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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 0-31049
TRADESTATION GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-0977576
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8050 S.W. 10TH STREET, SUITE 4000, PLANTATION, FLORIDA 33324
------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
954-652-7000
------------------------------------------------------------
(Registrant's telephone number, including area code)
8700 WEST FLAGLER STREET, MIAMI, FLORIDA 33174
------------------------------------------------------------
(Former address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
AS OF JULY 26, 2002, THERE WERE 44,568,524 SHARES OF THE REGISTRANT'S COMMON
STOCK OUTSTANDING.
TRADESTATION GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001...................................... 3
Consolidated Statements of Operations
Three and six months ended June 30, 2002 and 2001 (unaudited)........................ 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001 (unaudited).................................. 5
Notes to Consolidated Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
Signature ........................................................................................ 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS:
- -------
Cash and cash equivalents (Note 5) $ 19,368,941 $ 19,981,591
Receivables from clearing firms 1,418,404 255,146
Securities owned, at market value 104,370 415,928
Accounts receivable 204,475 330,300
Property and equipment, net 3,516,631 3,224,518
Intangible assets, net 621,276 1,748,096
Other assets 1,176,856 865,424
------------ ------------
Total assets $ 26,410,953 $ 26,821,003
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
LIABILITIES:
Accounts payable $ 2,020,018 $ 1,596,244
Accrued expenses 6,655,667 6,013,038
Capital lease obligations 1,908,010 1,406,872
Deferred revenue 220,717 347,336
------------ ------------
Total liabilities 10,804,412 9,363,490
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000
shares authorized, none issued and outstanding -- --
Common stock, $.01 par value; 200,000,000
shares authorized, 44,568,393 and 44,547,316
issued and outstanding at June 30, 2002 and
December 31, 2001, respectively 445,684 445,473
Additional paid-in capital 51,668,839 51,609,498
Accumulated deficit (36,507,982) (34,597,458)
------------ ------------
Total shareholders' equity 15,606,541 17,457,513
------------ ------------
Total liabilities and shareholders' equity $ 26,410,953 $ 26,821,003
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Brokerage revenues $ 9,797,580 $ 4,110,868 $ 16,645,846 $ 9,192,834
Subscription fees 1,533,129 2,644,750 3,193,271 5,398,557
Other 892,080 3,837,861 2,062,861 8,109,240
------------ ------------ ------------ ------------
Total revenues 12,222,789 10,593,479 21,901,978 22,700,631
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Clearing and execution costs 2,429,540 1,346,384 4,369,435 2,936,195
Data center costs 1,211,031 1,311,068 2,423,196 2,675,681
Technology development 2,340,641 3,386,789 4,687,761 5,828,683
Sales and marketing 3,506,201 3,302,556 6,745,710 6,340,622
General and administrative 2,496,305 3,154,302 5,420,051 7,189,867
Amortization of intangibles 258,548 1,541,963 514,320 3,060,175
------------ ------------ ------------ ------------
Total operating expenses 12,242,266 14,043,062 24,160,473 28,031,223
------------ ------------ ------------ ------------
Loss from operations (19,477) (3,449,583) (2,258,495) (5,330,592)
OTHER INCOME, net 361,081 179,607 348,297 401,241
------------ ------------ ------------ ------------
Income (loss) before income taxes 341,604 (3,269,976) (1,910,198) (4,929,351)
INCOME TAX PROVISION 326 4,896 326 16,642
------------ ------------ ------------ ------------
Net income (loss) $ 341,278 $ (3,274,872) $ (1,910,524) $ (4,945,993)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.01 $ (0.07) $ (0.04) $ (0.11)
============ ============ ============ ============
Diluted $ 0.01 $ (0.07) $ (0.04) $ (0.11)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 44,547,816 44,485,540 44,547,816 44,396,283
============ ============ ============ ============
Diluted 44,600,584 44,485,540 44,547,816 44,396,283
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,910,524) $ (4,945,993)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,517,584 3,801,518
Provision for bad debts -- 714,286
Gain on sale of intangible assets (287,500) --
Compensation expense on stock option grants 37,692 75,180
(Increase) decrease in:
Receivables from clearing firms (1,163,258) 650,915
Accounts receivable 125,825 (926,853)
Other assets (311,432) (2,935,381)
Income tax receivable -- 8,542,413
Increase (decrease) in:
Accounts payable 423,774 (1,824,009)
Accrued expenses 642,629 453,819
Income tax payable -- (869,707)
Deferred revenue (126,619) 65,682
------------ ------------
Net cash (used in) provided by operating activities (1,051,829) 2,801,870
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (246,055) (396,350)
Purchases of securities owned (2,970) (1,436,103)
Redemption of/proceeds from maturity of securities owned 314,528 92,380
Acquisition of data rights and other intangibles (100,000) (125,000)
Proceeds from sale of intangibles 1,000,000 --
------------ ------------
Net cash provided by (used in) investing activities 965,503 (1,865,073)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 21,860 69,094
Repayment of capital lease obligations (548,184) (43,368)
------------ ------------
Net cash (used in) provided by financing activities (526,324) 25,726
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (612,650) 962,523
CASH AND CASH EQUIVALENTS, beginning of period 19,981,591 18,394,996
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 19,368,941 $ 19,357,519
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 124,874 $ 54,872
============ ============
Cash paid for income taxes $ -- $ 900,354
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 1,049,322 $ 1,296,123
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
TRADESTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL NOTES AND RELATED DISCLOSURES APPLICABLE
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 ARE UNAUDITED)
TradeStation Group, Inc. ("TradeStation Group" or the "Company"), a Florida
corporation formed in 2000, is the successor company to Omega Research, Inc., a
Florida corporation that was formed in 1982. TradeStation Group is listed on The
Nasdaq National Market under the symbol "TRAD." TradeStation Securities, Inc.
("TradeStation Securities") and TradeStation Technologies, Inc. ("TradeStation
Technologies") are TradeStation Group's two operating subsidiaries. The
accompanying consolidated financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K of TradeStation Group for
the year ended December 31, 2001. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position as of June 30, 2002, the consolidated
results of operations for the three and six months ended June 30, 2002 and 2001,
and the consolidated cash flows for the six months ended June 30, 2002 and 2001
have been made. The results of operations and cash flows for an interim period
are not necessarily indicative of the results of operations or cash flows that
may be reported for the year or for any subsequent period. Certain prior period
amounts have been reclassified to conform to the current period presentation.
(1) EARNINGS (LOSS) PER SHARE
Weighted average shares outstanding for the three and six months ended June
30, 2002 and 2001 are calculated as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares
outstanding (basic) 44,547,816 44,485,540 44,547,816 44,396,283
Impact of dilutive options after
applying the treasury stock method 52,768 -- -- --
---------- ---------- ---------- ----------
Weighted average shares
outstanding (diluted) 44,600,584 44,485,540 44,547,816 44,396,283
========== ========== ========== ==========
Options and warrants outstanding for the three and six months ended June
30, 2002 and 2001, which are not included in the calculation of diluted earnings
(loss) per share because their impact is antidilutive, are as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ----------- -------------
Options 6,574,791 6,057,731 6,722,481 6,057,731
============ ============ =========== =============
Warrants 386,370 386,370 386,370 386,370
============ ============ =========== =============
In February 1998, a former officer of TradeStation Securities received
763,199 shares of common stock in connection with his employment, subject to
repurchase by TradeStation Securities in the event of his resignation or
termination for cause prior to February 28, 2001. The redemption provision with
respect to two-thirds of these shares expired on February 29, 2000, and the
remaining one-third expired on February 28, 2001. Prior to the expiration of the
relative redemption provisions, the shares remaining subject to redemption were
excluded from basic and diluted weighted average shares outstanding, as they
were antidilutive.
6
(2) INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following as of June 30, 2002 and
December 31, 2001:
JUNE 30, 2002
-------------------------------------------------------
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
---------------- --------------- ---------------
Purchased technology $ 7,600,000 $ (7,333,333) $ 266,667
Customer lists 936,901 (930,474) 6,427
Other 947,900 (599,718) 348,182
---------------- --------------- ---------------
Total intangible assets $ 9,484,801 $ (8,863,525) $ 621,276
================ =============== ===============
DECEMBER 31, 2001
-------------------------------------------------------
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
---------------- --------------- ---------------
Purchased technology $ 7,600,000 $ (6,933,333) $ 666,667
Customer lists 2,631,240 (1,902,672) 728,568
Other 847,900 (495,039) 352,861
---------------- --------------- ---------------
Total intangible assets $ 11,079,140 $ (9,331,044) $ 1,748,096
================ =============== ===============
In December 2001, based upon its decision to sell brokerage accounts that
did not meet the requirements of its active and institutional trader business
model, the Company recorded a non-cash charge of $1.1 million for impairment of
certain intangible assets previously acquired from Newport Discount Brokerage,
Inc. ("Newport"), reducing the value of the intangible assets to its estimated
fair value of $712,500. During the second quarter of 2002, the Company sold
these intangible assets for $1.0 million in cash, and recorded a gain on the
sale of $287,500.
The following reconciliation adjusts prior year periods' net loss to remove
amortization expense related to goodwill and workforce that is no longer
amortized effective January 1, 2002 under the provisions of Statement of
Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
--------------- ---------------
Reported net loss $ (3,274,872) $ (4,945,993)
Add back goodwill amortization 102,063 204,125
Add back workforce amortization 166,667 333,333
--------------- ---------------
Adjusted net loss $ (3,006,142) $ (4,408,535)
=============== ===============
Reported basic and diluted loss per share $ (0.07) $ (0.11)
Add back goodwill amortization -- --
Add back workforce amortization -- 0.01
--------------- ---------------
Adjusted basic and diluted loss per share $ (0.07) $ (0.10)
=============== ===============
7
(3) ACCRUED EXPENSES
Accrued expenses consist of the following as of June 30, 2002 and December
31, 2001:
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
Payroll and related accruals $ 1,497,062 $ 1,216,440
Data and exchange fees 975,842 887,725
Estimated loss on sublease of facilities 904,000 380,000
Uninsured loss reserves 596,250 550,000
Consulting and professional fees 572,911 620,751
Returns 200,000 546,000
Other 1,909,602 1,812,122
--------------- ---------------
$ 6,655,667 $ 6,013,038
=============== ===============
"Other" includes clearing deposits, event termination fees, commissions to
third parties, and other accrued expenses and reserves, none of which
individually exceeds 5% of total liabilities.
(4) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in a business
enterprise's equity during a period arising from transactions, events or
circumstances relating to non-owner sources, such as foreign currency
translation adjustments and unrealized gains or losses on available-for-sale
securities. It includes all changes in equity during a period except those
resulting from investments by, or distributions to, owners. Comprehensive income
(loss) is equal to net income (loss) for all periods presented.
(5) COMMITMENTS AND CONTINGENCIES
RESTRICTED CASH
As of June 30, 2002, the Company had $3.5 million of restricted cash, as
follows: (i) $2.4 million of cash supporting a ten-year real property lease
agreement; (ii) $895,000 of cash securing a letter of credit, which secures
equipment leases; and (iii) $200,000 of cash securing a credit card clearing
agreement.
PURCHASE OBLIGATION
As of June 30, 2002, the Company has an obligation to purchase
approximately $540,000 of television advertising through the end of 2002.
INSURANCE CLAIM
In June 2001, the Company made a claim of $2.7 million with its insurance
carrier relating to a trading error made with respect to a client's account. In
December 2001, the insurance company denied this claim and, accordingly, the
receivable recorded in the consolidated balance sheets was fully reserved as of
June 30, 2002 and December 31, 2001. On July 25, 2002, the Company entered into
an agreement to settle this claim for $1.25 million, payment of which is due no
later than August 31, 2002.
LITIGATION
The Company is engaged in routine litigation incidental to, and part of the
ordinary course of, its business. The Company does not believe that the results
of any such pending litigation will have a material adverse effect on its
consolidated financial position, results of operations or cash flows.
8
(6) SEGMENT AND RELATED INFORMATION
For the three months ended June 30, 2002 and 2001, TradeStation Group
operated in two principal business segments: (i) brokerage services; and (ii)
software products and services. The Company evaluates the performance of its
segments based on revenue and operating income. The brokerage services segment
represents the operations of TradeStation Securities and the software products
and services segment represents the operations of TradeStation Technologies. All
intercompany transactions are eliminated in consolidation.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
Revenues:
Brokerage services $ 9,735,548 $ 4,110,868 $ 16,583,814 $ 9,192,834
Software products and services 5,318,941 6,482,611 8,871,364 13,507,797
Eliminations (2,831,700) -- (3,553,200) --
--------------- --------------- --------------- ----------------
$ 12,222,789 $ 10,593,479 $ 21,901,978 $ 22,700,631
=============== =============== =============== ================
(Loss) income from operations:
Brokerage services $ (188,251) $ 178,597 $ (399,579) $ 762,075
Software products and services 168,774 (3,628,180) (1,858,916) (6,092,667)
--------------- --------------- --------------- ----------------
$ (19,477) $ (3,449,583) $ (2,258,495) $ (5,330,592)
=============== =============== =============== ================
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
Identifiable assets:
Brokerage services $ 20,123,702 $ 20,144,278
Software products and services 6,287,251 6,676,725
--------------- ---------------
$ 26,410,953 $ 26,821,003
=============== ===============
(7) 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
June 30, 2002, TradeStation Securities had net capital of $10.4 million, which
was $10.1 million in excess of its required net capital of $294,000, and a ratio
of aggregate indebtedness to net capital of .42 to 1.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements of
TradeStation Group and its subsidiaries contained herein. The results of
operations for an interim period may not give a true indication of results for
the year, or for any subsequent period.
RESULTS OF OPERATIONS
TradeStation Group operated in two principal business segments: brokerage
services and software products and services. All intercompany transactions are
eliminated in consolidation. The following table presents, for the periods
indicated, certain items in our consolidated statements of operations broken
down by segment:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
------------------------------------------ -------------------------------------------
SOFTWARE SOFTWARE
PRODUCTS PRODUCTS
BROKERAGE AND ELIMIN- BROKERAGE AND ELIMIN-
SERVICES SERVICES ATIONS TOTAL SERVICES SERVICES ATIONS TOTAL
-------- ----------- -------- -------- --------- ----------- --------- --------
(In thousands) (In thousands)
Revenues:
Brokerage revenues $ 9,736 $ -- $ 62 $ 9,798 $ 4,111 $ -- $ -- $ 4,111
Subscription fees -- 4,365 (2,832) 1,533 -- 2,645 -- 2,645
Other -- 954 (62) 892 -- 3,837 -- 3,837
-------- -------- -------- -------- -------- -------- --------- --------
Total revenues 9,736 5,319 (2,832) 12,223 4,111 6,482 -- 10,593
-------- -------- -------- -------- -------- -------- --------- --------
Operating expenses:
Clearing and execution costs 2,430 -- -- 2,430 1,346 -- -- 1,346
Data center costs 2,832 1,211 (2,832) 1,211 -- 1,311 -- 1,311
Technology development 124 2,216 -- 2,340 28 3,359 -- 3,387
Sales and marketing 3,161 345 -- 3,506 1,683 1,620 -- 3,303
General and administrative 1,377 1,119 -- 2,496 723 2,431 -- 3,154
Amortization of intangibles -- 259 -- 259 152 1,390 -- 1,542
-------- -------- -------- -------- -------- -------- --------- --------
Total operating expenses 9,924 5,150 (2,832) 12,242 3,932 10,111 -- 14,043
-------- -------- -------- -------- -------- -------- --------- --------
(Loss) income from operations $ (188) $ 169 $ -- $ (19) $ 179 $ (3,629) $ -- $ (3,450)
======== ======== ======== ======== ======== ======== ========= ========
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
-------------------------------------------- -----------------------------------------
SOFTWARE SOFTWARE
PRODUCTS PRODUCTS
BROKERAGE AND ELIMIN- BROKERAGE AND ELIMIN-
SERVICES SERVICES ATIONS TOTAL SERVICES SERVICES ATIONS TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands) (In thousands)
Revenues:
Brokerage revenues $ 16,584 $ -- $ 62 $ 16,646 $ 9,193 $ -- $ -- $ 9,193
Subscription fees -- 6,746 (3,553) 3,193 -- 5,399 -- 5,399
Other -- 2,125 (62) 2,063 -- 8,109 -- 8,109
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 16,584 8,871 (3,553) 21,902 9,193 13,508 -- 22,701
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Clearing and execution costs 4,369 -- -- 4,369 2,936 -- -- 2,936
Data center costs 3,553 2,423 (3,553) 2,423 -- 2,676 -- 2,676
Technology development 231 4,457 -- 4,688 28 5,801 -- 5,829
Sales and marketing 6,038 708 -- 6,746 3,392 2,949 -- 6,341
General and administrative 2,792 2,628 -- 5,420 1,772 5,418 -- 7,190
Amortization of intangibles -- 514 -- 514 303 2,757 -- 3,060
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 16,983 10,730 (3,553) 24,160 8,431 19,601 -- 28,032
-------- -------- -------- -------- -------- -------- -------- --------
(Loss) income from operations $ (399) $ (1,859) $ -- $ (2,258) $ 762 $ (6,093) $ -- $ (5,331)
======== ======== ======== ======== ======== ======== ======== ========
10
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 of Notes to
Consolidated Financial Statements included in the Annual Report on Form 10-K of
TradeStation Group for the year ended December 31, 2001 - DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those estimates.
BROKERAGE REVENUES. Brokerage revenues are a key component of our results
of operations and are comprised mainly of transactional fee income for
securities and futures transactions. Brokerage revenues and related clearing
costs are recorded on a trade date basis as transactions occur. During the first
quarter of 2002, a reserve was established for $297,000 related to potential
rebates as a result of a change in our commission rates, which resulted in a
reduction to brokerage revenues. This reserve was based upon management's best
estimate as of March 31, 2002. During the second quarter of 2002, commission
rebates were applied against this reserve with the balance of the reserve,
approximately $270,000, reversed as an increase to brokerage revenues by the end
of the quarter.
INCOME TAXES. Management determines any valuation allowance recorded
against our net deferred tax assets, which includes the benefit from net
operating loss carryforwards. For all periods presented, a valuation allowance
was recorded to offset the tax benefit of all current period changes in deferred
taxes. During the 2001 fourth quarter, we recorded a $4.8 million charge
establishing a full valuation allowance against our previously recorded deferred
tax assets. As of June 30, 2002, we have approximately $12.9 million of deferred
tax assets that have been fully reserved, the benefit of which may be recorded
in future periods.
INSURANCE CLAIM. In June 2001, we made a claim of $2.7 million with our
insurance carrier relating to a trading error made with respect to a client's
account. In December 2001, the insurance company denied this claim and,
accordingly, the receivable recorded in our consolidated balance sheets was
fully reserved as of June 30, 2002 and December 31, 2001. On July 25, 2002, we
entered into an agreement to settle this claim for $1.25 million, payment of
which is due no later than August 31, 2002. The effect of this settlement is
expected to be recorded in the third quarter of 2002 and is not reflected in our
current business outlook published on July 16, 2002. See "SOFTWARE PRODUCTS AND
SERVICES SEGMENT - TECHNOLOGY DEVELOPMENT."
SUBLEASE OF FACILITIES. During the second quarter of 2002, we completed the
consolidation of our Florida operations to one location. Based upon advice from
our outside real estate advisors, using current market factors, we estimated the
potential losses relating to the sublease of facilities that we will no longer
occupy. During the first half of 2002, we increased our estimated loss accrual
by $524,000, to a total of $904,000.
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
OVERALL
Total revenues were $12.2 million for the three months ended June 30, 2002,
as compared to $10.6 million for the three months ended June 30, 2001, an
increase of $1.6 million, or 15%, due primarily to an increase in brokerage
revenues, partially offset by a decrease in other revenues (which now includes
software licensing fees) and a decrease in subscription fees.
11
Loss from operations was $19,000 for the three months ended June 30, 2002,
as compared to $3.4 million for the three months ended June 30, 2001, an
improvement of nearly $3.4 million, or 99%. This improvement related primarily
to higher revenues, lower amortization of intangibles (resulting from the 2001
fourth quarter impairment charge that reduced intangibles to their estimated
fair value), lower technology development costs, and lower general and
administrative expenses, partially offset by higher clearing and execution costs
associated with the higher revenues.
Other income, net consists primarily of interest income earned on our cash
and marketable securities, offset by interest expense related to capital lease
obligations, as well as other miscellaneous gains and losses. Other income, net
was $361,000 for the three months ended June 30, 2002, as compared to $180,000
for the three months ended June 30, 2001, an increase of $181,000, or 101%. This
increase was due primarily to a gain of $287,500 recorded on the sale of legacy
customer accounts during the second quarter of 2002, partially offset by a
decrease in interest income related to lower interest rates.
BROKERAGE SERVICES SEGMENT
REVENUES
BROKERAGE REVENUES. Brokerage revenues are comprised primarily of fees
earned from brokerage transactions, interest earned from interest revenue
sharing arrangements with the brokerage's clearing firms and data fees earned
from brokerage customers using the TRADESTATION 6 trading platform. For the
three months ended June 30, 2002, brokerage revenues were $9.7 million,
including $9.0 million of brokerage fees, as compared to $4.1 million, including
$3.8 million of brokerage fees, for the same period in 2001. This increase of
$5.6 million, or 137%, is primarily due to increased trading volume related to
account growth of brokerage clients who use the TRADESTATION 6 trading platform.
Since the June 27, 2001 launch of the TRADESTATION 6 online trading platform,
all new brokerage customers are provided with access to that platform and use it
to place their trades.
OPERATING EXPENSES
CLEARING AND EXECUTION COSTS. Clearing and execution costs are the costs of
executing and clearing customer trades, including commissions paid to
third-party broker-dealers. Clearing and execution costs were $2.4 million for
the three months ended June 30, 2002, as compared to $1.3 million for the three
months ended June 30, 2001, an increase of $1.1 million, or 81%, primarily as a
result of increased trading volume. Clearing and execution costs as a percentage
of brokerage fees decreased to 27% for the three months ended June 30, 2002,
from 35% for the three months ended June 30, 2001, due to improved rates with
our clearing firms and lower commissions paid to third-party broker-dealers.
DATA CENTER COSTS. Data center costs represent intercompany subscription
fees paid to the software products and services segment for providing streaming
real-time, Internet-based trading analysis software and data services to
brokerage clients. Data center costs for the three months ended June 30, 2002
were $2.8 million, including a $693,000 charge arising from an intercompany
pricing increase in the second quarter made retroactive to the first quarter of
2002. This charge had no effect on the consolidated results. There were no data
center costs for the brokerage segment during the three months ended June 30,
2001, as the TRADESTATION 6 platform developed by the software products and
services segment was not launched until June 27, 2001. See "SOFTWARE PRODUCTS
AND SERVICES SEGMENT - REVENUES - SUBSCRIPTION FEES" AND "- OPERATING EXPENSES -
DATA CENTER COSTS."
TECHNOLOGY DEVELOPMENT. Technology development expenses consist primarily
of personnel costs associated with product management of the brokerage products
and services TradeStation Securities offers to its clients. Technology
development expenses for the three months ended June 30, 2002 were $124,000, as
compared to $28,000 for the three months ended June 30, 2001, an increase of
$96,000. See "SOFTWARE PRODUCTS AND SERVICES SEGMENT - TECHNOLOGY DEVELOPMENT."
12
SALES AND MARKETING. Sales and marketing expenses consist primarily of
employee-related costs for sales, customer support centers, marketing and order
desk, as well as brokers' commissions; marketing programs, including
advertising, brochures, direct mail programs and account opening kits; data and
information tools used by sales and brokerage personnel; and Web site
maintenance and administration costs. Sales and marketing expenses were $3.2
million for the three months ended June 30, 2002, as compared to $1.7 million
for the three months ended June 30, 2001, an increase of $1.5 million, or 88%.
This increase was due primarily to increased advertising and promotional costs
of $1.1 million and increased personnel and related costs of $485,000.
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; insurance; and other facility
expenses. General and administrative expenses were $1.4 million for the three
months ended June 30, 2002, as compared to $723,000 for the three months ended
June 30, 2001, an increase of $654,000, or 90%. This increase is due primarily
to increases in facility costs of $238,000, including an increase in estimated
loss on the sublease of facilities that as a result of our consolidation will no
longer be occupied, personnel and related costs of $241,000 and
telecommunication costs of $199,000.
AMORTIZATION OF INTANGIBLES. Historically, amortization of intangible
assets was related to the December 1999 acquisition of certain customer
accounts, which was accounted for under the purchase method of accounting. In
December 2001, based upon our decision to sell those accounts (as they did not
meet the requirements of our active and institutional trader business model), we
determined that these intangible assets were impaired and, therefore, they were
reduced to their estimated fair value. There was no amortization during 2002, as
these intangible assets were held for sale, and then sold during the second
quarter of 2002. Amortization of intangibles for the three months ended June 30,
2001 was $152,000.
SOFTWARE PRODUCTS AND SERVICES SEGMENT
REVENUES
TOTAL REVENUES. Total revenues were $5.3 million for the three months ended
June 30, 2002, as compared to $6.5 million for the same period in 2001, a
decrease of $1.2 million, or 18%, due primarily to a decrease in other revenues
(which now includes licensing fees), partially offset by an increase in
subscription fees.
SUBSCRIPTION FEES. Subscription fees represent monthly fees earned for
providing streaming real-time, Internet-based trading analysis software and data
services. Subscription fees also include intercompany revenue for providing this
software to the brokerage customers of TradeStation Securities ("Intercompany
Subscription Fees"). Subscription fees were $4.4 million for the three months
ended June 30, 2002, as compared to $2.6 million for the three months ended June
30, 2001, an increase of $1.7 million, or 65%. This increase is due primarily to
an increase in brokerage accounts at TradeStation Securities which resulted in
$2.8 million of Intercompany Subscription Fees, including $693,000 arising from
an intercompany pricing increase in the second quarter made retroactive to the
first quarter 2002. This intercompany pricing increase had no effect on the
consolidated results. Excluding Intercompany Subscription Fees, subscription
fees decreased $1.1 million, or 42%, due to our December 2000 decision not to
actively market subscription services, but rather focus on the growth of our
brokerage business.
OTHER REVENUES. Other revenues consist primarily of royalties and
commissions received from third parties whose customers use our legacy software
products, and licensing fees that are derived from sales of our legacy client
software products. Other revenues were $954,000 for the three months ended June
30, 2002, as compared to $3.8 million for the three months ended June 30, 2001,
a decrease of $2.9 million, or 75%. This expected decrease was due primarily to
a decrease in royalties resulting from the expiration of a minimum royalty
arrangement with a third party, and decreased licensing fees resulting from the
May 2000 discontinuation of active marketing of client software products. As a
result of these factors, other revenues are expected to continue to decrease in
future quarters.
13
OPERATING EXPENSES
DATA CENTER COSTS. Data center costs represent expenses related to the
operation, maintenance and support of our data server farms. These expenses
consist primarily of rent for facilities, rent or depreciation for servers, and
data distribution and exchange fees. Data center costs for the three months
ended June 30, 2002 were $1.2 million, as compared to $1.3 million for the three
months ended June 30, 2001, a decrease of $100,000, or 8%. The decrease is due
primarily to lower data distribution fees resulting from more favorable rates
negotiated in the third quarter of 2001, and lower lease costs associated with
the conversion of certain operating leases to capital leases, partially offset
by higher exchange fees.
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 $2.2 million for the three months ended
June 30, 2002, as compared to $3.4 million for the three months ended June 30,
2001, a decrease of $1.2 million, or 34%, due primarily to a 2001 second quarter
charge of $750,000 for uninsured loss reserves, and, to a lesser extent, lower
personnel and related costs of $402,000. The expected 2002 third quarter
payment for the settlement of the insurance claim should reduce technology
development expenses in that quarter. See "CRITICAL ACCOUNTING POLICIES AND
ESTIMATES - INSURANCE CLAIM."
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 $345,000 for the three months ended June 30, 2002, as compared to $1.6
million for the three months ended June 30, 2001, a decrease of $1.3 million, or
79%, due primarily to decreased advertising and promotional costs of $848,000
and decreased personnel and related costs of $354,000.
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; and
insurance. General and administrative expenses were $1.1 million for the three
months ended June 30, 2002, as compared to $2.4 million for the three months
ended June 30, 2001, a decrease of $1.3 million, or approximately 54%, due
primarily to decreases in professional fees of $510,000, personnel and related
costs of $505,000, and facility costs of $197,000.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles includes,
primarily, amortization related to the October 1999 acquisition of Window On
WallStreet Inc., which was accounted for under the purchase method of
accounting, its assets being amortized over their estimated useful lives, which
range from three to four years. Amortization of intangibles also includes
amortization of data rights and other intangibles. Amortization of intangibles
was $259,000 for the three months ended June 30, 2002, as compared to $1.4
million for the three months ended June 30, 2001, a decrease of $1.1 million, or
81%. The decrease is due to the December 2001 adjustment that reduced the value
of all of the goodwill and certain intangible assets associated with the
acquisition of Window On WallStreet to their estimated fair value, resulting
from our decision, made and implemented in the fourth quarter of 2001, to
upgrade all WINDOWONWALLSTREET.COM subscribers to TRADESTATION 6.
14
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
OVERALL
Total revenues were $21.9 million for the six months ended June 30, 2002,
as compared to $22.7 million for the six months ended June 30, 2001, a decrease
of $799,000, or 4%, due primarily to a decrease in other revenues, and, to a
lesser extent, a decrease in subscription fees, partially offset by an increase
in brokerage revenues.
Loss from operations was $2.3 million for the six months ended June 30,
2002, as compared to $5.3 million for the six months ended June 30, 2001, an
improvement of $3.1 million, or 58%. This improvement related primarily to lower
amortization of intangibles (resulting from the 2001 fourth quarter impairment
charge that reduced intangibles to their estimated fair value), lower general
and administrative expenses, and lower technology development costs, partially
offset by lower revenues and higher clearing and execution costs.
Other income, net was $348,000 for the six months ended June 30, 2002, as
compared to $401,000 for the six months ended June 30, 2001, a decrease of
$53,000, or 13%, due primarily to a decrease in interest income of $311,000 as a
result of lower interest rates, partially offset by a gain of $287,500 recorded
on the sale of legacy customer accounts during the second quarter of 2002.
BROKERAGE SERVICES SEGMENT
REVENUES
BROKERAGE REVENUES. For the six months ended June 30, 2002, brokerage
revenues were $16.6 million, including $15.4 million of brokerage fees, as
compared to $9.2 million, including $8.5 million of brokerage fees, for the same
period in 2001. This increase of $7.4 million, or 80%, is due primarily to
increased trading volume related to customer account growth fueled by our June
27, 2001 launch of the TRADESTATION 6 trading platform.
OPERATING EXPENSES
CLEARING AND EXECUTION COSTS. Clearing and execution costs were $4.4
million for the six months ended June 30, 2002, as compared to $2.9 million for
the six months ended June 30, 2001, an increase of $1.4 million, or 49%,
primarily as a result of increased trading volume. Clearing and execution costs
as a percentage of brokerage fees decreased to 28% for the six months ended June
30, 2002, from 34% for the six months ended June 30, 2001, due to improved rates
with our clearing firms and lower commissions paid to third-party
broker-dealers.
DATA CENTER COSTS. Data center costs for the six months ended June 30, 2002
were $3.6 million. There were no data center costs for the brokerage segment
during the six months ended June 30, 2001, as the TRADESTATION 6 platform
developed by the software products and services segment was not launched until
June 27, 2001. See "SOFTWARE PRODUCTS AND SERVICES SEGMENT - REVENUES -
SUBSCRIPTION FEES" AND "- OPERATING EXPENSES - DATA CENTER COSTS."
15
TECHNOLOGY DEVELOPMENT. Technology development expenses for the six months
ended June 30, 2002 were $231,000, as compared to $28,000 for the six months
ended June 30, 2001, an increase of $203,000, which relates to personnel costs
associated with product management of the brokerage products and services
TradeStation Securities offers to its online trading customers. See "SOFTWARE
PRODUCTS AND SERVICES SEGMENT - TECHNOLOGY DEVELOPMENT."
SALES AND MARKETING. Sales and marketing expenses were $6.0 million for the
six months ended June 30, 2002, as compared to $3.4 million for the six months
ended June 30, 2001, an increase of $2.6 million, or 78%. This increase was due
primarily to increased advertising and promotional costs of $1.8 million and
increased personnel and related costs of $832,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.8
million for the six months ended June 30, 2002, as compared to $1.8 million for
the six months ended June 30, 2001, an increase of $1.0 million, or 58%. This
change is due primarily to increases in facility costs of $687,000 (mainly
related to an increase in the estimated loss on the sublease of facilities that
will no longer be occupied) and personnel and related costs of $629,000,
partially offset by a decrease in uninsured loss provisions of $271,000.
AMORTIZATION OF INTANGIBLES. Historically, amortization of intangible
assets was related to the December 1999 acquisition of certain customer
accounts, which was accounted for under the purchase method of accounting. In
December 2001, based upon our decision to sell those accounts (as they did not
meet the requirements of our active and institutional trader business model), we
determined that these intangible assets were impaired and, therefore, they were
reduced to their estimated fair value. There was no amortization during 2002, as
these intangible assets were held for sale, and then sold during the second
quarter of 2002. Amortization of intangibles for the six months ended June 30,
2001 was $303,000.
SOFTWARE PRODUCTS AND SERVICES SEGMENT
REVENUES
TOTAL REVENUES. Total revenues were $8.9 million for the six months ended
June 30, 2002, as compared to $13.5 million for the same period in 2001, a
decrease of $4.6 million, or 34%, due primarily to a decrease in other revenues,
partially offset by an increase in subscription fees.
SUBSCRIPTION FEES. Subscription fees were $6.7 million for the six months
ended June 30, 2002, as compared to $5.4 million for the six months ended June
30, 2001, an increase of $1.3 million, or 25%. This increase was due primarily
to $3.6 million of Intercompany Subscription Fees, which resulted from increased
brokerage accounts at TradeStation Securities. Excluding Intercompany
Subscription Fees, subscription fees decreased $2.2 million, or 41%, due to our
December 2000 decision not to actively market subscription services, but rather
focus on the growth of our brokerage business.
OTHER REVENUES. Other revenues were $2.1 million for the six months ended
June 30, 2002, as compared to $8.1 million for the six months ended June 30,
2001, a decrease of $6.0 million, or 74%. This expected decrease was due
primarily to a decrease in royalties resulting from the expiration of a minimum
royalty arrangement with a third party, and decreased licensing fees resulting
from the May 2000 discontinuation of active marketing of client software
products. As a result of these factors, other revenues are expected to continue
to decrease in future quarters.
OPERATING EXPENSES
DATA CENTER COSTS. Data center costs for the six months ended June 30, 2002
were $2.4 million, as compared to $2.7 million for the six months ended June 30,
2001, a decrease of $253,000, or 9%. The decrease is due primarily to lower data
distribution fees resulting from more favorable rates negotiated in the third
quarter of 2001, and lower lease costs associated with the conversion of certain
operating leases to capital leases, partially offset by higher facility costs.
16
TECHNOLOGY DEVELOPMENT. Technology development expenses were $4.5 million
for the six months ended June 30, 2002, as compared to $5.8 million for the six
months ended June 30, 2001, a decrease of $1.3 million, or 23%, due primarily to
a 2001 second quarter charge of $750,000 for uninsured loss reserves, and lower
personnel and related costs of $563,000.
SALES AND MARKETING. Sales and marketing expenses were $708,000 for the six
months ended June 30, 2002, as compared to $2.9 million for the six months ended
June 30, 2001, a decrease of $2.2 million, or 76%, due primarily to decreased
advertising and promotional costs of $1.1 million and decreased personnel and
related costs of $873,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.6
million for the six months ended June 30, 2002, as compared to $5.4 million for
the six months ended June 30, 2001, a decrease of $2.8 million, or approximately
51%, due primarily to decreases in personnel and related costs of $1.1 million,
provision for bad debts of $714,000, professional fees of $468,000, and facility
costs of $226,000. The 2001 provision for bad debts relates to the portion of
TradeStation Technologies' 2001 royalty receivable that was part of a
"pre-petition" estate in a Chapter 11 bankruptcy filed in February 2001, and was
not paid as a result of the rejection of that agreement in those bankruptcy
proceedings.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $514,000 for
the six months ended June 30, 2002, as compared to $2.8 million for the six
months ended June 30, 2001, a decrease of $2.2 million, or 81%. The decrease is
due to the December 2001 adjustment that reduced the value of all of the
goodwill and certain intangible assets associated with the acquisition of Window
On WallStreet to their estimated fair value, resulting from our decision, made
and implemented in the fourth quarter of 2001, to upgrade all
WINDOWONWALLSTREET.COM subscribers to TRADESTATION 6.
INCOME TAXES
For the three and six months ended June 30, 2001, taxes totaling $5,000 and
$17,000 were provided for certain state and local income taxes where our net
operating loss carryforwards could not be utilized. Such amounts for the three
and six months ended June 30, 2002 were $326. A valuation allowance was recorded
to offset the tax benefit of all other net operating losses generated during the
six months ended June 30, 2002 and 2001.
VARIABILITY OF RESULTS
The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year. Our quarterly revenues and
operating results have varied in the past, and are likely to vary in the future.
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 ongoing changes and modifications to the commission pricing structure used
by our brokerage, the timing, level and rate of acceptance of releases of new
products and services and/or enhancements, conditions and seasonality in the
economy and securities markets, fluctuations in number and share volume of
client trades, 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.
17
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, we had cash and cash equivalents of approximately
$19.4 million, of which $3.5 million is restricted. Restricted cash supports a
facility lease, a stand-by letter of credit securing equipment leases and a
credit card clearing agreement. See Note 5 of Notes to Consolidated Financial
Statements - COMMITMENTS AND CONTINGENCIES -- RESTRICTED CASH.
During the first six months of 2002, equipment valued at $552,000 was
acquired under a capital lease obligation for use at our data server farms,
replacing certain operating leases. In addition, in connection with the
relocation of our three Florida offices to one Florida location, we acquired
approximately $497,000 of furniture and equipment under two capital lease
obligations. A summary of our capital and operating leases (net of subleases) as
well as our purchase obligations as of June 30, 2002 is as follows:
CAPITAL
LEASE OPERATING PURCHASE
YEAR OBLIGATIONS LEASES OBLIGATIONS TOTAL
------------- ------------- ------------- ------------- -------------
2002 $ 727,511 $ 1,502,028 $ 539,835 $ 2,769,374
2003 1,020,929 2,367,130 -- 3,388,059
2004 152,050 2,107,474 -- 2,259,524
2005 7,520 2,006,716 -- 2,014,236
2006 -- 2,040,259 -- 2,040,259
Thereafter -- 9,805,872 -- 9,805,872
------------- ------------- ------------- -------------
Total $ 1,908,010 $ 19,829,479 $ 539,835 $ 22,277,324
============= ============= ============= =============
The purchase obligation relates to television advertising. Also, in
connection with the expected growth of our brokerage business and the relocation
of our Florida offices, we anticipate acquiring in the form of capital and/or
operating leases an additional $350,000 to $850,000 of equipment over the
remainder of 2002.
In July 2002, we announced a stock repurchase program authorizing, at the
discretion of management, the repurchase from time to time of up to 4 million
shares of the Company's common stock. Such repurchases will be at prevailing
market prices in the open market or through privately-negotiated transactions
using available cash. Notwithstanding the adoption of the stock repurchase
program, there can be no assurance that we will repurchase any or all of the
common stock contemplated to be repurchased under such program or as to the
timing thereof.
We anticipate that our available cash resources and cash flows from
operations will be sufficient to meet our presently anticipated working capital
and capital expenditure requirements through at least the next twelve months.
Cash used in operating activities during the six months ended June 30, 2002
totaled $1.1 million, compared to cash provided of $2.8 million in the
comparable period of 2001. Net cash used in operating activities during the six
months ended June 30, 2002 was due primarily to operating losses and an increase
in receivables from clearing firms, partially offset by increases in accounts
payable and accrued expenses. Net cash provided by operating activities during
the six months ended June 30, 2001 was primarily due to the receipt of income
tax receivables of $8.5 million in April 2001, partially offset by increases in
other assets and accounts receivable and decreases in merger and non-recurring
accounts payable and income taxes payable.
Investing activities provided cash of $1.0 million during the six months
ended June 30, 2002 primarily related to cash proceeds from the sale of certain
legacy customer accounts during the second quarter of 2002. See Note 2 of Notes
to Consolidated Financial Statements - INTANGIBLE ASSETS, NET. Investing
activities used cash of $1.9 million during the six months ended June 30, 2001
primarily related to purchases of certificates of deposit.
18
Financing activities used cash of $526,000 during the six months ended June
30, 2002 due primarily to repayment of capital lease obligations. Financing
activities provided cash of $26,000 during the six months ended June 30, 2001,
primarily from the issuance of common stock from the exercise of stock options
under our Incentive Stock Plan, net of repayment of capital lease obligations.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward-looking within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. When used in this report, the words "believes,"
"plans," "estimates," "expects," "intends," "designed," "anticipates," "may,"
"will," "should," "could," "become," "upcoming," "potential," "pending," and
similar expressions, to the extent used, are intended to identify the
forward-looking statements. All forward-looking statements are based on current
expectations and beliefs concerning future events that are subject to risks and
uncertainties. Actual results may differ materially from the results suggested
in this report. Factors that may cause or contribute to such differences, and
our business risks generally, include, but are not limited to, the items
described in our Annual Report on Form 10-K for the year ended December 31,
2001, as well as in other sections of this report and in our other public
filings and recent 2002 press releases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) SALES OF UNREGISTERED SECURITIES
During the three months ended June 30, 2002, we issued to three employees
options to purchase an aggregate of approximately 70,750 shares of common stock.
Such options vest ratably in annual increments over a five-year period and are
exercisable at prices ranging from $1.12 to $1.43 per share, which was the fair
market value (as defined in our Incentive Stock Plan) of our common stock on the
dates the options were granted. All of the options were granted under our
Incentive Stock Plan in the ordinary course, and expire, if they remain
unexercised, on the tenth anniversary of the date on which they were granted.
All the foregoing options were issued by us in reliance upon the exemption
from registration available under Section 4(2) of the Securities Act of 1933, as
amended. Other than as described above, we did not issue or sell any
unregistered securities during the second quarter of 2002.
(d) USE OF PROCEEDS
TradeStation Securities (then known as onlinetradinginc.com corp.) effected
an initial public offering pursuant to a Registration Statement on Form SB-2
(File No. 333-75119), which was declared effective by the Securities and
Exchange Commission on June 11, 1999. For a description of the use of proceeds
from such offering, see Item 2 in Part II of onlinetradinginc.com corp.'s
Quarterly Report on Form 10-QSB for the fiscal quarter ended October 31, 2000.
Subsequent to October 31, 2000, the remaining proceeds were fully utilized as
follows: approximately $5.8 million for working capital; $2.0 million to pay
merger costs; $1.1 million for capital expenditures and acquisition of data
rights and other intangible assets; and approximately $900,000 to pay capital
lease obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K
(i) On May 2, 2002, we filed a Current Report on Form 8-K for events
that occurred on April 30 and May 1, 2002, reporting in Item 5
thereof that entities owned by William R. Cruz and Ralph L. Cruz,
the founders and Co-Chief Executive Officers of TradeStation Group,
purchased on May 1, 2002, 3,000,000 shares of our common stock from
an entity owned by Farshid Tafazzoli, a former insider of
TradeStation Group, at $1.40 per share for a total purchase price of
$4,200,000. In connection with the stock purchase, the voting trust
among entities owned by the Cruzes and Mr. Tafazzoli and other
former principal shareholders of onlinetradinginc.com corp. was
terminated effective as of April 30, 2002.
(ii) On May 14, 2002, we filed a Current Report on Form 8-K for an event
that occurred on May 13, 2002, reporting in Item 4 thereof a change
in our independent accountants for 2002 from Arthur Andersen LLP to
Ernst & Young LLP.
(iii) On July 25, 2002, we filed a Current Report on Form 8-K for an event
that occurred on July 25, 2002, reporting in Item 5 thereof that our
Board of Directors approved a stock repurchase program authorizing
the repurchase from time to time of up to 4 million shares of the
Company's common stock in the open market or through
privately-negotiated transactions.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TradeStation Group, Inc.
Registrant
August 2, 2002 /s/ DAVID H. FLEISCHMAN
- -------------- --------------------------------------------
Date David H. Fleischman
Chief Financial Officer
Vice President of Finance and Treasurer
(Signing both in his capacity as an authorized
officer and as Principal Financial and
Accounting Officer of the Registrant)
21