Add
TRAD to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| TRAD > SEC Filings for TRAD > Form 10-Q on 9-Aug-2004 | All Recent SEC Filings |
9-Aug-2004
Quarterly Report
This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of TradeStation Group and its subsidiaries contained herein. The results of operations for an interim period are not necessarily indicative of results for the year, or for any subsequent period.
Overview and Recent Developments
TradeStation Securities, a leading direct-access brokerage firm serving the active trader and certain institutional trader markets, is the company's principal operating subsidiary. TradeStation Securities is a registered broker-dealer and futures commission merchant, and a member of the National Association of Securities Dealers ("NASD"), Securities Investor Protection Corporation ("SIPC"), National Futures Association ("NFA"), American Stock Exchange ("AMEX"), Archipelago Exchange ("ArcaEx" or "ARCX"), Boston Options Exchange ("BOX"), Chicago Board Options Exchange ("CBOE"), International Securities Exchange ("ISE"), Pacific Stock Exchange ("PCX"), and Philadelphia Stock Exchange ("PHLX"), and has a pending membership application with the New York Stock Exchange ("NYSE").
As of June 30, 2004, TradeStation Securities had 15,106 equities, futures and forex accounts, the vast majority of which were equities and futures accounts, as compared to 10,115 accounts as of June 30, 2003. During the 2004 second quarter, TradeStation Securities' brokerage client account base had 33,477 daily average revenue trades, as compared to 22,295 during the 2003 second quarter.
On June 25, 2004, we received clearing firm membership with the National Securities Clearing Corporation ("NSCC") and were approved as a Participant in the Depository Trust Company ("DTC"). These were the final approvals required to commence self-clearing operations for our active trader equities brokerage services. We are currently focused on the final training and live quality assurance testing for our self-clearing systems. We expect to complete the transfer of our existing client account base from our current clearing firm to self-clearing no later than September 2004. The cost savings benefits of self-clearing are not anticipated to begin until the fourth quarter of 2004.
We also provide via our technologies subsidiary, TradeStation Technologies, subscription services. The subscription version of TradeStationoffers strategy trading software tools that generate real-time buy and sell alerts based upon the subscriber's custom strategies, but does not include order execution. Subscribers are charged a monthly subscription fee.
Results of Operations
For the three and six months ended June 30, 2004 and 2003, 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 intercompany transactions are eliminated in consolidation.
During the 2004 second quarter, TradeStation Securities and TradeStation Technologies amended their intercompany licensing and support agreement and entered into a new expense sharing agreement to reflect current business requirements. These changes had no effect on the consolidated results, but did result in an increased allocation of approximately $123,000, during the three months ended June 30, 2004, of general and administrative expenses within the brokerage services segment and a corresponding decrease in the software products and services segment.
The following table presents, for the periods indicated, certain items in our consolidated statements of income broken down by segment:
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
----------------------------------------------------- -----------------------------------------------------
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 $ 14,736 $ - $ - $ 14,736 $ 12,721 $ - $ - $ 12,721
Subscription fees - 6,175 (4,113 ) 2,062 - 4,684 (2,990 ) 1,694
Other 72 349 - 421 74 480 - 554
------ ----- ------ ------ ------ ----- ------ ------
Total revenues 14,808 6,524 (4,113 ) 17,219 12,795 5,164 (2,990 ) 14,969
------ ----- ------ ------ ------ ----- ------ ------
Operating expenses:
Clearing and execution costs 5,543 - - 5,543 4,811 - - 4,811
Data center costs 4,440 1,287 (4,113 ) 1,614 3,186 967 (2,990 ) 1,163
Technology development 385 1,475 - 1,860 368 1,499 - 1,867
Sales and marketing 2,564 85 - 2,649 2,521 200 - 2,721
General and administrative 1,671 1,337 - 3,008 1,057 1,127 - 2,184
Amortization of intangible
assets - 8 - 8 - 52 - 52
------ ----- ------ ------ ------ ----- ------ ------
Total operating expenses 14,603 4,192 (4,113 ) 14,682 11,943 3,845 (2,990 ) 12,798
------ ----- ------ ------ ------ ----- ------ ------
Income from operations $ 205 $ 2,332 $ - $ 2,537 $ 852 $ 1,319 $ - $ 2,171
------ ----- ------ ------ ------ ----- ------ ------
|
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------------------------------------------------ ------------------------------------------------------
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 $ 29,843 $ - $ - $ 29,843 $ 23,683 $ - $ - $ 23,683
Subscription fees - 11,776 (7,832 ) 3,944 - 10,240 (6,835 ) 3,405
Other 161 732 - 893 102 1,092 - 1,194
------ ------ ------ ------ ------ ------ ------ ------
Total revenues 30,004 12,508 (7,832 ) 34,680 23,785 11,332 (6,835 ) 28,282
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Clearing and execution costs 11,235 - - 11,235 8,304 - - 8,304
Data center costs 8,429 2,575 (7,832 ) 3,172 7,213 1,981 (6,835 ) 2,359
Technology development 769 2,990 - 3,759 692 3,026 - 3,718
Sales and marketing 5,006 313 - 5,319 4,960 331 - 5,291
General and administrative 2,440 2,663 - 5,103 1,994 2,185 - 4,179
Amortization of intangible
assets - 38 - 38 - 105 - 105
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses 27,879 8,579 (7,832 ) 28,626 23,163 7,628 (6,835 ) 23,956
------ ------ ------ ------ ------ ------ ------ ------
Income from operations $ 2,125 $ 3,929 $ - $ 6,054 $ 622 $ 3,704 $ - $ 4,326
------ ------ ------ ------ ------ ------ ------ ------
|
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, 2003 - DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those estimates.
Brokerage Revenues. Brokerage revenues are the key component of our results of operations and are comprised of brokerage commissions and fees earned from our clients' brokerage transactions and, to a lesser extent, platform fees earned from brokerage customers using the TradeStation electronic trading platform and interest earned from interest revenue sharing arrangements with the brokerage's clearing firms. Brokerage commissions and fees and their related clearing costs are recorded on a trade date basis as transactions occur. Platform fees and interest are recorded monthly, when earned.
Income Taxes. As of June 30, 2004, we had net deferred income tax assets of $6.4 million including a valuation allowance of $926,500. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, deferred income tax assets should be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management evaluates and determines on a periodic basis, the amount of the valuation allowance required and adjusts the valuation allowance, as needed. In June 2004, we reversed a significant portion of the valuation allowance that was provided on our deferred income tax assets. In the opinion of management, it is more likely than not that these benefits will now be realized. This decision was triggered primarily by TradeStation Securities receiving final approval by the NSCC and the DTC to begin self-clearing for equities, the rollout of TradeStation 8(which includes integrated options execution), as well as eight consecutive quarters of operating profit. In the 2004 second quarter, the result of this reversal, was a net tax benefit of $3.2 million recorded in the consolidated statement of income and a $3.3 million credit to additional paid-in capital (relating to the tax benefit of stock option exercises). The remaining valuation allowance of $926,500 relates to net operating loss carryforwards from a 1999 acquisition. We did not reverse the remaining valuation allowance as the acquired net operating loss carryforwards (expiring in 2018 and 2019) are subject to annual usage limitations. The portion which was not reversed represents the last five years of the annual limitation amount due to the inability to estimate taxable income that far into the future. Management will continue to make periodic evaluations of the valuation allowance and will determine periodic adjustments, as required. See "Income Taxes" below.
Uninsured Loss Reserves. We decided, as of June 1, 2002, to no longer carry errors or omissions insurance that covers third-party claims made by brokerage clients or software subscribers as a result of alleged human or system errors, failures, acts or omissions. This decision was made based upon our assessment of the potential risks and benefits, including significant increases in premium rates, deductibles and coinsurance amounts, reductions in available per occurrence and aggregate coverage amounts, and the unavailability of policies that sufficiently cover the types of risks that relate to our business. Each quarter, we continue to evaluate our accruals for settlements related to claims and potential claims. Estimates of settlements for such potential claims, including related legal fees, are accrued in the consolidated financial statements. The ultimate outcome of such potential claims may be substantially different than our estimates.
Three Months Ended June 30, 2004 and 2003
Overall
Total revenues were $17.2 million for the three months ended June 30, 2004, as compared to $15.0 million for the three months ended June 30, 2003, an increase of $2.2 million, or 15%, due primarily to an increase in brokerage revenues of $2.0 million.
Income from operations was $2.5 million for the three months ended June 30, 2004, as compared to $2.2 million for the three months ended June 30, 2003, an improvement of $366,000, or 17%. This improvement was due primarily to higher brokerage revenues, net of related clearing and execution costs, partially offset by higher general and administrative expenses and data center costs.
Other income (expense), net consists primarily of interest income earned on our cash and cash equivalents offset by interest expense related to capital lease obligations, and bank fees, as well as gains or losses on the sale of assets. Other income, net was $69,000 for the three months ended June 30, 2004, as compared to other expense, net of $29,000 for the three months ended June 30, 2003. The increase of $98,000 was due primarily to a loss during the 2003 second quarter of $55,000 on the sale of investments in corporate stock, an increase in interest income of $25,000 as a result of higher average cash balances (partially offset by lower interest rates), and lower interest expense as a result of fewer capital lease obligations.
A net income tax benefit of $3.2 million was recorded during the three months ended June 30, 2004 related primarily to the reversal of a significant portion of the valuation allowance on deferred income tax assets, as compared to an income tax benefit of $714,000 during the three months ended June 30, 2003 associated primarily with income tax refunds. See "Income Taxes" below.
Brokerage Services Segment
Revenues
Brokerage Revenues. Brokerage revenues are comprised of brokerage commissions and fees earned from our clients' brokerage transactions and, to a lesser extent, platform fees earned from brokerage customers using the TradeStation electronic trading platform and interest earned from interest revenue sharing arrangements with the brokerage's clearing firms. For the three months ended June 30, 2004, brokerage revenues were $14.7 million (which included brokerage commissions of $11.0 million), as compared to brokerage revenues of $12.7 million (which included brokerage commissions of $10.3 million) for the three months ended June 30, 2003. This $2.0 million increase, or 16%, was due primarily to increased trading activity and platform fees related to brokerage client account growth, partially offset by a decrease in our commission pricing. Effective November 1, 2003, we reduced our commission pricing for futures and our commission pricing per share for equities trades. Continued price pressure on online brokerage commissions and fees, as well as our ability to maintain or improve revenue growth, are challenges we could continue to face.
Other Revenues. Other revenues are comprised primarily of fees for our training workshops that help customers take full advantage of the state-of-the-art features of the TradeStation electronic trading platform. Other revenues were $72,000 for the three months ended June 30, 2004, as compared to $74,000 in the comparable period of the prior year, a decrease of $2,000, or 3%.
Operating Expenses
Clearing and Execution Costs. Clearing and execution costs are the costs associated with executing and clearing customer trades, including commissions paid to third-party broker-dealers. Beginning in 2004, clearing and execution costs include new expenses related to our anticipated self-clearing operations, primarily personnel and related expenses and consulting expenses, for which we will receive no offsetting cost-savings until self-clearing commences. Clearing and execution costs were $5.5 million for the three months ended June 30, 2004, as compared to $4.8 million for the three months ended June 30, 2003, an increase of $732,000, or 15%. This increase was due primarily to increased trading activity related to brokerage client account growth and, to a lesser extent, $450,000 of incremental expenses in the 2004 second quarter relating to our anticipated self-clearing operations, partially offset by approximately $400,000 of increased costs for futures clearing in the 2003 second quarter imposed by our former futures clearing firm that were not incurred in the 2004 second quarter with our current futures clearing firm.
Clearing and execution costs, as a percentage of brokerage revenues, were 38% for both the three months ended June 30, 2004 and 2003. The impact of the price reductions, effective November 2003, and the costs related to self-clearing operations (which impacted only 2004) were entirely offset by the 2003 second quarter increase in costs for futures clearing imposed by our former futures clearing firm that were not incurred in the 2004 second quarter with our current futures clearing firm. While no assurances can be given, we expect to see improvement in our gross margin in the 2004 fourth quarter resulting from the commencement of self-clearing of equities trades for our active trader client base, which is anticipated to begin late in the 2004 third quarter.
Data Center Costs. Data center costs are primarily intercompany subscription fees, eliminated upon consolidation, paid on a per user basis to the software products and services segment for providing streaming real-time, Internet-based trading analysis software and data services to brokerage clients and, to a lesser extent, data communications costs necessary to connect our server farms directly to electronic
market places. See "Technology Development" below. Data center costs were $4.4 million for the three months ended June 30, 2004, as compared to $3.2 million for the three months ended June 30, 2003, an increase of $1.2 million, or 39%, related primarily to increased intercompany subscription fees paid to the software products and services segment and, to a lesser extent, increased costs to connect our data server farms directly to electronic market places. The increase in intercompany subscription fees resulted mainly from an increase in the number of brokerage accounts during 2004 as compared to 2003. 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 and the creation of documentation and other training and educational materials. Technology development expenses for the three months ended June 30, 2004 were $385,000, as compared to $368,000 for the three months ended June 30, 2003, an increase of $17,000, or 5%, due mainly to increased personnel and related costs. Most of the technology costs required for our brokerage firm to offer and operate a highly sophisticated electronic trading platform are borne by its technology affiliate, which licenses that technology to the brokerage firm pursuant to an intercompany agreement. See "Software Products and Services Segment - Operating Expenses - Technology Development."
Sales and Marketing. Sales and marketing expenses consist primarily of:
personnel costs for sales, customer support centers, marketing and order desk,
as well as brokers' commissions; marketing programs, including advertising,
brochures, direct mail programs and account opening kits; data and information
tools used by sales and brokerage personnel; and Web-site maintenance and
administration costs. Sales and marketing expenses were $2.6 million for the
three months ended June 30, 2004, as compared to $2.5 million for the three
months ended June 30, 2003, an increase of $43,000, or 2%. Sales and marketing
expenses are anticipated to significantly increase beginning in the 2004 third
quarter as we ramp up our advertising and seek to grow our sales force to
further accelerate account growth. These additional sales and marketing expenses
are not expected to produce results until later periods.
General and Administrative. General and administrative expenses consist primarily of costs for administrative personnel such as executive, human resources, finance, compliance and information technology employees; professional fees; telecommunications; rent; insurance; and other facility expenses. General and administrative expenses were $1.7 million for the three months ended June 30, 2004, as compared to $1.1 million for the three months ended June 30, 2003, an increase of $614,000, or 58%, due primarily to an increase in professional fees of $382,000 and, to a lesser extent, increases in insurance of $60,000, facility costs of $60,000, and personnel and related costs of $45,000. Professional fees increased during 2004 as compared to 2003 due to increased legal fees related to ongoing litigation and claims, and increased accounting fees related to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Higher insurance was primarily the result of increased cost of directors' and officers' liability insurance.
Software Products and Services Segment
Revenues
Subscription Fees. Subscription fees represent monthly fees earned for providing streaming real-time, Internet-based trading analysis software tools and data services. Subscription fees also include intercompany revenue for licensing to TradeStation Securities, on a per user basis, the right to provide these software tools and data services to the brokerage customers of TradeStation Securities ("Intercompany Subscription Fees"). Intercompany Subscription Fees have no effect on the consolidated results. Subscription fees were $6.2 million for the three months ended June 30, 2004, as compared to $4.7 million for the three months ended June 30, 2003, an increase of $1.5 million, or 32%, due primarily to an increase in Intercompany Subscription Fees resulting from increased brokerage accounts at TradeStation Securities. Excluding Intercompany Subscription Fees, subscription fees were $2.1 million
for the three months ended June 30, 2004, as compared to $1.7 million for the three months ended June 30, 2003, an increase of $368,000, or 22%, as a result of price increases to certain groups of subscribers effective September 2003 and May 2004, partially offset by a decrease in the number of subscribers. Subscription services have not been actively marketed since December 2000.
Other Revenues. Other revenues consist primarily of royalties and commissions received from third parties whose customers use our legacy software products, and licensing fees derived from direct sales of our legacy client software products. Other revenues were $349,000 for the three months ended June 30, 2004, as compared to $480,000 for the three months ended June 30, 2003, a decrease of $131,000, or 27%. This expected decrease is the result of no longer marketing legacy client software since May 2000 and no longer offering legacy client software products domestically since September 2001. Other revenues are expected to continue to decrease in future quarters.
Operating Expenses
Data Center Costs. Data center costs represent expenses related to the operation, maintenance and support of our data server farms. These expenses consist primarily of rent and data communications costs at our facilities where the data server farms are located, including costs necessary to connect our data server farms directly to electronic market places, rent or depreciation for servers, and data distribution and exchange fees. Data center costs for the three months ended June 30, 2004 were $1.3 million, as compared to $1.0 million for the three months ended June 30, 2003, an increase of $320,000, or 33%. The increase is due primarily to increased rent and data communication charges at our facilities of $395,000 and, to a lesser extent, increased server costs, partially offset by lower data distribution and exchange fees of $139,000. The decrease in data distribution and exchange fees resulted from increased exchange fees charged to client accounts and receipt of data directly from exchanges (as opposed to a data vendor who is paid monthly fees) beginning during the 2003 . . .
|
|