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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR o
    
    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 August 2, 2004, there were 41,722,394 shares of the Registrants
Common Stock outstanding.




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets June 30, 2004 (unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income Three and Six Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Cash Flows Six Months Ended June 30, 2004 and 2003 (unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    32Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    32Signature
    
    
    
    
    33Co-Chief Exec. Officer Cert. Sec. 302Co-Chief Exec. Officer Cert. Sec. 302CEO Cert. Sec. 302Co-Chief Exec. Officer Cert. Sec. 906CFO Cert. Sec. 906
 2




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS TRADESTATION GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETS:Cash and cash equivalents, including restricted cash
of $2,748,127 and $2,682,627 at June 30, 2004
and December 31, 2003, respectively
    
    $
    37,211,568
    
    
    $
    31,017,502Marketable securities
    
    
    
    
    
    
    1,997,060Receivables from clearing firms
    
    
    1,016,999
    
    
    
    526,832Property and equipment, net
    
    
    3,360,072
    
    
    
    3,628,773Deferred income taxes, net
    
    
    6,427,626
    
    
    
    Other assets
    
    
    2,362,439
    
    
    
    830,385Total assets
    
    $
    50,378,704
    
    
    $
    38,000,552LIABILITIES AND SHAREHOLDERS EQUITY:LIABILITIES:Accounts payable
    
    $
    1,937,870
    
    
    $
    2,047,332Accrued expenses
    
    
    5,330,872
    
    
    
    6,207,194Total liabilities
    
    
    7,268,742
    
    
    
    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, 41,717,810 and 41,446,436
issued and outstanding at June 30, 2004 and December 31, 2003, respectively
    
    
    417,178
    
    
    
    414,464Additional paid-in capital
    
    
    54,594,178
    
    
    
    50,540,630Accumulated deficit
    
    
    (11,901,394
    )
    
    
    (21,209,068
    )Total shareholders equity
    
    
    43,109,962
    
    
    
    29,746,026Total liabilities and shareholders equity
    
    $
    50,378,704
    
    
    $
    38,000,552
 See accompanying notes. 3




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TRADESTATION GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003REVENUES:Brokerage revenues
    
    $
    14,736,274
    
    
    $
    12,720,649
    
    
    $
    29,843,008
    
    
    $
    23,682,872Subscription fees
    
    
    2,061,828
    
    
    
    1,694,372
    
    
    
    3,944,290
    
    
    
    3,405,459Other
    
    
    421,046
    
    
    
    554,435
    
    
    
    892,578
    
    
    
    1,193,688Total revenues
    
    
    17,219,148
    
    
    
    14,969,456
    
    
    
    34,679,876
    
    
    
    28,282,019OPERATING EXPENSES:Clearing and execution costs
    
    
    5,543,222
    
    
    
    4,810,867
    
    
    
    11,234,837
    
    
    
    8,304,232Data center costs
    
    
    1,614,034
    
    
    
    1,163,172
    
    
    
    3,172,147
    
    
    
    2,359,081Technology development
    
    
    1,860,199
    
    
    
    1,867,161
    
    
    
    3,758,375
    
    
    
    3,717,854Sales and marketing
    
    
    2,648,642
    
    
    
    2,721,353
    
    
    
    5,319,056
    
    
    
    5,291,467General and administrative
    
    
    3,007,741
    
    
    
    2,183,374
    
    
    
    5,102,943
    
    
    
    4,178,655Amortization of intangible assets
    
    
    8,334
    
    
    
    52,479
    
    
    
    38,312
    
    
    
    104,957Total operating expenses
    
    
    14,682,172
    
    
    
    12,798,406
    
    
    
    28,625,670
    
    
    
    23,956,246Income from operations
    
    
    2,536,976
    
    
    
    2,171,050
    
    
    
    6,054,206
    
    
    
    4,325,773OTHER INCOME (EXPENSE), net
    
    
    69,256
    
    
    
    (29,280
    )
    
    
    124,888
    
    
    
    (18,586
    )Income before income taxes
    
    
    2,606,232
    
    
    
    2,141,770
    
    
    
    6,179,094
    
    
    
    4,307,187INCOME TAX BENEFIT
    
    
    (3,200,038
    )
    
    
    (714,046
    )
    
    
    (3,128,580
    )
    
    
    (800,829
    )Net income
    
    $
    5,806,270
    
    
    $
    2,855,816
    
    
    $
    9,307,674
    
    
    $
    5,108,016EARNINGS PER SHARE:Basic
    
    $
    0.14
    
    
    $
    0.07
    
    
    $
    0.22
    
    
    $
    0.13Diluted
    
    $
    0.13
    
    
    $
    0.07
    
    
    $
    0.21
    
    
    $
    0.12WEIGHTED AVERAGE SHARES
OUTSTANDING:Basic
    
    
    41,625,992
    
    
    
    40,092,803
    
    
    
    41,556,551
    
    
    
    39,843,096Diluted
    
    
    44,233,907
    
    
    
    43,588,162
    
    
    
    44,421,196
    
    
    
    42,093,040
 See accompanying notes. 4




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TRADESTATION GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
 Six Months EndedJune 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    9,307,674
    
    
    $
    5,108,016Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,093,222
    
    
    
    1,139,575Deferred income taxes
    
    
    (3,144,579
    )
    
    
    Loss on sale of investments
    
    
    
    
    
    
    54,823(Increase) decrease in:Receivables from clearing firms
    
    
    (490,167
    )
    
    
    270,434Income tax receivable
    
    
    
    
    
    
    (873,949
    )Other assets
    
    
    (1,522,245
    )
    
    
    38,894Increase (decrease) in:Accounts payable
    
    
    (109,462
    )
    
    
    (58,706
    )Accrued expenses
    
    
    (706,249
    )
    
    
    (258,308
    )Net cash provided by operating activities
    
    
    4,428,194
    
    
    
    5,420,779CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (786,209
    )
    
    
    (543,965
    )(Increase) decrease in restricted cash
    
    
    (65,500
    )
    
    
    584,543Proceeds from sale/maturity of marketable securities
    
    
    1,997,060
    
    
    
    46,577Acquisition of intangible assets
    
    
    
    
    
    
    (15,000
    )Net cash provided by investing activities
    
    
    1,145,351
    
    
    
    72,155CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    725,094
    
    
    
    2,614,424Repayment of capital lease obligations
    
    
    (170,073
    )
    
    
    (847,413
    )Net cash provided by financing activities
    
    
    555,021
    
    
    
    1,767,011NET INCREASE IN UNRESTRICTED CASH AND
CASH EQUIVALENTS
    
    
    6,128,566
    
    
    
    7,259,945UNRESTRICTED
CASH AND CASH EQUIVALENTS,
beginning of period
    
    
    28,334,875
    
    
    
    12,982,856UNRESTRICTED
CASH AND CASH EQUIVALENTS,
end of period
    
    $
    34,463,441
    
    
    $
    20,242,801SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid for interest
    
    $
    6,967
    
    
    $
    53,666Cash paid for income taxes, net
    
    $
    33,000
    
    
    $
    71,217
 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 and six months ended June 30, 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 and hosts an annual strategy trading software conference. 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 June 30,
2004, the consolidated results of operations for the three and six months ended
June 30, 2004 and 2003, and the consolidated results of cash flows for the six
months ended June 30, 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) INCOME TAXES During the three and six months ended June 30, 2004, the Company recorded
an income tax benefit, net of expense, of $3.2 million and $3.1 million,
respectively, related primarily to the reversal of a significant portion of a
valuation allowance on deferred income tax assets (see below). During the
three and six months ended June 30, 2003, we recorded an income tax benefit,
net of expense, of $714,000 and $801,000, respectively, comprised primarily of
refunds related to prior year federal income tax returns. In June 2004, the Company reversed a significant portion of the valuation
allowance that was provided on its deferred income tax assets. In the opinion
of management, it is more likely than not that these benefits will now be
realized. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes,deferred income tax assets
should be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred income tax assets will not be realized.
Management evaluates and determines, on a periodic basis, the amount of the
valuation allowance required and adjusts the valuation allowance, as needed.
The decision to reverse a significant portion of the valuation allowance was
triggered primarily by TradeStation Securities receiving final approval by the
National Securities Clearing Corporation (NSCC) and the Depository Trust
Company (DTC) to begin self-clearing for equities, the rollout of
TradeStation 8(which includes integrated options execution), as well as eight
consecutive quarters of operating profit. In the 2004 second quarter, the
result of this reversal was a net tax benefit of $3.2 million recorded in the
consolidated statement of income and a $3.3 million credit to additional
paid-in capital (relating to the tax benefit of stock option exercises). As of
June 30, 2004, the Company had net deferred income tax assets of $6.4 million,
which includes a valuation allowance of $926,500 relating to net operating loss
carryforwards 6




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from a 1999 acquisition. The Company did not reverse the remaining valuation
allowance as the acquired net operating loss carryforwards (expiring in 2018
and 2019) are subject to annual usage limitations. The portion which was not
reversed represents the last five years of the annual limitation amount due to
the inability to estimate taxable income that far into the future. Management
will continue to make periodic evaluations of the valuation allowance and will
determine periodic adjustments, as required. Beginning in the 2004 third
quarter, the Company anticipates recording income tax expense at an estimated
annual effective tax rate of approximately 37.5%. As of June 30, 2004, the Company had available, for federal tax purposes,
total net operating loss carryforwards of approximately $13 million, which
expire between 2018 and 2023, including $3.6 million of net operating loss
carryforwards that relate to a 1999 acquisition. (2) EARNINGS PER SHARE Weighted average shares outstanding for the three and six months ended
June 30, 2004 and 2003 are calculated as follows: For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Weighted average shares
outstanding (basic)
    
    
    41,625,992
    
    
    
    40,092,803
    
    
    
    41,556,551
    
    
    
    39,843,096Impact of dilutive stock options
and warrants after applying
the treasury stock method
    
    
    2,607,915
    
    
    
    3,495,359
    
    
    
    2,864,645
    
    
    
    2,249,944Weighted average shares
outstanding (diluted)
    
    
    44,233,907
    
    
    
    43,588,162
    
    
    
    44,421,196
    
    
    
    42,093,040
 Stock options outstanding for the three and six months ended June 30, 2004
and 2003, which are not included in the calculation of diluted earnings per
share because their impact is antidilutive, are presented below. All
unexercised warrants expired in June 2004. For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Stock options
    
    
    1,122,306
    
    
    
    465,685
    
    
    
    796,970
    
    
    
    465,685
 (3) STOCK-BASED COMPENSATION  PRO FORMA NET INCOME In accordance with SFAS No. 123, Accounting for Stock-Based Compensation,
in accounting for stock-based transactions with non-employees the Company
records compensation expense in the statement of income when such equity
instruments are issued. No such compensation expense was recorded for the six
months ended June 30, 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. 7




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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 Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    5,806,270
    
    
    $
    2,855,816
    
    
    $
    9,307,674
    
    
    $
    5,108,016Deduct: Total stock-based
employee compensation
expense determined under the
fair value based method for
all awards, net of tax impact
    
    
    (101,771
    )
    
    
    (468,743
    )
    
    
    (625,137
    )
    
    
    (976,482
    )Pro forma net income
    
    $
    5,704,499
    
    
    $
    2,387,073
    
    
    $
    8,682,537
    
    
    $
    4,131,534
 For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Earnings per share:Basic, as reported
    
    $
    0.14
    
    
    $
    0.07
    
    
    $
    0.22
    
    
    $
    0.13Diluted, as reported
    
    $
    0.13
    
    
    $
    0.07
    
    
    $
    0.21
    
    
    $
    0.12Basic, pro forma
    
    $
    0.14
    
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.10Diluted, pro forma
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    0.10
 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 Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Risk free interest rate
    
    
    3
    %
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Volatility factor
    
    
    63
    %
    
    
    68
    %
    
    
    63
    %
    
    
    68
    %Weighted average life (years)
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4
 (4) 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 gains and losses were excluded from
earnings and reported in comprehensive income. 8




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A reconciliation of net income to comprehensive income is as follows: For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    5,806,270
    
    
    $
    2,855,816
    
    
    $
    9,307,674
    
    
    $
    5,108,016Unrealized holding gains (losses)
on available-for-sale securities
arising during period,
net of tax
    
    
    
    
    
    
    707
    
    
    
    
    
    
    
    (19,423
    )Reclassification adjustment for
loss on available-for-sale
securities included in net
income, net of tax
    
    
    
    
    
    
    54,823
    
    
    
    
    
    
    
    54,823Comprehensive income
    
    $
    5,806,270
    
    
    $
    2,911,346
    
    
    $
    9,307,674
    
    
    $
    5,143,416
 (5) OTHER ASSETS Other assets consist of the following as of June 30, 2004 and December 31,
2003: June 30,
    
    December 31,2004
    
    2003Prepaid insurance
    
    $
    779,577
    
    
    $
    22,379Other receivables
    
    
    612,280
    
    
    
    402,517Exchange memberships
    
    
    455,000
    
    
    
    40,000Other prepaid expenses
    
    
    440,614
    
    
    
    243,365Other
    
    
    74,968
    
    
    
    122,124$
    2,362,439
    
    
    $
    830,385
 Included in Other receivables, is an unsecured account receivable of
$276,000. For further discussion, see Note 9  COMMITMENTS AND CONTINGENCIES 
Unsecured Account Receivable. (6) ACCRUED EXPENSES Accrued expenses consist of the following as of June 30, 2004 and December
31, 2003: June 30,
    
    December 31,2004
    
    2003Deferred rent and related concessions
    
    $
    886,594
    
    
    $
    861,789Data and exchange fees
    
    
    734,071
    
    
    
    753,638Payroll and related accruals
    
    
    710,920
    
    
    
    953,844Professional fees
    
    
    481,123
    
    
    
    465,132Customer credits
    
    
    444,829
    
    
    
    398,741Estimated loss on sublease of facilities
    
    
    385,829
    
    
    
    512,888Clearing deposits
    
    
    357,140
    
    
    
    455,138Uninsured loss reserves
    
    
    25,000
    
    
    
    525,000Other
    
    
    1,305,366
    
    
    
    1,281,024$
    5,330,872
    
    
    $
    6,207,194
 Other includes commissions to third parties, obligations under capital
leases, returns and other accrued expenses and reserves, none of which
individually exceeds 5% of total liabilities. 9




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(7) 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 and 1/15th of aggregate
indebtedness. Also, the ratio of aggregate indebtedness to net capital cannot
exceed 15 to 1. As of June 30, 2004, TradeStation Securities had net capital
of $11.8 million, which was $11.2 million in excess of its required net capital
of $581,000, and a ratio of aggregate indebtedness to net capital of 0.74 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. Once TradeStation Securities begins to self-clear equities trades,
currently expected to be later in 2004, the net capital calculation will change
to the alternative method, which means the net capital calculation will be
the greater of $250,000 or 2.0% of aggregate customer debit items. Based upon
customers debit items as of June 30, 2004, TradeStation Securities would have
a net capital requirement of approximately $1.2 million to $1.3 million. (8) SEGMENT AND RELATED INFORMATION For the three and six months ended June 30, 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 Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Brokerage services
    
    $
    14,807,929
    
    
    $
    12,794,637
    
    
    $
    30,003,465
    
    
    $
    23,785,185Software products and services
    
    
    6,524,344
    
    
    
    5,164,044
    
    
    
    12,508,661
    
    
    
    11,332,209Eliminations
    
    
    (4,113,125
    )
    
    
    (2,989,225
    )
    
    
    (7,832,250
    )
    
    
    (6,835,375
    )$
    17,219,148
    
    
    $
    14,969,456
    
    
    $
    34,679,876
    
    
    $
    28,282,019Income from operations:Brokerage services
    
    $
    205,138
    
    
    $
    851,890
    
    
    
    2,124,746
    
    
    
    622,322Software products and services
    
    
    2,331,838
    
    
    
    1,319,160
    
    
    
    3,929,460
    
    
    
    3,703,451$
    2,536,976
    
    
    $
    2,171,050
    
    
    $
    6,054,206
    
    
    $
    4,325,773
 As of
    
    As ofJune 30,
    
    December 31,2004
    
    2003Identifiable assets:Brokerage services
    
    
    
    
    
    $
    24,955,858
    
    
    $
    19,551,368Software products and services
    
    
    
    
    
    
    
    
    
    
    25,422,846
    
    
    
    18,449,184$
    50,378,704
    
    
    $
    38,000,552
 Effective April 2004, TradeStation Securities and TradeStation
Technologies amended their intercompany licensing and support agreement and
entered into a new expense sharing agreement to reflect current business
requirements. These changes had no effect on the consolidated results, but did 10




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##### Table of Contents



result in an increased allocation of approximately $123,000, during the three
months ended June 30, 2004, of general and administrative expenses within the
brokerage services segment and a corresponding decrease in the software
products and services segment. (9) COMMITMENTS AND CONTINGENCIES Restricted Cash As of June 30, 2004, the Company had $2.7 million of restricted cash,
broken down as follows: (i) $2.1 million of cash supporting a lease agreement;
and (ii) $598,000 of cash reserved for the benefit of certain customers. Litigation and 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. 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 11




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##### Table of Contents



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. This claim was settled in August
2004 for $30,000, pending approval by the court. 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. Unsecured Account Receivable TradeStation Securities became obligated to satisfy credit extended by one
of its clearing firms to one of its customers in a margin transaction when the
customers collateral was not sufficient to fully cover losses that the
customer incurred. The customer has made partial payments on the amount owed
and based upon information to date, the Company believes this amount is fully
collectible. However, no assurance can be given that the full amount will
ultimately be collected. As of June 30, 2004, the unsecured account receivable
balance is $276,000. Contractual Obligations A summary of capital lease obligations (net of interest and sales tax),
operating lease obligations (net of subleases), and minimum purchase
obligations (related to back-office systems, telecommunications services and
advertising) as of June 30, 2004 is as follows: Payments Due By Period2005
    
    2008
    
    2010 andContractual Obligations
    
    Total
    
    2004
    
    to 2007
    
    to 2009
    
    ThereafterCapital lease obligations
    
    $
    23,929
    
    
    $
    16,409
    
    
    $
    7,520
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    17,286,964
    
    
    
    1,353,676
    
    
    
    6,809,320
    
    
    
    3,811,515
    
    
    
    5,312,453Purchase obligations
    
    
    3,331,035
    
    
    
    826,510
    
    
    
    2,504,525
    
    
    
    
    
    
    
    Total
    
    $
    20,641,928
    
    
    $
    2,196,595
    
    
    $
    9,321,365
    
    
    $
    3,811,515
    
    
    $
    5,312,453
 (10) SUBSEQUENT EVENT In July 2004, in connection with TradeStation Securities plan to begin
self-clearing equities trades later in 2004, TradeStation Securities made an
interest-bearing security deposit with the NSCC in the amount of $10.0 million. 12




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##### Table of Contents



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 registered
broker-dealer and futures commission merchant, and a member of the National
Association of Securities Dealers (NASD), Securities Investor Protection
Corporation (SIPC), National Futures Association (NFA), American Stock
Exchange (AMEX), Archipelago Exchange (ArcaEx or ARCX), Boston Options
Exchange (BOX), Chicago Board Options Exchange (CBOE), International
Securities Exchange (ISE), Pacific Stock Exchange (PCX), and Philadelphia
Stock Exchange (PHLX), and has a pending membership application with the New
York Stock Exchange (NYSE). As of June 30, 2004, TradeStation Securities had 15,106 equities, futures
and forex accounts, the vast majority of which were equities and futures
accounts, as compared to 10,115 accounts as of June 30, 2003. During the 2004
second quarter, TradeStation Securities brokerage client account base had
33,477 daily average revenue trades, as compared to 22,295 during the 2003
second quarter. On June 25, 2004, we received clearing firm membership with the National
Securities Clearing Corporation (NSCC) and were approved as a Participant in
the Depository Trust Company (DTC). These were the final approvals required
to commence self-clearing operations for our active trader equities brokerage
services. We are currently focused on the final training and live quality
assurance testing for our self-clearing systems. We expect to complete the
transfer of our existing client account base from our current clearing firm to
self-clearing no later than September 2004. The cost savings benefits of
self-clearing are not anticipated to begin until the fourth quarter of 2004. We also provide via our technologies subsidiary, TradeStation
Technologies, subscription services. The subscription version of 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 and six months ended June 30, 2004 and 2003, we operated in
two principal business segments: (i) brokerage services and (ii) software
products and services. The brokerage services segment represents the
operations of TradeStation Securities and the software products and services
segment represents the operations of TradeStation Technologies. All
intercompany transactions are eliminated in consolidation. During the 2004 second quarter, TradeStation Securities and TradeStation
Technologies amended their intercompany licensing and support agreement and
entered into a new expense sharing agreement to reflect current business
requirements. These changes had no effect on the consolidated results, but did
result in an increased allocation of approximately $123,000, during the three
months ended June 30, 2004, of general and administrative expenses within the
brokerage services segment and a corresponding decrease in the software
products and services segment. 13




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##### Table of Contents



The following table presents, for the periods indicated, certain items in
our consolidated statements of income broken down by segment: Three Months Ended
    
    Three Months EndedJune 30, 2004
    
    June 30, 2003Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    SoftwareProducts
    
    
    
    
    
    
    
    
    
    
    
    
    
    ProductsBrokerage
    
    And
    
    Elimin-
    
    
    
    
    
    Brokerage
    
    And
    
    Elimin-Services
    
    Services
    
    ations
    
    Total
    
    Services
    
    Services
    
    ations
    
    Total(In thousands)
    
    
    
    
    
    
    
    
    
    (In thousands)Revenues:Brokerage revenues
    
    $
    14,736
    
    
    $
    
    
    
    $
    
    
    
    $
    14,736
    
    
    $
    12,721
    
    
    $
    
    
    
    $
    
    
    
    $
    12,721Subscription fees
    
    
    
    
    
    
    6,175
    
    
    
    (4,113
    )
    
    
    2,062
    
    
    
    
    
    
    
    4,684
    
    
    
    (2,990
    )
    
    
    1,694Other
    
    
    72
    
    
    
    349
    
    
    
    
    
    
    
    421
    
    
    
    74
    
    
    
    480
    
    
    
    
    
    
    
    554Total revenues
    
    
    14,808
    
    
    
    6,524
    
    
    
    (4,113
    )
    
    
    17,219
    
    
    
    12,795
    
    
    
    5,164
    
    
    
    (2,990
    )
    
    
    14,969Operating expenses:Clearing and execution costs
    
    
    5,543
    
    
    
    
    
    
    
    
    
    
    
    5,543
    
    
    
    4,811
    
    
    
    
    
    
    
    
    
    
    
    4,811Data center costs
    
    
    4,440
    
    
    
    1,287
    
    
    
    (4,113
    )
    
    
    1,614
    
    
    
    3,186
    
    
    
    967
    
    
    
    (2,990
    )
    
    
    1,163Technology development
    
    
    385
    
    
    
    1,475
    
    
    
    
    
    
    
    1,860
    
    
    
    368
    
    
    
    1,499
    
    
    
    
    
    
    
    1,867Sales and marketing
    
    
    2,564
    
    
    
    85
    
    
    
    
    
    
    
    2,649
    
    
    
    2,521
    
    
    
    200
    
    
    
    
    
    
    
    2,721General and administrative
    
    
    1,671
    
    
    
    1,337
    
    
    
    
    
    
    
    3,008
    
    
    
    1,057
    
    
    
    1,127
    
    
    
    
    
    
    
    2,184Amortization of intangible assets
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    52Total operating expenses
    
    
    14,603
    
    
    
    4,192
    
    
    
    (4,113
    )
    
    
    14,682
    
    
    
    11,943
    
    
    
    3,845
    
    
    
    (2,990
    )
    
    
    12,798Income from operations
    
    $
    205
    
    
    $
    2,332
    
    
    $
    
    
    
    $
    2,537
    
    
    $
    852
    
    
    $
    1,319
    
    
    $
    
    
    
    $
    2,171
 Six Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2003Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    SoftwareProducts
    
    
    
    
    
    
    
    
    
    
    
    
    
    ProductsBrokerage
    
    And
    
    Elimin-
    
    
    
    
    
    Brokerage
    
    And
    
    Elimin-Services
    
    Services
    
    ations
    
    Total
    
    Services
    
    Services
    
    ations
    
    Total(In thousands)
    
    
    
    
    
    
    
    
    
    (In thousands)Revenues:Brokerage revenues
    
    $
    29,843
    
    
    $
    
    
    
    $
    
    
    
    $
    29,843
    
    
    $
    23,683
    
    
    $
    
    
    
    $
    
    
    
    $
    23,683Subscription fees
    
    
    
    
    
    
    11,776
    
    
    
    (7,832
    )
    
    
    3,944
    
    
    
    
    
    
    
    10,240
    
    
    
    (6,835
    )
    
    
    3,405Other
    
    
    161
    
    
    
    732
    
    
    
    
    
    
    
    893
    
    
    
    102
    
    
    
    1,092
    
    
    
    
    
    
    
    1,194Total revenues
    
    
    30,004
    
    
    
    12,508
    
    
    
    (7,832
    )
    
    
    34,680
    
    
    
    23,785
    
    
    
    11,332
    
    
    
    (6,835
    )
    
    
    28,282Operating expenses:Clearing and execution costs
    
    
    11,235
    
    
    
    
    
    
    
    
    
    
    
    11,235
    
    
    
    8,304
    
    
    
    
    
    
    
    
    
    
    
    8,304Data center costs
    
    
    8,429
    
    
    
    2,575
    
    
    
    (7,832
    )
    
    
    3,172
    
    
    
    7,213
    
    
    
    1,981
    
    
    
    (6,835
    )
    
    
    2,359Technology development
    
    
    769
    
    
    
    2,990
    
    
    
    
    
    
    
    3,759
    
    
    
    692
    
    
    
    3,026
    
    
    
    
    
    
    
    3,718Sales and marketing
    
    
    5,006
    
    
    
    313
    
    
    
    
    
    
    
    5,319
    
    
    
    4,960
    
    
    
    331
    
    
    
    
    
    
    
    5,291General and administrative
    
    
    2,440
    
    
    
    2,663
    
    
    
    
    
    
    
    5,103
    
    
    
    1,994
    
    
    
    2,185
    
    
    
    
    
    
    
    4,179Amortization of intangible assets
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    105Total operating expenses
    
    
    27,879
    
    
    
    8,579
    
    
    
    (7,832
    )
    
    
    28,626
    
    
    
    23,163
    
    
    
    7,628
    
    
    
    (6,835
    )
    
    
    23,956Income from operations
    
    $
    2,125
    
    
    $
    3,929
    
    
    $
    
    
    
    $
    6,054
    
    
    $
    622
    
    
    $
    3,704
    
    
    $
    
    
    
    $
    4,326
 Critical Accounting Policies and Estimates Our significant accounting policies are described in Note 1 of Notes to
Consolidated Financial Statements included in the Annual Report on Form 10-K of
TradeStation Group for the year ended December 31, 2003  DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates. Brokerage Revenues.Brokerage revenues are the key component of our
results of operations and are comprised of brokerage commissions and fees
earned from our clients brokerage transactions and, to a lesser extent,
platform fees earned from brokerage customers using the 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. 14




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##### Table of Contents



Income Taxes.As of June 30, 2004, we had net deferred income tax assets
of $6.4 million including a valuation allowance of $926,500. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes,deferred income tax assets should be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. Management evaluates and
determines on a periodic basis, the amount of the valuation allowance required
and adjusts the valuation allowance, as needed. In June 2004, we reversed a
significant portion of the valuation allowance that was provided on our
deferred income tax assets. In the opinion of management, it is more likely
than not that these benefits will now be realized. This decision was triggered
primarily by TradeStation Securities receiving final approval by the NSCC and
the DTC to begin self-clearing for equities, the rollout of TradeStation 8
(which includes integrated options execution), as well as eight consecutive
quarters of operating profit. In the 2004 second quarter, the result of this
reversal, was a net tax benefit of $3.2 million recorded in the consolidated
statement of income and a $3.3 million credit to additional paid-in capital
(relating to the tax benefit of stock option exercises). The remaining
valuation allowance of $926,500 relates to net operating loss carryforwards
from a 1999 acquisition. We did not reverse the remaining valuation allowance
as the acquired net operating loss carryforwards (expiring in 2018 and 2019)
are subject to annual usage limitations. The portion which was not reversed
represents the last five years of the annual limitation amount due to the
inability to estimate taxable income that far into the future. Management will
continue to make periodic evaluations of the valuation allowance and will
determine periodic adjustments, as required. See Income Taxes below. Uninsured Loss Reserves. We decided, as of June 1, 2002, to no longer
carry errors or omissions insurance that covers third-party claims made by
brokerage clients or software subscribers as a result of alleged human or
system errors, failures, acts or omissions. This decision was made based upon
our assessment of the potential risks and benefits, including significant
increases in premium rates, deductibles and coinsurance amounts, reductions in
available per occurrence and aggregate coverage amounts, and the unavailability
of policies that sufficiently cover the types of risks that relate to our
business. Each quarter, we continue to evaluate our accruals for settlements
related to claims and potential claims. Estimates of settlements for such
potential claims, including related legal fees, are accrued in the consolidated
financial statements. The ultimate outcome of such potential claims may be
substantially different than our estimates. Three Months Ended June 30, 2004 and 2003 Overall Total revenues were $17.2 million for the three months ended June 30,
2004, as compared to $15.0 million for the three months ended June 30, 2003, an
increase of $2.2 million, or 15%, due primarily to an increase in brokerage
revenues of $2.0 million. Income from operations was $2.5 million for the three months ended June
30, 2004, as compared to $2.2 million for the three months ended June 30, 2003,
an improvement of $366,000, or 17%. This improvement was due primarily to
higher brokerage revenues, net of related clearing and execution costs,
partially offset by higher general and administrative expenses and data center
costs. Other income (expense), net consists primarily of interest income earned
on our cash and cash equivalents offset by interest expense related to capital
lease obligations, and bank fees, as well as gains or losses on the sale of
assets. Other income, net was $69,000 for the three months ended June 30,
2004, as compared to other expense, net of $29,000 for the three months ended
June 30, 2003. The increase of $98,000 was due primarily to a loss during the
2003 second quarter of $55,000 on the sale of investments in corporate stock,
an increase in interest income of $25,000 as a result of higher average cash
balances (partially offset by lower interest rates), and lower interest expense
as a result of fewer capital lease obligations. 15




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##### Table of Contents



A net income tax benefit of $3.2 million was recorded during the three
months ended June 30, 2004 related primarily to the reversal of a significant
portion of the valuation allowance on deferred income tax assets, as compared
to an income tax benefit of $714,000 during the three months ended June 30,
2003 associated primarily with income tax refunds. See Income Taxes below. Brokerage Services Segment Revenues Brokerage Revenues. Brokerage revenues are comprised of brokerage
commissions and fees earned from our clients brokerage transactions and, to a
lesser extent, platform fees earned from brokerage customers using the
TradeStationelectronic trading platform and interest earned from interest
revenue sharing arrangements with the brokerages clearing firms. For the
three months ended June 30, 2004, brokerage revenues were $14.7 million (which
included brokerage commissions of $11.0 million), as compared to brokerage
revenues of $12.7 million (which included brokerage commissions of $10.3
million) for the three months ended June 30, 2003. This $2.0 million increase,
or 16%, was due primarily to increased trading activity and platform fees
related to brokerage client account growth, partially offset by a decrease in
our commission pricing. Effective November 1, 2003, we reduced our commission
pricing for futures and our commission pricing per share for equities trades.
Continued price pressure on online brokerage commissions and fees, as well as
our ability to maintain or improve revenue growth, are challenges we could
continue to face. Other Revenues. Other revenues are comprised primarily of fees for our
training workshops that help customers take full advantage of the
state-of-the-art features of the TradeStationelectronic trading platform.
Other revenues were $72,000 for the three months ended June 30, 2004, as
compared to $74,000 in the comparable period of the prior year, a decrease of
$2,000, or 3%. Operating Expenses Clearing and Execution Costs.Clearing and execution costs are the costs
associated with executing and clearing customer trades, including commissions
paid to third-party broker-dealers. Beginning in 2004, clearing and execution
costs include new expenses related to our anticipated self-clearing operations,
primarily personnel and related expenses and consulting expenses, for which we
will receive no offsetting cost-savings until self-clearing commences.
Clearing and execution costs were $5.5 million for the three months ended June
30, 2004, as compared to $4.8 million for the three months ended June 30, 2003,
an increase of $732,000, or 15%. This increase was due primarily to increased
trading activity related to brokerage client account growth and, to a lesser
extent, $450,000 of incremental expenses in the 2004 second quarter relating to
our anticipated self-clearing operations, partially offset by approximately
$400,000 of increased costs for futures clearing in the 2003 second quarter
imposed by our former futures clearing firm that were not incurred in the 2004
second quarter with our current futures clearing firm. Clearing and execution costs, as a percentage of brokerage revenues, were
38% for both the three months ended June 30, 2004 and 2003. The impact of the
price reductions, effective November 2003, and the costs related to
self-clearing operations (which impacted only 2004) were entirely offset by the
2003 second quarter increase in costs for futures clearing imposed by our
former futures clearing firm that were not incurred in the 2004 second quarter
with our current futures clearing firm. While no assurances can be given, we
expect to see improvement in our gross margin in the 2004 fourth quarter
resulting from the commencement of self-clearing of equities trades for our
active trader client base, which is anticipated to begin late in the 2004 third
quarter. Data Center Costs. Data center costs are primarily intercompany
subscription fees, eliminated upon consolidation, paid on a per user basis to
the software products and services segment for providing streaming real-time,
Internet-based trading analysis software and data services to brokerage clients
and, to a lesser extent, data communications costs necessary to connect our
server farms directly to electronic 16




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market places. See Technology Development below. Data center costs were
$4.4 million for the three months ended June 30, 2004, as compared to $3.2
million for the three months ended June 30, 2003, an increase of $1.2 million,
or 39%, related primarily to increased intercompany subscription fees paid to
the software products and services segment and, to a lesser extent, increased
costs to connect our data server farms directly to electronic market places.
The increase in intercompany subscription fees resulted mainly from an increase
in the number of brokerage accounts during 2004 as compared to 2003. See
"Software Products and Services Segment  Revenues  Subscription Fees and -
Operating Expenses  Data Center Costs. Technology Development. Technology development expenses consist primarily
of personnel costs associated with product management of the brokerage products
and services TradeStation Securities offers to its clients and the creation of
documentation and other training and educational materials. Technology
development expenses for the three months ended June 30, 2004 were $385,000, as
compared to $368,000 for the three months ended June 30, 2003, an increase of
$17,000, or 5%, due mainly to increased personnel and related costs. Most of
the technology costs required for our brokerage firm to offer and operate a
highly sophisticated electronic trading platform are borne by its technology
affiliate, which licenses that technology to the brokerage firm pursuant to an
intercompany agreement. See Software Products and Services Segment 
Operating Expenses  Technology Development. Sales and Marketing. Sales and marketing expenses consist primarily of:
personnel costs for sales, customer support centers, marketing and order desk,
as well as brokers commissions; marketing programs, including advertising,
brochures, direct mail programs and account opening kits; data and information
tools used by sales and brokerage personnel; and Web-site maintenance and
administration costs. Sales and marketing expenses were $2.6 million for the
three months ended June 30, 2004, as compared to $2.5 million for the three
months ended June 30, 2003, an increase of $43,000, or 2%. Sales and marketing
expenses are anticipated to significantly increase beginning in the 2004 third
quarter as we ramp up our advertising and seek to grow our sales force to
further accelerate account growth. These additional sales and marketing expenses are not
expected to produce results until later periods. General and Administrative. General and administrative expenses consist
primarily of costs for administrative personnel such as executive, human
resources, finance, compliance and information technology employees;
professional fees; telecommunications; rent; insurance; and other facility
expenses. General and administrative expenses were $1.7 million for the three
months ended June 30, 2004, as compared to $1.1 million for the three months
ended June 30, 2003, an increase of $614,000, or 58%, due primarily to an
increase in professional fees of $382,000 and, to a lesser extent, increases in
insurance of $60,000, facility costs of $60,000, and personnel and related
costs of $45,000. Professional fees increased during 2004 as compared to 2003
due to increased legal fees related to ongoing litigation and claims, and
increased accounting fees related to the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. Higher insurance was primarily the result of
increased cost of directors and officers liability insurance. Software Products and Services Segment Revenues Subscription Fees. Subscription fees represent monthly fees earned for
providing streaming real-time, Internet-based trading analysis software tools
and data services. Subscription fees also include intercompany revenue for
licensing to TradeStation Securities, on a per user basis, the right to provide
these software tools and data services to the brokerage customers of
TradeStation Securities (Intercompany Subscription Fees). Intercompany
Subscription Fees have no effect on the consolidated results. Subscription
fees were $6.2 million for the three months ended June 30, 2004, as compared to
$4.7 million for the three months ended June 30, 2003, an increase of $1.5
million, or 32%, due primarily to an increase in Intercompany Subscription Fees
resulting from increased brokerage accounts at TradeStation Securities.
Excluding Intercompany Subscription Fees, subscription fees were $2.1 million 17




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for the three months ended June 30, 2004, as compared to $1.7 million for the
three months ended June 30, 2003, an increase of $368,000, or 22%, as a result
of price increases to certain groups of subscribers effective September 2003
and May 2004, partially offset by a decrease in the number of subscribers.
Subscription services have not been actively marketed since December 2000. Other Revenues. Other revenues consist primarily of royalties and
commissions received from third parties whose customers use our legacy software
products, and licensing fees derived from direct sales of our legacy client
software products. Other revenues were $349,000 for the three months ended
June 30, 2004, as compared to $480,000 for the three months ended June 30,
2003, a decrease of $131,000, or 27%. This expected decrease is the result of
no longer marketing legacy client software since May 2000 and no longer
offering legacy client software products domestically since September 2001.
Other revenues are expected to continue to decrease in future quarters. Operating Expenses Data Center Costs. Data center costs represent expenses related to the
operation, maintenance and support of our data server farms. These expenses
consist primarily of rent and data communications costs at our facilities where
the data server farms are located, including costs necessary to connect our
data server farms directly to electronic market places, rent or depreciation
for servers, and data distribution and exchange fees. Data center costs for
the three months ended June 30, 2004 were $1.3 million, as compared to $1.0
million for the three months ended June 30, 2003, an increase of $320,000, or
33%. The increase is due primarily to increased rent and data communication
charges at our facilities of $395,000 and, to a lesser extent, increased server
costs, partially offset by lower data distribution and exchange fees of
$139,000. The decrease in data distribution and exchange fees resulted from
increased exchange fees charged to client accounts and receipt of data directly
from exchanges (as opposed to a data vendor who is paid monthly fees) beginning
during the 2003 fourth quarter, partially offset by incremental costs related
to account growth and approximately $75,000 of credits received from our data
vendors during the 2003 second 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 both the three months ended June 30, 2004 and 2003. Sales and Marketing. We no longer actively market software products and
services, the focus of our business being online brokerage services 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 $85,000 for the three months ended
June 30, 2004, as compared to $200,000 for the three months ended June 30,
2003, a decrease of $115,000, or 58%, due primarily to the transfer of
substantially all of the customer support team from the software products and
services segment to the brokerage services segment during 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 June 30,
2004, as compared to $1.1 million for the three months ended June 30, 2003, an
increase of $210,000, or 19%. This increase was due primarily to increased
professional fees of $195,000 and, to a lesser extent, increased personnel and
related costs and facility expenses, partially offset by a decrease in
communication costs. Professional fees increased during 2004 as compared to
2003 due to increased legal fees related to 18




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ongoing litigation and claims and increased accounting fees related to the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Six Months Ended June 30, 2004 and 2003 Overall Total revenues were $34.7 million for the six months ended June 30, 2004,
as compared to $28.3 million for the six months ended June 30, 2003, an
increase of $6.4 million, or 23%, due primarily to an increase in brokerage
revenues of $6.1 million. Income from operations was $6.0 million for the six months ended June 30,
2004, as compared to $4.3 million for the six months ended June 30, 2003, an
improvement of $1.7 million, or 40%. This improvement was due primarily to
higher brokerage revenues, net of related clearing and execution costs,
partially offset by higher general and administrative expenses and data center
costs. Other income, net was $125,000 for the six months ended June 30, 2004, as
compared to other expense, net of $19,000 for the six months ended June 30,
2003. The increase of $144,000 was due primarily to a loss during the 2003
second quarter of $55,000 on the sale of investments in corporate stock, lower
interest expense of $47,000 as a result of fewer capital lease obligations, and
an increase in interest income of $34,000 as a result of higher average cash
balances (partially offset by lower interest rates). An income tax benefit of $3.1 million was recorded during the six months
ended June 30, 2004 primarily related to the reversal of a significant portion
of the valuation allowance on deferred income tax assets, as compared to an
income tax benefit of $801,000 during the six months ended June 30, 2003 that
was associated mainly with income tax refunds. See Income Taxes below. Brokerage Services Segment Revenues Brokerage Revenues. For the six months ended June 30, 2004, brokerage
revenues were $29.8 million (which included brokerage commissions of $22.5
million), as compared to brokerage revenues of $23.7 million (which included
brokerage commissions of $19.1 million) for the six months ended June 30, 2003.
This $6.1 million increase, or 26%, was due primarily to increased trading
activity and platform fees related to brokerage client account growth,
partially offset by a decrease in our commission pricing effective November 1,
2003. Other Revenues.Other revenues were $161,000 for the six months ended
June 30, 2004, as compared to $102,000 in the comparable period of the prior
year, an increase of $59,000, or 58%. The increase was a result of training
workshops being offered in all six months of 2004, as opposed to not being
offered until March during the 2003 six-month period. Operating Expenses Clearing and Execution Costs.Clearing and execution costs were $11.2
million for the six months ended June 30, 2004, as compared to $8.3 million for
the six months ended June 30, 2003, an increase of $2.9 million, or 35%. This
increase was due primarily to increased trading activity related to brokerage
client account growth and, to a lesser extent, $900,000 of incremental expenses
relating to our anticipated self-clearing operations during the first six
months of 2004, partially offset by approximately $400,000 of increased costs
for futures clearing in the 2003 second quarter imposed by our former futures
clearing firm that were not incurred in the 2004 second quarter with our
current futures clearing firm. 19




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Clearing and execution costs, as a percentage of brokerage revenues,
increased to 38% for the six months ended June 30, 2004, as compared to 35% for
the six months ended June 30, 2003, due primarily to 2004 costs related to
anticipated self-clearing operations and overall price reductions, partially
offset by the 2003 second quarter increased futures clearing costs. Data Center Costs. Data center costs were $8.4 million for the six months
ended June 30, 2004, as compared to $7.2 million for the six months ended June
30, 2003, an increase of $1.2 million, or 17%, related primarily to an increase
in intercompany subscription fees paid to the software products and services
segment resulting from an increase in the number of brokerage accounts during
2004 as compared to 2003 and, to a lesser extent, increased costs to connect
our data server farms directly to electronic market places. See Software
Products and Services Segment  Revenues  Subscription Fees and - Operating
Expenses  Data Center Costs. Technology Development. Technology development expenses for the six
months ended June 30, 2004 were $769,000, as compared to $692,000 for the six
months ended June 30, 2003, an increase of $77,000, or 11%, due mainly to
increased personnel and related costs. Sales and Marketing. Sales and marketing expenses were $5.0 million for
both the six months ended June 30, 2004 and 2003. General and Administrative. General and administrative expenses were $2.4
million for the six months ended June 30, 2004, as compared to $2.0 million for
the six months ended June 30, 2003, an increase of $446,000, or 22%. This
increase is due primarily to increases in professional fees of $572,000 and, to
a lesser extent, increases in personnel and related costs, insurance, and
facility expenses. Professional fees increased during 2004 as compared to 2003
due to increased legal fees related to ongoing litigation and claims, and
increased accounting fees related to the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. Higher insurance was primarily the result of
increased cost of directors and officers liability insurance. These
increases were partially offset by the 2004 first quarter reversal of an
uninsured loss provision and related legal fees of $569,000 for a third party
claim which had 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. Software Products and Services Segment Revenues Subscription Fees. Subscription fees were $11.8 million for the six
months ended June 30, 2004, as compared to $10.2 million for the six months
ended June 30, 2003, an increase of $1.6 million, or 15%, due primarily to an
increase in Intercompany Subscription Fees resulting from increased brokerage
accounts at TradeStation Securities. Excluding Intercompany Subscription Fees,
subscription fees were $3.9 million for the six months ended June 30, 2004, as
compared to $3.4 million for the six months ended June 30, 2003, an increase of
$539,000, or 16%, as a result of price increases to certain groups of
subscribers during September 2003 and May 2004, partially offset by a decrease
in the number of subscribers. Subscription services have not been actively
marketed since December 2000. Other Revenues. Other revenues were $732,000 for the six months ended
June 30, 2004, as compared to $1.1 million for the six months ended June 30,
2003, a decrease of $360,000, or 33%. 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. Operating Expenses Data Center Costs. Data center costs for the six months ended June 30,
2004 were $2.6 million, as compared to $2.0 million for the six months ended
June 30, 2003, an increase of $594,000, or 30%. The 20




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increase is due primarily to increased rent and data communication charges at
our facilities of $730,000 and, to a lesser extent, increased server costs,
partially offset by lower data distribution and exchange fees of $224,000. 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 $208,000 of credits received from our data
vendors during the first half of 2003. Technology Development. Technology development expenses were $3.0 million
for both the six months ended June 30, 2004 and 2003. Sales and Marketing. We no longer actively market software products and
services, the focus of our business being online brokerage services for active
and institutional traders. Sales and marketing expenses were $313,000 for the
six months ended June 30, 2004, as compared to $331,000 for the six months
ended June 30, 2003, a decrease of $18,000, or 5%. A decrease in personnel and
related costs was partially offset by a reduction of expenses of $112,000 in
the 2003 first quarter as a result of a favorable resolution of an event
cancellation dispute. General and Administrative. General and administrative expenses were $2.7
million for the six months ended June 30, 2004, as compared to $2.2 million for
the six months ended June 30, 2003, an increase of $478,000, or 22%. This
increase was due primarily to increased professional fees of $361,000 (related
to increased legal fees for ongoing litigation and claims and increased
accounting fees related to the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002) and, to a lesser extent, increased personnel and
related costs, insurance and facility expenses. Partially offsetting these
increases was a decrease in communication costs. 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. Income Taxes During the three and six months ended June 30, 2004, we recorded an income
tax benefit, net of expense, of $3.2 million and $3.1 million, respectively,
related primarily to the reversal of a significant portion of a valuation
allowance on deferred income tax assets. In June 2004, we reversed a
significant portion of the valuation allowance that was provided on our
deferred income tax assets. In the opinion of management, it is more likely
than not that these benefits will now be realized. In accordance with SFAS No.
109, Accounting for Income Taxes,deferred income tax assets should be reduced
by a valuation allowance if it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. Management evaluates
and determines, on a periodic basis, the amount of the valuation allowance
required and adjusts the valuation allowance, as needed. The decision to
reverse a significant portion of the valuation allowance was triggered
primarily by TradeStation Securities receiving final approval by the NSCC and
the DTC to begin self-clearing for equities, the rollout of TradeStation 8
(which includes integrated options execution), as well as eight consecutive
quarters of operating profit. In the 2004 second quarter, the result of this
reversal was a net tax benefit of $3.2 million recorded in the consolidated
statement of income and a $3.3 million credit to additional paid-in capital
(relating to the tax benefit of stock option exercises). As of June 30, 2004,
we had net deferred income tax assets of $6.4 million, which include a
valuation allowance of $926,500, pertaining to net operating loss carryforwards
from a 1999 acquisition. We did not reverse the remaining valuation allowance
as the acquired net operating loss carryforwards (expiring in 2018 and 2019)
are subject to annual usage limitations. The 21




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portion which was not reversed represents the last five years of the annual
limitation amount due to the inability to estimate taxable income that far into
the future. Management will continue to make periodic evaluations of the
valuation allowance and will determine periodic adjustments, as required.
Beginning in the 2004 third quarter, we anticipate recording income tax expense
at an estimated annual effective tax rate of approximately 37.5%. As of June 30, 2004, we had available, for federal tax purposes, total net
operating loss carryforwards of approximately $13 million, which expire between
2018 and 2023, including $3.6 million of net operating loss carryforwards that
relate to a 1999 acquisition. During the three and six months ended June 30, 2003, we recorded an income
tax benefit, net of expense, of $714,000 and $801,000, respectively, comprised
primarily of refunds related to prior year federal income tax returns and a
state income tax refund received during the 2003 first quarter for the
overpayment of a prior years income tax, partially offset by an increase to
the valuation allowance established for the estimated amount due under the 2003
alternative minimum tax calculation. Other than the increase to the valuation
allowance for the estimated amount due under the 2003 alternative minimum tax
calculation, the income tax expense associated with net operating income
generated during the six months ended June 30, 2003 was totally offset by a
reduction to the previously established valuation allowance associated with
deferred income tax assets, primarily net operating loss carryforwards. Liquidity and Capital Resources As of June 30, 2004, we had cash and cash equivalents of approximately
$37.2 million, of which $2.7 million was restricted. Restricted cash supports
a facility lease and certain customer agreements. See Note 9 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, telecommunications services and
advertising) as of June 30, 2004 is as follows: Payments Due By Period2005
    
    2008
    
    2010 andContractual Obligations
    
    Total
    
    2004
    
    to 2007
    
    to 2009
    
    ThereafterCapital lease obligations
    
    $
    23,929
    
    
    $
    16,409
    
    
    $
    7,520
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    17,286,964
    
    
    
    1,353,676
    
    
    
    6,809,320
    
    
    
    3,811,515
    
    
    
    5,312,453Purchase obligations
    
    
    3,331,035
    
    
    
    826,510
    
    
    
    2,504,525
    
    
    
    
    
    
    
    Total
    
    $
    20,641,928
    
    
    $
    2,196,595
    
    
    $
    9,321,365
    
    
    $
    3,811,515
    
    
    $
    5,312,453
 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 $1.9 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 July 2004, in connection with our plan for TradeStation Securities to begin
self-clearing equities trades later in 2004, we made an interest bearing
security deposit with the NSCC in the amount of $10.0 million. Additionally,
once TradeStation Securities begins to self-clear equities trades, the net
capital calculation will change to the alternative method, which means the
net capital calculation will be the greater of $250,000 or 2.0% of aggregate
customer debit items. Based upon our customers debit items as of June 30,
2004, TradeStation Securities would have a net capital requirement of 22




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approximately $1.2 million to $1.3 million, as compared to the current
requirement of $581,000 as of June 30, 2004. Net cash provided by operating activities of $4.4 million during the six
months ended June 30, 2004 consisted primarily of net income, as adjusted for
non cash items, including the reversal of the valuation allowance associated
with deferred income tax assets, partially offset by increases in other assets
and receivables from clearing firms and a decrease in accrued expenses. Net
cash provided by operating activities of $5.4 million during the six months
ended June 30, 2003 was due primarily to net income and a reduction in
receivables from clearing firms, partially offset by the recording of an income
tax receivable and reductions in accrued expenses. Investing activities provided cash of $1.1 million during the six months
ended June 30, 2004 mainly due to $2.0 million of proceeds from the maturity of
marketable securities, partially offset by capital expenditures of $786,000
(mostly computer hardware and software for our data server farms and to support
the growth of our business) and a small increase in restricted cash. Investing
activities provided cash of $72,000 during the six months ended June 30, 2003,
consisting primarily of a decrease in restricted cash, and, to a lesser extent,
proceeds from the sale of investments, partially offset by capital
expenditures. Financing activities provided cash of $555,000 during the six months ended
June 30, 2004, and $1.8 million during the six months ended June 30, 2003.
Proceeds from issuance of common stock from exercises of stock options from our
incentive stock plans and employee stock purchase plan provided cash of
$725,000 and $2.6 million during the six months ended June 30, 2004 and 2003,
respectively. Repayments of capital lease obligations were $170,000 and
$847,000 during the six months ended June 30, 2004 and 2003, respectively. During the six months ended June 30, 2004, we issued 1,851 shares of
common stock associated with the exercise of warrants in exchange for the
delivery and cancellation of 4,108 warrants. As of June 30, 2004, all warrants
had either been exercised or expired. 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. See Note 9 of Notes to Consolidated Financial Statements 
COMMITMENTS AND CONTINGENCIES  Unsecured Account Receivable. 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. 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 23




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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(s), believe(s), believed, could, designed,
estimate, estimates, estimated, expect(s), expected,
expectation(s), going forward, future, hopeful, hope(s), 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 the 2004 second quarter reversal of a significant
portion of an income tax valuation allowance relating to net deferred
income tax assets, which generated an income tax benefit of $3.2
million in that quarter;  
    
    the effect, on the companys net income and earnings per share, of
income tax expense at an estimated annual effective rate of
approximately 37.5% estimated to be applied beginning in the 2004 third
quarter (which is significantly higher than the effective income tax
rate over the last eight fiscal quarters); 24




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
    
    the timing, success and other effects of our anticipated
self-clearing operations, or delays in completing final quality
assurance testing of our self-clearing system, or in seamlessly
converting the clearing of active trader stock trades from Bear Stearns
to self-clearing operations;  
    
    the collectibility (and, if collectible, the date(s) received) of
an unsecured account receivable having an outstanding balance of
$276,000 as of June 30, 2004 related to an 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 patent infringement case against the company
and other online brokerage firms and other potential patent
infringement claims, and pending NASD arbitrations concerning brokerage
customer claims seeking, in the aggregate, tens of millions of dollars
of actual and punitive damages;  
    
    the quality and success of, and potential continuous changes in,
sales or marketing strategies (which continue to evolve), including the
effect of our recent decision to increase materially advertising and
marketing expenditures to try to help accelerate growth of revenues and
market share, and the timing of those marketing 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;  
    
    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; 25




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
    
    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, 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 Not Benefit As Much As We Think We Will From 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. Those self-clearing operations should begin in
September 2004. Currently, all of our clients equities trades are cleared
through Bear Stearns, our clearing agent. When we commence self-clearing, we
do so with no prior experience, and the cost savings and efficiencies of
self-clearing may be less favorable than we expect as a result of unanticipated
increased fixed, infrastructure or incremental costs, 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. Also, our self-clearing back-office
operations will rely on the Phase III self-clearing software licensed to us by
Sungard Financial Systems, and our business would likely suffer substantial
harm if that software fails or otherwise causes unintended results. 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 26




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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 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 27




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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 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 (this is scheduled to commence in
September 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 28




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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, which are currently $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 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 29




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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 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 August 2, 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. 30




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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 June 30, 2004,
our cash and cash equivalents consist primarily of money market funds and U.S.
Treasury Bills. 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. 31




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PART II  OTHER INFORMATION 
  ITEM 1.
    LEGAL PROCEEDINGS 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.
This claim was settled in August 2004 for $30,000, pending approval by the
court. 
  ITEM 2.
    CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES (c) Sales of Unregistered Securities During the three months ended June 30, 2004, we issued to two employees
options to purchase an aggregate of 15,000 shares of common stock. Such
options vest ratably in annual increments over a five-year period and are
exercisable at $7.27 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 second 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 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.  (ii)
    
    On July 19, 2004, we filed a Current Report on Form 8-K for an
event that occurred on July 19, 2004, reporting in Item 12 thereof the
release of our financial results for the second quarter of 2004 and a
Business Outlook for the 2004 third quarter. 32




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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.
RegistrantAugust 9, 2004
    
    /s/ David H. FleischmanDate
    
    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)
 33




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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.
 34