with 2001 being the last
year and
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requiring $8.0 million of minimum royalties. The agreement was originally due to
expire in January 2002; however, in February 2001, Bridge Information Systems
(including Telerate) commenced a reorganization under Chapter 11 of the federal
bankruptcy code. On October 17, 2001, the agreement was rejected in the
bankruptcy proceedings, and a new agreement with MoneyLine Network, Inc., the
company which acquired the relevant Telerate assets, was simultaneously
executed. The MoneyLine agreement, which grants to MoneyLine the right to market
and distribute TRADESTATION to its data subscribers worldwide through December
31, 2002, has no minimum royalty requirements. After giving effect to all
payments made by Bridge and MoneyLine relating to the 2001 year under both
agreements, we received approximately $6.0 million of the $8.0 million minimum
for 2001. The royalties expected to be received from MoneyLine in 2002 are
substantially lower (no higher than $130,000 per month), and are expected to
sequentially decrease as the agreement nears termination.
TECHNOLOGY DEVELOPMENT
We believe that our success depends, in large part, on our ability to offer
unique, Internet-based strategy trading technologies with state-of-the-art,
intelligent direct-access order execution technologies, and continuously enhance
those technologies, as well as develop and implement well-designed and
user-friendly Web sites. To date, we have relied primarily on internal
development of our products and services. We currently perform all quality
assurance and develop user education and other training materials internally,
but this may change to some extent. In 2001, 2000 and 1999, technology
development expenses were approximately $12.0 million, $8.1 million and $4.9
million, respectively. As of December 31, 2001, our technology development team
was comprised of 98 persons, as compared to 88 as of December 31, 2000, an 11.4%
increase.
We view our technology development cycle as a four-step process to achieve
technical feasibility. The first step is to conceptualize in detail the defining
features and functions that we believe our targeted market requires from the
product or service, and to undertake a cost-benefit analysis to determine the
proper scope and integration of such features and functions. Once the functional
requirements of the product or service have been determined, the second step is
to technically design the product or service. The third step is the detailed
implementation, or engineering, of this technical design. The fourth step is
rigorous quality assurance testing to ensure that the final product or service
generally meets the functional requirements determined in the first step.
Several refinements are typically added and tested in the quality assurance
phase of development. Once this process is completed, technological feasibility
has been achieved and the working model is available for release to our
customers.
The market for strategy trading tools, streaming real-time market data and
news services, and online order execution services is characterized by: rapidly
changing technology; evolving industry standards in computer hardware,
programming tools and languages, operating systems, database technology and
information delivery systems; changes in customer requirements; and frequent new
product and service introductions and enhancements. Our success will depend in
part upon our ability to develop and maintain competitive technologies and to
develop and introduce new products, services and enhancements in a timely and
cost-effective manner that meets changing conditions such as evolving customer
needs, existing and new competitive product and service offerings, emerging
industry standards and changing technology. There can be no assurance that we
will be able to develop and market, on a timely basis, if at all, products,
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services or enhancements that respond to changing market conditions or that will
be accepted by customers. Any failure by us to anticipate or to respond quickly
to changing market conditions, or any significant delays in the introduction of
new products and services or enhancements could cause customers to delay or
decide against the use of our products and services and could have a material
adverse effect on our business, financial condition and results of operations.
CLIENT SERVICES AND SUPPORT AND TRAINING
We provide client services and support and product-use training in the
following ways:
CLIENT SERVICES AND SUPPORT. TradeStation Securities provides telephone
client services to its brokerage customers through a trained client services
team. Technical support to subscription and brokerage customers who use
TRADESTATION 6 is provided by TradeStation Technologies' technical support team
via telephone, electronic mail and fax. Customers of the 2000I line of products
may also receive technical support from TradeStation Technologies' technical
support team. Advanced EASYLANGUAGE consulting services (services that
technically assist customers in the use of EASYLANGUAGE to write the customers'
own trading strategies) are also available from internal resources and
unaffiliated, independent EasyLanguage consultants. A substantial amount of
technical support information is also provided on our Web sites. During 2002, we
plan to coordinate more closely our brokerage client and technical support
services for our brokerage customers who use the TRADESTATION 6 trading
platform.
PRODUCT-USE TRAINING. We consider user education important to try to help
our customers increase their ability to use our products and services fully and
effectively. The majority of our training materials consist of extensive online
documentation and technical assistance information on our Web sites, including
online tutorials, so that our customers may learn to use and take full advantage
of the sophisticated technology of TRADESTATION 6.
COMPETITION
The market for online brokerage services is intensely competitive and
rapidly evolving, and there appears to be substantial consolidation in the
industry of online brokerage services, Internet-based real-time market data
services, and trading analysis software tools. With TRADESTATION 6, we have
embraced this evolution and consolidation. However, we believe that due to the
current and anticipated rapid growth of the market for integrated trading tools,
real-time market data and online brokerage services, competition, as well as
consolidation, will substantially increase and intensify in the future. We
believe our ability to compete will depend upon many factors both within and
outside our control, including: pricing; the timing and market acceptance of new
products and services and enhancements developed by us and our competitors; our
ability to design and support efficient, materially error-free Internet-based
systems; market conditions, such as recession; product and service
functionality; data availability; ease of use; reliability; customer service and
support; and sales and marketing efforts.
We face direct competition from several publicly-traded and privately-held
companies, principally online brokerages, including providers of direct-access
order execution services. Our competitors include the hundreds of online
brokerages currently active in the United States, including Ameritrade, Inc.
(which includes Ameritrade Pro, a direct-access service based upon
8
the technology of recently-acquired TradeCast Ltd.), Charles Schwab & Co., Inc.
(including the CyberTrader and StreetSmartPro direct-access services as a result
of its acquisition of Cybercorp.), CSFBdirect (formerly DLJdirect), Datek Online
Financial Services LLC (including the Datek Direct direct-access service),
E*Trade Securities, Incorporated (including E*Trade Pro, a direct-access service
based upon technology recently licensed from A.B. Watley), Fidelity Brokerage
Services, Inc., Instinet Corporation (a Reuters subsidiary, and an ECN that also
provides direct-access brokerage service as a result of its recent acquisition
of the ProTrader technology), JPMorgan, Merrill Lynch Direct, Morgan Stanley
Online, Quick & Reilly, Inc. (which includes the recently-acquired SureTrade),
Redi Products, a division of Spear, Leeds & Kellogg (which is owned by Goldman
Sachs), Scottrade, and TD Waterhouse Investor Services, Inc. (which recently
acquired a small direct-access firm, R.J. Thompson Holdings). Those brokers
currently serve, in the aggregate, more than 90% of existing online accounts,
and many are focusing on attracting and retaining active traders to and who use
their services. More than 100 online brokerages currently claim to offer
direct-access service. Even though we currently appear to be rated the No. 1
direct-access broker in the United States, there can be no assurance that we
will be able to maintain such rating, be rated that highly by other industry
critics or participants, compete effectively with our competitors, adequately
educate potential customers about the benefits our products and services
provide, or continue to offer such products and services.
Many of our existing and potential competitors, which include large, online
discount and traditional national brokerages, and financial institutions that
are focusing more closely on online services, including direct-access services
for active traders, have longer operating histories, significantly greater
financial, technical and marketing resources, greater name recognition and a
larger installed customer base than do we. Further, there is the risk that
larger financial institutions which offer online brokerage services as only one
of many financial services may decide to use extremely low commission pricing as
a "loss leader" to acquire and accumulate customer accounts and assets to derive
interest income and income from their other financial services. We do not offer
other financial services, and have no plans to do so; therefore, such pricing
techniques, should they become common in our industry, could have a material,
adverse effect on our results of operations, financial condition and business
model.
Generally, competitors may be able to respond more quickly to new or
emerging technologies or changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products and services
than do we. There can be no assurance that our existing or potential competitors
will not develop products and services comparable or superior to those developed
and offered by us or adapt more quickly than us to new technologies, evolving
industry trends or changing customer requirements, or that we will be able to
timely and adequately complete the implementation, and appropriately maintain
and enhance the operation, of our new business model. Increased competition
could result in price reductions, reduced margins, failure to obtain any
significant market share, or loss of market share, any of which could materially
adversely affect our business, financial condition and results of operations.
There can be no assurance that we will be able to compete successfully against
current or future competitors, or that competitive pressures faced by us will
not have a material adverse effect on our business, financial condition and
results of operations.
9
INTELLECTUAL PROPERTY
Our success is and will be heavily dependent on proprietary software
technology, including certain technology currently in development. We view our
software 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 establish
and protect our proprietary rights. We have a formal patent application pending
for the TRADESTATION 6 trading platform, but software patents, particularly
Internet-related software patents, are increasingly difficult to obtain, and
there can be no assurance that we will obtain a patent or patents broad enough
in scope to have value, or obtain a patent at all. We have registered copyright
rights in our EASYLANGUAGE dictionary and documentation and TRADESTATION 6
software.
We have obtained trademark registrations for the TRADESTATION mark in the
United States, Australia, Canada, the European Community, Indonesia, Korea,
Singapore, South Africa and Taiwan. We have obtained registrations for the
OPTIONSTATION mark in the United States, Canada and the European Community. We
have obtained registrations in the United States for the marks ACTIVITYBAR,
EASYLANGUAGE, POWEREDITOR, PROBABILITYMAP, PROSUITE, RADARSCREEN, TEST BEFORE
YOU TRADE and other marks.
We use an online subscription agreement for our Internet trading tool and
data services between TradeStation Technologies and each of the users (whether
the users are brokerage customers or monthly subscribers) in order to protect
our copyrights and trade secrets and to prevent such users from commercially
exploiting such copyrights and trade secrets for their own gain. Since these
licenses are not physically signed by the licensees, it is possible their
enforceability is limited under certain state laws and the laws of many foreign
jurisdictions.
Despite our efforts to protect our proprietary rights, unauthorized parties
copy or otherwise obtain, use or exploit our software or technology
independently. Policing unauthorized use of our software technology is
difficult, and we are unable to determine the extent to which piracy of our
software technology exists. Piracy can be expected to be a persistent problem,
particularly in international markets and as a result of the growing use of the
Internet. In addition, effective protection of intellectual property rights may
be unavailable or limited in certain countries, including some in which we may
attempt to expand sales efforts. There can be no assurance that the steps taken
by us to protect our proprietary rights will be adequate or that our competitors
will not independently develop technologies that are substantially equivalent or
superior to ours.
There has been substantial litigation in the software industry involving
intellectual property rights. We do not believe that we are infringing, or that
any technology in development will infringe, the intellectual property rights of
others. The risk of infringement by us is heightened with respect to our new
business model technology, as that technology has not stood any significant
"test of time" as has our legacy client software technology. There can be no
assurance that infringement claims would not have a material adverse effect on
our business, financial condition and results of operations. In addition, to the
extent that we acquire or license a portion of the software or data included in
our products or services from third parties (all data is licensed from third
parties), or market products licensed from others generally, our exposure to
infringement actions may increase because we must rely upon such third parties
for information as to the origin and ownership of such acquired or licensed
software or data technology. In the
10
future, litigation may be necessary to establish, define, enforce and protect
trade secrets, copyrights, trademarks and other intellectual property rights. We
may also be subject to litigation to defend against claimed infringement of the
rights of others or to determine the scope and validity of the intellectual
property rights of others. Any such litigation could be costly and divert
management's attention, which could have a material adverse effect on our
business, financial condition and results of operations. Adverse determinations
in such litigation could result in the loss of proprietary rights, subject us to
significant liabilities, require us to seek licenses from third parties, which
could be expensive, or prevent us from selling our products or services or using
our trademarks, any one of which could have a material adverse effect on our
business, financial condition and results of operations.
GOVERNMENT REGULATION
Our brokerage subsidiary, TradeStation Securities, is subject to extensive
securities and futures industry regulation under both federal and state laws as
a broker-dealer with respect to its equities business and as an introducing
broker with respect to its futures business. Broker-dealers and introducing
brokers are subject to regulations covering all aspects of those businesses,
including: sales methods; trade practices; use and safe-keeping of customers'
funds and securities; arrangements with clearing houses; capital structure;
record keeping; conduct of directors, officers and employees; and supervision.
To the extent TradeStation Securities solicits orders from customers or makes
investment recommendations, it is subject to additional rules and regulations
governing, among other things, sales practices and the suitability of
recommendations to its customers.
TradeStation Securities' mode of operation and profitability may be
directly affected by: additional legislation; changes in rules promulgated by
the Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD"), the Commodity Futures Trading Commission ("CFTC"),
the National Futures Association ("NFA"), the Board of Governors of the Federal
Reserve System, the various stock and futures exchanges and other
self-regulatory organizations; and changes in the interpretation or enforcement
of existing rules and laws, particularly any changes focused on online
brokerages that target an active trader customer base.
With respect to active trading, the NASD has adopted rules that require
firms to provide customers with a risk disclosure statement about active
trading. Further, the NASD and NYSE have amended their margin rules to impose
more restrictive requirements for "pattern" active traders. Governmental concern
is focused in two basic areas: that the customer has sufficient trading
experience and has sufficient risk capital to engage in active trading. A
minimum equity account balance of $25,000 is required. TradeStation Securities'
customer account documentation is clear that being a brokerage customer of
TradeStation Securities is only for traders who have experience in active
trading, are willing to risk considerable amounts of capital (at least $50,000),
and are interested in engaging in high-risk, speculative trading activity.
Further, a $30,000 equity balance is required to open a TradeStation Securities
equities account. We believe TRADESTATION'S minimum suitability requirements, as
well as the extensive user education documentation and tutorials offered on its
Web site, are consistent with both the letter and the spirit of recent NASD
rules and regulations concerning active trading.
11
The SEC, the NASD, the CFTC, the NFA and other self-regulatory
organizations and state securities commissions can censure, fine, enjoin,
suspend, expel or issue cease-and-desist orders to a broker-dealer or
introducing broker or any of its officers or employees.
Marketing campaigns by TradeStation Securities to bring brand name
recognition to it and to promote the benefit of its services, such as the
TRADESTATION 6 trading platform and its direct-access electronic order
execution, are regulated by the NASD and NFA, and all marketing materials must
be reviewed by an appropriately-licensed TradeStation Securities principal prior
to release, and must conform to standards articulated by the SEC, NASD and NFA.
The NASD or NFA may request that revisions be made to marketing materials, and
can impose certain penalties for violations of its advertising regulations,
including censures or fines, a requirement of advance regulatory approval of all
advertising, the issuance of cease-and-desist orders, and the suspension or
expulsion of a broker-dealer or introducing broker or any of its officers or
employees.
The SEC, the NASD, the CFTC and the NFA and various other regulatory
agencies have stringent rules with respect to the maintenance of specific levels
of net capital by securities broker-dealers and introducing brokers. Net capital
is the net worth of a broker or dealer (assets minus liabilities), less
deductions for certain types of assets as well as other charges. If a firm fails
to maintain the required net capital it may be subject to suspension or
revocation of registration by the SEC or the CFTC and suspension or expulsion by
the NASD or NFA, and it could ultimately lead to the firm's liquidation.
TradeStation Securities is registered as a broker-dealer in every U.S.
state and the District of Columbia, and is subject to regulation under the laws
of those jurisdictions, including registration requirements and being subject to
sanctions if a determination of misconduct is made.
TradeStation Securities is a member of the Securities Investor Protection
Corporation ("SIPC"). SIPC provides protection of up to $500,000 for each
equities brokerage customer, subject to a limitation of $100,000 for cash
balances, in the event of the financial failure of a broker-dealer. In addition,
TradeStation Securities clears all of its custody and clearing issues associated
with equity brokerage transactions through Bear, Stearns Securities Corp. Bear,
Stearns has obtained an excess securities bond issued by Travelers Casualty and
Surety Company, which provides protection for any loss of securities and/or cash
in excess of the primary SIPC protection, up to the amount of the covered
accounts' net equity.
It is possible that other federal or state agencies will attempt to
regulate our current and planned online and other electronic service activities
with rules that may include compliance requirements relating to record keeping,
data processing, other operation methods, privacy, pricing, content and quality
of goods and services as the market for online commerce evolves. Because of the
growth in the electronic commerce market, Congress had held hearings on whether
to regulate providers of services and transactions in the electronic commerce
market. As a result, federal or state authorities could enact laws, rules or
regulations, not only with respect to online brokerage services, but other
online services we provide or may in the future provide. Such laws, rules and
regulations, if and when enacted, could have a material adverse effect on our
business, financial condition, results of operations and prospects.
12
EMPLOYEES
As of December 31, 2001, we had 272 full-time equivalent employees
consisting of 98 in technology development, including software engineering,
product management, user education and quality assurance, 129 in sales and
marketing relating to brokerage services, subscriptions and software products
(including 33 in sales, 24 on the trading desk, 19 in client services, 39 in
software support and 14 in advertising and fulfillment), and 45 in general and
administrative, including executive management, finance, information technology
services and human resources. Our employees are not represented by any
collective bargaining organization, and we have never experienced a work
stoppage and consider our relations with our employees to be good.
Our future success depends, in significant part, upon the continued service
of our key senior management, technology and sales and marketing personnel. The
loss of the services of one or more of these key employees could have a material
adverse effect on us. There can be no assurance that we will be able to retain
our key personnel. Departures and additions of personnel, to the extent
disruptive, could have a material adverse effect on our business, financial
condition and results of operations.
ITEM 2. PROPERTIES
We recently signed a ten-year lease (with two 5-year renewal options) that
is expected to commence in the summer of 2002 for an approximate 70,000 square
foot corporate headquarters in Plantation, Florida. Plantation is just west of
Ft. Lauderdale, Florida (Broward County). This headquarters will consolidate the
personnel and operations of our current Miami and Boca Raton offices, which are
discussed in the next paragraph. The new location is approximately 30 to 35
miles from each of our three current south Florida locations.
Our corporate headquarters are currently located in Miami, Florida, in a
leased facility consisting of approximately 60,500 square feet of office space
(approximately 7,000 square feet of which have been subleased) pursuant to a
lease that expires August 2002. Our brokerage operations are currently conducted
chiefly from 11,800 square feet of office facilities in Boca Raton, Florida
pursuant to a lease that expires in 2007 (which we intend to sublease sometime
this year). We also currently lease a second facility in Boca Raton, Florida,
consisting of approximately 6,000 square feet of space, which is used for
additional technology development and data services operations. That lease
expires January 1, 2005, and has a five-year renewal option (we also intend to
sublease this space sometime this year).
The brokerage also has small branch offices in Osterville, Massachusetts,
Pittsburgh, Pennsylvania, and Hudson and Cincinnati, Ohio. The technologies
subsidiary also has an approximate 13,500 square foot leased facility in
Richardson, Texas from which certain data services development and technical
operations are conducted. That lease expires July 31, 2002, and has a three-year
renewal option. We also lease space for our data server farms at two co-location
sites in Richardson, Texas and Miami, Florida. None of the facilities described
in this paragraph are affected by the expected consolidation of the south
Florida operations in Plantation this summer.
13
We believe that our existing and planned facilities are adequate to support
our existing operations and that, if needed, we will be able to obtain suitable
additional facilities on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
Since January 2, 2001, our common stock, par value $.01 per share, has been
listed on The Nasdaq National Market under the symbol "TRAD." Prior to that
time, the predecessor company's common stock was listed under the symbol "OMGA."
The high and low closing sales prices based on actual transactions on The
Nasdaq National Market during each of the quarters presented are as follows:
Closing Sales Price
------------------------------
High Low
------------- -------------
2000:
First Quarter $ 8.13 $ 4.63
Second Quarter 4.44 2.50
Third Quarter 3.75 2.50
Fourth Quarter 2.88 1.75
2001:
First Quarter $ 3.13 $ 1.88
Second Quarter 5.30 1.75
Third Quarter 5.37 1.92
Fourth Quarter 2.38 1.35
As of March 1, 2002, there were 62 holders of record of our common stock,
and, based upon information previously provided to us by depositories and
brokers, we believe there are more than 4,700 beneficial owners.
DIVIDEND POLICY
We currently expect operating losses for at least the next few quarters and
intend to retain any future earnings to finance our growth and development.
Therefore, we do not anticipate paying any cash dividends in the foreseeable
future. Payment of any future dividends will depend upon our future earnings and
capital requirements and other factors we consider appropriate. We did not
distribute any dividends during the years ended December 31, 2001, 2000 or 1999.
RECENT SALES OF UNREGISTERED SECURITIES
No unregistered securities were issued during the three months ended
December 31, 2001.
15
USE OF PROCEEDS
TradeStation Securities (then known as onlinetradinginc.com corp.) effected
an initial public offering pursuant to a Registration Statement on Form SB-2
(File No. 333-75119), which was declared effective by the Securities and
Exchange Commission on June 11, 1999. For a description of the use of proceeds
from such offering, see Item 2 in Part II of onlinetradinginc.com corp.'s
Quarterly Report on Form 10-QSB for the fiscal quarter ended October 31, 2000.
In addition, since October 31, 2000, $1.8 million was used to pay merger costs
and $3.3 million was used for working capital. The balance of $4.7 million
continues to be invested in money market funds.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and the
Consolidated Financial Statements and Notes thereto included in this report. The
Consolidated Statement of Operations Data presented below for each of the years
in the three-year period ended December 31, 2001, and the Consolidated Balance
Sheet Data as of December 31, 2001 and 2000, have been derived from our
Consolidated Financial Statements included on pages F-1 through F-28 of this
report, which have been audited by Arthur Andersen LLP, independent certified
public accountants. The Consolidated Statement of Operations Data presented
below for each of the years in the two-year period ended December 31, 1998, and
the Consolidated Balance Sheet Data as of December 31, 1999, 1998 and 1997, have
been derived from audited financial statements not included in this report. See
also Note 19 of Notes to Consolidated Financial Statements - UNAUDITED QUARTERLY
FINANCIAL INFORMATION for quarterly financial information for fiscal years 2001
and 2000.
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)
CONSOLIDATED STATEMENT OF OPERATIONS DATA (1):
Revenues:
Brokerage revenues ........................... $ 18,602 $ 17,934 $ 9,783 $ 5,628 $ 3,674
Subscription fees ............................ 9,566 8,170 304 -- --
Licensing fees (2) ........................... 5,029 18,343 16,218 22,005 24,365
Other ........................................ 7,790 8,479 7,214 6,211 4,861
-------- -------- -------- -------- --------
Total revenues ........................... 40,987 52,926 33,519 33,844 32,900
-------- -------- -------- -------- --------
Operating expenses:
Clearing and other transaction costs ......... 5,772 4,787 2,708 1,840 1,592
Data delivery and related costs .............. 5,302 4,002 81 -- --
Technology development ....................... 12,016 8,128 4,932 3,319 1,891
Sales and marketing .......................... 11,174 26,435 20,824 14,721 10,503
Inventory and handling costs ................. 151 1,245 3,085 2,969 3,007
General and administrative ................... 12,925 11,915 6,785 8,578 6,936
Amortization of goodwill and other intangibles 6,198 5,979 1,033 2 2
Merger related costs ......................... -- 3,800 -- -- --
Impairment of goodwill and certain intangibles 5,285 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses ................. 58,823 66,291 39,448 31,429 23,931
-------- -------- -------- -------- --------
(Loss) income from operations ............ (17,836) (13,365) (5,929) 2,415 8,969
Other income (expense), net ..................... 599 1,293 1,653 752 (51)
-------- -------- -------- -------- --------
(Loss) income before income taxes ........ (17,237) (12,072) (4,276) 3,167 8,918
Income tax provision (benefit) .................. 4,668 1,403 (1,634) 1,104 (937)
-------- -------- -------- -------- --------
Historical net (loss) income ............. $(21,905) $(13,475) $ (2,642) $ 2,063 $ 9,855
======== ======== ======== ======== ========
Pro forma net income (3) ................. N/A N/A N/A N/A $ 5,432
========
16
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- ------
(In thousands, except per share data)
Historical (loss) earnings per share:
Basic ............................ $ (0.49) $ (0.31) $ (0.07) $ 0.06 $ 0.28
Diluted .......................... (0.49) (0.31) (0.07) 0.05 0.28
Pro forma earnings per share (3):
Basic ............................ N/A N/A N/A N/A 0.16
Diluted .......................... N/A N/A N/A N/A 0.15
Weighted average shares outstanding:
Basic ............................ 44,459 43,956 40,065 36,756 34,672
Diluted .......................... 44,459 43,956 40,065 37,968 35,385
December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- ------
(In thousands)
CONSOLIDATED BALANCE SHEET DATA (1):
Cash and cash equivalents .......... $19,982 $18,395 $17,304 $ 8,443 $12,542
Total assets ....................... 26,821 50,354 58,920 31,797 28,812
Capital lease obligations .......... 1,407 214 112 -- --
Subordinated loans ................. -- -- -- 525 500
Shareholders' equity ............... 17,458 39,025 51,740 28,120 25,726
- ---------------
(1) The selected financial data as of and for the four years ended December 31,
2000 has been restated to reflect the December 29, 2000 merger of
TradeStation Technologies and TradeStation Securities under the
pooling-of-interests method of accounting. See Note 3 of Notes to
Consolidated Financial Statements - BUSINESS COMBINATIONS.
(2) Prior to 1999, licensing fees were recognized in full (net of provision for
anticipated returns) upon shipment. Upon the release of our 2000I product
line, we began recognizing sales on an "as due" basis in accordance with
the payment terms of the sale (generally over a period of 12 to 16 months).
See Note 1 of Notes to Consolidated Financial Statements - DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(3) Our predecessor company, TradeStation Technologies (then known as Omega
Research), was treated as an S corporation for federal and state income tax
purposes prior to September 30, 1997. Pro forma income taxes have been
provided as if we had been a C corporation for all periods prior to
September 30, 1997. In addition, upon terminating our S corporation
election, we were required to record a non-recurring credit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH SELECTED FINANCIAL DATA AND
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTAINED IN THIS REPORT.
17
OVERVIEW
TradeStation Group, Inc., 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 and TradeStation Technologies are
TradeStation Group's two operating subsidiaries. See Note 3 of Notes to
Consolidated Financial Statements - BUSINESS COMBINATIONS.
Over the past two-and-one-half years we have taken a series of steps to
transform ourselves from a software company to an Internet-based securities
brokerage for institutional, professional and serious, active individual traders
- - a brokerage that offers an electronic trading platform which seamlessly
integrates powerful strategy trading tools, historical and streaming real-time
market data, and "intelligent" direct-access order-routing and execution.
Direct-access trading means, with respect to equity securities transactions,
direct Internet connections to electronic marketplaces, such as ECN's, where
anonymous buyers and sellers participating on the network are matched. With
respect to futures transactions, it means an interface between TRADESTATION
technology and the futures clearing firm's online execution system which,
depending upon the type of futures contract, either sends the order directly to
the trading pit or, for electronic futures markets, implements an electronic
order placement and execution.
The cornerstone of the company's transformation was created on June 27,
2001, the day we launched TRADESTATION 6. In July 2001, as a result of the
launch of TRADESTATION 6, TradeStation Securities was named the "No. 1 Direct
Access Broker" by BARRON'S magazine. In January 2002, TradeStation Securities
won the TECHNICAL ANALYSIS OF STOCKS AND COMMODITIES Reader's Choice Award for
best STOCKS DIRECT ACCESS BROKERAGE, and TRADESTATION 6 won the Reader's Choice
Award for best PROFESSIONAL PLATFORM. TRADESTATION 6 was also named as a
finalist in two CODIE EXCELLENCE IN SOFTWARE categories for 2002 (the winners
will be announced in April 2002). A formal patent application covering
TRADESTATION 6 was filed with the United States Patent and Trademark Office in
October 2001. Advertisement on CNBC of TradeStation Securities' online brokerage
services using TRADESTATION 6 was commenced in February 2002.
Under this new business model, we seek recurring revenues mainly by
offering, through TRADESTATION 6 (and its planned enhanced versions),
commission-based brokerage services. We expect to leverage our historical
success providing strategy trading tools, and the unique quality and
functionality of those tools, to build a high-quality brokerage customer base of
institutional, professional and serious, active individual traders. We also
intend to continue to provide via our technologies subsidiary, TradeStation
Technologies, subscription services for TRADESTATION 6 (and its planned enhanced
versions). The subscription version of TRADESTATION 6 is an
institutional-quality service that offers strategy trading software tools that
generate real-time buy and sell alerts based upon the subscriber's programmed
strategies, but does not include order execution. Subscribers are charged a
monthly subscription fee. Domestically, we no longer offer our traditional
software products, i.e., "client" software products delivered on disks.
Our principal executive offices are located at 8700 West Flagler Street,
Miami, Florida 33174, and our telephone number is (305) 485-7000. In the summer
of 2002, our principal executive offices are expected to be relocated to 8050
S.W. 10th Street, Plantation, Florida 33324.
18
RESULTS OF OPERATIONS
For the three years ended December 31, 2001, we operated in two principal
business segments: (i) brokerage services and (ii) software products and
services. The brokerage services segment represents the operations of
TradeStation Securities and the software products and services segment
represents the operations of TradeStation Technologies. All periods prior to the
December 29, 2000 merger of TradeStation Technologies and TradeStation
Securities, accounted for under the pooling-of-interests method, have been
restated to give the merger retroactive effect. See Note 3 of Notes to
Consolidated Financial Statements - BUSINESS COMBINATIONS. For the periods
indicated, the following table presents certain items in our consolidated
statements of operations broken down by segment:
Year Ended Year Ended
December 31, 2001 December 31, 2000
----------------------------------- -----------------------------------
Software Software
Products Products
Brokerage and Brokerage and
Services Services Total Services Services Total
--------- -------- -------- --------- -------- --------
(In thousands) (In thousands)
Revenues:
Brokerage revenues ........................... $ 18,602 $ -- $ 18,602 $ 17,934 $ -- $ 17,934
Subscription fees ............................ -- 9,566 9,566 -- 8,170 8,170
Licensing fees ............................... -- 5,029 5,029 -- 18,343 18,343
Other ........................................ -- 7,790 7,790 -- 8,479 8,479
-------- -------- -------- -------- -------- --------
Total revenues ........................... 18,602 22,385 40,987 17,934 34,992 52,926
-------- -------- -------- -------- -------- --------
Operating expenses:
Clearing and other transaction costs ......... 5,772 -- 5,772 4,787 -- 4,787
Data delivery and related costs .............. -- 5,302 5,302 -- 4,002 4,002
Technology development ....................... 224 11,792 12,016 701 7,427 8,128
Sales and marketing .......................... 7,776 3,398 11,174 6,006 20,429 26,435
Inventory and handling costs ................. -- 151 151 -- 1,245 1,245
General and administrative ................... 3,829 9,096 12,925 3,456 8,459 11,915
Amortization of goodwill and other intangibles 661 5,537 6,198 541 5,438 5,979
Merger related costs ......................... -- -- -- 1,290 2,510 3,800
Impairment of goodwill and certain intangibles 1,043 4,242 5,285 -- -- --
-------- -------- -------- -------- -------- --------
Total operating expenses ................. 19,305 39,518 58,823 16,781 49,510 66,291
-------- -------- -------- -------- -------- --------
Income (loss) from operations ............ $ (703) $(17,133) $(17,836) $ 1,153 $(14,518) $(13,365)
======== ======== ======== ======== ======== ========
Year Ended
December 31, 1999
----------------------------------
Software
Products
Brokerage and
Services Services Total
--------- -------- --------
(In thousands)
Revenues:
Brokerage revenues ........................... $ 9,783 $ -- $ 9,783
Subscription fees ............................ -- 304 304
Licensing fees ............................... -- 16,218 16,218
Other ........................................ -- 7,214 7,214
-------- -------- --------
Total revenues ........................... 9,783 23,736 33,519
-------- -------- --------
Operating expenses:
Clearing and other transaction costs ......... 2,708 -- 2,708
Data delivery and related costs .............. -- 81 81
Technology development ....................... 280 4,652 4,932
Sales and marketing .......................... 3,897 16,927 20,824
Inventory and handling costs ................. -- 3,085 3,085
General and administrative ................... 2,251 4,534 6,785
Amortization of goodwill and other intangibles 95 938 1,033
Merger related costs ......................... -- -- --
Impairment of goodwill and certain intangibles -- -- --
-------- -------- --------
Total operating expenses ................. 9,231 30,217 39,448
-------- -------- --------
Income (loss) from operations ............ $ 552 $ (6,481) $ (5,929)
======== ======== ========
19
YEARS ENDED DECEMBER 31, 2001 AND 2000
OVERALL
Total revenues were $41.0 million for the year ended December 31, 2001, as
compared to $52.9 million for 2000, a decrease of $11.9 million, or 23%, due
primarily to a decrease in licensing fees.
Loss from operations was $17.8 million for the year ended December 31,
2001, as compared to $13.4 million for 2000, an increase of $4.4 million, or
33%. This increase related primarily to lower revenues, a 2001 non-cash charge
for the impairment of all goodwill and certain intangible assets totaling $5.3
million, and, to a lesser extent, higher technology development expenses,
clearing and other transaction costs, data delivery and related costs and
general and administrative expenses, partially offset by substantially lower
sales and marketing expenses and no merger costs in 2001.
BROKERAGE SERVICES SEGMENT
REVENUES
BROKERAGE REVENUES. Brokerage revenues are comprised primarily of fees
earned from brokerage transactions and interest earned from interest revenue
sharing arrangements with the brokerage's clearing firms. For the year ended
December 31, 2001, brokerage revenues were $18.6 million, including $17.3
million of brokerage fees, as compared to $17.9 million, including $17.1 million
of brokerage fees, for the year ended 2000. This increase of $668,000, or 4%, is
due to increased trading volume and increased interest earned from the interest
revenue sharing arrangements with the brokerage's clearing firms as a result of
higher cash balances having been maintained by the clearing firms.
OPERATING EXPENSES
CLEARING AND OTHER TRANSACTION COSTS. Clearing and other transaction costs
are the costs of executing and clearing customer trades, including commissions
paid to third-party broker-dealers. Clearing and other transaction costs were
$5.8 million for the year ended December 31, 2001, as compared to $4.8 million
for 2000, an increase of $1.0 million, or 21%, primarily as a result of
increased trading volume. Clearing and other transaction costs as a percentage
of brokerage fees increased from 28% for the year ended December 31, 2000 to 33%
for the year ended December 31, 2001 due to more lower-priced transactions
during the year ended December 31, 2001 as compared to 2000.
TECHNOLOGY DEVELOPMENT. Technology development expenses for the year ended
December 31, 2001 consist of personnel costs associated with product management
of TRADESTATION 6, which totaled $224,000 for the year. Technology development
expenses for the year ended December 31, 2000 were $701,000, consisting of
consulting and professional fees and personnel costs for the pre-merger joint
development of our order execution technology. See "SOFTWARE PRODUCTS AND
SERVICES SEGMENT - TECHNOLOGY DEVELOPMENT."
20
SALES AND MARKETING. Sales and marketing expenses consist primarily of
brokers' commissions, other personnel costs for order desk and customer support
centers, marketing programs, including advertising, brochures, direct mail
programs and account opening kits, and data and information tools used by sales
and brokerage personnel. Sales and marketing expenses were $7.8 million for the
year ended December 31, 2001, as compared to $6.0 million for the year ended
December 31, 2000, an increase of $1.8 million, or 29%. This increase was due
primarily to increased personnel and related costs of $1.1 million and increased
advertising and promotion costs of $605,000. Sales and marketing expenses, as a
percentage of total revenues, was 42% for the year ended December 31, 2001, as
compared to 33% for the year ended December 31, 2000. We believe that, in the
future, the absolute dollar amount of sales and marketing expenses will increase
as we continue to market the TRADESTATION 6 brokerage platform. The level of
such increase will depend upon the extent to which such brokerage services are
aggressively marketed and the rate of customer account growth.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, finance and information technology employees; professional fees;
telecommunications; rent; insurance; and other facility expenses. General and
administrative expenses were $3.8 million for the year ended December 31, 2001,
as compared to $3.5 million for 2000, an increase of $373,000, or 11%, due
primarily to an increase in uninsured loss reserves of $903,000 and an increase
in insurance costs of $227,000, partially offset by a decrease in personnel and
related costs of $830,000 related to reduced general and administrative expenses
after the merger.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles includes amortization of intangible assets from the
December 1999 acquisition of the customer accounts of Newport Discount
Brokerage, Inc. ("Newport"), which was accounted for under the purchase method
of accounting. Through December 31, 2001, these intangible assets were being
amortized over their estimated useful lives over a period of five years.
Amortization of goodwill and other intangibles was $661,000 and $541,000 for the
years ended December 31, 2001 and 2000, respectively. As of December 31, 2001,
the remaining Newport intangible assets are held for sale and, beginning in
2002, amortization will be discontinued and the assets will be periodically
tested for impairment. See "IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES"
below and Note 2 of Notes to Consolidated Financial Statements - IMPAIRMENT OF
GOODWILL AND CERTAIN INTANGIBLES.
IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES. In December of 2001, based
upon our decision to sell the Newport accounts, which do not meet the
requirements of our active and institutional trader business model, we recorded
a non-cash charge of $1.1 million for the impairment of certain intangible
assets associated with acquisition of those customer accounts. See Note 1 of
Notes to Consolidated Financial Statements - DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES -- IMPAIRMENT OF LONG-LIVED ASSETS and Note 2
of Notes to Consolidated Financial Statements - IMPAIRMENT OF GOODWILL AND
CERTAIN INTANGIBLES.
21
SOFTWARE PRODUCTS AND SERVICES SEGMENT
REVENUES
TOTAL REVENUES. Total revenues were $22.4 million for the year ended
December 31, 2001, as compared to $35.0 million for the same period in 2000, a
decrease of $12.6 million, or 36%, due primarily to a decrease in licensing
fees.
SUBSCRIPTION FEES. Subscription fees represent monthly fees earned for
providing streaming real-time, Internet-based trading analysis software and data
services. Subscription fees were $9.6 million for the year ended December 31,
2001, as compared to $8.2 million for the year ended December 31, 2000, an
increase of $1.4 million, or 17%, due primarily to an increased subscriber base
following the December 2000 launch of TRADESTATION 6. As a result of our focus
on our brokerage business, we have not actively marketed subscription services
during 2001 and may not do so in the future. Accordingly, subscription fees are
expected to decrease in the future.
LICENSING FEES. Licensing fees are derived from sales of client software
products, principally the recognition of licensing fee installment payments from
sales initiated in prior quarters. Licensing fees were $5.0 million for the year
ended December 31, 2001, as compared to $18.3 million for 2000, a decrease of
$13.3 million, or 73%, due primarily to our discontinuation in May 2000 of
active marketing of client software products and, as of September 2001, no
longer offering these products domestically. As a result of this
discontinuation, licensing fees will continue to decrease in the future.
OTHER REVENUES. Other revenues consist primarily of royalties and
commissions received from third parties whose customers use our legacy software
products, and, prior to 2001, income from our conference designed to highlight
the benefits of trading strategy development. Other revenues were $7.8 million
for the year ended December 31, 2001, as compared to $8.5 million for 2000, a
decrease of $689,000, or 8%. The decrease was due primarily to the cancellation
this year of our trading strategy conference. Commencing first quarter 2002,
other revenues are expected to decrease substantially. See "ITEM I. BUSINESS -
Strategic Relationships -- TELERATE AGREEMENT" and Note 17 of Notes to
Consolidated Financial Statements - COMMITMENTS AND CONTINGENCIES - TELERATE
ROYALTY AGREEMENT.
OPERATING EXPENSES
DATA DELIVERY AND RELATED COSTS. Data delivery and related 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 delivery
and related costs for the year ended December 31, 2001 were $5.3 million, as
compared to $4.0 million for the year ended December 31, 2000, an increase of
$1.3 million, or 32%. The increase is due primarily to increased server farm
infrastructure costs (rent and depreciation for additional facilities and
servers) as well as increased data distribution and exchange fees.
22
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, uninsured loss reserves, 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 $11.8 million for the year ended December
31, 2001, as compared to $7.4 million for the year ended December 31, 2000, an
increase of $4.4 million, or 59%, due primarily to increased uninsured loss
reserves of $2.7 million and increased personnel and related expenses of $1.3
million.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing programs, including advertising, brochures, and direct mail programs;
sales commissions; personnel costs for marketing and customer support centers;
and Web site maintenance and administration costs. Sales and marketing expenses
were $3.4 million for the year ended December 31, 2001, as compared to $20.4
million for 2000, a decrease of $17.0 million, or 83%, due primarily to
decreased advertising and promotion costs of $11.3 million, decreased personnel
and related costs of $4.3 million and decreased travel costs of $850,000. The
decrease in personnel costs is the result of a restructuring of the sales and
marketing team at the end of the first quarter of 2000, and the transfer of
substantially all remaining sales personnel to the brokerage services segment
during the first quarter of 2001. Sales and marketing expenses as a percentage
of total revenues decreased to 15% for the year ended December 31, 2001, as
compared to 58% for the year ended December 31, 2000. Sales and marketing
expenses are expected to continue to decrease as most future marketing efforts
will be focused on the brokerage services segment. See "BROKERAGE SERVICES
SEGMENT - SALES AND MARKETING."
INVENTORY AND HANDLING COSTS. Inventory and handling costs consist
primarily of costs related to shipping of client software products, product
media, and packaging and storage of inventory. Inventory and handling costs were
$151,000 for the year ended December 31, 2001, as compared to $1.2 million for
the same period in 2000, a decrease of $1.1 million, or 88%, due to decreased
shipments of client software during 2001 as a result of the discontinuation in
May 2000 of active marketing of client software products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of employee-related costs for administrative personnel such as
executive, human resources, finance and information technology employees;
professional fees; telecommunications; rent; other facility expenses; insurance;
and provision for bad debts. General and administrative expenses were
approximately $9.1 million for the year ended December 31, 2001, as compared to
$8.5 million for 2000, an increase of $637,000, or 8%, due primarily to a
$714,000 provision for bad debt recognized in the first quarter of 2001. The
provision for bad debt relates to the portion of the 2001 Telerate royalty
receivable that was part of the "pre-petition" estate in Telerate's Chapter 11
bankruptcy, which was filed in February 2001, and was not paid as a result of
the rejection of that agreement in those bankruptcy proceedings. See Note 17 of
Notes to Consolidated Financial Statements - COMMITMENTS AND CONTINGENCIES.
23
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles includes, primarily, amortization related to the October
1999 acquisition of Window On WallStreet accounted for under the purchase method
of accounting and is being amortized over the assets' estimated useful lives,
which range from three to four years, and also includes amortization of data
rights. Amortization of goodwill and other intangibles was $5.5 million and $5.4
million for the years ended December 31, 2001 and 2000, respectively. Future
amortization is expected to be significantly lower due to the December 2001
adjustment that reduced all of the goodwill and certain intangible assets
associated with the acquisition of Window On WallStreet to their current fair
value. See "IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES" below and Note 2 of
Notes to Consolidated Financial Statements - IMPAIRMENT OF GOODWILL AND CERTAIN
INTANGIBLES.
IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES. In December 2001, we
recorded a non-cash charge of $4.2 million for the impairment of all of the
goodwill and certain intangible assets associated with the acquisition of Window
On WallStreet. This was done as a result of our decision, made and implemented
in the fourth quarter of 2001, to upgrade all WindowOnWallStreet.com subscribers
to TRADESTATION 6. See Note 1 of Notes to Consolidated Financial Statements -
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
IMPAIRMENT OF LONG-LIVED ASSETS and Note 2 of Notes to Consolidated Financial
Statements - IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES.
YEARS ENDED DECEMBER 31, 2000 AND 1999
OVERALL
Total revenues increased $19.4 million, or 58%, from $33.5 million in 1999
to $52.9 million in 2000, due primarily to an increase in subscription fees
(from our software products and services segment) and brokerage revenues (from
our brokerage services segment).
Loss from operations was $13.4 million in 2000, an increase of $7.4 million
compared to $5.9 million in 1999. This increase was due primarily to increased
amortization of goodwill and intangibles of $4.9 million, and approximately $3.8
million of merger related costs associated with the merger of TradeStation
Technologies and TradeStation Securities, partially offset by the increase in
revenues. The merger related costs were comprised of approximately $1.6 million
in banking fees, $1.2 million in legal, accounting and tax service fees, $0.6
million in severance expenses and $0.4 million in printing and miscellaneous
expenses.
BROKERAGE SERVICES SEGMENT
REVENUES
BROKERAGE REVENUES. For the year ended December 31, 2000, brokerage
revenues were $17.9 million, including $17.1 million of brokerage fees, as
compared to $9.8 million, including $9.5 million of brokerage fees. This
increase of $8.2 million, or 83%, was due primarily to continued customer growth
and the December 1999 acquisition of the customer accounts of Newport. See Note
4 of Notes to Consolidated Financial Statements - ACQUISITION OF CERTAIN
INTANGIBLES.
24
OPERATING EXPENSES
CLEARING AND OTHER TRANSACTION COSTS. Clearing and other transaction costs
were $4.8 million for the year ended December 31, 2000, as compared to $2.7
million in 1999, an increase of $2.1 million, or 77%, as a result of the
increase in volume of transactions, the December 1999 acquisition of clients
from Newport, and the cost of maintaining third-party clearing agreements.
Clearing and other transaction costs as a percentage of brokerage fees decreased
to 28% in 2000, as compared to 29% in 1999, due to more favorable clearing
rates, partially offset by increased commissions paid to third-party
broker-dealers.
TECHNOLOGY DEVELOPMENT. Technology development expenses were $701,000 for
the year ended December 31, 2000, as compared to $280,000 in 1999, an increase
of $421,000, or 150%, due to the development of a new direct-access
order-execution system, and were comprised primarily of consulting and
professional fees.
SALES AND MARKETING. Sales and marketing expenses were $6.0 million for the
year ended December 31, 2000, as compared to $3.9 million in 1999, an increase
of $2.1 million, or 54%, due primarily to increased personnel and related costs
of $1.8 million and, to a lesser extent, increased costs related to data and
information tools. Increased personnel costs were due primarily to increased
brokers' commissions of $805,000 as a result of increased brokerage revenues,
and order desk and customer support personnel increasing from 11 at the end of
1999 to 38 at December 31, 2000. Sales and marketing expenses, as a percentage
of total revenues, improved from 40% in 1999 to 33% in 2000, due primarily to
reduced commissions as a percentage of brokerage revenues as a result of a
majority of brokerage fee growth being attributable to online accounts.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.5
million for the year ended December 31, 2000, as compared to $2.3 million in
1999, an increase of $1.2 million, or 54%, due primarily to increases in
personnel and related costs of $554,000, facility expenses of $259,000, and, to
a lesser extent, increased telecommunications and insurance expenses.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was approximately $541,000 in 2000 and $95,000 in 1999.
The increase was due to the intangible assets from the December 1999 acquisition
of the Newport customer accounts. See Note 4 of Notes to Consolidated Financial
Statements - ACQUISITION OF CERTAIN INTANGIBLES.
MERGER RELATED COSTS. During the fourth quarter of 2000, our brokerage
services segment recorded approximately $1.3 million of merger related costs
associated with the merger of TradeStation Technologies and TradeStation
Securities.
SOFTWARE PRODUCTS AND SERVICES SEGMENT
REVENUES
TOTAL REVENUES. Total revenues were $35.0 million for the year ended
December 31, 2000, as compared to $23.7 million in 1999, an increase of $11.3
million, or 47%.
25
SUBSCRIPTION FEES. Subscription fees were $8.2 million for the year ended
December 31, 2000, as compared to $304,000 in 1999, an increase of $7.9 million,
due primarily to the January 25, 2000 launch of WINDOWONWALLSTREET.COM, which
contributed $7.1 million in 2000.
LICENSING FEES. Licensing fees were $18.3 million for the year ended
December 31, 2000, as compared to $16.2 million in 1999, an increase of $2.1
million, or 13%, due primarily to a change in recognition of revenue in 1999.
Prior to 1999, licensing fees were recognized in full (net of provision for
anticipated returns) upon shipment. In 1999, upon the release of the 2000I
product line, we began recognizing sales on an as due basis in accordance with
the payment terms of the sale (generally over a period of 12 to 16 months). The
change in revenue recognition resulted from changes in the facts and
circumstances surrounding product sales, including the introduction of a new,
higher-priced product, with longer financing terms, which were deemed to alter
the predictability of return reserves and the future collectibility of
receivables.
OTHER REVENUES. Other revenues were $8.5 million for the year ended
December 31, 2000, as compared to $7.2 million in 1999, an increase of $1.3
million, or 18%, due primarily to minimum royalties under the license agreement
with Telerate increasing by $2.0 million, partially offset by decreases in
end-of-day data vendor royalties and a decrease in revenues generated from our
conference designed to highlight the benefits of trading strategy development.
OPERATING EXPENSES
DATA DELIVERY AND RELATED COSTS. Data delivery and related costs for 2000
were approximately $4.0 million, compared to $81,000 in 1999. The increase was
due primarily to the launch of the WINDOWONWALLSTREET.COM subscription service
on January 25, 2000.
TECHNOLOGY DEVELOPMENT. Technology development expenses were $7.4 million
for the year ended December 31, 2000, as compared to $4.7 million in 1999, an
increase of $2.8 million, or 60%, due primarily to technology development
personnel increasing 76%, from 50 at September 30, 1999 (the month prior to the
Window On WallStreet acquisition) to 88 at December 31, 2000.
SALES AND MARKETING. Sales and marketing expenses were $20.4 million for
the year ended December 31, 2000, as compared to $16.9 million in 1999, an
increase of $3.5 million, or 21%, due primarily to increased advertising of $5.2
million (primarily television advertising), partially offset by decreased
personnel and related costs of $1.3 million related to the restructuring of the
sales team at the end of the first quarter of 2000, and, to a lesser extent,
decreased travel costs of $381,000 related to the discontinuation of sales
seminars. Sales and marketing expenses as a percentage of total revenues
decreased from 71% in 1999 to 58% in 2000 due primarily to increased revenues in
2000.
INVENTORY AND HANDLING COSTS. Inventory and handling costs were $1.2
million for the year ended December 31, 2000, as compared to $3.1 million in
1999, a decrease of $1.8 million, or 60%, due to decreased shipments of client
software during 2000 as compared to the prior year. Inventory and handling costs
as a percentage of licensing fees decreased from 19% in 1999
26
to 7% in 2000, due primarily to a shift in the recognition of 2000I licensing
fee revenue from upon shipment to an "as due" basis in accordance with the
payment terms of the sale.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $8.5
million for the year ended December 31, 2000, as compared to $4.5 million in
1999, an increase of $4.0 million, due primarily to increases in personnel costs
of $1.2 million, facility expenses of $1.2 million, and consulting and
professional fees of $1.0 million. Approximately 22% of the overall increase in
general and administrative expenses was related to the addition of
administrative costs associated with Window On WallStreet's operations.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was approximately $5.4 million in 2000 as compared to
$938,000 in 1999. The increase was due to the amortization of goodwill and other
intangibles associated with the October 1999 acquisition of Window On
WallStreet. See Note 3 of Notes to Consolidated Financial Statements - BUSINESS
COMBINATIONS.
MERGER RELATED COSTS. During the fourth quarter of 2000, our software
products and services segment recorded approximately $2.5 million of merger
related costs associated with the merger of TradeStation Technologies and
TradeStation Securities.
INCOME TAXES
During the year ended December 31, 2001, we recorded an income tax
provision of $4.7 million, which includes a fourth quarter non-cash charge in
accordance with the requirements of Statement of Financial Accounting Standards
("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES, of $4.8 million to establish a
full valuation allowance against our deferred tax assets. A valuation allowance
was recorded to offset the tax benefit of all other net operating losses
generated during the year. See Note 12 of Notes to Consolidated Financial
Statements - INCOME TAXES.
Prior to December 29, 2000, the effective time of the merger of
TradeStation Technologies and TradeStation Securities, TradeStation Technologies
and TradeStation Securities were separate tax-paying entities. Accordingly, it
is appropriate to look at each company's income taxes separately for 2000 and
1999.
No taxes were provided for TradeStation Technologies during 2000, as a
valuation allowance was recorded to offset the tax benefit of all net operating
losses generated during 2000. The effective tax rate for 1999 approximated the
38.6% statutory rate.
TradeStation Securities' effective tax rate was 60.7% and 39.4% for 2000
and 1999, respectively. The effective tax rate for 2000 exceeded the statutory
rate due to nondeductible merger-related expenses.
27
VARIABILITY OF RESULTS
The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year, particularly given that we
have recently completed a transition to a new business model. Our quarterly
revenues and operating results have varied in the past, and are likely to vary
even more in the future due to that transition to the new business model. Such
fluctuations may result in volatility in the price of our common stock. As
budgeted expenses are based upon expected revenues, if actual quarterly revenues
are below management's expectations, then results of operations are likely to be
adversely affected because a large amount of our expenses do not vary with
revenues in the short term. In addition, operating results may fluctuate based
upon the timing, level and rate of acceptance of releases of new products and
services and/or enhancements, fluctuations in the share volume of exchange
transactions, conditions in the economy and securities markets, fluctuations in
number and share volume of client trades, pricing changes, increased
competition, variations in the revenue mix, and announcements of new products
and services and/or enhancements by us or our competitors, and other factors.
Such fluctuations may result in volatility in the price of our common stock. See
Note 19 of Notes to Consolidated Financial Statements - UNAUDITED QUARTERLY
FINANCIAL INFORMATION.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had cash and cash equivalents of approximately
$20.0 million and securities owned of $416,000. Of these amounts, $3.9 million
is restricted, held to support a facility lease, two stand-by letters of credit
securing equipment leases and a credit card clearing agreement. See Note 17 of
Notes to Consolidated Financial Statements - COMMITMENTS AND CONTINGENCIES --
RESTRICTED CASH AND MARKETABLE SECURITIES.
In connection with the expected growth of our new brokerage business model
and the relocation and consolidation of our south Florida offices, we anticipate
we will acquire in 2002, in the form of capital and operating leases, $1.3 to
$1.8 million of equipment and furniture. See Note 10 of Notes to Consolidated
Financial Statements - CAPITAL LEASE OBLIGATIONS and Note 17 of Notes to
Consolidated Financial Statements - COMMITMENTS AND CONTINGENCIES -- OPERATING
LEASES for a discussion of our outstanding capital and operating lease
obligations.
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 totaled $2.8 million and $241,000 in
2001 and 2000, respectively, compared to cash used in operating activities of
approximately $736,000 in 1999. The increase in net cash provided by operating
activities in 2001 was due primarily to the collection of an income tax
receivable of $8.5 million in April 2001, partially offset by the current year
loss in 2001.
Investing activities used cash of $937,000 and $1.7 million in 2001 and
1999, respectively, and provided cash of approximately $543,000 during 2000.
During 2001, cash used in investing activities was comprised mainly of $546,000
in capital expenditures, and to a lesser extent the purchase of intangibles,
primarily data rights. During 2000, cash provided by investing activities was
comprised of proceeds from maturity of securities, net of related purchases, of
$1.6 million,
28
partially offset by capital expenditures of $1.0 million. During 1999, cash used
in investing activities was comprised mainly of $2.9 million paid for certain
intangible assets, including Newport assets, $1.8 million in capital
expenditures, and $1.1 million (net of cash acquired) paid for costs associated
with the October 1999 acquisition of Window On WallStreet. These payments were
partially offset by $4.0 million of proceeds from maturity of securities owned.
Financing activities used cash of $300,000 during 2001 and provided cash of
$307,000 and $11.3 million during 2000 and 1999, respectively. Proceeds from
issuance of common stock from our Employee Stock Purchase Plan and the exercise
of stock options under our other stock plans (Incentive Stock Plan and
Nonemployee Director Stock Option Plan) provided cash of $109,000, $386,000, and
$466,000 during 2001, 2000, and 1999, respectively. In addition, during 1999,
TradeStation Securities completed its initial public offering, generating net
proceeds of $15.8 million. During 1999, such proceeds were partially offset by
the repayment of Window On WallStreet debt of $4.1 million, repayment of all
outstanding subordinated loans, net of related borrowings, of $525,000, and the
redemption of TradeStation Securities outstanding preferred stock held by a
former director for $330,000, 110% of the stated value. Repayments of capital
lease obligations were $410,000 and $78,000 during 2001 and 2000, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
We adopted SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, on January 1, 2001. SFAS No. 133, as amended by SFAS No. 138,
requires the recognition of all derivatives on the balance sheet as either
assets or liabilities measured at fair value. Derivatives that do not qualify
for hedge accounting must be adjusted to fair value through income. Adoption of
SFAS No. 133 had no impact on our consolidated financial statements, as no
derivative contracts have been entered into and there are no current plans to do
so in the future.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, BUSINESS COMBINATIONS. SFAS No. 141, which addresses financial
accounting and reporting for business combinations, supersedes Accounting
Principles Board Opinion ("APB") No. 16, BUSINESS COMBINATIONS, and SFAS No. 38,
ACCOUNTING FOR PREACQUISITION CONTINGENCIES OF PURCHASED ENTERPRISES. All
business combinations in the scope of SFAS No. 141 are to be accounted for under
the purchase method. The July 2001 adoption of SFAS No. 141 did not have an
impact on our consolidated financial position, results of operations or cash
flows.
In June 2001, the FASB also issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets. SFAS
No. 142 also addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. With the adoption of SFAS No.
142, goodwill is no longer subject to amortization, but will be subject to at
least an annual assessment for impairment by applying a fair value-based test.
The impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than the carrying or book value. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Impairment loss for goodwill
arising from the initial application of SFAS No. 142 is to be reported as
resulting from a change in accounting principle. We do not believe that the 2002
29
adoption of SFAS No. 142 will have a material impact on our consolidated
financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF, and
APB No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS. SFAS No. 144 establishes a single accounting
model for assets to be disposed of by sale whether previously held and used or
newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for
presentation of discontinued operations in the income statement, but broadens
the presentation to include a component of an entity. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001 and the interim periods
within. We do not believe that the 2002 adoption of SFAS No. 144 will have a
material impact on our consolidated financial position, results of operations or
cash flows.
FORWARD-LOOKING STATEMENTS; BUSINESS RISKS
This report contains statements that are forward-looking within the meaning
of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. When used in this report, the words "believes,"
"estimates," "plans," "expects," "intends," "anticipates," "contemplates,"
"may," "will," "shall," "assuming," "prospect," "should," "could," "would,"
"looking forward" and similar expressions, to the extent used, are intended to
identify the forward-looking statements. All forward-looking statements are
based on current expectations and beliefs concerning future events that are
subject to risks and uncertainties. Actual results may differ materially from
the results suggested in this report. Factors that may cause or contribute to
such differences, and our business risks generally, include, but are not limited
to, the items described below, as well as in other sections of this report and
in our other public filings and our press releases.
THERE ARE SEVERAL FACTORS THAT MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY
OPERATING RESULTS, WHICH WOULD LIKELY 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 will likely fluctuate in the future.
These fluctuations may be expected to be even greater due to the
unpredictability inherent in our recent change to a new business model. Causes
of such significant fluctuations may include, but are not limited to:
o cash flow problems that may occur;
o market or competitive pressure to lower commissions and fees charged
to customers;
o our ability to successfully complete our transition from a revenue
model based upon expensive, one-time client software sales and
low-priced monthly subscription services to
30
a revenue model based mainly upon brokerage commissions and fees (as
this requires increasing revenue from the new model to replace
decreasing revenue from the old model in time to avoid depletion of
all of our available cash);
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;
o the timing, completion, cost and effect of our development and launch
of planned enhancements to the TRADESTATION 6 trading platform;
o the timing and cost of completing a combined company infrastructure
(as a result of our December 29, 2000 merger), including information
technology and databases, mechanisms and methods of delivery of
products and services, administrative functions, technology
development and sales and marketing;
o payment in whole or in part of a $2.7 million pending insurance claim;
o the size and frequency of any trading errors for which we ultimately
suffer the economic burden, in whole or in part;
o changes in demand for our products and services due to the rapid pace
in which new technology is offered to customers in our industry;
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 general economic and market factors that affect active trading,
including changes in the securities and financial markets; and
o delays and unanticipated costs in, or relating to, completing the
build-out of our new corporate headquarters, occupying the new
headquarters, and/or subleasing our two Boca Raton office facilities.
WE MAY NEED CASH IN THE FORESEEABLE FUTURE
We are experiencing a period of net losses. While we anticipate having
sufficient cash to meet our needs over the next 12 months, our future liquidity
and capital requirements will depend upon numerous factors, including: the
success of our existing and new product and service offerings (as revenues from
our discontinued product and service offerings continue to decline); the rate of
customer acceptance of our new products and services, including the number of
new brokerage accounts acquired and the number and volume of trades made by our
brokerage customers; price competition that may result in us charging lower
commissions and fees to customers; costs and timing of expansion of research and
development and marketing efforts, and the success and timing of the success
thereof; and competing technological and
31
market developments. Funds may be raised through debt financing and/or the
issuance of equity securities, there being no assurance that any such type of
financing on terms satisfactory to us will be available or otherwise occur. Any
equity financing or debt financing which requires issuance of equity securities
or warrants to the lender would reduce the percentage ownership of the
shareholders of the company. Shareholders also may, if issuance of equities
occurs, experience additional dilution in net book value per share, or the
issued equities may have rights, preferences or privileges senior to those of
existing shareholders.
THE NEW BUSINESS MODEL IS ONE WITH NO HISTORICAL RECORD, WHICH MAKES
BUSINESS PLANNING DIFFICULT
Because the new business model, i.e., a direct-access brokerage based upon
an "institutional-quality" Internet-based strategy trading software platform, is
one with no significant historical record for our company, and, to our
knowledge, one with no significant historical record for any other company, our
attempts to predict the size of our market and our potential market share, to
anticipate revenues and costs, to prepare budgets under the new business model,
and to make decisions regarding obtaining third-party financing that may be
required, will generally be based upon theoretical assumptions. Future events
and results may differ drastically from those planned or anticipated, which, if
negative, would result in a material adverse effect on our business, financial
condition, results of operations and prospects. See "WE MAY NEED CASH IN THE
FORESEEABLE FUTURE" above.
OUR TRANSITION TO THE NEW BUSINESS MODEL HAS REQUIRED RAPID AND SUBSTANTIAL
CHANGES TO OUR INFRASTRUCTURE
We now depend upon a different operational infrastructure than the one
which supported our client software business, and have substantially modified
our approaches to technology development and sales and marketing. Those changes
are still in progress. Our infrastructure must now support three separate kinds
of business operations: development of strategy trading tools; organization and
delivery of streaming real-time data and news; and direct-access online
brokerage services, all of which need to be seamlessly integrated in a unified
product/service offering. This has required substantial changes in information
technology and databases, mechanisms and methods of delivery of products and
services, administrative functions, and use of personnel resources. Technology
development has changed its focus from client software to Internet and Web
site-related technology, and sales and marketing has changed its focus from
high-priced client software sales to brokerage service commission revenues, the
advertising of which is intensely regulated by governmental and
quasi-governmental authorities.
WE HAVE VIRTUALLY NO MARKETING OR SALES EXPERIENCE RELATING TO BROKERAGE
SERVICES
Until very recently, our marketing and sales resources and personnel have
been focused on client software and subscriptions. Now, we require a trained,
licensed sales force and marketing and sales expertise that focus on financial
services, i.e., commission-based brokerage services. Although we continue to use
TRADESTATION technology as a main selling proposition for what we offer, there
are significant differences between selling software disks for one-time license
fees and software subscriptions for relatively low monthly fees, as compared to
selling brokerage services, which requires customers to deliver to us a
substantial dollar amount to open an account and to trust us to effectuate
important financial transactions on their behalves. We have virtually
32
no marketing or sales experience relating to brokerage services, as TradeStation
Securities has not, prior to the efforts recently commenced, used media
advertising or fielded an experienced sales team to promote its brokerage
services. Our brokerage's sales team, though trained and licensed, remains
relatively inexperienced in the sale of brokerage services. Our failure to build
and maintain a successful sales and marketing operation for our brokerage
services will, regardless of the uniqueness or value of our technology, severely
negatively affect our operating results and financial condition. See "WE MAY
NEED CASH IN THE FORESEEABLE FUTURE" above.
FLUCTUATIONS IN THE SECURITIES AND FINANCIAL MARKETS MAY AFFECT OUR RATES
OF CUSTOMER ACQUISITION, RETENTION AND TRADING ACTIVITY
Our current and planned products and services are and will be marketed to
customers who invest or trade in the securities and financial markets. To the
extent that interest in investing or trading decreases due to volatility or
significant downward movement in the securities or financial markets, such as
has recently occurred, tax law changes, recession, depression, war, terrorism,
or otherwise, our business, financial condition, results of operations and
prospects could be materially adversely affected. It is possible, if not likely,
that increased losses by customers that occur as a result of any such recession,
depression or other negative event will increase the quantity and size of legal
claims that may be made against us. See "THE NATURE OF OUR BUSINESS RESULTS IN
POTENTIAL LIABILITY TO CUSTOMERS" below.
OUR INDUSTRY IS INTENSELY COMPETITIVE, WHICH MAKES IT DIFFICULT TO ATTRACT
AND RETAIN CUSTOMERS
The markets for (i) online brokerage services, (ii) client software and
Internet-based trading tools and (iii) real-time market data services are
intensely competitive and rapidly evolving, and there appears to be substantial
consolidation of those three products and services occurring in the industry.
Our new business model embraces this evolution and consolidation. However, we
believe that due to the current and anticipated rapid growth of the market for
integrated trading tools, real-time market data and online brokerage services,
competition, as well as consolidation, will substantially increase and intensify
in the future. We believe our ability to compete will depend upon many factors
both within and outside our control. These include: the timing and market
acceptance of new products and services and enhancements developed by us and our
competitors; our ability to integrate the respective businesses in an orderly,
efficient and otherwise successful manner; the design and support of efficient,
materially error-free Internet-based systems; product and service functionality;
data availability; ease of use; pricing; reliability; customer service and
support; and sales and marketing efforts. See "ITEM 1. BUSINESS -- Competition."
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. Any such litigation could
have a material adverse effect on our business, financial condition, results of
operations and prospects. Additionally, our other 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
33
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. This risk is heightened by our offering of online brokerage
services seamlessly integrated with real-time strategy trading tools. 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. See "SYSTEMS FAILURE MAY
RESULT IN OUR INABILITY TO DELIVER ON TIME, OR AT ALL, IMPORTANT AND
TIME-SENSITIVE SERVICES TO OUR CUSTOMERS" below.
SYSTEMS FAILURE MAY RESULT IN OUR INABILITY TO DELIVER ON TIME, OR AT ALL,
IMPORTANT AND TIME-SENSITIVE SERVICES TO OUR CUSTOMERS
We will be receiving and processing trade orders through Internet-based
trading platforms and online order execution systems. Thus, we will depend
heavily on the integrity of the electronic systems supporting this type of
trading, including the strategy trading tools containing buy and sell alerts
that initiate trading decisions or order placement. Heavy stress placed on these
systems during peak trading times could cause these systems to operate too
slowly or fail. Additionally, the integrity of these systems is increasingly
being attacked by persons sometimes referred to as "hackers" who intentionally
introduce viruses or other defects to cause damage, inaccuracies or complete
failure. Also, as a result of recent events, fears of "cyberterrorism" have
heightened. If these systems or any other systems in the trading process slow
down significantly or fail, even for a short time, our brokerage customers would
suffer delays in trading, potentially causing substantial losses and possibly
subjecting us to claims for such losses or to litigation claiming fraud or
negligence. During a systems failure, 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. In
addition, a hardware or software failure, power or telecommunications
interruption or natural disaster could cause a systems failure. Any systems
failure that interrupts our operations 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" above.
OUR TRANSITION TO THE NEW BUSINESS MODEL PLACES A SIGNIFICANT STRAIN ON OUR
MANAGEMENT AND OPERATIONS
Our transition to the new business model has placed, and will continue to
place, a significant strain on our management and operations. Our future
operating results will depend, in part, on our ability to continue to broaden
our senior and middle management groups and administrative infrastructure, and
our ability to attract, hire and retain skilled employees, particularly in
marketing and sales, technology development, Web site design and information
technology.
34
THE INTERNET, AS IT GROWS, MAY HAVE PROBLEMS THAT AFFECT OUR BUSINESS
There is the risk that, over time, the Internet may not prove to be a
viable commercial marketplace because of a failure to continue to develop the
necessary infrastructure, such as reliable network backbones and adequate
band-widths, or the failure to develop complementary products and services, such
as high-speed modems. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth.
OPERATION IN A HIGHLY-REGULATED INDUSTRY AND COMPLIANCE FAILURES MAY RESULT
IN SEVERE PENALTIES AND OTHER HARMFUL GOVERNMENTAL ACTIONS AGAINST US
The securities industry is subject to extensive regulation covering all
aspects of the securities business. Regulatory authorities are currently
focusing intensely on the online trading industry, particularly the segment that
seeks the accounts of active traders. The various governmental authorities and
industry self-regulatory organizations that supervise and regulate our brokerage
have broad enforcement powers to censure, fine, suspend, enjoin, expel or issue
cease-and-desist orders to our brokerage or any of its officers or employees who
violate applicable laws or regulations. Additionally, new rules relating to
active traders have recently been enacted and more may be enacted which severely
limit the operations and potential success of our business model. Our ability to
comply with all applicable laws and rules is largely dependent on our
brokerage's maintenance of compliance and reporting systems, as well as its
ability to attract and retain qualified compliance and other personnel. Our
brokerage could be subject to disciplinary or other regulatory or legal actions
in the future due to noncompliance.
DEPENDENCE UPON OUTSIDE DATA SOURCES CREATES RISKS OUTSIDE OF OUR CONTROL
WHICH MAY AFFECT OUR ABILITY TO PROVIDE OUR CUSTOMERS WITH MARKET DATA AND NEWS
Our business is dependent upon our ability to enter into contracts with
private business information compilers in order to provide market data and news
to customers. We obtain such information pursuant to non-exclusive licenses from
private information compilers, some of which are our current or potential
competitors. These contracts typically provide for royalties based on usage or
minimums. We must also comply with rules and regulations of the exchanges that
are the sources of market data information. Failure to comply could result in us
becoming a prohibited recipient of market data from exchanges the rules or
regulations of which were violated. While we are not aware of any material data
supplier contracts that are in jeopardy of being terminated or not renewed,
there can be no assurance that we will be able to renew our current contracts
with data sources, maintain comparable price levels for information, or
negotiate additional contracts with data sources as necessary to maintain
existing products and services or introduce new products and services. There is
no assurance comparable alternative sources of information would be able to be
obtained should existing contracts be terminated or not renewed. Termination of
our relationship with one or more information suppliers could have a material
adverse effect on our business, financial condition, results of operations and
prospects.
35
THE LOSS OF KEY EMPLOYEES COULD DECREASE THE QUALITY OF OUR MANAGEMENT AND
OPERATIONS
Our success depends to a very significant extent on the continued
availability and performance of a number of senior management, technology and
sales and marketing personnel. The loss of one or more of these key employees
could have a material adverse effect on our company.
THERE ARE RISKS RELATING TO OUR ABILITY TO MAINTAIN CUSTOMER PRIVACY AND
SECURITY AND THAT INCREASED GOVERNMENT REGULATION OF INTERNET BUSINESS MAY OCCUR
A significant risk for our Internet operations is that customers may refuse
to transact business over the Internet, particularly business, such as ours,
that involves the handling of significant amounts of customers' funds due to
privacy or security concerns. This risk will grow if, as and to the extent
"cyberterrorism" occurs or is perceived to be a viable, prominent threat or
likelihood to occur. We currently incorporate and plan to continue to
incorporate security measures into our privacy policies. However, a major breach
of customer privacy or security could have serious consequences for our
Internet-based operations. Use of the Internet, particularly for commercial
transactions, may not continue to increase as rapidly as it has during the past
few years as a result of privacy or security concerns, or for other reasons. If
this occurs, the growth of our operations would be materially hindered. If
Internet activity becomes heavily regulated in these respects, that could also
have significant negative consequences for the growth of our current and planned
operations.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION
There has been substantial litigation in the software industry involving
intellectual property rights. Although we do not believe that we are or will be
infringing upon the intellectual property rights of others, there can be no
assurance that infringement claims, if asserted, would not have a material
adverse effect on our business, financial condition, results of operations and
prospects, or result in our being unable to use intellectual property which is
integral to one or more of our products or services. The risk of infringement
claims is heightened with respect to some of the TRADESTATION 6 technology
because that technology, as opposed to our historical client software
technology, has not stood any significant "test of time."
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR PRESERVE OUR RIGHTS IN
INTELLECTUAL PROPERTY
Our success is and will 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 are unable to determine the extent to which piracy of our products and
services exists. There can be no assurance that the steps taken by us to protect
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.
36
OUR BROKERAGE MUST MEET NET CAPITAL REQUIREMENTS AS A BROKER-DEALER THAT,
IF NOT COMPLIED WITH, COULD RESULT IN SEVERE PENALTIES, AND WHICH AT ALL TIMES
LIMIT OUR RIGHT TO USE ALL OF ITS CASH
The SEC, the NASD and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers. Net capital is the net worth of a broker or dealer
(assets minus liabilities), less deductions for certain types of assets as well
as other charges. If a firm fails to maintain the required net capital it may be
subject to suspension or revocation of registration by the SEC and suspension or
expulsion by the NASD, and it could ultimately lead to the firm's liquidation.
If such net capital rules are changed or expanded, or if there is an unusually
large charge against net capital, operations that require the use of capital
would be limited. Also, our ability to withdraw capital from our TradeStation
Securities brokerage subsidiary will be restricted under SEC rules, which in
turn could materially impact our available working capital and materially impact
or limit our ability to repay debt as and when due, redeem or purchase shares of
our outstanding stock, if required, and pay dividends in the future. A large
operating loss or charge against net capital could adversely affect our ability
to expand or even maintain our then present levels of business, which could have
a material adverse effect on our business, financial condition, results of
operations and prospects. See "WE MAY NEED CASH IN THE FORESEEABLE FUTURE"
above.
LOSS OF OUR CLEARING FIRM RELATIONSHIPS COULD RESULT IN REGULATORY
COMPLIANCE ISSUES
Our clearing relationships may be terminated by either party on 60 days'
advance written notice. If a clearing relationship terminates, TradeStation
Securities would need to replace it with another appropriate clearing firm on
substantially similar terms, as to which no assurance may be given. If
TradeStation Securities is for some reason unable to engage the services of any
clearing firm, it would need to provide its own clearing to remain in business.
If it was to provide its own clearing, it would need first to meet certain
financial strength standards, obtain regulatory approval (which could be
time-consuming), and would subject itself to substantial additional
infrastructure costs and increased net capital reserve requirements and other
complex and intense regulatory requirements. Accordingly, termination of a
clearing relationship could have a material adverse effect on our business,
financial condition, results of operations and prospects.
CONTROL OF TRADESTATION GROUP BY THE CRUZES MEANS THAT IMPORTANT DECISIONS
AFFECTING THE COMPANY ARE CONCENTRATED IN THE JUDGMENT OF TWO RELATED
INDIVIDUALS
Affiliates of William R. Cruz and Ralph L. Cruz (the Co-Chairmen and
Co-Chief Executive Officers of our company) own 18,524,208 shares of our common
stock, approximately 41.6% of the outstanding shares of our common stock. In
addition, pursuant to a voting trust agreement the Cruzes have the ability
through December 29, 2002 to elect at least five (of which two are required to
be independent directors) of the eight directors of TradeStation Group. As a
result, the Cruzes control TradeStation Group.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto and the report of
the independent certified public accountants set forth on pages F-1 through F-28
are filed as part of this report and incorporated herein by reference.
The Consolidated Financial Statement Schedule and the report of the
independent certified public accountants set forth on pages S-1 through S-3 are
filed as part of this report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of TradeStation Group and their
respective ages and positions as of March 1, 2002 are as follows:
Name Age Position With the Company
- ---- --- -------------------------
William R. Cruz 40 Co-Chairman of the Board and Co-Chief Executive Officer
Ralph L. Cruz 38 Co-Chairman of the Board and Co-Chief Executive Officer
Salomon Sredni 34 President and Chief Operating Officer and Director
David H. Fleischman 56 Chief Financial Officer, Vice President of Finance and Treasurer
Marc J. Stone 41 Vice President of Corporate Development, General Counsel and Secretary
Stephen C. Richards (1)(2) 48 Director
Charles F. Wright (1)(2) 51 Director
Michael W. Fipps (1) 59 Director
- --------------------
(1) Member of the Audit Committee of the board of directors.
(2) Member of the Compensation Committee of the board of directors.
The directors hold office until the next annual meeting of shareholders.
Executive officers serve at the discretion of the board of directors.
WILLIAM R. CRUZ co-founded the company with his brother, Ralph Cruz, in
1982 and has been a director since that time. He served as President from 1982
to September 1999. Mr. Cruz was appointed Co-Chairman of the Board and Co-Chief
Executive Officer of the company in 1996. Mr. Cruz studied classical violin at
the University of Miami, which he attended on a full scholarship, and the
Juilliard School of Music, during which time he won numerous classical violin
competitions. Mr. Cruz has been primarily responsible for the conception and
management of the company's products and product strategies.
RALPH L. CRUZ co-founded the company in 1982 and has been a director since
that time. Mr. Cruz was Vice President of the company from 1982 until 1996, at
which time he was appointed Co-Chairman of the Board and Co-Chief Executive
Officer. Mr. Cruz also serves as a director of the company's two operating
subsidiaries. Mr. Cruz studied classical violin at the University of Miami,
which he attended on a full scholarship, and Indiana University, during which
time he won numerous classical violin competitions. Mr. Cruz historically has
been responsible for the company's marketing strategies.
SALOMON SREDNI joined the company in December 1996 as its Vice President of
Operations and Chief Financial Officer and was named Treasurer and a director of
the company in July 1997. In August 1999, he was named President and Chief
Operating Officer. Mr. Sredni also serves as a director of the company's two
operating subsidiaries. Before joining the company, from August 1994 to November
1996, Mr. Sredni was Vice President of Accounting and Corporate Controller at
IVAX Corporation, a publicly-held pharmaceutical company. Prior
39
to that time, from January 1988 to August 1994, Mr. Sredni was with Arthur
Andersen LLP, an international accounting firm. Mr. Sredni is a Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants and the Florida Institute of Certified Public Accountants. He has a
bachelor's degree in Accounting from The Pennsylvania State University.
DAVID H. FLEISCHMAN joined the company as Chief Financial Officer, Vice
President of Finance and Treasurer in February 2001. Prior to joining
TradeStation Group, Mr. Fleischman was engaged as a Director of Crossroads LLC,
a firm that provides financial and management expertise and services to
companies seeking to maximize the efficiencies and performance of their
management teams. From January 1997 until September 2000, Mr. Fleischman served
as Senior Vice President, Chief Financial Officer and member of the Board of
Advisors of The SeaSpecialties Group. From 1992 to 1996, he served as Senior
Vice President and Treasurer of The Kislak Organization - J.I. Kislak, Inc., an
organization that, during those years, included the largest privately-held
mortgage-banking company in the United States. From 1983 to 1992, Mr. Fleischman
served as a Director, Vice President and Chief Financial Officer of the U.S.
group of Berisford International plc, a publicly-held United Kingdom company.
From 1969 to 1983, he held several positions with subsidiaries of Midland Bank
plc, including London American Finance Corporation and Drake America
Corporation. He began his career in 1967 in the audit division of a predecessor
firm of Ernst & Young. Mr. Fleischman has a bachelor's of science degree in
accounting from The New York Institute of Technology.
MARC J. STONE joined the company in May 1997 as its Vice President of
Corporate Development, General Counsel and Secretary. Mr. Stone also serves as a
director of the company's two operating subsidiaries. From January 1993 to May
1997, Mr. Stone was a partner at a predecessor law firm of Bilzin Sumberg Dunn
Baena Price & Axelrod LLP, which currently serves as the company's regular
outside counsel. Prior to that time, from 1985 to 1992, Mr. Stone was an
associate with that predecessor law firm. Mr. Stone is of counsel to Bilzin
Sumberg. Mr. Stone has bachelor's degrees in English and American Literature and
Theatre Arts and Dramatic Literature from Brown University, and received his law
degree from University of California (Boalt Hall) School of Law at Berkeley. Mr.
Stone is a member of the Bar of the State of New York, The Florida Bar, the
American Bar Association and the New York State Bar Association.
STEPHEN C. RICHARDS is Chief Operating Officer and Chief Financial Officer
of Network Associates, Inc. (NYSE:NET), a provider of network security and
availability solutions for e-business. He served as Chief Online Trading Officer
of E*TRADE Group, Inc., a position he held from March 1999 to June 2000. From
1998 to February 1999, Mr. Richards served as Senior Vice President, Corporate
Development and New Ventures at E*TRADE, following two years as E*TRADE's Senior
Vice President of Finance, Chief Financial Officer and Treasurer. Prior to
joining E*TRADE in April 1996, Mr. Richards was Managing Director and Chief
Financial Officer of Correspondent Clearing at Bear Stearns & Companies, Inc.,
where he was employed for more than 11 years. He is also a former Vice
President/Deputy Controller of Becker Paribas, and former First Vice
President/Controller of Jefferies and Company, Inc. Mr. Richards also serves as
a director of McAfee.com Corporation (Nasdaq:MCAF), a provider of online PC
management products and services, and Archipelago LLC, a leading ECN. He
received a Bachelor of Arts in Statistics and Economics from the University of
California at Davis and an MBA in Finance from the University of California at
Los Angeles. Mr. Richards is a Certified Public Accountant. Mr. Richards became
a director of the company in August 1999,
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at which time he was also elected to the Compensation Committee and the Audit
Committee of the board of directors.
CHARLES F. WRIGHT is the Chairman of Fall River Group, Inc., which owns and
operates a group of foundries in Wisconsin. He has been Chairman since 1984, and
has been associated with Fall River Group since 1973. He is also the Chairman
and a Principal of Fall River Capital, LLC, an investment advisory firm that
specializes in the trading of global financial and natural resource futures. He
has held these positions since 1999. Since 1997, Mr. Wright has also been
Chairman and a co-owner of Quaestus & Co., Inc., a merchant banking firm located
in Milwaukee, Wisconsin. Since 2001 he has been Chairman and co-owner of
Kilbourn Capital Management, Inc., which manages the Kilbourn Diversified
Strategy Fund, a hedge Fund of Funds. From 1992 until its acquisition by Cumulus
Media, Inc. in 1997, Mr. Wright served as Chairman of Caribbean Communications
Company Ltd., a developer and operator of a radio network throughout the
English-speaking Caribbean Islands. Mr. Wright serves as Chairman of Goodwill
Industries of Southeastern Wisconsin and Metropolitan Chicago, President of
Second Harvest Food Bank Foundation, trustee of University School of Milwaukee,
and a director of the Private Industry Council of Milwaukee County. Mr. Wright
is registered with the CFTC and the NFA as a Commodity Trading Advisor, and
holds a Master's Degree in Business Administration from Harvard University
Graduate School of Business. Mr. Wright became a director of the company in June
2001, at which time he was also elected to the Compensation Committee and Audit
Committee of the board of directors. Mr. Wright has occasionally performed
consulting services for the company under a 3-year agreement that expires in
2002. All compensation payable under that agreement was paid in 1999, two years
before he joined our board.
MICHAEL W. FIPPS joined our board as director, and became a member of the
Audit Committee, in March 2002. Since October 1997, he has been semi-retired,
working occasionally as an independent consultant. From December 1998 through
April 2000, he worked as an independent consultant in association with Connally
and Associates, a profit recovery firm. Prior to that, from June 1994 to October
1997, he served as Chief Financial Officer and Senior Vice President of IVAX
Corporation, a publicly-held pharmaceutical company. Before going to IVAX, from
1973 to 1994, Mr. Fipps served as Vice President-Finance and Treasurer of Bergen
Brunswig Corporation, a large wholesale distributor of prescription
pharmaceuticals and other health care products. Mr. Fipps is a Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants. He has a
bachelor of arts degree from University of North Carolina.
INDEPENDENT DIRECTORS; COMMITTEES OF THE BOARD OF DIRECTORS
The company's board of directors currently includes three (3) nonemployee,
independent members, Stephen C. Richards, Charles F. Wright and Michael W.
Fipps, all of whom serve on the Audit Committee of the board of directors. The
Audit Committee monitors and oversees the company's financial reporting process
on behalf of the board of directors and, in connection therewith, reviews the
independence of our auditors, and recommends the annual engagement of our
auditors, with whom the Audit Committee reviews the scope of audit and non-audit
assignments, related fees, the accounting principles used in financial
reporting, internal financial auditing procedures and the adequacy of the
internal control procedures. Mr. Richards and Mr. Wright also serve on the
Compensation Committee of the board of directors. The Compensation
41
Committee determines executive officers' salaries and bonuses and administers
our Incentive Stock Plan and Employee Stock Purchase Plan.
The board of directors does not currently have a nominating committee or a
committee that performs similar functions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires officers (as defined under the Exchange Act) and
directors, and persons who own more than ten percent of a registered class of a
company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Our officers, directors and greater than ten percent
shareholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to us and our
understanding that no Forms 5 were required, we believe that during the fiscal
year ended December 31, 2001 all Section 16(a) filing requirements applicable to
our officers, directors and greater than ten percent beneficial owners were
satisfied, except that a Form 4 for Mr. Wright, one of our non-employee
directors, who made one purchase of company shares of common stock in September
2001, was, due to an oversight, filed a few days late.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to all compensation
paid or earned for services rendered to us in the three years ended December 31,
2001 by our Co-Chief Executive Officers and our three other most highly
compensated executive officers (who, as a group, comprise all of the executive
officers of the company) whose aggregate annual compensation for 2001 exceeded
$100,000 (together, the "Named Executive Officers"). We did not have a pension
plan or a long-term incentive plan, had not issued any restricted stock awards
and had not granted any stock appreciation rights as of December 31, 2001. The
value of all perquisites and other personal benefits received by each Named
Executive Officer did not exceed 10% of the Named Executive Officer's total
annual compensation.
Long-term
Compensation
Annual Compensation Awards
-------------------------------------- -------------
Securities All Other
Fiscal Underlying Compen-
NAME AND PRINCIPAL POSITION Year Salary ($) Bonus ($) Options (1) (#) sation ($)
- --------------------------- ------ ----------- ---------- --------------- ----------
William R. Cruz......................... 2001 $ 150,000 $ -- -- $ --
Co-Chief Executive Officer 2000 150,000 -- -- --
1999 150,000 -- -- 5,400 (2)
Ralph L. Cruz........................... 2001 $ 150,000 -- -- --
Co-Chief Executive Officer 2000 150,000 -- -- --
1999 150,000 -- -- 5,400 (2)
42
Long-term
Compensation
Annual Compensation Awards
-------------------------------------- -------------
Securities All Other
Fiscal Underlying Compen-
NAME AND PRINCIPAL POSITION Year Salary ($) Bonus ($) Options (1) (#) sation ($)
- --------------------------- ------ ----------- ---------- --------------- ----------
Salomon Sredni.......................... 2001 $ 238,208 -- 80,000 --
President and Chief Operating 2000 237,000 -- 60,000 --
Officer 1999 193,636 25,000 100,000 6,000 (2)
David H. Fleischman.................. 2001(3) $ 181,945(3) -- 75,000 --
Chief Financial Officer, 2000 -- -- -- --
Vice President of Finance 1999 -- -- -- --
and Treasurer
Marc J. Stone......................... 2001 $ 198,017 -- 40,000 --
Vice President of Corporate 2000 197,250 -- 40,000 --
Development, General Counsel 1999 186,323 -- -- --
and Secretary
- ---------------
(1) Represents shares of common stock issuable upon the exercise of options
granted under our Incentive Stock Plan.
(2) Represents 401(k) Plan company contributions on behalf of the Named
Executive Officer during the indicated year, but paid out during the
subsequent year.
(3) Mr. Fleischman began his employment with TradeStation Group on February 1,
2001.
OPTION GRANTS IN 2001 FISCAL YEAR
The following table summarizes the options that were granted during the
fiscal year ended December 31, 2001 to the Named Executive Officers.
Individual Grants
------------------------------------------------------------ Potential Realizable
Number Percent of Value at Assumed
Of Total Annual Rate of
Securities Options Value at Stock Price
Underlying Granted to Exercise Exercise Grant-Date Appreciation for
Options Employees or Base or Base Market Option Term(1)
Granted In Fiscal Price on Grant Expiration Price 0% ----------------------
Name (#)(2) Year(%) ($/Sh)(3) Date ($/Sh) Date ($)(3) 5% 10%
- ---- ----------- --------- --------- ----------- ---------- ---------- --------- ---------
William R. Cruz.... -- -- -- -- -- -- -- --
Ralph L. Cruz...... -- -- -- -- -- -- -- --
Salomon Sredni..... 80,000 6% $ 2.13 $ 2.50 1/2/11 $ 29,600 $ 155,379 $ 348,348
David H. Fleischman 75,000 6% 3.07 3.00 1/31/11 -- 136,251 353,342
Marc J. Stone...... 40,000 3% 2.13 2.50 1/2/11 14,800 77,689 174,174
- -------------
(1) Potential realizable value is based on the assumption that the common stock
price appreciates at the annual rate shown (compounded annually) from the
date of grant until the end of the option term. The amounts have been
calculated based on the requirements promulgated by the SEC. The actual
value, if any, a Named Executive Officer may realize will depend on the
excess, if any, of the stock price over the exercise price on the date the
option is exercised (if the executive officer were to sell the shares on
the date of exercise), so there is no assurance that the value realized
will be at or near the potential realizable value as calculated in this
table.
(2) These options vest and become exercisable ratably on an annual basis over
five years, beginning on the anniversary of the date of grant date, and
have a term of ten years from the date of grant, subject to acceleration
under certain circumstances.
(3) All options were granted at "fair market value" as defined under our
Incentive Stock Plan, which is the average of the high and low sales prices
of a share of common stock on The Nasdaq National Market on the trading day
immediately preceding the date of grant. The Compensation Committee
believes this calculation more accurately reflects "fair market value" of
our common stock on any given day as compared to simply using the closing
market price on the date of grant. As a result, the closing market price on
the date of grant may be different than the exercise price per share.
43
AGGREGATED OPTION EXERCISES IN 2001 FISCAL YEAR
AND 2001 FISCAL YEAR-END OPTION VALUES
The following table provides information regarding the value of all options
exercised during 2001 by the Named Executive Officers and of all unexercised
options held at December 31, 2001 by the Named Executive Officers measured in
terms of the closing market price of our common stock on December 31, 2001.
Number of
Securities Underlying Value of Unexercised
Unexercised Options At In-the-Money Options At
Shares December 31, 2001 (#) December 31, 2001 ($)(1)
Acquired On Value ----------------------------- -------------------------------
Name Exercise (#) Realized ($) Exercisable Unexcercisable Exercisable Unexercisable
- ---- ------------- ------------ ----------- -------------- ----------- -------------
William R. Cruz ... -- -- -- -- -- --
Ralph L. Cruz ..... -- -- -- -- -- --
Salomon Sredni .... -- -- 262,000 248,000 $37,200 $ --
David H. Fleischman -- -- -- 75,000 -- --
Marc J. Stone ..... -- -- 142,000 138,000 -- --
(1) Based on a per share price of $1.56 on December 31, 2001, which was the
closing market price of our common stock on the last day of the 2001 fiscal
year.
OTHER COMPENSATION ARRANGEMENTS
EXECUTIVE OFFICER BONUS PLAN. The Compensation Committee of the company put
in place an incentive bonus compensation program for certain executive officers
of the company for the 2001 and 2002 fiscal years. Under the program, an
executive officer is eligible to earn an annual bonus of up to a certain
percentage of his base salary. To be awarded a bonus in the program, certain
numbers contained in the company's internal incentive budget need to be met.
Those numbers were not met in 2001.
INCENTIVE STOCK PLAN. Pursuant to the TradeStation Group, Inc. Incentive
Stock Plan, officers, employees and nonemployee consultants may be granted stock
options, stock appreciation rights, stock awards, performance shares and
performance units. The authorized number of shares of common stock for issuance
under the Incentive Stock Plan is 7,500,000, subject to future antidilution
adjustments. As of December 31, 2001, options to purchase 4,817,265 shares were
outstanding and 2,416,551 shares were available for issuance under the
TradeStation Group Incentive Stock Plan.
The Incentive Stock Plan is administered by the Compensation Committee of
the board of directors, whose members must qualify as "nonemployee directors"
(as such term is defined in Rule 16b-3 under the Exchange Act). The Compensation
Committee is authorized to determine, among other things, the employees to whom,
and the times at which, options and other benefits are to be granted, the number
of shares subject to each option, the applicable vesting schedule and the
exercise price (provided that, for incentive stock options, the exercise price
shall not be less than 100% of the fair market value of the common stock on the
date of grant). The Compensation Committee also determines the treatment to be
afforded to a participant in the Incentive Stock Plan in the event of
termination of employment for any reason, including death, disability or
retirement, or change in control. Under the Incentive Stock Plan, the maximum
term of an incentive stock option is ten years and the maximum term of a
nonqualified stock option is fifteen years.
44
The Compensation Committee may delegate to the company's Co-CEOs the
authority to grant options under the Incentive Stock Plan to employees (other
than officers) of the company identified by the Co-CEOs. The Compensation
Committee has historically delegated to the Co-CEOs the authority to grant
options covering up to 250,000 shares of common stock per annum, and retains the
ability to revoke the delegation at any time. No such authority is currently
delegated to the Co-CEOs.
The board of directors has the power to amend the Incentive Stock Plan from
time to time. Shareholder approval of an amendment is only required to the
extent that it is necessary to maintain the Incentive Stock Plan's status as a
protected plan under applicable securities laws or as a qualified plan under
applicable tax laws.
TRADESTATION SECURITIES ASSUMED OPTIONS. In connection with the December
29, 2000 merger acquisition of TradeStation Securities, we assumed the
outstanding options under TradeStation Securities' 1999 incentive stock plan.
Each option issued under TradeStation Securities' plan was assumed and converted
to 1.7172 options to purchase the company's common stock at the original
exercise price divided by 1.7172. As of December 31, 2001, options to purchase
706,952 shares were outstanding.
WINDOW ON WALLSTREET ASSUMED OPTIONS. In October 1999, in connection with
our merger acquisition of Window On WallStreet, TradeStation Technologies
assumed all outstanding stock options to purchase Window On WallStreet common
stock ("WOW Options"), which, based on an exchange ratio of .210974 shares of
the TradeStation Technologies common stock for each share of Window On
WallStreet common stock, were exercisable at the time of assumption for an
aggregate of 182,529 shares of common stock (82,783 shares of common stock at an
exercise price of $.48 per share, and 99,746 shares of common stock at an
exercise price of $8.06 per share). The WOW Options generally vest ratably over
a four-year period and their terms are ten years. After giving effect to the
company's assumption of the WOW Options pursuant to the company's December 29,
2000 merger acquisition of TradeStation Securities, as of December 31, 2001
there were 163,449 WOW Options outstanding.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. Our Nonemployee Director Stock
Option Plan, pursuant to which initial and annual grants of nonqualified stock
options are made to each nonemployee director, became operative December 29,
2000 upon the closing of the merger by, on that date, assumption of the
TradeStation Technologies Nonemployee Director Stock Option Plan and all options
and option agreements issued thereunder. Upon initial election to the board of
directors, each nonemployee director may be granted options to purchase up to
75,000 shares of common stock as determined by the board of directors at such
time. Upon each re-election to the board of directors at the annual meeting of
shareholders, each nonemployee director will be granted additional options to
purchase 7,000 shares of common stock. Each option will be granted at an
exercise price equal to the fair market value of the common stock on the date of
grant. We have reserved 350,000 shares of common stock for issuance under the
Nonemployee Director Stock Option Plan, subject to antidilution adjustments.
Options granted to date have a term of five years and vest in equal installments
over three years. As of December 31, 2001, options to purchase 57,000 shares
were outstanding and 218,000 shares were available for issuance under the
Nonemployee Director Stock Option Plan.
45
The board of directors has the power to amend the Nonemployee Director
Stock Option Plan from time to time. Shareholder approval of an amendment is
only required to the extent that it is necessary to maintain the Nonemployee
Director Stock Option Plan's status as a protected plan under applicable
securities laws.
OUTSTANDING OPTIONS. As of December 31, 2001, options to purchase a total
of 5,744,666 shares were outstanding under all stock option plans (inclusive of
all options assumed under the plans discussed above), of which options to
purchase 865,000 shares had been granted to executive officers. During 2001,
options granted to executive officers totaled options to purchase 195,000 shares
of common stock, which were granted at exercise prices ranging from $2.13 to
$3.07 per share. In general, options granted under the Incentive Stock Plan and
the other incentive stock plans described above vest at the rate of 20% per year
and have a total term of ten years (except for the WOW Options, which vest
ratably over 4 years). Options which have been granted under the Incentive Stock
Plan to certain executive officers may immediately vest and become exercisable
in certain circumstances. The options to purchase the shares granted and assumed
under all plans discussed above that were outstanding as of December 31, 2001
have a weighted average exercise price of $3.49 per share. See Note 11 of Notes
to Consolidated Financial Statements - SHAREHOLDERS' EQUITY.
EMPLOYEE STOCK PURCHASE PLAN. Our Employee Stock Purchase Plan provides for
the issuance of a maximum of 500,000 shares of common stock pursuant to the
exercise of nontransferable options granted to participating employees. The
Employee Stock Purchase Plan is administered by the Compensation Committee of
the board of directors.
All employees whose customary employment is more than 20 hours per week and
more than five months in any calendar year and who have completed at least three
months of employment are eligible to participate in the Employee Stock Purchase
Plan. Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of our stock, and the nonemployee
directors, may not participate in the Employee Stock Purchase Plan. To
participate in the Employee Stock Purchase Plan, an employee must authorize us
to deduct an amount (not less than one percent nor more than ten percent of a
participant's total cash compensation) from his or her pay during six-month
periods (each, a "Plan Period"). The maximum number of shares of common stock an
employee may purchase in any Plan Period is 500 shares. The exercise price for
the option for each Plan Period is 85% of the lower of the market price of the
common stock on the first and last business day of the Plan Period. If an
employee is not a participant on the last day of the Plan Period, such employee
is not entitled to exercise his or her option, and the amount of his or her
accumulated payroll deductions is refunded. An employee's rights under the
Employee Stock Purchase Plan terminate upon his or her voluntary withdrawal from
the Employee Stock Purchase Plan or upon termination of employment. The first
Plan Period (giving effect to the assumption of the predecessor company's plan)
began January 1, 1998. During the years ended December 31, 2001, 2000 and 1999,
50,470, 30,209 and 23,585 shares, respectively, of common stock were issued
under the plan at average prices of $1.49, $2.07 and $3.27, respectively. As of
December 31, 2001, there were 383,229 shares available for issuance under the
Employee Stock Purchase Plan.
46
The board of directors has the power to amend or terminate the Employee
Stock Purchase Plan. Shareholder approval of an amendment is only required to
the extent that it is necessary to maintain the Employee Stock Purchase Plan's
status as a protected plan under applicable securities laws or as a qualified
plan under applicable tax laws.
401(K) PLAN. We have a defined contribution retirement plan which complies
with Section 401(k) of the Internal Revenue Code. All employees with at least
three months of continuous service are eligible to participate and may
contribute up to 15% of their compensation. Company contributions are vested 20%
for each year of service. Matching contributions accrued under the 401(k) Plan
amounted to approximately $242,000 in 1999. There were no matching contributions
accrued in 2001 or 2000.
NON-COMPETITION AGREEMENTS
Virtually all employees, including the Named Executive Officers, have
entered into agreements with the company which contain certain non-competition,
non-disclosure and non-solicitation restrictions and covenants, including a
provision prohibiting such employees from competing with the company during
their employment with us and for a period of at least two years thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We formed the Compensation Committee of the board of directors in December
2000, at which time two independent directors were appointed as members. One has
since been replaced by another independent director. The compensation (including
salaries, bonuses and stock options) of the company's executive officers for
2001 was determined by the Compensation Committee. In 2001, no member of the
Compensation Committee of the board of directors of our company had any
relationship with the company requiring disclosure under Item 404 of Regulation
S-K.
DIRECTOR COMPENSATION
Our independent directors receive $750 for attendance at each meeting of
the board of directors and, if held on a separate date, committees thereof, with
an additional $150 paid to the chairman of the committee meeting, provided that
it is chaired by an independent director. Pursuant to the Nonemployee Director
Stock Plan, each independent director also receives options to purchase up to
75,000 shares of common stock upon initial election as a director, as determined
by the board of directors at such time, and options to purchase 7,000 shares of
common stock upon each re-election as an independent director at our annual
meeting of shareholders. See "EXECUTIVE COMPENSATION-- Other Compensation
Arrangements- NONEMPLOYEE DIRECTOR STOCK OPTION PLAN." All directors may also be
reimbursed for certain expenses in connection with attendance at board of
directors and committee meetings. Other than with respect to reimbursement of
expenses, directors who are employees or officers did not in 2001 receive
additional compensation for service as a director.
47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 1, 2002 by (i) each person who is
known to us to own beneficially more than 5% of our common stock, (ii) each
director, (iii) each Named Executive Officer, and (iv) all directors and
executive officers as a group. Except as otherwise described in the footnotes
below, we believe that the beneficial owners of the common stock listed below,
based on information provided by such owners, have sole investment and voting
power with respect to such shares.
Shares Beneficially Owned(1)
-------------------------------
Name of Beneficial Owner (1) Number Percent
---------------------------- --------- -------
William R. Cruz (2)(7) 9,317,654 20.9 %
Ralph L. Cruz (3)(7) 9,206,554 20.7 %
Benedict Gambino (7) 4,480,960 10.1 %
Farshid Tafazzoli (4)(7) 4,072,376 9.1 %
Andrew Allen (5)(7) 4,020,960 9.0 %
Salomon Sredni 302,750 *
Marc J. Stone 166,000 *
Charles F. Wright (6) 133,138 *
David H. Fleischman 40,000 *
Stephen C. Richards 30,666 *
Michael W. Fipps 250 *
All executive officers and
directors as a group (8 persons)(8) 19,197,012 42.6 %
- --------------------
* Less than 1%.
(1) The address of: William R. Cruz and Ralph L. Cruz is TradeStation Group,
Inc., 8700 West Flagler Street, Miami, Florida 33174; Benedict Gambino is
22356 Timberlea Lane, Kildeer, Illinois 60047; Farshid Tafazzoli is 798 NW
6th Drive, Boca Raton, Florida 33486; and Andrew A. Allen is One
Yellowstone Club Trail, Big Sky, Montana 59716. Beneficial ownership is
determined in accordance with the rules of the SEC that deem shares to be
beneficially owned by any person who has or shares voting or investment
power with respect to such shares. Includes options held by executive
officers and/or directors which are exercisable within 60 days of March 1,
2002.
(2) All but 100 shares are held by two Texas limited partnerships as to which
William R. Cruz possesses sole voting and dispositive powers through his
direct and/or indirect 100% ownership of the sole general partner of each
of such limited partnerships. In one limited partnership William R. Cruz is
the sole limited partner and in the other limited partnership William R.
Cruz and a grantor retained annuity trust for the benefit of William R.
Cruz and his family are the limited partners. Does not include 900 shares
owned by the spouse of William R. Cruz with respect to which Mr. Cruz
disclaims beneficial ownership.
(3) The shares are held by two Texas limited partnerships as to which Ralph L.
Cruz possesses sole voting and dispositive powers through his direct and/or
indirect 100% ownership of the sole general partner of each of such limited
partnerships. In one limited partnership Ralph L. Cruz is the sole limited
partner and in the other Ralph L. Cruz and his spouse are the limited
partners.
48
(4) The shares are held by Tafazzoli Family Limited Partnership as to which
Farshid Tafazzoli possesses sole voting and dispositive powers through his
100% ownership of the sole general partner of such limited partnership.
(5) Includes 3,893,000 shares held by Andrew A. Allen Family Limited
Partnership as to which Andrew A. Allen possesses sole voting and
dispositive powers through his 100% ownership of the sole general partner
of such limited partnership.
(6) Includes 6,500 shares held as custodian for the benefit of the sons of
Charles F. Wright.
(7) These shares of common stock are subject to the terms of voting trust
entered into in conjunction with the merger of TradeStation Technologies
and TradeStation Securities. In addition, 290,663 shares of common stock
held by zum Tobel Family Limited Partnership and 257,918 shares of common
stock held by Derek J. Hernquist are also subject to the terms of the
voting trust. See "Voting Trust" below.
(8) See other footnotes above.
VOTING TRUST
In connection with entering into the merger acquisition of TradeStation
Securities (then known as onlinetradinginc.com corp.), certain former
shareholders of TradeStation Technologies (formerly Omega Research, Inc.) and
TradeStation Securities entered into a voting trust agreement effective as of
December 29, 2000 pursuant to which certain shares of common stock of
TradeStation Group owned by them are subject to the terms of a voting trust. The
former shareholders of TradeStation Technologies who entered into the voting
trust agreement are Texas limited partnerships beneficially owned by William R.
Cruz and Ralph L. Cruz (collectively, the "Cruz Group"). The Cruz Group
collectively holds an aggregate of 18,313,108 shares of common stock that are
subject to the voting trust agreement, representing approximately 41.1% of the
outstanding shares of TradeStation Group's common stock. The former shareholders
of TradeStation Securities who entered into the voting trust agreement are
Andrew A. Allen, Andrew A. Allen Family Limited Partnership, Tafazzoli Family
Limited Partnership, zum Tobel Family Limited Partnership, Derek J. Hernquist
and Benedict S. Gambino (collectively, the "Online Group"). The Online Group, as
of March 1, 2002, collectively holds an aggregate of approximately 13,122,877
shares of common stock that are subject to the voting trust agreement,
representing approximately 29.5% of the outstanding shares of TradeStation
Group's common stock. The parties to the voting trust agreement have agreed
that, during the term of the voting trust agreement, the voting trustee, Marc J.
Stone, is required with respect to shares of TradeStation Group's common stock
subject to the voting trust to vote and abstain from voting or otherwise to
participate in shareholder actions, including executing written consents, in all
matters relating to TradeStation Group subject to and limited by and as directed
pursuant to the voting trust agreement.
The Cruz Group has the right to direct the voting trustee to vote all of
the shares subject to the voting trust in a manner such that, at a shareholder
meeting to elect the board of directors, five of the total of eight directors
constituting TradeStation Group's board of directors, two of whom are required
to be independent directors, are designated by the Cruz Group. The Online Group
has the right to direct the voting trustee to vote all of the shares subject to
the voting trust in a manner such that, at a shareholder meeting to elect the
board of directors, three of such total
49
number of eight directors, one of whom is required to be an independent
director, are designated by the Online Group. In the event that the number of
directors constituting TradeStation Group's board of directors is increased or
decreased, then each group of shareholders will be entitled to designate its
number of the total number of directors for election at shareholder meetings
based upon a ratio of 62.5% for the Cruz Group shareholders and 37.5% for the
Online Group. If the foregoing ratio yields other than whole numbers as to the
number of directors for which each group of shareholders is entitled to
designate the shares to be voted, then the number of directors which each such
group is entitled to designate shall be rounded down to the nearest whole
number, and the one remaining directorship that this rounding down will create
shall be designated by the Cruz Group.
With respect to all matters other than the election of directors at a
shareholder meeting as to which a vote (or written consent) of shareholders of
TradeStation Group will be made, the voting trustee will vote the shares owned
by each shareholder who is a party to the voting trust agreement as specifically
instructed in writing by the shareholder owning the beneficial interest in, and
voting trust certificate relating to, such shares. In the event that the voting
trustee does not timely receive such written voting instructions, in whole or in
part, from a shareholder, then the voting trustee shall abstain from voting the
shares owned by such shareholder with respect to any or all matters as to which
the voting trustee has not received written voting instructions.
The voting trust shall dissolve on the earliest of the following dates: (i)
December 29, 2002; (ii) the date when the voting trustee shall resign in writing
unless such vacancy is timely filled as provided under the voting trust
agreement; (iii) the date when the shareholders who are parties to the voting
trust agreement holding 67% or more of the shares then subject to that agreement
shall execute a written instrument so declaring; or (iv) the date when less than
75% of the aggregate number of shares owned as of December 29, 2000 by either
the Cruz Group or the Online Group remains subject to the voting trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Marc J. Stone, the Vice President of Corporate Development, General Counsel
and Secretary, was a partner in a predecessor law firm to Bilzin Sumberg Dunn
Baena Price & Axelrod LLP until immediately prior to joining the company in May
1997. Thereafter, Mr. Stone was of counsel to the predecessor firm and is
currently of counsel to Bilzin Sumberg. Bilzin Sumberg and its predecessor firms
have acted as our regular outside legal counsel since 1994. The total fees and
costs paid by us to Bilzin Sumberg in 2001 were approximately $833,000, $679,000
of which consisted of fees and costs relating to our December 29, 2000 merger
acquisition of TradeStation Securities. We believe that the fees paid are no
less favorable to us than could be obtained from comparable law firms in the
Miami area.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. Financial Statements. The Financial Statements and notes thereto and
the report of the independent auditors thereon set forth on pages F-1
through F-28 herein are filed as part of this report and incorporated
herein by reference.
2. Financial Statement Schedules. The Financial Statement Schedule and
the report of the independent auditors thereon set forth on pages S-1
through S-3 herein are filed as part of this report and incorporated
herein by reference.
3. Exhibits.
Exhibit
Number Description
------- -----------
3.1 TradeStation Group's Articles of Incorporation, as amended**
3.2 TradeStation Group's Bylaws**
4.1 Form of Specimen Certificate for TradeStation Group's Common
Stock****
9.1 Voting Trust Agreement dated January 19, 2000 by and among
certain shareholders of each of Omega Research, Inc. and
onlinetradinginc.com corp. and Marc J. Stone, as voting
trustee*
10.1 Agreement and Plan of Merger and Reorganization dated as of
January 19, 2000 by and among Omega Research, Inc.,
onlinetradinginc.com corp., OnlineTrading.com Group, Inc.,
Omega Acquisition Corporation and Onlinetrading Acquisition
Corporation, together with the following exhibit thereto: (i)
Form of Omega Affiliate Agreement; (ii) Form of Online
Affiliate Agreement; (iii) Form of Employment Agreement; and
(iv) Form of Non-Competition and Non-Disclosure Agreement*
10.2 First Amendment to Agreement and Plan of Merger and
Reorganization effective March 7, 2000 among Omega Research,
Inc., onlinetradinginc.com corp., OnlineTrading.com Group,
Inc., Omega Acquisition Corporation and Onlinetrading
Acquisition Corporation, Second Amendment to Agreement and
Plan of Merger and Reorganization dated as of July 19, 2000 by
and among Omega Research, Inc., onlinetradinginc.com corp.,
TradeStation Group, Inc., Omega Acquisition Corporation and
Onlinetrading Acquisition
51
Corporation and Third Amendment to Agreement and Plan of
Merger and Reorganization dated as of September 21, 2000 by
and among Omega Research, Inc., onlinetradinginc.com corp.,
TradeStation Group, Inc., Omega Acquisition Corporation and
Onlinetrading Acquisition Corporation*
10.3 Letter Agreement dated January 19, 2000 from
onlinetradinginc.com corp. to and accepted by Andrew A. Allen*
10.4 TradeStation Group, Inc. Incentive Stock Plan***#
10.5 TradeStation Group, Inc. Amended and Restated Nonemployee
Director Stock Option Plan (filed herewith)#
10.6 Software License, Maintenance and Development Agreement
between Dow Jones Markets, Inc. and Omega Research, Inc. as
amended (TradeStation Agreement)+
10.7 Software License, Maintenance and Development Agreement
between Dow Jones Markets, Inc. and Omega Research, Inc.
(SuperCharts Agreement)+
10.8 Standard Office Building Lease between 8700 Flagler, Ltd. and
Omega Research, Inc., as amended by Memorandum of Commencement
Date+
10.9 Form of Indemnification Agreement+
10.10 S Corporation Tax Allocation and Indemnification Agreement++
10.11 TradeStation Group, Inc. Employee Stock Purchase Plan***#
10.12 Form of Non-Competition Agreement+
10.13 Letter Agreement dated October 27, 1997 from Dow Jones
Markets, Inc. to Omega Research, Inc.+++
10.14 Sublease (for fourth floor of 8700 Flagler Building) and
Modification of Lease Agreement (incorporated by reference to
Exhibit 10.11 to Omega Research, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1998)
10.15 Second Modification of Lease Agreement, dated January 31,
2000, between Nationwide Theaters West Flagler, L.L.C. and
Omega Research, Inc. (incorporated by reference to Exhibit
10.12 to Omega Research, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999)
52
10.16 Office/Showroom/Warehouse Lease Agreement dated June 12, 1996
between Springcreek Place Ltd. and Window On WallStreet Inc.
(then named MarketArts, Inc.), as amended by Addendum to Lease
dated October 12, 1998, and as further amended by Addendum to
Lease dated May 28, 1999 (incorporated by reference to Exhibit
10.13 to Omega Research, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999)
10.17 Lease Agreement, dated November 16, 1999, between Fairfax Boca
92, L.P. and Omega Research, Inc. (incorporated by reference
to Exhibit 10.14 to Omega Research, Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1999)
10.18 Employment Agreement dated as of January 19, 2000 between
Farshid Tafazzoli and TradeStation Group, Inc.+++++#
10.19 Severance Agreement, dated July 20, 2001, between TradeStation
Group, Inc. and Farshid Tafazzoli (without exhibit) (filed
herewith)#
10.20 Employment Agreement dated as of January 19, 2000 between E.
Steven zum Tobel and TradeStation Group, Inc.+++++#
10.21 Severance Agreement, dated July 20, 2001, between TradeStation
Group, Inc. and E. Steven zum Tobel (without exhibit) (filed
herewith)#
10.22 onlinetradinginc.com corp. 1999 Stock Option
Plan***#
10.23 Window On WallStreet Inc. 1997 Long Term Incentive
Plan***#
10.24 Clearing Agreement with Bear, Stearns Securities Corp.++++
10.25 Office Lease dated August 13, 1998 between
onlinetradinginc.com corp. and Highwood/Florida Holdings,
L.P.+++++
10.26 Form of Non-Competition and Non-Disclosure Agreement*
10.27 Lease Agreement, dated November 13, 2001, between Crossroads
Business Park Associates LLP and TradeStation Group, Inc.
(without exhibits and schedules) (filed herewith)
21.1 List of Subsidiaries+++++
23.1 Consent of Arthur Andersen LLP, Independent Certified Public
Accountants, with respect to TradeStation Group, Inc.'s
consolidated financial statements (filed herewith)
53
----------------------------------
* Previously filed as part of the Rule 424(b)(1) Proxy
Statement/Prospectus of TradeStation Group filed with the
Securities and Exchange Commission (the "Commission") on
December 12, 2000.
** Previously filed as part of Registration Statement No.
333-34922 on Form S-4 of OnlineTrading.com Group, Inc. filed
with the Commission on April 17, 2000.
*** Previously filed as part of Registration Statement No.
333-53222 on Form S-8 of TradeStation Group, Inc. filed with
the Commission on January 5, 2001.
**** Previously filed as part of Amendment No. 3 to Registration
Statement No. 333-34922 on Form S-4 of OnlineTrading.com
Group, Inc. filed with the Commission on November 21, 2000.
+ Previously filed as part of Registration Statement No.
333-32077 on Form S-1 of Omega Research, Inc. filed with the
Commission on July 25, 1997.
++ Previously filed as part of Amendment No.1 to Registration
Statement No. 333-32077 of Omega Research, Inc. filed with the
Commission on August 25, 1997.
+++ Previously filed as part of Annual Report on Form 10-K of
Omega Research, Inc. for the fiscal year ended December 31,
1997.
++++ Previously filed as part of Registration Statement No.
333-75119 of Form SB-2 of onlinetradinginc.com corp. filed
with the Commission on March 26, 1999.
+++++ Previously filed as part of the Annual Report on Form 10-K of
TradeStation Group, Inc. filed with the Commission on March
30, 2001.
# Indicates a management contract or compensatory plan or
arrangement.
(b) REPORTS ON FORM 8-K.
(i) On January 17, 2002, we filed a Current Report on Form 8-K, for an
event on January 17, 2002, reporting in Item 9 thereof our 2002
Business Outlook and that our fourth quarter 2001 financial results
reflect (a) a $5.3 million, non-cash charge relating to the impairment
of goodwill and certain intangible assets and (b) a $4.8 million,
non-cash charge to provide a full valuation allowance against deferred
tax assets.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: MARCH 14, 2002 TRADESTATION GROUP, INC.
By: /s/ William R. Cruz
-------------------------------------
William R. Cruz
Co-Chairman of the Board of Directors
and Co-Chief Executive Officer
By: /s/ Ralph L. Cruz
-------------------------------------
Ralph L. Cruz
Co-Chairman of the Board of Directors
and Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ William R. Cruz Co-Chairman of the Board of Directors March 14, 2002
- --------------------------- and Co-Chief Executive Officer
William R. Cruz (Co-Principal Executive Officer)
/s/ Ralph L. Cruz Co-Chairman of the Board of Directors March 14, 2002
- --------------------------- and Co-Chief Executive Officer
Ralph L. Cruz (Co-Principal Executive Officer)
/s/ Salomon Sredni Chief Operating Officer, President March 14, 2002
- --------------------------- and Director (Principal Operating Officer)
Salomon Sredni
/s/ David H. Fleischman Chief Financial Officer, Vice President March 14, 2002
- --------------------------- of Finance and Treasurer (Principal
David H. Fleischman Financial and Accounting Officer)
/s/ Stephen C. Richards Director March 14, 2002
- --------------------------
Stephen C. Richards
/s/ Charles F. Wright Director March 14, 2002
- --------------------------
Charles F. Wright
/s/ Michael W. Fipps Director March 14, 2002
- --------------------------
Michael W. Fipps
55
TRADESTATION GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants....................... . F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.............. F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999........................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999......................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999......................................... F-6
Notes to Consolidated Financial Statements................................ F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To TradeStation Group, Inc.:
We have audited the accompanying consolidated balance sheets of
TradeStation Group, Inc. (a Florida corporation) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TradeStation Group, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
February 8, 2002.
F-2
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
2001 2000
------------ ------------
ASSETS:
Cash and cash equivalents (Note 17) $ 19,981,591 $ 18,394,996
Securities owned, at market value (Note 17) 415,928 249,423
Accounts receivable 330,300 644,200
Other receivables 315,669 1,028,920
Income tax receivable -- 8,542,413
Property and equipment, net 3,224,518 2,651,057
Goodwill, net -- 1,156,709
Other intangible assets, net 1,748,096 11,850,148
Deferred income taxes, net -- 4,805,651
Other assets 804,901 1,030,631
------------ ------------
Total assets $ 26,821,003 $ 50,354,148
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 1,596,244 $ 3,579,962
Accrued expenses 6,013,038 5,709,542
Income tax payable -- 1,003,912
Deferred revenue 347,336 821,593
Capital lease obligations 1,406,872 214,069
------------ ------------
Total liabilities 9,363,490 11,329,078
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 16 and 17)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000
shares authorized, none issued and outstanding -- --
Common stock, $.01 par value; 200,000,000
shares authorized, 44,547,316 and 44,476,501
issued and outstanding at December 31, 2001
and 2000, respectively 445,473 444,765
Additional paid-in capital 51,609,498 51,272,899
Accumulated deficit (34,597,458) (12,692,594)
------------ ------------
Total shareholders' equity 17,457,513 39,025,070
------------ ------------
Total liabilities and shareholders' equity $ 26,821,003 $ 50,354,148
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
----------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES:
Brokerage revenues $ 18,601,627 $ 17,933,750 $ 9,782,370
Subscription fees 9,566,566 8,170,083 304,382
Licensing fees 5,028,830 18,343,279 16,217,922
Other 7,790,120 8,478,621 7,214,231
------------ ------------ ------------
Total revenues 40,987,143 52,925,733 33,518,905
------------ ------------ ------------
OPERATING EXPENSES:
Clearing and other transaction costs 5,771,610 4,787,328 2,707,971
Data delivery and related costs 5,301,917 4,001,542 80,905
Technology development 12,015,812 8,128,376 4,931,660
Sales and marketing 11,174,225 26,435,076 20,823,837
Inventory and handling costs 150,824 1,244,837 3,085,414
General and administrative 12,924,434 11,915,028 6,784,980
Amortization of goodwill and other intangibles 6,198,264 5,978,478 1,033,131
Merger related costs -- 3,800,000 --
Impairment of goodwill and certain intangibles 5,285,497 -- --
------------ ------------ ------------
Total operating expenses 58,822,583 66,290,665 39,447,898
------------ ------------ ------------
Loss from operations (17,835,440) (13,364,932) (5,928,993)
OTHER INCOME, net 598,708 1,292,632 1,653,205
------------ ------------ ------------
Loss before income taxes (17,236,732) (12,072,300) (4,275,788)
INCOME TAX PROVISION (BENEFIT) 4,668,132 1,402,710 (1,633,776)
------------ ------------ ------------
Net loss $(21,904,864) $(13,475,010) $ (2,642,012)
============ ============ ============
LOSS PER SHARE:
Basic and diluted $ (0.49) $ (0.31) $ (0.07)
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic and diluted 44,458,689 43,955,819 40,065,348
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Accumulated
Preferred --------------------------- Paid-in Earnings
Stock Shares Amount Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 $ 300,000 37,533,950 $ 375,340 $ 23,953,188 $ 3,491,111 $ 28,119,639
Redemption of preferred stock (300,000) -- -- -- (30,000) (330,000)
Issuance of common stock -- 4,648,400 46,483 16,230,130 -- 16,276,613
Issuance of common stock
in connection with
acquisition -- 1,999,995 20,000 8,605,009 -- 8,625,009
Issuance of stock options
in connection with
acquisition -- -- -- 1,495,059 -- 1,495,059
Issuance of stock options for
domain name -- -- -- 55,000 -- 55,000
Issuance of warrants -- -- -- 100 -- 100
Compensation expense on
stock option grants -- -- -- 140,796 -- 140,796
Net loss -- -- -- -- (2,642,012) (2,642,012)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 -- 44,182,345 441,823 50,479,282 819,099 51,740,204
Issuance of common stock -- 150,770 1,508 384,378 -- 385,886
Issuance of common stock
in connection with
contingent payment of
acquisition -- 143,386 1,434 255,566 -- 257,000
Compensation expense on
stock option grants -- -- -- 153,673 -- 153,673
Change in fiscal year end of
pooled company -- -- -- -- (36,683) (36,683)
Net loss -- -- -- -- (13,475,010) (13,475,010)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2000 -- 44,476,501 444,765 51,272,899 (12,692,594) 39,025,070
Issuance of common stock -- 70,815 708 108,494 -- 109,202
Compensation expense on
stock option grants -- -- -- 228,105 -- 228,105
Net loss -- -- -- -- (21,904,864) (21,904,864)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2001 $ -- 44,547,316 $ 445,473 $ 51,609,498 $(34,597,458) $ 17,457,513
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(21,904,864) $(13,475,010) $(2,642,012)
Adjustment for change in fiscal year-end of pooled company -- (36,683) --
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,772,935 7,514,405 1,978,718
Impairment of goodwill and certain intangibles 5,285,497 -- --
Provision for doubtful accounts 714,286 -- 25,000
Compensation expense on stock option grants 228,105 153,673 140,796
Deferred income tax provision (benefit) 4,805,651 10,706,200 (8,459,100)
(Increase) decrease in:
Securities owned -- 3,689 226,072
Accounts receivable (400,386) 1,331,800 7,497,044
Other receivables 713,251 (269,737) (186,750)
Income tax receivable 8,542,413 (10,278,458) (791,106)
Other assets 225,730 509,477 (641,203)
Increase (decrease) in:
Accounts payable (1,983,718) 295,529 1,413,397
Accrued expenses 303,496 3,028,660 52,046
Income tax payable (1,003,912) 350,771 614,911
Deferred revenue (474,257) 406,769 36,439
------------ ------------ -----------
Net cash provided by (used in) operating activities 2,824,227 241,085 (735,748)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (545,788) (1,039,365) (1,785,969)
Purchases of securities owned (317,828) (4,086,860) --
Proceeds from maturity of securities owned 151,323 5,684,064 4,041,654
Acquisition of intangible assets (225,000) (15,000) (2,862,000)
Cash paid in acquisition, net of cash acquired -- -- (1,134,441)
------------ ------------ ------------
Net cash (used in) provided by investing activities (937,293) 542,839 (1,740,756)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 109,202 385,886 16,276,613
Repayment of capital lease obligations (409,541) (78,456) --
Proceeds from issuance of warrants -- -- 100
Redemption of preferred stock -- -- (330,000)
Proceeds from borrowings of debt -- -- 360,000
Repayment of borrowings of debt -- -- (4,969,491)
------------ ------------ ------------
Net cash (used in) provided by financing activities (300,339) 307,430 11,337,222
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,586,595 1,091,354 8,860,718
CASH AND CASH EQUIVALENTS, beginning of year 18,394,996 17,303,642 8,442,924
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 19,981,591 $ 18,394,996 $ 17,303,642
============ ============ ============
(continued)
F-6
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For the Years Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 198,935 $ 51,878 $ 57,806
============ ============ ============
Cash paid for income taxes $ 916,252 $ 1,068,949 $ 7,008,645
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
During the years ended December 31, 2001, 2000 and 1999, the Company
acquired office furniture and equipment through capital leases in the amounts of
$1.6 million, $180,450 and $112,075, respectively.
In December 2000, the Company's obligation to issue shares of common stock,
valued at $257,000, as a contingent payment in connection with the acquisition
of certain intangible assets became fixed. See Note 4 of Notes to Consolidated
Financial Statements - ACQUISITION OF CERTAIN INTANGIBLES.
Effective October 26, 1999, the Company acquired Window On WallStreet Inc.
See Note 3 of Notes to Consolidated Financial Statements - BUSINESS
COMBINATIONS. Information with respect to the acquisition is summarized below:
Consideration paid:
Fair value of common stock issued $ 8,625,009
Fair value of options issued 1,495,059
Acquisition costs 1,200,000
-----------
Total consideration paid 11,320,068
Fair value of net identifiable assets acquired 9,687,068
-----------
Goodwill $ 1,633,000
===========
During the year ended December 31, 1999, the Company issued options valued
at $55,000 to acquire a domain name.
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
TRADESTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
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. See Note 3 -
BUSINESS COMBINATIONS for further discussion.
Over the past two-and-one-half years, the Company has taken a series of
steps to transform itself from a software company to an Internet-based
securities brokerage for institutional, professional and serious, active
individual traders - a brokerage that offers an electronic trading platform
which seamlessly integrates powerful strategy trading tools, historical and
streaming real-time market data, and "intelligent" direct-access order-routing
and execution.
The following is a summary of significant accounting policies followed in
the preparation of these financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, TradeStation Technologies and TradeStation
Securities, and, since its October 26, 1999 acquisition by TradeStation
Technologies, Window On WallStreet Inc. ("Window On WallStreet"). All
significant intercompany transactions have been eliminated in consolidation. On
December 31, 2000, Window On WallStreet was merged into TradeStation
Technologies in a transaction between entities under common control.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of overnight investments, money market funds and
certificates of deposit. Cash and cash equivalents at December 31, 2001 and 2000
include $3.6 million and $510,000, respectively, of restricted cash. See Note 17
- - COMMITMENTS AND CONTINGENCIES -- RESTRICTED CASH AND MARKETABLE SECURITIES.
SECURITIES OWNED
Securities owned consist primarily of certificates of deposit, corporate
stocks, and U.S. government obligations. The cost of these investments
approximates market value and in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, management has currently designated these securities
as trading securities. Securities owned at December 31, 2001 include
approximately $315,000 of restricted securities. See Note 17 - COMMITMENTS AND
CONTINGENCIES -- RESTRICTED CASH AND MARKETABLE SECURITIES.
F-8
ACCOUNTS RECEIVABLE
As of December 31, 2001 and 2000, accounts receivable were comprised
primarily of receivables earned under royalty agreements with entities that
market and sell financial market data subscriptions (see OTHER REVENUES below
and Note 17 - COMMITMENTS AND CONTINGENCIES). The Company performs periodic
credit evaluations and no allowances for potential credit losses were deemed
necessary at December 31, 2001 or 2000.
OTHER RECEIVABLES
Other receivables consist primarily of receivables from the brokerage's
clearing organizations. The Company services its brokerage customer securities
accounts through Bear, Stearns Securities Corp. and its futures accounts through
Refco, LLC (collectively, the "Clearing Firms") on a fully disclosed basis. The
Clearing Firms provide services, handle the Company's customers' funds, hold
securities and remit monthly activity statements to the customers on the
Company's behalf. The receivables from the Clearing Firms relate to commissions
earned by the Company for trades executed by the Clearing Firms on the Company's
behalf.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, securities owned,
accounts receivable, other receivables and accounts payable approximated fair
value as of December 31, 2001 and 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Property and equipment are depreciated or amortized using the
straight-line method over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense when incurred; betterments
are capitalized. Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is recognized
currently. See Note 6 - PROPERTY AND EQUIPMENT, NET.
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, ACCOUNTING FOR THE COST OF CAPITALIZED
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, the Company examines its
software development costs after technological feasibility has been established
to determine the amount of capitalization that is required. Based on the
Company's technology development process, technological feasibility is
established upon completion of a working model. The costs that are capitalized
are amortized over the period of benefit of the related products. For the
periods presented, the technological feasibility of the Company's products and
the general release of such software substantially coincide, and, as a result,
software development costs qualifying for capitalization are not significant.
There were no capitalized software development costs at December 31, 2001 or
2000.
F-9
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated at cost less accumulated
amortization and are amortized using the straight-line method. Goodwill has
historically been amortized over its estimated useful life of four years. Other
intangible assets are amortized over their estimated useful lives of one to five
years. See Note 2 - IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES and Note 7 -
GOODWILL AND OTHER INTANGIBLE ASSETS, NET.
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of the assets. The amount of the
impairment is calculated as the amount by which the carrying value exceeds fair
value. An impairment of goodwill and certain intangibles was recorded in
December 2001. See Note 2 - IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES. No
impairments were recorded in 2000 or 1999.
REVENUE RECOGNITION:
BROKERAGE REVENUES
Brokerage revenues are comprised mainly of transactional fee income for
securities and futures transactions. Brokerage revenues and related clearing
costs are recorded on a trade date basis as transactions occur, while such
transactions are reported to the customer on a settlement date basis.
SUBSCRIPTION FEES
The Company provides investment analysis trading tools, including streaming
real-time market information, via the Internet through its subscription services
in exchange for monthly subscription fee payments. In addition to these
services, payment of subscription fees also gives customers access to certain
customer support services such as telephone and electronic mail support. Revenue
is recognized on a monthly basis as the service is provided. Payments received
in advance of service are deferred and recognized on a monthly basis as service
is provided.
LICENSING FEES
Beginning in 1999 with the launch of the Company's 2000I product line,
changes in the Company's client software product sales, including introduction
of a new, higher-priced product with longer financing terms, were deemed to
alter the predictability of return reserves and the future collectibility of
receivables. Accordingly, all 2000I product sales are recognized as they become
due (generally over a period of up to 12 months and, for PROSUITE 2000I sales,
over the course of up to 16 months) in accordance with the provisions of the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, SOFTWARE REVENUE RECOGNITION.
F-10
While the Company has no obligation to perform future services subsequent
to shipment of client software, for a limited time the Company voluntarily
provides support on its Web site, periodic "bug" fixes (on a global, as opposed
to individual, basis) and telephone and electronic mail customer support as an
accommodation to purchasers of its products as a means of fostering customer
satisfaction. The majority of such services are provided during the first 60
days of ownership of its products. Costs associated with this effort are
insignificant in relation to product sales value and are accrued at the date the
software is delivered in accordance with SOP 97-2.
OTHER REVENUES
Other revenues are comprised mainly of royalties. The Company has, with
respect to its client software products, entered into certain agreements with
entities that market and sell financial market data subscriptions. Except for
the agreement described in Note 17 - COMMITMENTS AND CONTINGENCIES -- TELERATE
ROYALTY AGREEMENT (which is a royalty arrangement), the Company receives monthly
commission payments based on its client software customers' use of financial
market data feed subscriptions that are accessed through one of its client
software products. The Company records these revenues as they are earned in
accordance with the terms of the applicable contracts.
ADVERTISING COSTS
Advertising costs are expensed when the initial advertisement is run, and
are included in sales and marketing expenses in the accompanying statements of
operations. Advertising costs for the years ended December 31, 2001, 2000 and
1999 were $663,000, $10.8 million and $5.7 million, respectively.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
in accounting for stock-based transactions with non-employees, the Company
records compensation expense in the statement of operations when such equity
instruments are issued. As permitted by SFAS No. 123, the Company accounts for
its stock-based compensation paid to employees in accordance with Accounting
Principles Board ("APB") Opinion No. 25. See Note 11 - SHAREHOLDERS' EQUITY.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires that deferred income tax
balances be recognized based on the differences between the financial statement
and income tax bases of assets and liabilities using the enacted tax rates.
Prior to December 29, 2000, the effective time of the merger of TradeStation
Technologies and TradeStation Securities, TradeStation Technologies and
TradeStation Securities were separate tax-paying entities. Accordingly, each
company's income taxes were accounted for separately. See Note 12 - INCOME
TAXES.
F-11
LOSS PER SHARE
Loss per share is calculated in accordance with SFAS No. 128, EARNINGS PER
SHARE, which requires presentation of basic and diluted loss per share on the
face of the statement of operations. Basic loss per share is computed by
dividing the net loss available to common shareholders by the weighted average
shares of outstanding common stock. Basic and diluted loss per share are the
same for all periods presented as all common stock equivalents, such as stock
options and warrants, are antidilutive. See Note 14 - LOSS PER SHARE.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in a business enterprise's
equity during a period arising from transactions, events or circumstances
relating to non-owner sources, such as foreign currency translation adjustments
and unrealized gains or losses on available-for-sale securities. It includes all
changes in equity during a period except those resulting from investments by, or
distributions to, owners. Comprehensive loss is equal to net loss for all
periods presented.
SEGMENT INFORMATION
Segment information is required to be presented in accordance with SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS
No. 131 is based on a management approach, which requires segmentation based
upon a Company's internal organization and disclosure of revenue and operating
income based upon internal accounting methods. During the three years ended
December 31, 2001, management evaluated and operated its business as two
segments. See Note 18 - SEGMENT AND RELATED INFORMATION.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, on January 1, 2001. SFAS No. 133, as amended by SFAS No.
138, requires the recognition of all derivatives on the balance sheet as either
assets or liabilities measured at fair value. Derivatives that do not qualify
for hedge accounting must be adjusted to fair value through income. Adoption of
SFAS No. 133 had no impact on the consolidated financial statements, as no
derivative contracts have been entered into and there are no current plans to do
so in the future.
F-12
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, BUSINESS COMBINATIONS. SFAS No. 141, which addresses financial
accounting and reporting for business combinations, supersedes APB No. 16,
BUSINESS COMBINATIONS, and SFAS No. 38, ACCOUNTING FOR PREACQUISITION
CONTINGENCIES OF PURCHASED ENTERPRISES. All business combinations in the scope
of SFAS No. 141 are to be accounted for under the purchase method. The July 2001
adoption of SFAS No. 141 did not have an impact on the Company's consolidated
financial position, results of operations or cash flows.
In June 2001, the FASB also issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets. SFAS
No. 142 also addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. With the adoption of SFAS No.
142, goodwill is no longer subject to amortization, but will be subject to at
least an annual assessment for impairment by applying a fair value-based test.
The impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than the carrying or book value. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Impairment loss for goodwill
arising from the initial application of SFAS No. 142 is to be reported as
resulting from a change in accounting principle. The Company does not believe
that the 2002 adoption of SFAS No. 142 will have a material impact on its
consolidated financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF and
APB No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF BUSINESS AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS. SFAS No. 144 establishes a single accounting
model for assets to be disposed of by sale whether previously held and used or
newly acquired. SFAS No. 144 retains the provisions of APB No. 30 for
presentation of discontinued operations in the income statement, but broadens
the presentation to include a component of an entity. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001 and the interim periods
within. The Company does not believe that the 2002 adoption of SFAS No. 144 will
have a material impact on its consolidated financial position, results of
operations or cash flows.
(2) IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES
In December 2001, the Company recorded a non-cash charge of $5.3 million
for impairment of goodwill and certain intangible assets. Approximately $4.2
million of this impairment charge, relates to the software products and services
segment, and results from the Company's decision, made and implemented in the
fourth quarter of 2001, to upgrade all WindowOnWallStreet.com subscribers to
TRADESTATION 6. Accordingly, intangible assets associated with the acquisition
of Window On WallStreet were reduced to their estimated fair value, including
goodwill, purchased technology, trade names, patents, customer lists and
non-compete agreements. See Note 3 - BUSINESS COMBINATIONS. The remaining $1.1
million of this impairment charge relates to the brokerage services segment, and
results from the Company's December 2001 decision to sell accounts that do not
meet the requirements of its active and institutional trader business model.
Accordingly, the value of the intangible assets acquired from Newport Discount
Brokerage, Inc. ("Newport"), including customer lists, was reduced to its
estimated fair value. See Note 4 - ACQUISITION OF CERTAIN INTANGIBLES. In both
cases, fair value was determined by a qualified independent appraiser,
representing the price at which the assets would change hands
F-13
between a willing buyer and seller. The remaining Newport assets are held for
sale. Accordingly, beginning in 2002, amortization will be discontinued and the
assets will be periodically tested for impairment.
(3) BUSINESS COMBINATIONS
TradeStation Group was formed in connection with the December 29, 2000
merger of TradeStation Technologies (formerly known as Omega Research, Inc.) and
TradeStation Securities (formerly known as onlinetradinginc.com corp.)
As a result of the merger, all of the outstanding shares of common stock of
each of TradeStation Technologies and TradeStation Securities converted into
shares of common stock of TradeStation Group. TradeStation Technologies
shareholders received one share of TradeStation Group common stock for each
share of TradeStation Technologies common stock (a 1 to 1 ratio) and
TradeStation Securities shareholders received 1.7172 shares of TradeStation
Group common stock for each share of TradeStation Securities common stock (a
1.7172 to 1 ratio). At the effective time of the merger, TradeStation Group was
owned approximately 57% (on a fully diluted basis) by former TradeStation
Technologies' shareholders and approximately 43% (on a fully diluted basis) by
TradeStation Securities' former shareholders. After giving effect to the merger,
there were outstanding 44,476,501 shares of common stock of TradeStation Group.
Nonrecurring merger expenses, recorded during the quarter ended December
31, 2000 (the period that the merger became effective) were approximately $3.8
million, comprised of approximately $1.6 million in banking fees, $1.2 million
in legal, accounting and tax service fees, $600,000 in severance expenses and
$400,000 in printing and miscellaneous expenses.
The merger was intended to qualify as a tax-free reorganization for United
States federal income tax purposes, and TradeStation Group accounted for the
merger as a pooling-of-interests. Accordingly, the financial data herein gives
retroactive effect to the combination by merger.
Prior to the merger, TradeStation Technologies reported operations on a
calendar year basis while TradeStation Securities reported operations on a
fiscal year basis with a year-end of January 31. TradeStation Group reports
financial information on a calendar year basis. The accompanying consolidated
statements of operations, shareholders' equity and cash flows for the year ended
December 31, 1999 combine TradeStation Technologies' results for the year ended
December 31, 1999 with TradeStation Securities' results for the year ended
January 31, 2000. For the year ended December 31, 2000, TradeStation Securities
converted from its fiscal year-end of January 31 to a December 31 calendar
year-end. Accordingly, the accompanying statements of operations, shareholders'
equity and cash flows for the year ended December 31, 2000 combine both
TradeStation Technologies' and TradeStation Securities' results for the year
ended December 31, 2000, and the accompanying balance sheet as of December 31,
2000 combines both TradeStation Technologies' and TradeStation Securities'
balance sheets as of December 31, 2000. The conversion of TradeStation
Securities' fiscal year-end from January 31 to December 31 resulted in the
results of operations, shareholders' equity and cash flows for the month ended
January 31, 2000 being recorded twice, both in 1999 and 2000. This resulted in
an adjustment to accumulated deficit during the year ended December 31, 2000
reducing shareholders' equity by $36,683, which is comprised of the following:
F-14
Revenues $1,504,904
Operating expenses 1,424,395
Net income 36,683
The following table summarizes components of selected financial data:
2001 2000 1999
------------ ------------ ------------
Revenues:
TradeStation Technologies $ 22,385,516 $ 34,991,983 $ 23,736,535
TradeStation Securities 18,601,627 17,933,750 9,782,370
------------ ------------ ------------
TradeStation Group $ 40,987,143 $ 52,925,733 $ 33,518,905
============ ============ ============
Net (loss) income:
TradeStation Technologies $(21,315,205) $(14,430,631) $ (3,722,518)
TradeStation Securities (589,659) 955,621 1,080,506
------------ ------------ ------------
TradeStation Group $(21,904,864) $(13,475,010) $ (2,642,012)
============ ============ ============
Effective October 26, 1999, TradeStation Technologies acquired Window On
WallStreet, a leading provider of Internet-based streaming real-time market data
and a developer of client software and online trading strategy tools. Under the
terms of the merger agreement, Window On WallStreet shareholders received
1,999,995 newly-issued shares of TradeStation Technologies' common stock for all
of the issued and outstanding shares of Window On WallStreet's common stock. In
addition, TradeStation Technologies (i) repaid in accordance with its terms
approximately $4.1 million of Window On WallStreet debt, (ii) assumed all
outstanding stock options to purchase Window On WallStreet common stock which,
based on an exchange ratio of 0.210974, were exercisable for an aggregate of
182,529 shares of TradeStation Technologies' common stock, (iii) issued to
employees 335,000 stock options to purchase TradeStation Technologies' common
stock, and (iv) paid fees and costs relating to the acquisition of $1.2 million.
The consolidated financial statements contained herein reflect this acquisition
under the purchase method of accounting.
On the Window On WallStreet acquisition date, the shares of the
TradeStation Technologies common stock issued were valued at $8.6 million based
upon the closing price of TradeStation Technologies common stock on the day the
merger agreement was simultaneously executed and consummated. The options were
valued at $1.5 million based upon the fair value, calculated using the
Black-Scholes model assuming a risk-free interest rate of 5%, volatility rate of
75%, and a weighted average life ranging from 2 to 5 years for the options
assumed and 5 years for the options issued to employees. Through December 31,
2001, the resulting goodwill of $1.6 million and identifiable intangible assets
of $15.0 million were being amortized over their estimated useful lives of three
to four years. See Note 7 - GOODWILL AND OTHER INTANGIBLE ASSETS, NET. During
the fourth quarter of 2001, it was determined that certain of these intangible
assets were impaired and, accordingly, they were reduced to their estimated fair
value. See Note 2 - IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES.
F-15
Under purchase accounting, the results of operations of the acquired
company are included from the acquisition date forward. Accordingly, the
consolidated financial statements include the results of operations of Window On
WallStreet from October 26, 1999 forward. The following unaudited pro forma
financial information for 1999 assumes the acquisition of Window On WallStreet
occurred on January 1, 1999:
Pro forma revenues $ 36,198,280
Pro forma net loss (10,731,082)
Pro forma loss per share (0.26)
There were no material relationships or intercompany transactions between
the Company and Window On WallStreet prior to the acquisition. Pro forma
adjustments primarily consist of the amortization of goodwill and other
intangible assets arising as a result of the transaction and Window On
WallStreet's results of operations prior to October 26, 1999, the acquisition
date. The pro forma information above may not be indicative of the operating
results that would have been reported had the acquisition been consummated on
January 1, 1999, and is not indicative of the results that will be reported in
the future.
(4) ACQUISITION OF CERTAIN INTANGIBLES
On December 6, 1999, TradeStation Securities acquired certain intangible
assets of Newport pursuant to an Asset Purchase Agreement dated September 21,
1999, as amended (the "Asset Purchase Agreement"). Pursuant to the Asset
Purchase Agreement, TradeStation Securities purchased all of Newport's right,
title and interest in and to Newport's customer accounts. The total
consideration paid by TradeStation Securities in connection with this
acquisition included cash of $2.7 million and 143,386 shares of the Company's
common stock.
Issuance and delivery of the common stock consideration were contingent
upon the acquired assets achieving certain revenue goals and maintaining certain
customer account levels during the year following closing. In December 2000, the
Company's obligation to issue these shares became fixed. For accounting
purposes, the transaction was treated as a purchase. TradeStation Securities
recorded intangible assets of $2.9 million in connection with this acquisition,
which, through December 31, 2001, were being amortized over their estimated
useful lives of five years. See Note 7 - GOODWILL AND OTHER INTANGIBLE ASSETS,
NET. In December 2001, it was determined that certain of these intangible assets
were impaired and, accordingly, they were reduced to their estimated fair value.
See Note 2 - IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES.
(5) SECURITIES OWNED
Securities owned, at market value, consist of the following as of December
31, 2001 and 2000:
2001 2000
-------- --------
Certificates of deposit $314,528 $ --
Corporate stocks 101,400 98,626
U.S. government obligations -- 150,797
-------- --------
$415,928 $249,423
======== ========
F-16
(6) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following as of December 31,
2001 and 2000:
Estimated Useful
Life in Years 2001 2000
---------------- ----------- -----------
Computers and software 3-5 $ 7,770,479 $ 5,715,205
Furniture and equipment 3-7 692,052 670,708
Leasehold improvements 1-8 390,558 318,993
----------- -----------
8,853,089 6,704,906
Accumulated depreciation and amortization (5,628,571) (4,053,849)
----------- -----------
$ 3,224,518 $ 2,651,057
=========== ===========
Depreciation and amortization expense related to property and equipment,
including equipment under capital leases, was approximately $1.6 million, $1.5
million and $1.0 million, for the years ended December 31, 2001, 2000 and 1999,
respectively.
(7) GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill and other intangible assets, net, consist of the following as of
December 31, 2001 and 2000:
Estimated Useful
Life in Years 2001 2000
--------------- ------------ ------------
Goodwill 4 $ -- $ 1,633,000
Accumulated amortization -- (476,291)
------------ ------------
Goodwill, net $ -- $ 1,156,709
============ ============
Purchased technology and workforce 3 $ 7,600,000 $ 11,600,000
Trade names and patents 3 -- 1,500,000
Customer lists 3-5 2,631,240 3,714,000
Non-compete agreements 4-5 200,000 1,100,000
Data rights 1-5 582,900 357,900
Domain name 3 65,000 65,000
------------ ------------
Total other intangible assets 11,079,140 18,336,900
Accumulated amortization (9,331,044) (6,486,752)
------------ ------------
Other intangible assets, net $ 1,748,096 $ 11,850,148
============ ============
During the fourth quarter of 2001, all goodwill and certain intangible
assets were determined to be impaired and were reduced to their estimated fair
value. See Note 2 - IMPAIRMENT OF GOODWILL AND CERTAIN INTANGIBLES.
F-17
(8) ACCRUED EXPENSES
Accrued expenses consist of the following as of December 31, 2001 and 2000:
2001 2000
---------- ----------
Payroll and related accruals $1,008,225 $ 941,088
Data and exchange fees 887,725 976,648
Consulting and professional fees 620,751 115,007
Uninsured loss reserves 550,000 --
Returns 546,000 146,186
Merger expenses 258,215 2,431,001
Other 2,142,122 1,099,612
---------- ----------
$6,013,038 $5,709,542
========== ==========
(9) DEFERRED REVENUE
Deferred revenue is comprised of deferrals for (i) payments received in
advance of service, and (ii) payments received for licensing fees prior to the
completion of the Company's 30-day trial period. Deferred revenue consists of
the following as of December 31, 2001 and 2000:
2001 2000
-------- --------
Subscription fees $343,336 $785,593
Licensing fees 4,000 36,000
-------- --------
$347,336 $821,593
======== ========
(10) CAPITAL LEASE OBLIGATIONS
The Company has four capital leases for computer equipment, primarily used
at the Company's data server farms, and office furniture and equipment. The
leases were capitalized at interest rates ranging from 8.7% to 13.3% and are
paid monthly over periods ranging from 18 to 36 months.
The following is an analysis of the leased property under capital leases by
major classes:
Estimated Useful
Life in Years 2001 2000
---------------- ----------- -----------
Computers and software 3-5 $ 1,644,353 $ 42,010
Furniture and equipment 5-7 250,515 250,515
----------- -----------
1,894,868 292,525
Accumulated depreciation (331,680) (42,984)
----------- -----------
$ 1,563,188 $ 249,541
=========== ===========
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease
obligations as of December 31, 2001:
2002 $ 1,114,230
2003 551,195
-----------
Total payments 1,665,425
Less amount representing estimated executory costs (primarily sales tax) (104,581)
-----------
Net minimum lease payments 1,560,844
Less amount representing interest (153,972)
-----------
Present value of net minimum lease payments $ 1,406,872
===========
F-18
(11) SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 25 million shares of preferred stock with a par
value of $.01 per share. No specific preferences or rights have been established
to date with respect to any of these shares, nor have any of these shares been
issued.
In July 1999, TradeStation Securities redeemed all of its then outstanding
preferred stock held by a former director for $330,000, 110% of the stated
value.
TRADESTATION SECURITIES' INITIAL PUBLIC OFFERING
TradeStation Securities completed its initial public offering by issuing
2,587,500 shares of its common stock on June 11, 1999. These shares were offered
and sold by the underwriters at an initial public offering price of $7.00 per
share, resulting in aggregate gross offering proceeds of $18,112,500. Net
proceeds to TradeStation Securities were $15,810,891. These shares represent
4,443,255 shares of TradeStation Group's common stock after applying the 1.7172
to 1 merger exchange ratio. See Note 3 - BUSINESS COMBINATIONS.
WARRANTS
In connection with TradeStation Securities' initial public offering,
warrants to purchase up to 225,000 shares of TradeStation Securities' common
stock, at an exercise price of $11.55, were granted to the underwriters, with an
expiration date of June 11, 2004. TradeStation Group assumed such warrants in
connection with the merger, and, based on the 1.7172 to 1 merger conversion
ratio, the underwriters may purchase up to 386,370 shares of the Company's
common stock at an exercise price of $6.73.
STOCK OPTION PLANS
The Company has reserved 7,500,000 shares of its common stock for issuance
under the TradeStation Group Incentive Stock Plan (the "Incentive Stock Plan").
Under the Incentive Stock Plan, incentive and nonqualified stock options, stock
appreciation rights, stock awards, performance shares and performance units are
available to employees or consultants. Currently, only options have been
granted. The terms of each option agreement are determined by the Compensation
Committee of the Board of Directors. The exercise price of incentive stock
options may not be less than fair market value at the date of grant and their
terms may not exceed ten years.
In connection with the merger, as discussed in Note 3 - BUSINESS
COMBINATIONS, TradeStation Group assumed the outstanding options under
TradeStation Securities' 1999 Stock Option Plan. Each option issued under
TradeStation Securities' plan was assumed and converted to 1.7172 options to
purchase TradeStation Group's common stock at the original exercise price
divided by 1.7172.
As also discussed in Note 3 - BUSINESS COMBINATIONS, TradeStation Group
assumed all outstanding stock options to purchase Window On WallStreet common
stock ("WOW Options"). The WOW Options generally vest ratably over a four-year
period and their terms are ten years.
F-19
The Company has reserved 350,000 shares of its common stock for issuance
under the TradeStation Group Amended and Restated Nonemployee Director Stock
Option Plan (the "Director Plan"). Under the Director Plan, an independent
director is awarded an initial grant of up to 75,000 non-qualified stock options
and annual grants of up to 7,000 non-qualified stock options. The terms of each
option grant are determined by the Board of Directors.
A summary of all stock option activity is as follows:
Option Price Per Share
Number -------------------------------------
of Shares Low High Weighted
--------- ---- ----- ---------
Outstanding, December 31, 1998 2,893,336 1.25 11.00 2.52
Granted 1,880,875 1.66 10.25 5.55
Assumed WOW Options 182,529 .48 8.06 4.62
Canceled (131,278) .48 11.00 3.91
Exercised (181,560) 1.25 11.00 2.14
---------
Outstanding, December 31, 1999 4,643,902 .48 11.00 3.80
Granted 1,118,515 1.72 6.63 4.84
Canceled (651,468) 1.66 11.00 5.03
Exercised (120,561) 1.66 11.00 2.68
---------
Outstanding, December 31, 2000 4,990,388 .48 11.00 3.90
Granted 1,327,690 1.88 4.08 2.24
Canceled (553,067) 1.66 11.00 4.26
Exercised (20,345) 1.25 2.88 1.66
---------
Outstanding, December 31, 2001 5,744,666 .48 11.00 3.49
=========
Additional information regarding options outstanding at December 31, 2001
is as follows:
Options Outstanding Options Exercisable
Range of -------------------------------------------------- ---------------------------------
Exercise Number Weighted Weighted Number Weighted
Prices Outstanding Average Average Exercisable Average
- --------------------- as of Contractual Exercise as of Exercise
Low High 12/31/01 Life in Years Price 12/31/01 Price
- --------- -------- --------------- ------------------ ------------- --------------- --------------
$ .48 $ .48 81,940 3.9 $ .48 81,940 $ .48
1.25 1.72 1,334,836 6.2 1.50 987,891 1.45
1.88 2.82 1,579,889 8.6 2.29 162,110 2.55
2.84 4.22 1,185,957 6.7 3.43 583,996 3.36
4.53 6.63 987,400 7.5 5.62 351,450 5.35
6.95 10.25 543,269 7.0 8.15 311,519 8.06
11.00 11.00 31,375 5.7 11.00 26,100 11.00
--------- ---------
$ .48 $ 11.00 5,744,666 7.2 $ 3.49 2,505,006 $ 3.41
========= =========
At December 31, 2001, there were approximately 2.4 million shares available
for future grant under the Incentive Stock Plan, and 218,000 shares available
for future grant under the Director Plan.
All options issued during 1996 were issued to key employees at an exercise
price that was subsequently determined to be approximately $291,000 in the
aggregate below fair value at the
F-20
date of grant as determined by an independent appraisal. Several of the options
issued during 1997 were determined to be, in the aggregate, approximately
$341,000 below fair value as determined by an independent appraisal. These
differences are being amortized over the five-year vesting period of the related
stock options. For the years ended December 31, 2001, 2000 and 1999, the Company
recorded compensation expense of approximately $228,000, $154,000 and $141,000,
respectively.
Included in compensation expense in 2001, 2000 and 1999 was approximately
$63,000, $37,000 and $5,000, respectively, related to options issued to
consultants, accounted for under the provisions of SFAS No. 123. Such options
were issued in connection with the procurement of training services and product
content. The exercise price of the consultant option grants in 1999 was $5.97,
and the option grants vest over a period of 3 years. The fair value of these
grants at the date of issue was $102,000. There were no consultant option grants
in 2001 or 2000. In determining the fair value of these grants, the assumptions
set forth below for employee option grants were used in the application of the
Black-Scholes model for these grants. The provisions of Emerging Issues Task
Force 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN
EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, were
applied in determining the amount of expense recorded in each of the periods
noted above.
The Company, as permitted by SFAS No. 123, applies APB Opinion No. 25 and
its interpretations for options granted to employees. Accordingly, no
compensation is recognized for such grants to the extent that their exercise
price is equal to the fair market value of the underlying stock at the date of
grant. Had compensation cost for the Company's stock options been based on fair
value at the grant dates consistent with the methodologies of SFAS No. 123, the
Company's pro forma net loss (and pro forma loss per share) would have been
approximately $24.1 million ($0.54 per share), $15.6 million ($0.35 per share)
and $3.6 million ($0.09 per share) for the years ended December 31, 2001, 2000
and 1999, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes model with the following assumptions:
2001 2000 1999
---- ---- ----
Risk free interest rate 5% 6% 5%
Dividend yield -- -- --
Volatility factors 75% 75% 75%
Weighted average life (years) 4 4 5
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 500,000 shares of common stock for issuance under
the TradeStation Group Employee Stock Purchase Plan (the "Purchase Plan"). Under
the Purchase Plan, participating employees may purchase common stock through
accumulated payroll deductions. The exercise price for the options for each
six-month Purchase Plan period is 85% of the lower of the fair market value of
the Company's common stock on the first and last business day of the Purchase
Plan period. During the years ended December 31, 2001, 2000 and 1999, 50,470,
30,209 and 23,585 shares of common stock were issued under the plan at an
average price of $1.49, $2.07 and $3.27, respectively.
F-21
(12) INCOME TAXES
The components of income tax provision (benefit) for the years ended
December 31, 2001, 2000, and 1999 are as follows:
2001 2000 1999
------------ ------------ ------------
Current tax (benefit) provision:
Federal $ (100,312) $ (8,111,780) $ 5,850,587
State (37,207) (1,191,710) 974,737
------------ ------------ ------------
Total current tax (benefit) provision (137,519) (9,303,490) 6,825,324
------------ ------------ ------------
Deferred tax provision (benefit):
Federal 4,230,651 9,273,800 (7,252,000)
State 575,000 1,432,400 (1,207,100)
------------ ------------ ------------
Total deferred tax provision (benefit) 4,805,651 10,706,200 (8,459,100)
------------ ------------ ------------
Total income tax provision (benefit) $ 4,668,132 $ 1,402,710 $ (1,633,776)
============ ============ ============
Deferred income taxes are recorded when revenues and expenses are
recognized in different periods for financial statement and tax return purposes.
The temporary differences that created deferred income taxes are as follows:
2001 2000
------------ ------------
Deferred income taxes, asset:
Net operating loss carryforwards $ 6,483,217 $ 4,510,000
Difference in revenue recognition 2,441,786 4,018,000
Deferred revenue and accrued liabilities 2,182,670 588,651
Intangible asset amortization 710,351 166,500
Tax credits 334,841 334,500
Stock option expense 238,358 177,000
Property and equipment depreciation 126,665 76,500
Reserves and allowances 59,985 73,000
Other -- 110,000
------------ ------------
12,577,873 10,054,151
Valuation allowance (12,577,873) (5,248,500)
------------ ------------
$ -- $ 4,805,651
============ ============
During the fourth quarter of 2001, in accordance with the requirements of
SFAS No. 109, the Company recorded a $4.8 million non-cash charge establishing a
full valuation allowance against its deferred tax assets.
The Company has available net operating loss carryforwards and tax credit
carryforwards for federal tax purposes estimated at $16.9 million and $335,000,
respectively, which expire between 2012 and 2021. For state tax purposes, the
available net operating loss carryforwards are estimated at $20.7 million.
Included in these amounts are net operating loss carryforwards and tax credit
carryforwards totaling approximately $6.3 million and $124,000, respectively,
through TradeStation Technologies' acquisition of Window On WallStreet. The
utilization of the Window On WallStreet net operating losses will be subject to
limitations of approximately $617,000 per year, which are cumulative to the
extent not utilized. The deferred tax asset related to all of these
carryforwards has been reduced to zero by a valuation allowance.
F-22
A reconciliation of the difference between the expected benefit for income
taxes using the statutory federal tax rate of 34% and the Company's actual
provision (benefit) is as follows:
2001 2000 1999
----------- ----------- -----------
Income tax benefit using statutory
Federal tax rate $(5,860,489) $(4,104,582) $(1,453,768)
Change in valuation allowance 7,329,373 2,479,500 (240,000)
Nondeductible merger expenses -- 1,292,000 --
Nondeductible amortization of goodwill and
other intangibles 1,784,270 1,818,971 303,162
Nondeductible impairment of goodwill and
other intangibles 1,442,319 -- --
Other (27,341) (83,179) (243,170)
----------- ----------- -----------
Total income tax provision (benefit) $ 4,668,132 $ 1,402,710 $(1,633,776)
=========== =========== ===========
(13) EMPLOYEE BENEFIT PLANS
TradeStation Securities had maintained a "SIMPLE" retirement plan for all
eligible employees. Eligible employees could contribute up to $500 per month,
for which TradeStation Securities would match, dollar-for-dollar, up to 3% of
the employees' compensation. Contributions by TradeStation Securities under this
plan were approximately $40,000, for the year ended December 31, 1999. Effective
December 31, 1999, TradeStation Securities terminated the plan.
Effective January 15, 2000, TradeStation Securities started a defined
contribution 401(k) plan (the "Old Plan"). Eligible employees could contribute
up to 15% of their eligible salary, which TradeStation Securities would match
fifty percent, up to $2,500. Contributions made under this plan were
approximately $57,000 and $92,000 for the years ended December 31, 2001 and
2000, respectively.
Effective July 1, 2001, the Old Plan was converted to the Company's plan,
which provides retirement benefits through a defined contribution 401(k) plan
(the "401(k) Plan") established during 1994. Employees become eligible based
upon meeting certain service requirements. The Company matches employee
contributions based upon a formula defined in the 401(k) Plan. There were no
matching contributions accrued in 2001 or 2000. During 1999, matching
contributions accrued under the 401(k) Plan amounted to approximately $242,000.
(14) LOSS PER SHARE
Weighted average shares outstanding for the years ended December 31, 2001,
2000 and 1999 were 44,458,689, 43,955,819 and 40,065,348, respectively. Basic
and diluted loss per share were the same for all periods presented as all common
stock equivalents, such as stock options and warrants, were antidilutive.
Options and warrants outstanding for the years ended December 31, 2001,
2000 and 1999, which were not included in the calculation of diluted loss per
share because their impact was antidilutive are as follows:
F-23
2001 2000 1999
--------- --------- ---------
Options 5,744,666 4,990,388 4,643,902
========= ========= =========
Warrants 386,370 386,370 386,370
========= ========= =========
In February 1998, a former officer of TradeStation Securities received
763,199 shares of common stock (after giving effect to the exchange ratio
pursuant to the merger) 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.
(15) 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
December 31, 2001, TradeStation Securities had net capital of $11,909,303, which
was $11,659,303 in excess of its required net capital of $250,000, and a ratio
of aggregate indebtedness to net capital of .28.
(16) CONCENTRATIONS AND CREDIT RISKS
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
TradeStation Securities' customer securities and futures activities are
transacted on either a cash or margin basis. In margin transactions,
TradeStation Securities may be obligated for credit extended to its customers by
the Clearing Firms, subject to various regulatory and Clearing Firm margin
requirements, collateralized by cash and securities in the customers' accounts.
In connection with these activities, TradeStation Securities executes customer
transactions involving the sale of securities not yet purchased, substantially
all of which are transacted on a margin basis subject to individual exchange
regulations. Such transactions may expose TradeStation Securities to significant
off-balance-sheet risk in the event margin requirements are not sufficient to
fully cover losses that customers may incur. In the event the customer fails to
satisfy its obligations, TradeStation Securities may be required to purchase or
sell financial instruments at prevailing market prices to fulfill the customer's
obligations.
TradeStation Securities seeks to control the risks associated with its
customer activities by requiring customers to maintain margin collateral in
compliance with its Clearing Firms' requirements as well as various regulatory
requirements. TradeStation Securities and its Clearing Firms monitor required
margin levels daily and, pursuant to such guidelines, require the customers to
deposit additional collateral or to reduce positions when necessary.
TradeStation Securities' customer financing and securities settlement
activities require TradeStation Securities' Clearing Firms to pledge customer
securities as collateral in support of various secured financing sources such as
bank loans and securities loaned. In the event the counterparty is unable to
meet its contractual obligation to return customer securities pledged as
F-24
collateral, TradeStation Securities may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its customers'
obligations. TradeStation Securities controls this risk by monitoring the market
value of securities pledged on a daily basis and by requiring adjustments of
collateral levels in the event of excess market exposure. In addition,
TradeStation Securities establishes credit limits for such activities and
monitors compliance on a daily basis.
CONCENTRATIONS OF CREDIT RISK
TradeStation Securities is engaged in various trading and brokerage
activities in which counterparties primarily include broker-dealers, banks, and
other financial institutions. In the event counterparties do not fulfill their
obligations, TradeStation Securities may be exposed to risk. The risk of default
depends on the creditworthiness of the counterparty or issuer of the instrument.
It is TradeStation Securities' policy to review, as necessary, the credit
standing of each counterparty.
(17) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company recently signed a ten-year lease (with two 5-year renewal
options) that is expected to commence in the summer of 2002 for an approximately
70,000 square foot corporate headquarters in Plantation, Florida. In addition to
this lease, the Company has eight non-cancelable operating leases for facilities
(including 2 data centers) with expirations ranging from February 2002 through
February 2007. In addition to the leases for facilities, the Company leases its
telephone system, certain computer equipment and office furniture. Future
minimum lease payments as of December 31, 2001 under all operating leases are as
follows:
2002 $ 2,932,605
2003 2,319,886
2004 2,058,356
2005 1,955,643
2006 1,987,142
Thereafter 9,742,567
-----------
$20,996,199
Total rent expense for 2001, 2000 and 1999 was approximately $4.9 million,
$3.6 million and $798,000, net of sublease rentals, respectively.
RESTRICTED CASH AND MARKETABLE SECURITIES
As of December 31, 2001, the Company has $3.9 million of restricted cash
and securities which is broken down as follows: (i) $2.4 million of cash
supporting a ten-year lease agreement; (ii) $1.0 million of cash securing a
letter of credit, which secures equipment leases; (iii) $315,000 of securities
securing a stand-by letter of credit, which secures an equipment lease; and (iv)
$200,000 of cash securing a credit card clearing agreement.
F-25
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 by the Company has been fully reserved. While no assurances
can be given, the Company and its advisors continue to believe the Company has a
valid claim under its insurance policy. The Company intends to vigorously pursue
collection of this claim.
DATA SERVICES PROVIDER AGREEMENT
The Company has an agreement with its data services provider that requires,
in the event of termination, the payment of a termination fee of $600,000 if
terminated prior to December 31, 2004. Other than the termination fee, no
minimum obligation exists under the agreement.
TELERATE ROYALTY AGREEMENT
The Company was party to a Software License, Maintenance and Development
Agreement (the "Agreement") with Telerate, Inc., a subsidiary of Bridge
Information Systems, Inc. ("Telerate"). Under the Agreement, the Company
modified one of its software products to create a Telerate version and granted
Telerate a license to promote, market, sublicense and distribute the Telerate
version for six years. During 2000 and 1999, the Company earned approximately
$6.0 million and $4.0 million, respectively, in royalties (based upon minimum
royalty requirements) under the terms of this Agreement. The minimum royalty
requirement for 2001 was $8.0 million. However in February 2001, Telerate and
its parent company filed a Chapter 11 reorganization proceeding under the
federal bankruptcy code. In October 2001, the assets of Telerate were sold to
MoneyLine Network, Inc. Effective October 17, 2001, the Company entered into a
new royalty agreement with MoneyLine that expires December 31, 2002, under which
the guaranteed royalty minimums for the 2001 fourth quarter were $230,000 per
month (as compared to the $666,667 per month minimum payments under the Telerate
agreement that was rejected in the bankruptcy). Accordingly, only $6.7 million
in royalties were recorded in 2001. Of this amount, approximately $714,000 was
considered part of the "pre-petition" estate in Telerate's Chapter 11
bankruptcy, and will not be paid as a result of the rejection of the Agreement
in those bankruptcy proceedings. A $714,000 provision for bad debt was
recognized in the first quarter of 2001. There will be no guaranteed royalty
minimums in 2002. Beginning in January 2002, royalties will be based on actual
usage only, are not expected to exceed $130,000 per month, and are expected to
sequentially decrease as the Agreement nears termination.
LITIGATION
On January 11, 2000, Robert A. Whigham, Jr. and Patricia F. Whigham filed a
civil action against TradeStation Securities (then named onlinetradinginc.com
corp.), Barry Goodman, Jan Bevivino, William L. Mark and Bear, Stearns
Securities Corp. The Whighams alleged damages plus interest, costs, fees and
treble damages. On May 8, 2001, the Whighams settled all of their claims against
TradeStation Securities, Jan Bevivino, William L. Mark and Bear, Stearns
Securities Corp. The settlement was not significant to the Company's financial
statements.
F-26
The Company is engaged in routine litigation incidental to, and part of the
ordinary course of, its business. The Company does not believe that the results
of any such pending litigation will have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
(18) SEGMENT AND RELATED INFORMATION
For the three years in the period ended December 31, 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.
As of or for the Years Ended December 31,
----------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
Brokerage services $ 18,601,627 $ 17,933,750 $ 9,782,370
Software products and services 22,385,516 34,991,983 23,736,535
------------ ------------ ------------
$ 40,987,143 $ 52,925,733 $ 33,518,905
============ ============ ============
(Loss) income from operations:
Brokerage services $ (703,128) $ 1,152,588 $ 552,000
Software products and services (17,132,312) (14,517,520) (6,480,993)
------------ ------------ ------------
$(17,835,440) $(13,364,932) $ (5,928,993)
============ ============ ============
Identifiable assets:
Brokerage services $ 20,144,278 $ 22,461,748 $ 19,360,804
Software products and services 6,676,725 27,892,400 39,559,055
------------ ------------ ------------
$ 26,821,003 $ 50,354,148 $ 58,919,859
============ ============ ============
Depreciation and amortization:
Brokerage services $ 815,356 $ 693,176 $ 131,163
Software products and services 6,957,579 6,821,229 1,847,555
------------ ------------ ------------
$ 7,772,935 $ 7,514,405 $ 1,978,718
============ ============ ============
Capital expenditures:
Brokerage services $ 17,952 $ 290,240 $ 191,791
Software products and services 527,836 749,125 1,594,178
------------ ------------ ------------
$ 545,788 $ 1,039,365 $ 1,785,969
============ ============ ============
F-27
(19) UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following tables summarize selected quarterly financial data for the
years ended December 31, 2001 and 2000.
2001
----------------------------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------ ------------ ------------ ------------ ------------
Revenues $ 12,107,152 $ 10,593,479 $ 9,175,203 $ 9,111,309 $ 40,987,143
Loss from operations (1,881,009) (3,449,583) (4,330,875) (8,173,973) (17,835,440)
Net loss (1,671,121) (3,274,872) (4,238,635) (12,720,236) (21,904,864)
Loss per share:
Basic and diluted (0.04) (0.07) (0.10) (0.29) (0.49)
Weighted average shares
outstanding:
Basic and diluted 44,307,025 44,485,540 44,520,498 44,521,893 44,458,689
2000
----------------------------------------------------------------------------------------
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------ ------------ ------------ ------------ ------------
Revenues $ 12,908,359 $ 13,857,243 $ 12,665,133 $ 13,494,998 $ 52,925,733
Loss from operations (4,229,871) (2,475,148) (1,502,535) (5,157,378) (13,364,932)
Net loss (4,131,242) (2,459,809) (1,537,292) (5,346,667) (13,475,010)
Loss per share:
Basic and diluted (0.09) (0.06) (0.03) (0.12) (0.31)
Weighted average shares
outstanding:
Basic and diluted 43,652,965 44,020,509 44,049,327 44,098,519 43,955,819
F-28
TRADESTATION GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL SCHEDULE
Report of Independent Certified Public Accountants on Schedule............. S-2
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2001, 2000 and 1999........................................... S-3
S-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To TradeStation Group, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in this Form
10-K and have issued our report thereon dated February 8, 2002. Our audits were
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The accompanying Schedule II is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Miami, Florida,
February 8, 2002.
S-2
TRADESTATION GROUP INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
------------ ------------ ------------ ------------
Year ended December 31, 2001:
Allowance for doubtful accounts $ -- $ 714,286 $ (714,286) $ --
Allowance for returns -- -- -- --
Deferred tax valuation allowance 5,248,500 7,329,373 -- 12,577,873
------------ ------------ ------------ ------------
$ 5,248,500 $ 8,043,659 $ (714,286) $ 12,577,873
============ ============ ============ ============
Year ended December 31, 2000:
Allowance for doubtful accounts $ 716,000 $ -- $ (716,000) $ --
Allowance for returns 83,000 26,647 (109,647) --
Deferred tax valuation allowance 2,769,000 2,479,500 -- 5,248,500
------------ ------------ ------------ ------------
$ 3,568,000 $ 2,506,147 $ (825,647) $ 5,248,500
============ ============ ============ ============
Year ended December 31, 1999:
Allowance for doubtful accounts $ 3,723,000 $ 25,000 $ (3,032,000) $ 716,000
Allowance for returns 7,350,000 83,000 (7,350,000) 83,000
Deferred tax valuation allowance 3,009,000 (240,000) -- 2,769,000
------------ ------------ ------------ ------------
$ 14,082,000 $ (132,000) $(10,382,000) $ 3,568,000
============ ============ ============ ============
S-3
EXHIBIT INDEX
Exhibit
Number Description
- -------- ------------
3.1 TradeStation Group's Articles of Incorporation, as amended**
3.2 TradeStation Group's Bylaws**
4.1 Form of Specimen Certificate for TradeStation Group's
Common Stock****
9.1 Voting Trust Agreement dated January 19, 2000 by and among certain
shareholders of each of Omega Research, Inc. and
onlinetradinginc.com corp. and Marc J. Stone, as voting trustee*
10.1 Agreement and Plan of Merger and Reorganization dated as of
January 19, 2000 by and among Omega Research, Inc.,
onlinetradinginc.com corp., OnlineTrading.com Group, Inc., Omega
Acquisition Corporation and Onlinetrading Acquisition Corporation,
together with the following exhibit thereto: (i) Form of Omega
Affiliate Agreement; (ii) Form of Online Affiliate Agreement;
(iii) Form of Employment Agreement; and (iv) Form of
Non-Competition and Non-Disclosure Agreement*
10.2 First Amendment to Agreement and Plan of Merger and Reorganization
effective March 7, 2000 among Omega Research, Inc.,
onlinetradinginc.com corp., OnlineTrading.com Group, Inc., Omega
Acquisition Corporation and Onlinetrading Acquisition Corporation,
Second Amendment to Agreement and Plan of Merger and
Reorganization dated as of July 19, 2000 by and among Omega
Research, Inc., onlinetradinginc.com corp., TradeStation Group,
Inc., Omega Acquisition Corporation and Onlinetrading Acquisition
Corporation and Third Amendment to Agreement and Plan of Merger
and Reorganization dated as of September 21, 2000 by and among
Omega Research, Inc., onlinetradinginc.com corp., TradeStation
Group, Inc., Omega Acquisition Corporation and Onlinetrading
Acquisition Corporation*
10.3 Letter Agreement dated January 19, 2000 from onlinetradinginc.com
corp. to and accepted by Andrew A. Allen*
10.4 TradeStation Group, Inc. Incentive Stock Plan
***#
10.5 TradeStation Group, Inc. Amended and Restated Nonemployee Director
Stock Option Plan (filed herewith)#
10.6 Software License, Maintenance and Development Agreement between
Dow Jones Markets, Inc. and Omega Research, Inc. as amended
(TradeStation Agreement)+
10.7 Software License, Maintenance and Development Agreement between
Dow Jones Markets, Inc. and Omega Research, Inc. (SuperCharts
Agreement)+
10.8 Standard Office Building Lease between 8700 Flagler, Ltd. and
Omega Research, Inc., as amended by Memorandum of Commencement
Date+
10.9 Form of Indemnification Agreement+
10.10 S Corporation Tax Allocation and Indemnification Agreement++
10.11 TradeStation Group, Inc. Employee Stock Purchase
Plan***#
10.12 Form of Non-Competition Agreement+
10.13 Letter Agreement dated October 27, 1997 from Dow Jones Markets,
Inc. to Omega Research, Inc.+++
10.14 Sublease (for fourth floor of 8700 Flagler Building) and
Modification of Lease Agreement (incorporated by reference to
Exhibit 10.11 to Omega Research, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1998)
10.15 Second Modification of Lease Agreement, dated January 31, 2000,
between Nationwide Theaters West Flagler, L.L.C. and Omega
Research, Inc. (incorporated by reference to Exhibit 10.12 to
Omega Research, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1999)
10.16 Office/Showroom/Warehouse Lease Agreement dated June 12, 1996
between Springcreek Place Ltd. and Window On WallStreet Inc. (then
named MarketArts, Inc.), as amended by Addendum to Lease dated
October 12, 1998, and as further amended by Addendum to Lease
dated May 28, 1999 (incorporated by reference to Exhibit 10.13 to
Omega Research, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1999)
10.17 Lease Agreement, dated November 16, 1999, between Fairfax Boca 92,
L.P. and Omega Research, Inc. (incorporated by reference to
Exhibit 10.14 to Omega Research, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1999)
10.18 Employment Agreement dated as of January 19, 2000 between Farshid
Tafazzoli and TradeStation Group, Inc.+++++#
10.19 Severance Agreement, dated July 20, 2001, between TradeStation
Group, Inc. and Farshid Tafazzoli (without exhibit) (filed
herewith)#
10.20 Employment Agreement dated as of January 19, 2000 between E.
Steven zum Tobel and TradeStation Group, Inc.+++++#
10.21 Severance Agreement, dated July 20, 2001, between TradeStation
Group, Inc. and E. Steven zum Tobel (without exhibit) (filed
herewith)#
10.22 onlinetradinginc.com corp. 1999 Stock Option
Plan***#
10.23 Window On WallStreet Inc. 1997 Long Term Incentive
Plan***#
10.24 Clearing Agreement with Bear, Stearns Securities Corp.++++
10.25 Office Lease dated August 13, 1998 between onlinetradinginc.com
corp. and Highwood/Florida Holdings, L.P.++++
10.26 Form of Non-Competition and Non-Disclosure Agreement*
10.27 Lease Agreement, dated November 13, 2001, between Crossroads
Business Park Associates LLP and TradeStation Group, Inc.
(without exhibits and schedules) (filed herewith)
21.1 List of Subsidiaries+++++
23.1 Consent of Arthur Andersen LLP, Independent Certified Public
Accountants, with respect to TradeStation Group, Inc.'s
consolidated financial statements (filed herewith)
- ----------------------------------
* Previously filed as part of the Rule 424(b)(1) Proxy
Statement/Prospectus of TradeStation Group filed with the
Securities and Exchange Commission (the "Commission") on December
12, 2000.
** Previously filed as part of Registration Statement No. 333-34922
on Form S-4 of OnlineTrading.com Group, Inc. filed with the
Commission on April 17, 2000.
*** Previously filed as part of Registration Statement No. 333-53222
on Form S-8 of TradeStation Group, Inc. filed with the Commission
on January 5, 2001.
**** Previously filed as part of Amendment No. 3 to Registration
Statement No. 333-34922 on Form S-4 of OnlineTrading.com Group,
Inc. filed with the Commission on November 21, 2000.
+ Previously filed as part of Registration Statement No. 333-32077
on Form S-1 of Omega Research, Inc. filed with the Commission on
July 25, 1997.
++ Previously filed as part of Amendment No.1 to Registration
Statement No. 333-32077 of Omega Research, Inc. filed with the
Commission on August 25, 1997.
+++ Previously filed as part of Annual Report on Form 10-K of Omega
Research, Inc. for the fiscal year ended December 31, 1997.
++++ Previously filed as part of Registration Statement No. 333-75119
of Form SB-2 of onlinetradinginc.com corp. filed with the
Commission on March 26, 1999.
+++++ Previously filed as part of the Annual Report on Form 10-K of
TradeStation Group, Inc. filed with the Commission on March 30,
2001.
# Indicates a management contract or compensatory plan or
arrangement.