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UNITED STATES
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 1934For the quarterly period ended March 31, 2004ORo
    
    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.  Florida
(State or other jurisdiction of
incorporation or organization)
    
    65-0977576
(I.R.S. Employer
Identification No.)
 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) 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   
o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   x   No   
o As of April 30, 2004, there were 41,616,323 shares of the Registrants
Common Stock outstanding.




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. EXHIBITS AND REPORTS ON FORM 8-KCertification of Co-Chairman and Co-CEOCertification of Co-Chairman and Co-CEOCertification of CFOSection 906 Certification of Co-Chairman & Co-CEOSection 906 Certification of CFO    Table of Contents  TRADESTATION GROUP, INC. AND SUBSIDIARIES INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets
          March 31, 2004 (unaudited) and December 31, 2003
    
    
    3Consolidated Statements of
Income
          Three Months Ended March 31, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Cash
Flows
          Three Months Ended March 31, 2004 and 2003 (unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II.
    
    OTHER INFORMATIONItem 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    28Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    28Signature
    
    
    
    
    29
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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS TRADESTATION GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETS:Cash and cash equivalents, including restricted cash
of $2,717,627 and $2,682,627 at March 31, 2004
and December 31, 2003, respectively
    
    $
    34,271,744
    
    
    $
    31,017,502Marketable securities
    
    
    
    
    
    
    1,997,060Receivables from clearing firms
    
    
    1,094,877
    
    
    
    526,832Accounts receivable
    
    
    112,361
    
    
    
    120,482Property and equipment, net
    
    
    3,484,881
    
    
    
    3,628,773Other assets
    
    
    1,675,559
    
    
    
    709,903Total assets
    
    $
    40,639,422
    
    
    $
    38,000,552LIABILITIES AND SHAREHOLDERS EQUITY:LIABILITIES:Accounts payable
    
    $
    2,063,150
    
    
    $
    2,047,332Accrued expenses
    
    
    5,002,849
    
    
    
    6,013,192Capital lease obligations
    
    
    109,798
    
    
    
    194,002Total liabilities
    
    
    7,175,797
    
    
    
    8,254,526COMMITMENTS AND CONTINGENCIESSHAREHOLDERS 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, 41,560,235 and 41,446,436
issued and outstanding at March 31, 2004 and
December 31, 2003, respectively
    
    
    415,602
    
    
    
    414,464Additional paid-in capital
    
    
    50,755,686
    
    
    
    50,540,630Accumulated deficit
    
    
    (17,707,663
    )
    
    
    (21,209,068
    )Total shareholders equity
    
    
    33,463,625
    
    
    
    29,746,026Total liabilities and shareholders equity
    
    $
    40,639,422
    
    
    $
    38,000,552
 See accompanying notes. 3




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TRADESTATION GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003REVENUES:Brokerage revenues
    
    $
    15,106,734
    
    
    $
    10,962,223Subscription fees
    
    
    1,882,462
    
    
    
    1,711,087Other
    
    
    471,532
    
    
    
    639,253Total revenues
    
    
    17,460,728
    
    
    
    13,312,563OPERATING EXPENSES:Clearing and execution costs
    
    
    5,691,615
    
    
    
    3,493,365Data center costs
    
    
    1,558,113
    
    
    
    1,195,909Technology development
    
    
    1,898,176
    
    
    
    1,850,693Sales and marketing
    
    
    2,670,414
    
    
    
    2,570,114General and administrative
    
    
    2,095,202
    
    
    
    1,995,281Amortization of intangible assets
    
    
    29,978
    
    
    
    52,478Total operating expenses
    
    
    13,943,498
    
    
    
    11,157,840Income from operations
    
    
    3,517,230
    
    
    
    2,154,723OTHER INCOME, net
    
    
    55,632
    
    
    
    10,694Income before income taxes
    
    
    3,572,862
    
    
    
    2,165,417INCOME TAX PROVISION (BENEFIT)
    
    
    71,458
    
    
    
    (86,783
    )Net income
    
    $
    3,501,404
    
    
    $
    2,252,200EARNINGS PER SHARE:Basic
    
    $
    0.08
    
    
    $
    0.06Diluted
    
    $
    0.08
    
    
    $
    0.06WEIGHTED AVERAGE SHARES
OUTSTANDING:Basic
    
    
    41,487,110
    
    
    
    39,593,389Diluted
    
    
    44,608,484
    
    
    
    40,597,919
 See accompanying notes. 4




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TRADESTATION GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months EndedMarch 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,501,404
    
    
    $
    2,252,200Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    547,222
    
    
    
    566,913(Increase) decrease in:Receivables from clearing firms
    
    
    (568,045
    )
    
    
    (283,548
    )Accounts receivable
    
    
    8,121
    
    
    
    (72,408
    )Other assets
    
    
    (995,634
    )
    
    
    (71,441
    )Increase (decrease) in:Accounts payable
    
    
    15,818
    
    
    
    (291,116
    )Accrued expenses
    
    
    (1,010,343
    )
    
    
    (492,085
    )Net cash provided by operating activities
    
    
    1,498,543
    
    
    
    1,608,515CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (373,351
    )
    
    
    (262,295
    )(Increase) decrease in restricted cash
    
    
    (35,000
    )
    
    
    234,254Proceeds from maturity of marketable securities
    
    
    1,997,060
    
    
    
    Acquisition of intangible assets
    
    
    
    
    
    
    (15,000
    )Net cash provided by (used in) investing activities
    
    
    1,588,709
    
    
    
    (43,041
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    216,194
    
    
    
    28,439Repayment of capital lease obligations
    
    
    (84,204
    )
    
    
    (411,892
    )Net cash provided by (used in) financing activities
    
    
    131,990
    
    
    
    (383,453
    )NET INCREASE IN UNRESTRICTED CASH AND
CASH EQUIVALENTS
    
    
    3,219,242
    
    
    
    1,182,021UNRESTRICTED CASH AND CASH EQUIVALENTS,
beginning of period
    
    
    28,334,875
    
    
    
    12,982,856UNRESTRICTED CASH AND CASH EQUIVALENTS,
end of period
    
    $
    31,554,117
    
    
    $
    14,164,877SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid for interest
    
    $
    4,626
    
    
    $
    32,023Cash paid (received) for income taxes, net
    
    $
    20,000
    
    
    $
    (13,783
    )
 See accompanying notes. 5




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TRADESTATION GROUP, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All notes and related disclosures applicable to
the three months ended March 31, 2004 and 2003 are unaudited) TradeStation Group, Inc. (the Company), a Florida corporation formed in
2000, is the successor company to a publicly-held trading software company 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. TradeStation Securities offers the TradeStationplatform to institutional,
professional and serious, active individual traders. TradeStationis an
electronic trading platform that enables clients to design, test and monitor
their own custom trading strategies and then automate them with direct-access
order execution. The trading platform currently offers streaming real-time
equities, options, futures and forex market data. TradeStation Technologies
develops and offers strategy trading software tools and subscription services,
and owns and operates the TradeStationWorld.comstrategy trading and
development community. 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, 2003. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the consolidated financial position as of March 31,
2004 and the consolidated results of operations and cash flows for the three
months ended March 31, 2004 and 2003 have been recorded. 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 PER SHARE Weighted average shares outstanding for the three months ended March 31,
2004 and 2003 are calculated as follows: For the Three MonthsEnded March 31,2004
    
    2003Weighted average shares outstanding (basic)
    
    
    41,487,110
    
    
    
    39,593,389Impact of dilutive stock options and warrants after
applying the treasury stock method
    
    
    3,121,374
    
    
    
    1,004,530Weighted average shares outstanding (diluted)
    
    
    44,608,484
    
    
    
    40,597,919
 Stock options and warrants outstanding for the three months ended March
31, 2004 and 2003, which are not included in the calculation of diluted
earnings per share because their impact is antidilutive, are as follows: For the Three MonthsEnded March 31,2004
    
    2003Stock options
    
    
    792,553
    
    
    
    2,601,878Warrants (expiring June 2004)
    
    
    
    
    
    
    386,369
 6




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(2) STOCK-BASED COMPENSATION  PRO FORMA NET INCOME In accordance with Statement of Financial Accounting Standards (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 income when such equity instruments are issued. No such
compensation expense was recorded for the three months ended March 31, 2004 or
2003. As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation paid to employees using the intrinsic value method in accordance
with the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,and related
interpretations. Generally, no stock-based employee compensation cost is
reflected in net income, as all options granted under the Companys plans have
an exercise price equal to the fair value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation. For the Three MonthsEnded March 31,2004
    
    2003Net income, as reported
    
    $
    3,501,404
    
    
    $
    2,252,200Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax impact
    
    
    (523,366
    )
    
    
    (471,425
    )Pro forma net income
    
    $
    2,978,038
    
    
    $
    1,780,775Earnings per share:Basic and diluted, as reported
    
    $
    0.08
    
    
    $
    0.06Basic and diluted, pro forma
    
    $
    0.07
    
    
    $
    0.04
 The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions: For the Three MonthsEnded March 31,2004
    
    2003Risk free interest rate
    
    
    3
    %
    
    
    4
    %Dividend yield
    
    
    
    
    
    
    Volatility factor
    
    
    67
    %
    
    
    66
    %Weighted average life (years)
    
    
    4
    
    
    
    4
 7




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(3) 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 unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments. It
includes all changes in equity during a period except those resulting from
investments by, or distributions to, owners. The Company held an investment in
corporate stock during 2003, classified as an available-for-sale security, at
market value. Temporary unrealized holding losses have been excluded from
earnings and are reported in comprehensive income. A reconciliation of net income to comprehensive income is as follows: For the Three MonthsEnded March 31,2004
    
    2003Net income
    
    $
    3,501,404
    
    
    $
    2,252,200Unrealized holding losses on
available-for-sale securities
    
    
    
    
    
    
    (20,130
    )Comprehensive income
    
    $
    3,501,404
    
    
    $
    2,232,070
 (4) ACCRUED EXPENSES Accrued expenses consist of the following as of March 31, 2004 and
December 31, 2003: March 31,
    
    December 31,2004
    
    2003Deferred rent and related concessions
    
    $
    874,191
    
    
    $
    861,789Data and exchange fees
    
    
    745,142
    
    
    
    753,638Payroll and related accruals
    
    
    515,284
    
    
    
    953,844Consulting and professional fees
    
    
    462,541
    
    
    
    465,132Estimated loss on sublease of facilities
    
    
    432,733
    
    
    
    512,888Customer credits
    
    
    431,778
    
    
    
    398,741Clearing deposits
    
    
    321,032
    
    
    
    455,138Uninsured loss reserves
    
    
    25,000
    
    
    
    525,000Other
    
    
    1,195,148
    
    
    
    1,087,022$
    5,002,849
    
    
    $
    6,013,192
 Other includes commissions to third parties, returns and other accrued
expenses and reserves, none of which individually exceeds 5% of total
liabilities. (5) NET CAPITAL REQUIREMENTS TradeStation Securities is subject to the net capital requirements of the
Securities and Exchange Commissions Uniform Net Capital Rule (Rule 15c3-1) and
the Commodity Futures Trading Commissions financial requirement (Regulation
1.17). To satisfy each requirement, TradeStation Securities is required to
maintain net capital equal to the greater of $250,000 or 1/15th of aggregate
indebtedness. Also, the ratio of aggregate indebtedness to net capital cannot
exceed 15 to 1. As of March 31, 2004, TradeStation Securities had net capital
of $12.1 million, which was $11.7 million in excess of its required net capital
of $411,000, and a ratio of aggregate indebtedness to net capital of 0.51 to 1.
As of December 31, 2003, TradeStation Securities had net capital of $11.3
million, which was $10.9 million in excess of its required net capital of
$415,000, and a ratio of aggregate indebtedness to net capital of 0.55 to 1. 8




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(6) SEGMENT AND RELATED INFORMATION For the three months ended March 31, 2004 and 2003, 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 MonthsEnded March 31,2004
    
    2003Revenues:Brokerage services
    
    $
    15,195,536
    
    
    $
    10,990,548Software products and services
    
    
    5,984,317
    
    
    
    6,168,165Eliminations
    
    
    (3,719,125
    )
    
    
    (3,846,150
    )$
    17,460,728
    
    
    $
    13,312,563Income (loss) from operations:Brokerage services
    
    $
    1,919,608
    
    
    $
    (229,568
    )Software products and services
    
    
    1,597,622
    
    
    
    2,384,291$
    3,517,230
    
    
    $
    2,154,723
 As of
    
    As ofMarch 31,
    
    December 31,2004
    
    2003Identifiable assets:Brokerage services
    
    $
    21,800,679
    
    
    $
    19,551,368Software products and services
    
    
    18,838,743
    
    
    
    18,449,184$
    40,639,422
    
    
    $
    38,000,552
 (7) COMMITMENTS AND CONTINGENCIES Restricted Cash As of March 31, 2004, the Company had $2.7 million of restricted cash,
broken down as follows: (i) $2.2 million of cash supporting a ten-year lease
agreement; and (ii) $567,000 of cash reserved for the benefit of certain
customers. Litigation & Claims On September 5, 2003, Datamize, Inc., a Wyoming corporation, filed an
Original Complaint for Patent Infringement against nine defendants, including
TradeStation Securities, all of whom offer online securities trading services.
The other defendants are Fidelity Brokerage Services, Scottrade, Interactive
Brokers Group, Instinet, Charles Schwab, CyberTrader, E*Trade Securities and
Terra Nova Trading. The complaint was filed in the United States District
Court, Eastern District of Texas. The complaint alleges that the online
trading platforms and services the defendants offer to their customers
infringes United States Patent No. 6,460,040 issued to Datamize on October 1,
2002. The lawsuit seeks injunctive relief, actual damages and attorneys fees.
The Company believes Datamizes claim is baseless and intends to defend itself
vigorously. 9




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Three lawsuits have been filed by former principal owners of
onlinetradinginc.com corp. (the predecessor of TradeStation Securities) against
the Company, certain of its directors and executive officers and certain family
partnerships owned by two of the executive officers. On July 25, 2003,
Benedict S. Gambino, from whom the Company, as of October 18, 2002, purchased
2,417,000 shares of its common stock in a private transaction, filed a lawsuit
against the Company and three of its executive officers, William R. Cruz, Ralph
L. Cruz and Marc J. Stone, in the Circuit Court of Broward County, State of
Florida. This lawsuits allegations include violation of the Florida
Securities and Investor Protection Act, common law fraud, negligent
misrepresentation, breach of fiduciary duty and breach of contract. On August
18, 2003, Andrew A. Allen Family Limited Partnership (owned and controlled by
Andrew A. Allen), from whom the Company, as of November 26, 2002, purchased
1,000,000 shares of its common stock in a private transaction, filed a lawsuit
against the same defendants in the same court. This lawsuits allegations
include violation of the Florida Securities and Investor Protection Act, common
law fraud, breach of fiduciary duty, negligent misrepresentation and fraudulent
inducement. On August 28, 2003, Farshid Tafazzoli and E. Steven zum Tobel
filed a lawsuit against the Company, the Cruzes, family partnerships owned and
controlled by the Cruzes, Mr. Stone, Charles Wright and David Fleischman in the
Circuit Court of Miami-Dade County, State of Florida. Mr. Tafazzolis claims
relate to his family partnerships sale, as of May 1, 2002, of 3,000,000 shares
of Company common stock to family partnerships owned by William and Ralph Cruz,
and Mr. zum Tobels claims relate to his family partnerships sale, as of May
3, 2002, of 133,942 shares of Company common stock to Charles Wright. This
lawsuits allegations include violation of the Florida Securities and Investor
Protection Act, common law fraud and breach of fiduciary duty. Each of the
three lawsuits seeks rescission of the share purchases and/or compensatory
damages, plus interest, costs and attorneys fees. The Company believes all of
the allegations are baseless, intends to defend itself and the other named
parties vigorously in court, and expects to prevail in each of the lawsuits. On February 11, 2003, the plan administrator appointed under the
reorganization plan in the Chapter 11 bankruptcy of Bridge Information Systems,
Inc. and its affiliates filed an adversary complaint against TradeStation
Technologies and the Company in the United States Bankruptcy Court for the
Eastern District of Missouri demanding that the Company and TradeStation
Technologies return payments made to TradeStation Technologies by a Bridge
subsidiary in December 2000 and January 2001 totaling approximately $1.0
million, claiming such payments were preferential transfers under the federal
bankruptcy code as a result of being made to TradeStation Technologies during
the ninety-day period immediately preceding the Chapter 11 bankruptcy filing.
The Company believes this claim to be without merit on various grounds and
intends to vigorously defend this claim. TradeStation Securities is also engaged in routine litigation or other
dispute resolution proceedings, such as arbitration, incidental to, and part of
the ordinary course of, its business (claims in pending arbitrations seek, in
the aggregate, tens of millions of dollars of actual and punitive damages). While no assurances can be given, the Company does not believe that the
ultimate outcome of any of the above legal matters or claims will result in a
material adverse effect on its consolidated financial position, results of
operations or cash flows. The Company decided, as of June 1, 2002, to no longer carry errors or
omissions insurance that covers third-party claims made by brokerage clients or
software subscribers as a result of alleged human or system errors, failures,
acts or omissions. This decision was made based upon the Companys 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 the Companys
business. 10




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Contractual Obligations A summary of our capital lease obligations (net of interest and sales
tax), operating lease obligations (net of subleases), and minimum purchase
obligations (related to back-office systems and telecommunications services) as
of March 31, 2004 is as follows: Payments Due By Period2005
    
    2008
    
    2010 andContractual Obligations
    
    Total
    
    2004
    
    to 2007
    
    to 2009
    
    ThereafterCapital lease obligations
    
    $
    109,798
    
    
    $
    102,278
    
    
    $
    7,520
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    17,692,837
    
    
    
    2,017,264
    
    
    
    6,551,605
    
    
    
    3,811,515
    
    
    
    5,312,453Purchase obligations
    
    
    2,265,971
    
    
    
    596,311
    
    
    
    1,669,660
    
    
    
    
    
    
    
    Total
    
    $
    20,068,606
    
    
    $
    2,715,853
    
    
    $
    8,228,785
    
    
    $
    3,811,515
    
    
    $
    5,312,453
 11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements of
TradeStation Group and its subsidiaries contained herein. The results of
operations for an interim period are not necessarily indicative of results for
the year, or for any subsequent period. 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 licensed
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 March 31, 2004, TradeStation Securities had 13,723 equities, futures
and forex accounts, the vast majority of which were equities and futures
accounts, as compared to 8,918 accounts as of March 31, 2003. During the 2004
first quarter, TradeStation Securities brokerage client account base had
33,877 daily average revenue trades, as compared to 17,235 during the 2003
first quarter. In March 2004, we launched the roll-out of TradeStation 8.0, which
includes fully-integrated, direct-access options execution. The roll-out of
TradeStation 8.0is being completed this month. We continue to work towards commencing self-clearing operations for our
active trader equities brokerage services. In April 2004, we announced that
our application is not likely to be acted upon until the Depository Trust &
Clearing Corporations (DTCC) anticipated June 2004 committee meeting, which
would mean the earliest start date for self-clearing would be late August 2004. We also provide via our technologies subsidiary, TradeStation
Technologies, subscription services. The subscription version of TradeStation
offers 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 months ended March 31, 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. The following table presents,
for the periods indicated, certain items in our consolidated statements of
income broken down by segment: 12




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##### Table of Contents



Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    SoftwareProducts
    
    
    
    
    
    
    
    
    
    
    
    
    
    ProductsBrokerage
    
    and
    
    Elimin-
    
    
    
    
    
    Brokerage
    
    and
    
    Elimin-Services
    
    Services
    
    ations
    
    Total
    
    Services
    
    Services
    
    ations
    
    Total(In thousands)
    
    
    (In thousands)Revenues:Brokerage revenues
    
    $
    15,107
    
    
    $
    
    
    
    $
    
    
    
    $
    15,107
    
    
    $
    10,962
    
    
    $
    
    
    
    $
    
    
    
    $
    10,962Subscription fees
    
    
    
    
    
    
    5,601
    
    
    
    (3,719
    )
    
    
    1,882
    
    
    
    
    
    
    
    5,557
    
    
    
    (3,846
    )
    
    
    1,711Other
    
    
    89
    
    
    
    383
    
    
    
    
    
    
    
    472
    
    
    
    29
    
    
    
    611
    
    
    
    
    
    
    
    640Total revenues
    
    
    15,196
    
    
    
    5,984
    
    
    
    (3,719
    )
    
    
    17,461
    
    
    
    10,991
    
    
    
    6,168
    
    
    
    (3,846
    )
    
    
    13,313Operating expenses:Clearing and execution costs
    
    
    5,692
    
    
    
    
    
    
    
    
    
    
    
    5,692
    
    
    
    3,493
    
    
    
    
    
    
    
    
    
    
    
    3,493Data center costs
    
    
    3,989
    
    
    
    1,288
    
    
    
    (3,719
    )
    
    
    1,558
    
    
    
    4,027
    
    
    
    1,015
    
    
    
    (3,846
    )
    
    
    1,196Technology development
    
    
    384
    
    
    
    1,514
    
    
    
    
    
    
    
    1,898
    
    
    
    325
    
    
    
    1,526
    
    
    
    
    
    
    
    1,851Sales and marketing
    
    
    2,442
    
    
    
    229
    
    
    
    
    
    
    
    2,671
    
    
    
    2,438
    
    
    
    132
    
    
    
    
    
    
    
    2,570General and administrative
    
    
    769
    
    
    
    1,326
    
    
    
    
    
    
    
    2,095
    
    
    
    937
    
    
    
    1,058
    
    
    
    
    
    
    
    1,995Amortization of intangible assets
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    53Total operating expenses
    
    
    13,276
    
    
    
    4,387
    
    
    
    (3,719
    )
    
    
    13,944
    
    
    
    11,220
    
    
    
    3,784
    
    
    
    (3,846
    )
    
    
    11,158Income (loss) from operations
    
    $
    1,920
    
    
    $
    1,597
    
    
    $
    
    
    
    $
    3,517
    
    
    $
    (229
    )
    
    $
    2,384
    
    
    $
    
    
    
    $
    2,155
 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 primarily of brokerage commissions and
fees earned from our clients brokerage transactions and, to a lesser extent,
platform fees earned from brokerage customers using the TradeStationelectronic
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.We have net deferred income tax assets of $7.6 million
which are offset by a valuation allowance of $7.6 million (the full amount) in
accordance with the requirements of Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Management evaluates and
determines, on a periodic basis, if the amount of the valuation allowance
should be adjusted. Of this $7.6 million, $3.4 million relate to net operating
loss carryforwards the benefit of which may be recorded through additional
paid-in capital and not through the consolidated statement of income should
realization become more likely than not. 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 13




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substantially different than our estimates. During the quarter ended March 31,
2004, we reversed $569,000 of our accruals related to a third-party claim which
has been inactive for over one year. During the prior year quarter ended March
31, 2003, we reduced our accruals by approximately $98,000 as a result of the
settlement of a claim for an amount lower than the amount we estimated. See
"Brokerage Services Segment  Operating Expenses  General and Administrative. Three Months Ended March 31, 2004 and 2003 Overall Total revenues were $17.5 million for the three months ended March 31,
2004, as compared to $13.3 million for the three months ended March 31, 2003,
an increase of $4.2 million, or 31%, due primarily to an increase in brokerage
revenues of $4.1 million. Income from operations was $3.5 million for the three months ended March
31, 2004, as compared to $2.2 million for the three months ended March 31,
2003, an improvement of $1.3 million, or 63%. This improvement was due
primarily to higher brokerage revenues, net of related clearing and execution
costs, partially offset by higher data center costs. Other income, 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 $56,000 for the three months ended March 31, 2004, as
compared to $11,000 for the three months ended March 31, 2003. The increase of
$45,000 was due primarily to lower interest expense of $27,000 as a result of
fewer capital lease obligations, and an increase in interest income of $9,000
as a result of higher average cash balances (partially offset by lower interest
rates). An income tax provision of $71,000 was recorded during the three months
ended March 31, 2004, as compared to an income tax benefit of $87,000 during
the three months ended March 31, 2003. See Income Taxes below. Brokerage Services Segment Revenues Brokerage Revenues. Brokerage revenues are comprised primarily of
brokerage commissions and fees earned from our clients brokerage transactions
and, to a lesser extent, platform fees earned from brokerage customers using
the TradeStationelectronic trading platform and interest earned from interest
revenue sharing arrangements with the brokerages clearing firms. For the
three months ended March 31, 2004, brokerage revenues were $15.1 million (which
included brokerage commissions of $11.6 million), as compared to brokerage
revenues of $11.0 million (which included brokerage commissions of $8.8
million) for the three months ended March 31, 2003. This $4.1 million
increase, or 38%, was due primarily to increased trading activity and platform
fees related to brokerage client account growth. Effective March 31, 2003, we reduced our commission pricing for futures
and options trades and, effective November 1, 2003, we further reduced our
commission pricing for futures and our commission pricing per share for
equities trades. While we believe these price reductions will have a favorable
impact on revenue growth long-term, they may have slowed and may continue to
slow our revenue growth in the short- and mid-term. The rate and timing at
which these price reductions will, if at all, increase new accounts, client
trading activity and/or market share (or continue to increase new accounts,
client trading activity and/or market share) is not known. Continued price
pressure on online brokerage commissions and fees, as well as our ability to
maintain or improve revenue growth, are challenges we expect to continue to
face. 14




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##### Table of Contents



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 TradeStationelectronic trading platform.
Other revenues were $89,000 for the three months ended March 31, 2004, as
compared to $29,000 in the comparable period of the prior year, an increase of
$60,000, or 207%. These training workshops were initially offered in the first
quarter of 2003. 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, exchange memberships and consulting expenses,
for which we will receive no offsetting cost-savings until
self-clearing commences. Clearing and execution costs were $5.7 million
for the three months ended March 31, 2004, as compared to $3.5 million for the
three months ended March 31, 2003, an increase of
$2.2 million, or 63%. 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 relating to our
anticipated self-clearing operations. Clearing and execution costs, as a percentage of brokerage revenues,
increased to 38% for the three months ended March 31, 2004, as compared to 32%
for the three months ended March 31, 2003, due primarily to costs related to
anticipated self-clearing operations and, to a lesser extent, overall price
reductions. We believe that clearing costs as a percentage of brokerage
revenues will increase in the short-term due to additional increased costs
related to our anticipated self-clearing operations. Later in 2004 we expect
to begin self-clearing of equities trades for our active trader client base
which, while no assurances can be given, we expect will improve our gross
margin. 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 $4.0 million for both the three
months ended March 31, 2004 and 2003. Increased costs to connect our data
server farms directly to electronic market places was offset by decreased
intercompany subscription fees paid to the software products and services
segment. Although there was an increase in the number of brokerage accounts
during 2004 as compared to 2003, this was offset by a decrease in the per
account intercompany subscription fee charged by TradeStation Technologies to
TradeStation Securities. 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 March 31, 2004 were $384,000,
as compared to $325,000 for the three months ended March 31, 2003, an increase
of $59,000, or 18%, 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. 15




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##### Table of Contents



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 $2.4 million for the
three months ended March 31, 2004 and for the three months ended March 31,
2003. Sales and marketing expenses are anticipated to increase during future
quarters as we explore and possibly implement different marketing initiatives,
increase our efforts to grow our institutional trader business, and increase
our customer support staff. To better serve our customers, during April 2004,
substantially all of the customer support team from the software products and
services segment was moved to the brokerage services segment. 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 $769,000 for the three
months ended March 31, 2004, as compared to $937,000 for the three months ended
March 31, 2003, a decrease of $168,000, or 18%. This decrease is due primarily
to the 2004 first quarter reversal of the uninsured loss provision and related
legal fees of $569,000 for a third party claim which has remained inactive for
over one year, versus the 2003 first quarter reversal of an uninsured loss
provision and related legal fees of $98,000 due to the favorable settlement of
a claim. See Critical Accounting Policies and Estimates  Uninsured Loss
Reserves. This decrease was partially offset by increases in other consulting
and professional fees of $190,000 and, to a lesser extent, increases in
personnel and related costs, insurance, communication costs and facility costs.
General and administrative expenses are anticipated to increase during 2004
due to increased consulting and professional fees (related to increased
securities law requirements and ongoing litigation and claims) and higher
insurance (primarily the cost of directors and officers liability and
excess-SIPC coverage). 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). Subscription fees
were $5.6 million for the three months ended March 31, 2004 and for the three
months ended March 31, 2003. An increase in Intercompany Subscription Fees
resulting from increased brokerage accounts at TradeStation Securities was
offset by a decrease in the per account Intercompany Subscription Fee charged
by TradeStation Technologies to TradeStation Securities. Excluding
Intercompany Subscription Fees, subscription fees were $1.9 million for the
three months ended March 31, 2004, as compared to $1.7 million for the three
months ended March 31, 2003, an increase of $171,000, or 10%, as a result of a
price increase to certain groups of subscribers during the second half of 2003,
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 $383,000 for the three months ended
March 31, 2004, as compared to $611,000 for the three months ended March 31,
2003, a decrease of $228,000, or 37%. 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. 16




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##### Table of Contents



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 March 31, 2004 were $1.3 million, as compared to $1.0
million for the three months ended March 31, 2003, an increase of $273,000, or
27%. The increase is due primarily to increased rent and data communication
charges at our facilities of $335,000, partially offset by lower data
distribution and exchange fees of $85,000. 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 fourth quarter,
partially offset by incremental costs related to account growth and
approximately $136,000 of credits received from our data vendors during the
2003 first quarter. Technology Development. Technology development expenses include: expenses
associated with the development of new products, services and technology;
enhancements to existing products, services and technology; and testing of
products and services. Technology development expenses consist primarily of
personnel costs, depreciation of computer and related equipment, facility
expenses and telecommunications costs. TradeStation Technologies owns all
intellectual property rights relating to our businesses, including, but not
limited to, all order execution technology. Technology development expenses
were $1.5 million for the three months ended March 31, 2004 and for the three
months ended March 31, 2003. Sales and Marketing. We no longer actively market software products and
services, the focus of our business being an online brokerage firm for active
and institutional traders. Sales and marketing expenses consist primarily of
personnel costs for customer support centers and, to a lesser extent, facility
costs. Sales and marketing expenses were $229,000 for the three months ended
March 31, 2004, as compared to $132,000 for the three months ended March 31,
2003, an increase of $97,000, or 73%, due primarily to a reduction of expenses
of $112,000 in the 2003 first quarter as a result of a favorable resolution of
an event cancellation dispute. Sales and marketing expenses are expected to
decrease during future quarters as substantially all of the customer support
team from the software products and services segment moved to the brokerage
services segment in April 2004. General and Administrative. General and administrative expenses consist
primarily of 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 $1.3 million for the three months ended March 31,
2004, as compared to $1.1 million for the three months ended March 31, 2003, an
increase of $268,000, or 25%. This increase was due primarily to increased
consulting and professional fees of $166,000 and, to a lesser extent, increased
insurance and personnel and related costs. General and administrative expenses
are anticipated to increase during 2004 due to increased insurance (primarily
the cost of directors and officers liability coverage) and increased
consulting and professional fees related to increased securities law
requirements and ongoing litigation and claims. Variability of Quarterly 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. See Issues, Uncertainties and Risk Factors below. 17




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##### Table of Contents



Income Taxes At March 31, 2004, we had net deferred income tax assets of $7.6 million,
which are offset by a valuation allowance of $7.6 million (the full amount).
Of this $7.6 million, $3.4 million relate to net operating loss carryforwards
the benefit of which may be recorded through additional paid-in capital and not
through the consolidated statement of income should realization become more
likely than not. As a result of our deferred income tax assets, which include those net
operating loss carryforwards, other than alternative minimum tax and state and
local income taxes where our net operating loss carryforwards could not be
utilized, we have not been obligated to pay income taxes on our earnings since
our return to profitability in the second quarter of 2002. During the second
quarter of 2004, in accordance with the requirements of SFAS 109, we anticipate
making a reversal of all or part of the valuation allowance on our net deferred
income tax assets referred to in the previous paragraph, which could generate
one-time income of more than $2.0 million in the quarter the reversal is made,
and after which we will begin to record income tax expense at an effective rate
of 37.6%. During the three months ended March 31, 2004, we recorded a net income tax
provision of $71,000, most of which was an increase to the valuation allowance
established for the amount due under the current years alternative minimum tax
calculation. Other than the increase to the valuation allowance for the amount
due under the current years alternative minimum tax calculation and state and
local income taxes where our net operating loss carryforwards could not be
utilized, the income tax expense associated with net operating income generated
during the three months ended March 31, 2004 was totally offset by a reduction
to the previously established valuation allowance associated with our deferred
income tax assets referred to in the paragraph above, including the net
operating loss carryforwards. During the three months ended March 31, 2003, we recorded an income tax
benefit of $87,000, consisting of (i) a $72,000 refund related to research and
development tax credits that arose in connection with an Internal Revenue
Service (IRS) audit of a prior years federal income tax return, and (ii) a
$15,000 state income tax refund received for the overpayment of a prior years
income tax. The income tax expense associated with net operating income
generated during the three months ended March 31, 2003 was totally offset by a
reduction to the valuation allowance associated with net operating loss
carryforwards. Liquidity and Capital Resources As of March 31, 2004, we had cash and cash equivalents of approximately
$34.3 million, of which $2.7 million was restricted. Restricted cash supports
a facility lease and certain customer agreements. See Note 7 of Notes to
Consolidated Financial Statements  COMMITMENTS AND CONTINGENCIES  Restricted
Cash. A summary of our capital lease obligations (net of interest and sales
tax), operating lease obligations (net of subleases), and minimum purchase
obligations (related to back-office systems and telecommunications services) as
of March 31, 2004 is as follows: Payments Due By Period2005
    
    2008
    
    2010 andContractual Obligations
    
    Total
    
    2004
    
    to 2007
    
    to 2009
    
    ThereafterCapital lease obligations
    
    $
    109,798
    
    
    $
    102,278
    
    
    $
    7,520
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    17,692,837
    
    
    
    2,017,264
    
    
    
    6,551,605
    
    
    
    3,811,515
    
    
    
    5,312,453Purchase obligations
    
    
    2,265,971
    
    
    
    596,311
    
    
    
    1,669,660
    
    
    
    
    
    
    
    Total
    
    $
    20,068,606
    
    
    $
    2,715,853
    
    
    $
    8,228,785
    
    
    $
    3,811,515
    
    
    $
    5,312,453
 18




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In addition to the purchase obligations set forth in the table above, we
anticipate, in connection with the expected growth of our brokerage business,
capital expenditures of approximately $2.3 million through the remainder of
2004, primarily for the purchase of computer hardware and software. These
expenditures are expected to be funded through operating cash flows, capital
leases, or a combination of the two. 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.
In connection with our plan for TradeStation Securities to begin self-clearing
equities trades later in 2004, we will be required to make interest bearing
security deposits with clearing corporations, currently estimated to be
approximately $10 million. Net cash provided by operating activities of $1.5 million during the three
months ended March 31, 2004 consisted primarily of net income partially offset
by decreases in accrued expenses and increases in receivables from the clearing
firms and other assets. Net cash provided by operating activities of $1.6
million during the three months ended March 31, 2003 was due primarily to net
income partially offset by decreases in accounts payable and accrued expenses
and increases in receivables from the clearing firms. Investing activities provided cash of $1.6 million during the three months
ended March 31, 2004 mainly due to $2.0 million of proceeds from the maturity
of marketable securities, partially offset by capital expenditures
(mostly computer hardware and software for our data server farms) and a small
increase in restricted cash. Investing activities used cash of $43,000 during
the three months ended March 31, 2003, consisting primarily of capital
expenditures (mostly computer hardware and software for our data server farms), partially
offset by a decrease in restricted cash. Financing activities provided cash of $132,000 during the three months
ended March 31, 2004, while financing activities used cash of $383,000 during
the three months ended March 31, 2003. Proceeds from issuance of common stock
from exercises of stock options from our incentive stock plans provided cash of
$216,000 and $28,000 during the three months ended March 31, 2004 and 2003,
respectively. Repayments of capital lease obligations were $84,000 and
$412,000 during the three months ended March 31, 2004 and 2003, respectively. During the three months ended March 31, 2004, we issued 1,634 shares of
common stock associated with the exercise of warrants in exchange for the
delivery and cancellation of 2,800 warrants. As of March 31, 2004, warrants
(expiring in June 2004) to purchase up to 62,101 shares of the companys common
stock at $6.73 were outstanding. Off-Balance-Sheet Arrangements TradeStation Securities customers trading activities are transacted
mostly on a margin basis. In margin transactions, TradeStation Securities may
be obligated for credit extended to its customers by TradeStation Securities
clearing firms that is collateralized by cash and securities in the customers
accounts. In connection with these activities, TradeStation Securities also
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 (i.e., customer collateral) 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 customers
obligations. TradeStation Securities seeks to control the risks associated with its
customers 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. 19




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The customers 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 collateral,
TradeStation Securities may be exposed to the risk of needing to acquire 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. Issues, Uncertainties and Risk Factors The Consolidated Financial Statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations should be read and
evaluated together with the issues, uncertainties and risk factors relating to
our business described below. While we have been and continue to be confident
in our business and business prospects, we believe it is very important that
anyone who reads this report consider these issues, uncertainties and risk
factors, which include business risks relevant both to our industry and to us
in particular. These issues, uncertainties and risk factors are not intended
to be exclusive. Issues, uncertainties and risk factors are also included in
other sections of this report when specifically relevant to a statement we have
made about an aspect of our business, or our financial condition or results of
operations. This report also contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. When used in this report, the words
anticipate(s), anticipated, anticipation, assume(s), assumption(s),
become(s), belief, believe(s), believed, could, designed,
estimate, estimates, estimated, expect(s), expected,
expectation(s), going forward, hopeful, intend(s), intended, look
forward, may, opportunity, opportunities, outlook(s), pending,
plan(s), planned, potential, scheduled, shall, should, think(s),
to be, upcoming, well-positioned, will, would, and similar
expressions, if and to the extent used, are intended to identify the
forward-looking statements. All forward-looking statements are based on
current expectations and beliefs concerning future events that are subject to
risks and uncertainties, including the risks and uncertainties described below
and elsewhere in this report. Actual results may differ materially from the
results suggested in this report. Factors that may cause or contribute to such
differences, and our business risks and uncertainties generally, include, but
are not limited to, the items described below, as well as those described in
other sections of this report, our other public filings and our press releases. There Are Several Factors That May Cause Fluctuations In Our Quarterly
Operating Results, Which Could Result In Significant Volatility In Our Stock
Price Quarterly revenues and operating results of TradeStation Group and its
predecessor companies have fluctuated significantly in the past, and our
quarterly revenues and operating results are likely to fluctuate in the future.
Causes of such significant fluctuations may include, but are not limited to:  
    
    the effect of an anticipated reversal, in the 2004 second quarter,
of an income tax valuation allowance relating to net deferred income
tax assets, which could generate one-time income of more than $2.0
million in the quarter the reversal is made; 20




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
    
    the effect, on the companys net income and earnings per share, of
income tax expense at an effective rate of 37.6% estimated to be
applied beginning in the quarter following our reversal of the income
tax valuation allowance (which is significantly higher than the
effective income tax rate over the last seven fiscal quarters);  
    
    the timing (i.e., number and length of delays), success and other
effects of our anticipated self-clearing operations, or our inability
to commence self-clearing as a result of a failure to obtain final
regulatory or other third-party approvals or to satisfy conditions
required to obtain a needed regulatory or other third-party approval;  
    
    the effect, in the event we decide that the commencement of
self-clearing operations will be delayed for a long period of time, or
decide not to self-clear, of the decisions we then make about clearing
(i.e., whether to enter into an omnibus clearing arrangement or
continue to use a fully-disclosed clearing agent for each equities
brokerage account);  
    
    the collectibility (and, if collectible, the date(s) received) of a
$300,000 unsecured debit in an equities brokerage account which
occurred in late April 2004;  
    
    the effect of changes to our commission pricing or other fee
structures (since the 2002 second quarter we have continuously reduced
commission pricing), and of additional price reductions that may be
implemented in the future (our most recent reduction to our commission
pricing for equities and futures trades became effective November 1,
2003);  
    
    market or competitive pressure to continue to lower commissions and
fees charged to customers;  
    
    the timing, success, volatility and other characteristics or
effects that develop concerning our new forex and online options trade
execution services;  
    
    the appeal of our products and services to the institutional trader
market (given our limited experience selling to that market), and the
cost of technology development and sales, marketing, compliance,
technical, administrative and other infrastructure that may be required
to improve our chance of success in the institutional trader market;  
    
    general economic and market factors that affect active trading,
including trade volume, market volatility, market direction, the level
of confidence and trust in the markets, and seasonality (summer months
and holiday seasons typically being slower periods);  
    
    pending or potential third-party claims that turn out to be
significantly more (or less) costly, in terms of both judgment or
settlement amounts and legal expenses, than we currently estimate or
expect, including, but not necessarily limited to, the three claims
filed in 2003 by the co-founders of the predecessor company to
TradeStation Securities against the company, certain of its executive
officers and directors and certain family partnerships owned by two of
the executive officers (which seek, in the aggregate, tens of millions
of dollars in damages), a recently-filed patent infringement case
against the company and other online brokerage firms and other
potential patent infringement claims, pending NASD arbitrations
concerning brokerage customer claims seeking damages, in the aggregate,
tens of millions of dollars of actual and punitive damages, and a
million dollar claim by the bankruptcy estate of Bridge Information
Systems;  
    
    the quality and success of, and potential continuous changes in,
sales or marketing strategies (which continue to evolve) and the costs
allocated to marketing campaigns and the timing of those campaigns;  
    
    variations from our expectations with respect to hiring and
retention of personnel, sales and marketing expenditures, product
development, customer account growth, customer trading activity and the
share volume of their trades, or other revenue or expense items; 21




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
    
    if revenues are lower than budgeted expectations, our inability to
make in a timely fashion commensurate expense reductions (as a large
amount of our expenses do not vary with revenues in the short term);  
    
    the effect of recent enhancements to the TradeStationelectronic
trading platform, including the possibility of less-than-anticipated
appeal to customers and unexpected technical issues or difficulties;  
    
    changes in demand for our products and services due to the rapid
pace at which new technology is offered to customers in our industry;  
    
    costs or adverse financial consequences that may occur with respect
to regulatory compliance or other regulatory issues, or exchange or
clearing membership issues; and  
    
    the size and frequency of any trading errors for which we may
ultimately suffer the economic burden, in whole or in part (including
losses from third party claims that may arise from time to time  as of
June 1, 2002, we have not carried errors or omissions insurance for
third party claims). Conditions In The Securities And Financial Markets May Affect Our Rates Of
Customer Acquisition, Retention And Trading Activity Our products and services are, and will continue to be, designed for
customers who trade actively in the securities and financial markets. There
has been, since mid-year 2000, and, despite improved conditions in 2003 and
2004 there may again be, unfavorable conditions in the securities and financial
markets. To the extent that interest in active trading decreases due to low
trading volumes, lack of volatility, or significant downward movement in the
securities or financial markets, such as has recently occurred, or future tax
law changes, recessions, depressions, wars, terrorism (including
cyberterrorism), or otherwise, our business, financial condition, results of
operations and prospects could be materially adversely affected. Unfavorable
market conditions have, historically, seemed to severely negatively impact the
share price of publicly-held online brokerage firms, and also may result in
more losses for our clients, which could result in increases in quantity and
size of errors or omissions claims that may be made against us by clients. We
do not currently carry any errors or omissions insurance that might cover, in
part, some of those potential claims. See The Nature Of Our Business Results
In Potential Liability To Customersbelow. We May Need to Make Decisions About When (Or If) We Will Begin
Self-Clearing Equity Trades For Active Trader Accounts We have planned for some time to begin self-clearing equities trades for
our active trader accounts as soon as possible in 2004. Currently, all of our
clients equities trades are cleared through Bear Stearns, our clearing agent.
There can be no assurance that we will obtain all of the approvals and
memberships required to conduct self-clearing operations as a broker-dealer.
There is also a significant risk that we will encounter substantial delays in
launching self-clearing operations due to difficulties in satisfying conditions
or requirements attached to membership or approvals (such as requirements
regarding large financial or security deposits and other risk management-related
issues), or as a result of technical issues or other third-party acts or
failures to act outside of our control. In fact, the Depository Trust &
Clearing Corporation (DTCC) has very recently expressed some concerns that need
to be addressed before we will be considered for approval. While we believe
the concerns that have been raised by the DTCC have been fully addressed, there
can be no assurance that we will ultimately commence self-clearing operations
(for example, we may decide that an omnibus clearing arrangement is more
suitable in the circumstances, or that continuing to use a fully-disclosed
clearing agent for the foreseeable future is the best decision). If we do
commence self-clearing, or an omnibus clearing arrangement, we have no such
experience, and the cost savings and efficiencies of self-clearing or omnibus
clearing, assuming either occurs, may be less favorable than we expect as a
result of unanticipated increased fixed, infrastructure or incremental costs, 22




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mistakes or other factors. Also, such anticipated savings may be more than
offset by account losses or reduced trading activity if any self-clearing
mistakes or failures occur which undermine our clients or prospects
confidence in our ability to conduct reliable self-clearing operations. Our Industry Is Intensely Competitive, Which Makes It Difficult To Attract
And Retain Customers The markets for online brokerage services, trading software tools, and
real-time market data services are intensely competitive and rapidly evolving,
and there has been substantial consolidation of those three products and
services in the industry, as well as consolidation of the types of financial
instruments (equities, equities options, futures, forex) offered by firms.
There has also been consolidation of online brokerage firms generally. We
believe that competition from large online and other large brokerage firms and
smaller brokerage firms focused on active traders, as well as consolidation,
will substantially increase and intensify in the future. Competition may be
further intensified by the size of the active trader market, which is generally
thought to be comprised of less than 10% of all online brokerage accounts. We
believe our ability to compete will depend upon many factors both within and
outside our control. Factors outside of our control include: price pressure;
the timing and market acceptance of new products and services and enhancements
developed by our competitors; market conditions, such as recession; the size of
the active trader market today and in the future; the extent to which
institutional traders are willing to use direct-access brokerage services from
firms that have traditionally served mostly retail clients; data availability
and cost; and third-party clearing costs. Factors over which we have more
control, but which are subject to substantial risks and uncertainties with
respect to our ability to effectively compete, include: timing and market
acceptance of new products and services and enhancements we develop; our
ability to design, improve and support materially error-free Internet-based
systems; ease-of-use of our products and services; reliability of our products
and services; pricing decisions; self-clearing costs; and sales and other
marketing decisions and efforts. Systems Failures May Result In Our Inability To Deliver Accurately, On
Time, Or At All, Important And Time-Sensitive Services To Our Customers The online electronic trading platform we provide to our clients is based
upon the integration of our sophisticated front-end software technology with
our equally-sophisticated, Internet-based server farm technology. Our server
farm technology is the foundation upon which online trading clients receive
real-time market data and place buy and sell orders. However, in order for
this technology to provide a live, real-time trading platform, it requires
integration with real-time market data, which are currently provided directly
by the exchanges or by systems of independent third-party market data vendors
(who obtain the data directly from the exchanges), the electronic order book
systems of electronic communication networks (ECNs) and electronic systems
offered by the exchanges, the clearing and back-office systems of the clearing
firms we use, and the forex deal order placement, settlement and back-office
systems of or licensed by the forex dealer firm which is responsible for all of
our clients forex trades. Accordingly, our ability to offer a platform that
enables the development, testing and automation of trading strategies and the
placement and execution of buy and sell orders depends heavily on the
effectiveness, integrity, reliability and consistent performance of all of
these systems and technologies. In particular, the stress that is placed on
these systems during peak trading times could cause one or more of these
systems to operate too slowly or fail. We have experienced several delays and
outages since we launched our online trading platform, many of which related to
data vendor, clearing firm, exchange and ECN outages or issues which are beyond
our control. Also, a hardware or software failure, software design limitations
or errors that exist in our and others technologies, power or
telecommunications interruption or natural disaster could cause a systems
failure or other potentially damaging results. When systems in the trading process slow down significantly or fail, even
for a short time, our brokerage customers could suffer delays in trading, or
unintended results or other problems, potentially causing losses and possibly
subjecting us to claims for such losses. Such failures or delays, depending
upon how often they occur and how serious they are, could also result in our
clients and client prospects 23




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losing or failing to gain confidence in our trading platform. Additionally, as
a general matter not applicable only to our company, the integrity of these
types of systems is increasingly being attacked by persons sometimes referred
to as hackers who intentionally introduce viruses or other defects to cause
damage, inaccuracies or complete failure. Also, cyberterrorism, should it
occur, may significantly affect peoples willingness to use Internet-based
services, particularly ones that involve their personal or companys assets. During a system outage or failure, our brokerage may be able to take
orders by telephone; however, only associates with appropriate licenses,
knowledge and experience can accept telephone orders, and an adequate number of
associates likely would not be available to take customer calls in the event of
a system outage or failure. System delays, errors, outages and failures,
depending upon how serious and how often they occur, could have a material
adverse effect on our business, financial condition, results of operations and
prospects. See The Nature Of Our Business Results In Potential Liability To
Customersbelow. 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 both class action and individual suits and
arbitrations that generally seek substantial damages, including in some cases
punitive damages. Our proprietary order routing technology, in addition to
offering charting, trade analysis and trade execution services of various
kinds, 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 or limitations in their designs or performance,
may operate too slowly, fail, cause confusion or uncertainty to the user, or
operate or produce results not understood or intended by the user. An investor
or trader using either the full electronic trading platform or our subscription
service might claim that investment or trading losses or lost profits resulted
from use of a flawed version of one of our trading software tools or systems,
or inaccurate assumptions made by the trading software tools regarding data, or
inaccurate data. Major failures of this kind may affect all customers who are
online simultaneously. Any such litigation could have a material adverse
effect on our business, financial condition, results of operations and
prospects. We do not currently carry any errors or omissions insurance that
might cover, in part, some of the above-described risks. While our contracts
with customers are, we believe, clear that customers who do business with us
must knowingly assume all of the risks described above, there can be no
assurance that a judge, arbitrator or regulator would enforce or honor such
contractual provisions. See Conditions In The Securities And Financial
Markets May Affect Our Rates Of Customer Acquisition, Retention And Trading
Activity, and Systems Failures May Result In Our Inability To Deliver
Accurately, On Time, Or At All, Important And Time-Sensitive Services To Our
Customers above. Dependence Upon Outside Data Sources And Clearing Relationships Creates
Risks Outside Of Our Control Which May Affect Our Ability To Provide, And Our
Cost To Provide, Market Data And Clearing And Account Services Our business is currently dependent upon our ability to maintain contracts
with private market and news data vendors and clearing and dealer firms in
order to provide certain market data and news, and clearing and account
services, respectively, to our customers. We currently obtain New York Stock
Exchange (NYSE), American Stock Exchange (AMEX), Nasdaq, Options Price
Reporting Authority (OPRA), Chicago Mercantile Exchange (CME), Chicago Board of
Trade (CBOT) and OneChicago real-time market data directly from those
exchanges, but obtain other market data (such as forex data and data of smaller
futures exchanges) and news pursuant to non-exclusive licenses from private
data vendors who in turn obtain the data from exchanges or other sources.
Clearing and back-office account services for our 24




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brokerage clients are obtained from established brokerage clearing firms. For
our forex services, we rely on a third-party forex dealer firm for all trade
activity account services. The data and news contracts typically provide for
royalties based on usage or minimums, the clearing contracts provide for
transactional clearing fees and charges, and the contract with the forex dealer
provides for sharing a fixed amount of the spread made by the forex dealer in
each deal. There can be no assurance that we will be able to renew or maintain
contracts or acceptable clearing cost or vendor fee rates. In fact, in 2003 we
needed to quickly change our futures clearing firm in response to a substantial
increase in our clearing costs imposed by our former futures clearing firm. We
have also decided, due principally to clearing cost considerations, to begin
self-clearing active trader equities accounts as soon as possible in 2004.
Changes (or, in some cases, failure or inability to make changes) in our
relationships with one or more of these third parties, or involuntary
termination of one or more of those relationships, could have a material
adverse effect on our business, financial condition, results of operations and
prospects. We Are 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 has been
an infringement claim asserted against us and eight other online brokerage
firms by a company named Datamize, Inc. which would have a material adverse
effect on our business, financial condition, results of operations and
prospects if it is successful. Such a case, as well as any other infringement
case that may be brought against us, could result in our being unable to use
intellectual property which is integral to one or more of our products or
services. While we believe Datamize, Inc.s claim is meritless, no assurances
can be made about the outcome of this litigation or the magnitude of the cost
to defend the claims made in this litigation. We May Not Be Able To Adequately Protect Or Preserve Our Rights In
Intellectual Property Our success is and will continue to be heavily dependent on proprietary
technology, including existing trading software, 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. We also have a pending patent
application covering the TradeStationelectronic platform, but we do not yet
know if the patent will be issued. Policing unauthorized use of our products
and services is difficult, however, and we may be unable to prevent, or
unsuccessful in attempts to prevent, theft, copying or other unauthorized use
or exploitation of our product and service technologies. There can be no
assurance that the steps taken by us to protect (or defend) our proprietary
rights will be adequate or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technologies
or products and services. We May Need Cash In The Foreseeable Future 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 rate of customer acceptance of our products
and services, including the number of new brokerage accounts acquired and the
number and volume of trades made by our brokerage customers; the effect of
price reductions; price competition that may result in our continuing to charge
lower commissions and fees to customers; significant, increased infrastructure
and operating costs as our business grows, including unanticipated costs for
self-clearing and/or omnibus clearing operations (such as large cash or
security deposits, currently estimated to be approximately $10 million);
unanticipated costs relating to our new forex and options execution services;
costs of technology development and sales, marketing, compliance, technical and
administrative operations relating to increased and intensified pursuit of
institutional clients; substantial legal costs and/or unexpected unfavorable
outcomes in lawsuits and arbitrations currently 25




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pending against us; and competing technological and market developments.
Funds, if and when needed, 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. Operation In A Highly-Regulated Industry And Compliance Failures May
Result In Severe Penalties And Other Harmful Governmental Actions Against Us The securities and commodity futures industries are subject to extensive
regulation covering all aspects of those businesses. Regulation of forex
dealer and brokerage services is increasing as well. The various governmental
authorities and industry self-regulatory organizations that supervise and
regulate (and may soon supervise and regulate) our brokerage firm have broad
enforcement powers to censure, fine, suspend, enjoin, expel or issue
cease-and-desist orders to our brokerage firm or any of its officers or
employees who violate applicable laws or regulations. Additionally, rules
relating specifically to active traders have been enacted and more may be
enacted which severely limit the operations and potential success of our
business. 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. 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 and product
development 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 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 (or recur on a regular basis). 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 or otherwise, that could also have
significant negative consequences for the growth of our current and planned
operations. Our Brokerage Must Meet Net Capital Requirements As A Broker-Dealer That,
If Not Satisfied, Could Result In Severe Penalties, And Which At All Times
Limit Our Right To Use All Of The Brokerages Cash The SEC, the NASD, the NFA and other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers and futures commission merchants. Net capital is the
net worth of the regulated company (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 CFTC and suspension 26




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or expulsion by the NASD or NFA, 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 is subject to 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 or desirable, 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. Control Of TradeStation Group By The Cruzes Means That Important Decisions
Affecting The Company Are Concentrated In The Judgment Of Two Related
Individuals As of April 30, 2004, affiliates of William R. Cruz and Ralph L. Cruz (the
Co-Chairmen and Co-Chief Executive Officers of our company) own more than 50%
of the outstanding shares of our common stock. Therefore, the Cruzes control
TradeStation Group. Any and all decisions and votes of our shareholders
(including the election of our Board of Directors and any merger, consolidation
or sale of all or substantially all of TradeStation Groups assets) will be
determined by the Cruzes. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to changes in interest rates. Changes in interest rates
affect the interest earned on our cash and cash equivalents, marketable
securities and the interest earned from interest revenue sharing arrangements
with our clearing firms. In order to reduce this interest rate risk, we are
currently invested in investments with short maturities. As of March 31, 2004,
our cash and cash equivalents consist primarily of money market funds, U.S.
Treasury Bills and obligations of U.S. government agencies. The interest
earned on those investments is relatively low based upon current market
interest rates. A significant increase in interest rates would have a positive
impact on our financial results. Any decrease in those rates would not have a
material impact on our financial results. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of, and with respect to, the period covered by this
Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design
and operation of the companys disclosure controls and procedures was made
under the supervision and with the participation of the companys management,
including the Co-Chief Executive Officers and the Chief Financial Officer.
Based on that evaluation, the companys management, including the Co-Chief
Executive Officers and the Chief Financial Officer, concluded that the
companys disclosure controls and procedures have been designed and are being
operated in a manner that provides reasonable assurance that the information
required to be disclosed by the company in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms. A
system of controls, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the system of controls are met, and
no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
There have been no changes in the companys internal controls over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
companys internal controls over financial reporting. 27




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PART II  OTHER INFORMATION 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES (c) Sales of Unregistered Securities During the three months ended March 31, 2004, we issued to four employees
options to purchase an aggregate of 11,500 shares of common stock. Such
options vest ratably in annual increments over a five-year period and are
exercisable at prices ranging from $9.32 to $10.37 per share, which was the
fair market value (as defined in our Incentive Stock Plan) of our common stock
on the date the options were granted. All of the options were granted under
our Incentive Stock Plan in the ordinary course, and expire, if they remain
unexercised, on the tenth anniversary of the date on which they were granted. 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 first quarter of 2004. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report: 31.1
    
    Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.3
    
    Certifications of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Co-Chief Executive Officers Under 18 U.S.C. §1350.32.2
    
    Certification of Chief Financial Officer Under 18 U.S.C. §1350.
 (b) Reports on Form 8-K  (i)
    
    On February 10, 2004, we filed a Current Report on Form 8-K for an
event that occurred on February 10, 2004, reporting in Item 12 thereof
the release of our financial results for the fourth quarter and year
ended December 31, 2003 and a 2004 Business Outlook.  (ii)
    
    On April 15, 2004, we filed a Current Report on Form 8-K for an
event that occurred on April 15, 2004, reporting in Item 12 thereof the
release of our financial results for the first quarter of 2004 and a
Business Outlook for the 2004 second quarter. 28




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##### Table of Contents



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.
RegistrantMay 5, 2004

Date
    
    /s/ David H. Fleischman
David H. Fleischman
Chief Financial Officer,
Vice President of Finance and Treasurer
(Signing both in his capacity as duly authorized
  officer and as Principal Financial and
  Accounting Officer of the Registrant)
 29




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Exhibit31.1
    
    Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.3
    
    Certifications of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Co-Chief Executive Officers Under 18 U.S.C. §1350.32.2
    
    Certification of Chief Financial Officer Under 18 U.S.C. §1350.
 30