<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
FORM 10-QSB
--------------------------------------------------------------------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 31, 2000
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________.
COMMISSION FILE NUMBER: 333-75119
onlinetradinginc.com corp.
(Exact name of small business issuer as specified in its charter)
Florida 65-0607814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 North Military Trail, Suite 200
Boca Raton, Florida 33431
(Address of principal executive offices)
(561) 995-1010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) 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 ____
On December 14, 2000 the registrant had 11,476,388 outstanding shares
of common stock, $0.01 par value.
Transitional Small Business Disclosure Format (check one):
Yes ____ No __X__
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onlinetradinginc.com corp.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations (unaudited) for the Three and Nine
Months Ended October 31, 2000 and 1999 1
Statements of Financial Condition as of October 31, 2000 (unaudited)
and January 31, 2000 2
Statement of Stockholders' Equity (unaudited) for the Nine
Months Ended October 31, 2000 3
Statements of Cash Flows (unaudited) for the Nine Months Ended
October 31, 2000 and 1999 4
Notes to the Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
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onlinetradinginc.com corp.
Statements of Income
(UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues
Commissions $ 4,337,402 $ 2,092,667 $ 12,040,084 $ 6,050,161
Investment gains, net 122,126 331,479 321,067 869,727
Interest - revenue sharing 322,154 108,909 633,372 246,119
Interest and dividends 265,380 234,814 758,184 336,890
Other revenues 30,918 - 54,628 -
------------- -------------- ------------- --------------
5,077,980 2,767,869 13,807,335 7,502,897
------------- -------------- ------------- --------------
Expenses
Employee compensation and benefits 1,942,460 1,276,917 5,301,055 3,683,646
Floor brokerage 1,279 14,755 12,649 41,806
Clearing and other transaction costs 1,201,982 539,944 3,268,815 1,823,223
Communications 83,955 43,134 236,374 107,599
Occupancy and equipment 126,659 85,223 376,436 216,350
Promotional costs 20,038 44,564 37,155 56,517
Product development 172,061 - 514,027 -
Interest expense 14,981 5,356 35,230 19,605
Regulatory fees and expenses 24,635 6,258 69,408 32,129
Amortization expense 135,183 1,083 405,549 4,949
Other operating expenses 365,658 95,633 1,038,215 212,709
------------- -------------- ------------- --------------
4,088,891 2,112,867 11,294,913 6,198,533
------------- -------------- ------------- --------------
Income from operations 989,089 655,002 2,512,422 1,304,364
Non-Operating Items:
Loss on disposal of assets - - (685) -
Settlement payment received - - - 175,000
------------- -------------- ------------- --------------
Income before income taxes 989,089 655,002 2,511,737 1,479,364
Income tax provision 381,987 240,120 969,852 556,387
------------- -------------- ------------- --------------
Net Income $ 607,102 $ 414,882 $ 1,541,885 $ 922,977
============= ============== ============= ==============
Earnings Per Share
Basic $0.05 $0.04 $0.14 $0.10
============= ============== ============= ==============
Diluted $0.05 $0.04 $0.13 $0.09
============= ============== ============= ==============
Weighted average common shares outstanding
Basic 11,328,240 11,031,944 11,296,880 9,432,595
============= ============== ============= ==============
Diluted 11,476,915 11,482,334 11,498,111 9,886,304
============= ============== ============= ==============
</TABLE>
See accompanying notes to financial statements.
1
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onlinetradinginc.com corp.
Statements of Financial Condition
<TABLE>
October 31, 2000 January 31, 2000
------------------- -------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 16,950,645 $ 15,127,790
Receivable from clearing organization 910,083 759,183
Securities owned, at market value 153,616 155,012
Other current assets 177,277 103,987
------------------- -------------------
Total Current Assets 18,191,621 16,145,972
Property and Equipment, net 711,127 400,776
Intangible Assets, net 2,190,300 2,592,600
Other Assets 240,198 221,456
------------------- -------------------
TOTAL ASSETS $ 21,333,246 $ 19,360,804
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease payable $ 103,748 $ 39,944
Accounts payable and accrued liabilities 1,828,604 1,291,317
Income taxes payable 454,580 653,141
Securities sold but not yet purchased, at market value 1,731 25,938
------------------- -------------------
Total Current Liabilities 2,388,663 2,010,340
------------------- -------------------
Deferred Income Taxes 34,300 34,300
------------------- -------------------
Capital Lease Payable, net of current portion 124,365 72,131
------------------- -------------------
Commitments and Contingencies (Note 8)
Stockholders' Equity
Common stock, $0.01 par value; 100,000,000 shares authorized;
11,476,388 shares issued and outstanding 114,763 114,763
Additional paid-in capital 15,943,179 15,943,179
Retained earnings 2,727,976 1,186,091
------------------- -------------------
Total Stockholders' Equity 18,785,918 17,244,033
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,333,246 $ 19,360,804
=================== ===================
</TABLE>
See accompanying notes to financial statements.
2
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onlinetradinginc.com corp.
Statement of Changes in Stockholders' Equity
For the Nine Months Ended October 31, 2000
(UNAUDITED)
<TABLE>
Common Stock
------------------------------- Additional
Shares Amount at Paid-In Retained
Issued Par Value Capital Earnings Total
---------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 31, 2000 11,476,388 $ 114,763 $ 15,943,179 $ 1,186,091 $ 17,244,033
Net income for nine months
ended October 31, 2000 - - - 1,541,885 1,541,885
---------------- -------------- ---------------- ---------------- ----------------
BALANCE, October 31, 2000 11,476,388 $ 114,763 $ 15,943,179 $ 2,727,976 $ 18,785,918
================ ============== ================ ================ ================
</TABLE>
See accompanying notes to financial statements.
3
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onlinetradinginc.com corp.
Statements of Cash Flows
(UNAUDITED)
<TABLE>
Nine Months Ended
October 31,
-----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,541,885 $ 922,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 488,040 36,245
Loss on sale of property and equipment 685 -
Deferred income taxes - 2,500
Other non-cash charges 89,974 -
Changes in operating assets and liabilities:
Receivable from clearing organization (150,900) 211,174
Other receivables - (118,509)
Securities owned, at market value 1,396 (395,859)
Other current assets (73,290) (120,350)
Other assets (21,992) 11,289
Accounts payable and accrued liabilities 537,287 (78,491)
Income taxes payable (198,561) 490,527
Other current liabilities - 79,010
Securities sold, but not yet purchased, at market value (24,207) 322,913
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,190,317 1,363,426
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 5,300 -
Purchase of property and equipment (308,345) (139,394)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (303,045) (139,394)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital lease obligation (64,417) -
Proceeds from issuance of common stock and warrants - 15,810,991
Repayment of subordinated loan - (125,000)
Redemption of preferred stock - (330,000)
-------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (64,417) 15,355,991
-------------- --------------
Net increase in cash and cash equivalents 1,822,855 16,580,023
Cash and cash equivalents, beginning of period 15,127,790 1,005,944
-------------- --------------
Cash and cash equivalents, end of period $ 16,950,645 $ 17,585,967
============== ==============
Supplemental Disclosure of Non-cash Financing and Investing Activities
Equipment acquired under capital lease $ 180,455 $ -
============== ==============
For the nine months ended October 31, 1999, the Company acquired the domain name
"onlinetrading.com" for cash and stock options. Accordingly, other assets and
additional paid-in capital were increased by $55,000, the value of the stock
options.
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes $ 978,633 $ 64,140
============== ==============
Cash paid for interest $ 35,230 $ 23,012
============== ==============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
onlinetradinginc.com corp.
Notes to Financial Statements
Three and Nine Months Ended October 31, 2000 and 1999
(UNAUDITED)
NOTE 1 - BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in
accordance with Item 310(b) of Regulation S-B, "Interim Financial Statements"
and, accordingly, do not include all information and footnotes required under
accounting principles generally accepted in the United States for complete
financial statements. For additional information, refer to the financial
statements and footnotes for the year ended January 31, 2000 included in the
onlinetradinginc.com corp. (the "Company") Form 10-KSB/A Annual Report.
Financial information as of January 31 has been derived from the audited
financial statements of the Company for the year ended January 31, 2000. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position as of October
31, 2000, the results of operations for the nine months ended October 31, 2000
and 1999 and cash flows for the nine months ended October 31, 2000 and 1999 have
been included in the accompanying financial statements. The results of
operations and cash flows for the interim periods, is not necessarily indicative
of the results of operations or cash flows that may be expected for the
remainder of the year.
Reclassifications
Certain prior period amounts in the accompanying financial statements
have been reclassified to conform with current period presentation.
NOTE 2 - NET CAPITAL REQUIREMENTS
The Company is subject to the Securities and Exchange Commission
uniform net capital rule (Rule 15c3-1), which requires the maintenance of
minimal net capital and requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. As of October 31, 2000, the
Company had net capital of $14,745,197, which was $14,495,197 in excess of its
required net capital of $250,000. The ratio of aggregate indebtedness to net
capital was .17 to 1.
NOTE 3 - SECURITIES OWNED
Securities owned consists of marketable trading and investment
securities at quoted market values. These securities consist of the following as
of October 31, 2000 and January 31, 2000:
<TABLE>
October 31, 2000 January 31, 2000
-------------------------------- --------------------------------
<S> <C> <C>
Corporate Stocks/Options $ 3,475 $ 5,200
Obligations of U.S. Government 150,141 149,812
-------------------------------- --------------------------------
$ 153,616 $ 155,012
================================ ================================
</TABLE>
5
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onlinetradinginc.com corp.
Notes to Financial Statements
Three and Nine Months Ended October 31, 2000 and 1999
(UNAUDITED)
NOTE 4 - INCOME TAXES
Income taxes for the interim periods were computed using the effective
tax rate estimated to be applicable for the full fiscal year, which is subject
to an ongoing quarterly review by management.
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
Three months ended Nine months ended
October 31, October 31,
---------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net earnings available to
common shareholders $ 607,102 $ 414,882 $ 1,541,885 $ 922,977
=============== =============== =============== ==============
Denominator:
Denominator for earnings per share
weighted average shares outstanding 11,328,240 11,031,944 11,296,880 9,432,595
Effect of dilutive securities - stock
options 527 5,946 21,723 9,265
Effect of shares subject to repurchase by the
Company 148,148 444,444 179,508 444,444
--------------- --------------- -------------- ---------------
Denominator for earnings per share - assuming
dilution - adjusted weighted average shares
outstanding 11,476,915 11,482,334 11,498,111 9,886,304
=============== =============== =============== ==============
Basic earnings per share $ 0.05 $ 0.04 $ 0.14 $ 0.10
=============== =============== =============== ==============
Diluted earnings per share $ 0.05 $ 0.04 $ 0.13 $ 0.09
=============== =============== =============== ==============
</TABLE>
NOTE 6 - CAPITAL LEASE
On December 1, 1999, the Company entered into a capital lease for
office furniture, computer equipment and phone system. As of January 31, 2000,
the leasing company had funded $112,070 representing a portion of the total
furniture and computer equipment to be received. The balance of the equipment
totaling $180,455 was funded during the quarter ended April 30, 2000, making the
total amount of the capital lease $292,525. The lease is to be paid over 36
months which commenced in April 2000 with an initial payment of $25,937 to be
followed by 33 monthly payments of $8,646 and a final payment of $20,477. All
payments are also subject to applicable sales tax.
6
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onlinetradinginc.com corp.
Notes to Financial Statements
Three and Nine Months Ended October 31, 2000 and 1999
(UNAUDITED)
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
October 31, 2000 January 31, 2000
---------------------------------- ----------------------------------
<S> <C> <C>
Covenants not to compete $ 500,000 $ 500,000
Customer lists 2,182,000 2,182,000
---------------------------------- ----------------------------------
2,682,000 2,682,000
Accumulated amortization (491,700) (89,400)
----------------------------------
----------------------------------
$ 2,190,300 $ 2,592,600
================================== ==================================
</TABLE>
The above intangibles are amortized over an estimated useful life of 5 years.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Operating Leases
On March 2, 1999, the Company entered into a three-year operating lease
to rent office furniture, office equipment and computer hardware. The monthly
rental payment under the agreement is $6,862 plus applicable taxes.
On June 29, 1999, an amendment to the Company's current lease agreement
for its office space located in Boca Raton, Florida became effective. The
amendment added 5,009 square feet of office space to its Boca Raton location.
The space was completed on March 1, 2000 and results in additional monthly rent
of $11,028 plus applicable taxes.
Litigation
On January 11, 2000, Robert A. Whigham, Jr. and Patricia F. Whigham
filed a civil action against onlinetradinginc.com corp., Barry Goodman, Jan
Bevivino, William L. Mark and Bear Stearns Securities Corp. The Company's
attorneys moved the case to the United States District Court for the District of
Massachusetts, Eastern Division and on May 5, 2000 the United States District
Court granted the Company's motion to compel arbitration and subsequently
entered a procedural order dismissing the Whigham's civil action without
prejudice. On September 9, 2000, the Company received notification from NASD
Dispute Resolution, Inc. that the Whighams had filed a statement of claim and
initiated arbitration against all parties named in the former civil action.
The Whighams have alleged that, during the period from January 1999
through August 1999, their accounts were serviced by an unregistered person,
Barry Goodman, in violation of Massachusetts General Laws c.110A and that the
Company aided and abetted Mr. Goodman in violation of c.110A. The Whighams have
also made allegations of excessive trading, excessive commissions, negligent
supervision and fraud in violation of 18 U.S.C. ss.1962. The Whighams seek total
alleged damages of $561,000 plus interest, costs, fees and treble damages. The
7
<PAGE>
onlinetradinginc.com corp.
Notes to Financial Statements
Three and Nine Months Ended October 31, 2000 and 1999
(UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
--------------------------------------
Company intends to present a vigorous defense and to seek reimbursement for
certain costs associated with the Company's defense. The Company believes the
allegations to be without merit; however, there can be no assurance that the
Company's defense of this claim will be successful.
Merger
On January 19, 2000, the Company signed a definitive, 100%
share-exchange merger agreement with Omega Research, Inc. ("Omega Research"), a
leading provider of branded real-time trading tools for active traders and
professionals. Omega Research's current products and services provide traders
with the ability to develop, historically test and computer automate trading
strategies and to access streaming, real-time charts, quotes and news via the
Internet.
Pursuant to an Agreement and Plan of Merger and Reorganization, as
amended (the "Merger Agreement"), and subject to closing, a newly-formed holding
company named TradeStation Group, Inc. (f/k/a OnlineTrading.com Group, Inc.)
("TradeStation Group") will own 100% of the issued and outstanding capital stock
of Omega Research (which, upon consummation of the merger, is to be renamed
TradeStation Technologies, Inc.) and the Company (which, as soon as practicable
after the consummation of the merger, is to be renamed TradeStation Securities,
Inc.). Upon completion of the merger, as a result of share exchanges between
TradeStation Group and each of Omega Research and the Company, and the listing
of TradeStation Group shares, TradeStation Group will be the sole
publicly-traded company in the group with its outstanding shares of common stock
listed on The Nasdaq National Market. TradeStation Group will initially be owned
approximately 57% (on a fully diluted basis) by Omega Research's shareholders
and approximately 43% (on a fully diluted basis) by the Company's shareholders.
The precise percentages will be determined by the formula set forth in the
Merger Agreement. Closing of the Merger Agreement is conditioned upon and
subject to the approval of the shareholders of each of Omega Research and the
Company, and the satisfaction of other conditions precedent. The financial
statements therein have not been restated to give effect to this pending merger
as it has not yet been closed.
NOTE 9 - SUBSEQUENT EVENT
On December 11, 2000 the SEC declared the registration statement for
the Company's merger with Omega Research effective. The merger is expected to
close on December 29, 2000, the date set for the Company's shareholders meeting.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of the
results of operations and financial condition of onlinetradinginc.com corp. (the
"Company"). This discussion should be read with the financial statements
appearing in Part I. Item 1 of this report. The results of operations for the
nine months ended October 31, 2000 are not necessarily indicative of the results
for the entire fiscal year ending January 31, 2001.
The Company is a brokerage firm registered with the Securities and
Exchange Commission, the National Association of Securities Dealers, the
Municipal Securities Rulemaking Board and all state securities divisions. The
Company provides financial brokerage services primarily to experienced investors
and small to mid-sized financial institutions through a variety of communication
mediums, including the Internet. While the Company's products allow clients to
trade directly over the Internet, the Company also provides a full range of
brokerage services including direct access to the various securities markets via
a computerized infrastructure. This enhances the Company's ability to obtain the
simplest, most direct execution of orders for clients at the best possible
price. In addition, as a result of the technology the Company uses, registered
representatives and clients have access to the most up-to-date electronic
information on stocks, market indices, analysts' research and news. The
Company's manner of executing trades using its computerized infrastructure
eliminates middlemen to save costs and increase investing efficiency.
On January 19, 2000, the Company entered into a Merger Agreement with
Omega Research, Inc. On December 11, 2000 the SEC declared the registration for
the Company's merger with Omega Research, Inc. effective. The merger is expected
to close on December 29, 2000, the date set for the Company's shareholders
meeting. Closing of the Merger Agreement is conditioned upon and subject to the
approval of the shareholders of each of Omega Research, Inc. and the Company and
the satisfaction of other conditions precedent. For more details regarding the
Merger Agreement please see the most recent Form 10-KSB and S-4 filings.
RESULTS OF OPERATIONS
Nine Months Ended October 31, 2000 Compared with Nine Months Ended October 31,
1999
REVENUES
Total Revenues. The Company's total revenues increased $6,304,438, or
84% from $7,502,897 for the nine months ended October 31, 1999 to $13,807,335
for the nine months ended October 31, 2000.
Commission Revenue. Commission revenue increased $5,989,923, or 99%
from $6,050,161 for the nine months ended October 31, 1999 to $12,040,084 for
the nine months ended October 31, 2000. The increase was the primary result of
our continued customer growth and the acquisition of Newport Discount
Brokerage's clients.
9
<PAGE>
Investment Gains, net. Our proprietary trading net profits decreased
$548,660 to $321,067 for the nine months ended October 31, 2000 as compared to
$869,727 for the nine months ended October 31, 1999. The Company is in the
process of winding down proprietary trading operations in anticipation of the
merger with Omega Research, Inc.
Interest - Revenue Sharing. Interest revenue sharing represents a
revenue sharing agreement with our clearing firm. Interest revenue sharing
increased by $387,253 to $633,372 for the nine months ended October 31, 2000 as
compared to $246,119 for the nine months ended October 31, 1999. The increase
was due primarily to a change in the percentage of revenue the Company receives
and the increase of our customer balances being maintained by the clearing firm.
Interest and Dividends. Interest and dividend income increased $421,294
to $758,184 for the nine months ended October 31, 2000 as compared to $336,890
for the nine months ended October 31, 1999. The increase was primarily as a
result of the Company's increased cash position available for investment and the
prevailing interest rates.
Other Revenues. Other revenues consist primarily of other service fees
shared with our clearing agent and licensing fees for the Company's Internet
trading platform. For the nine months ended October 31, 2000 other revenues
totaled $54,628. There were no other revenues for the nine months ended October
31, 1999.
EXPENSES
Total Operating Expenses. Total operating expenses increased by 82%
from $6,198,533 for the nine months ended October 31, 1999 to $11,294,913 for
the nine months ended October 31, 2000.
Employee Compensation and Benefits. Employee compensation and related
benefits increased by $1,617,409, or 44%, from $3,683,646 for the nine months
ended October 31, 1999 to $5,301,055 for the nine months ended October 31, 2000.
Included in this amount is commissions paid to the Company's brokers which
increased $705,279 from $2,139,351 for the nine months ended October 31, 1999 to
$2,844,630 for the nine months ended October 31, 2000 as a result of the
increased commission revenue. However, because the majority of the Company's
commission revenue growth is attributable to its internet and other
non-commissioned accounts, commissions paid to the Company's brokers as a
percentage of commission revenue has been decreasing and should continue to do
so. Also included in this amount are commissions paid to the Company's traders
which decreased by $366,810 to $124,446 for the nine months ended October 31,
2000 due to the decrease in investment gains. In addition, the Company has
employed various customer support, back office and management staff to support
the current growth. The percentage of employee compensation and related benefits
to revenue decreased from 49% for the nine months ended October 31, 1999 to 38%
for the nine months ended October 31, 2000.
Floor brokerage. Floor brokerage decreased from $41,806 for the nine
months ended October 31, 1999 to $12,649 for the nine months ended October 31,
2000.
10
<PAGE>
Clearing and Other Transaction Costs. Clearing and other transaction
costs represents the cost to execute and clear customer trades. These expenses
increased $1,445,592, or 79%, from $1,823,223 to $3,268,815 as a result of the
increase in our volume of transactions, the acquisition of clients from Newport
Discount Brokerage, Inc. ("Newport") and the cost of maintaining third party
clearing agreements. However, as a percentage of commission revenue for the nine
months ended October 31, 2000, clearing costs decreased to 27% as compared to
30% for the nine months ended October 31, 1999 due to improved clearing rates
and a classification change of certain market data expenses to other expenses.
This was slightly offset by third party clearing costs.
Communications. Communication costs increased $128,775 or 120% from
$107,599 for the nine months ended October 31, 1999 to $236,374 for the nine
months ended October 31, 2000. This increase is primarily due to increased
customer trading activity.
Occupancy and Equipment. Occupancy and equipment expenses consist
primarily of facilities rent and leasing and depreciation of fixed assets.
Occupancy and equipment expenses increased $160,086 or 74%, from $216,350 for
the nine months ended October 31, 1999 to $376,436 for the nine months ended
October 31, 2000. This increase is the primary result of increased rent for
additional space and depreciation and leasing costs on equipment and other fixed
assets necessary to accommodate our growth.
Promotional Costs. Promotional costs consist of advertising and public
relations. Promotional costs totaled $37,155 for the nine months ended October
31, 2000 compared to $56,517 for the nine months ended October 31, 1999.
Product Development. Product development costs represent the cost to
develop our new order execution system. These costs totaled $514,027 for the
nine months ended October 31, 2000. There were no product development costs for
the nine months ended October 31, 1999.
Interest Expense. Interest expense increased $15,625 from $19,605 for
the nine months ended October 31, 1999 to $35,230 for the nine months ended
October 31, 2000. This increase is primarily due to interest paid on a capital
lease.
Regulatory Fees and Expenses. Regulatory fees and expenses represent
the fees paid to regulatory organizations such as the National Association of
Securities Dealers, Inc. (NASD) and state regulatory agencies for licensing the
Company and its registered agents. These costs increased $37,279 or 116%, from
$32,129 for the nine months ended October 31, 1999 to $69,408 for the nine
months ended October 31, 2000. This increase is primarily due to increased
assessment fees to the NASD based upon the Company's increase in gross revenues
and licensing fees for additional registered employees necessary to accommodate
our anticipated growth.
Amortization Expense. Amortization expense increased $400,600 from
$4,949 for the nine months ended October 31, 1999 to $405,549 for the nine
months ended October 31, 2000. The increase is due to the amortization of
intangible assets related to the acquisition of clients from Newport.
11
<PAGE>
Other operating expenses. Other operating expenses consist primarily of
Market Data expenses, general office expenses and all other expenses related to
the operation of the Company. These expenses increased by $825,506 from $212,709
for the nine months ended October 31, 1999 to $1,038,215 for the nine months
ended October 31, 2000. This increase is primarily due to our continued rapid
expansion, the Newport acquisition and a classification change of certain market
data expenses from the clearing and other transaction costs category.
Income Taxes. The Company recorded a provision for income taxes of
$969,852 for the nine months ended October 31, 2000 as compared to $556,387 for
the nine months ended October 31, 1999. The effective tax rate was 38.6% for the
nine months ended October 31, 2000 and 37.6% for the nine months ended October
31, 1999.
NON-OPERATING ITEMS
Loss on disposal of assets. The Company sold phone equipment, which
resulted in a loss of $685 for the nine months ended October 31, 2000.
Settlement payment received. The Company received an arbitration
settlement payment of $175,000 in July 1999.
As a result of the above, results improved from net income of $922,977
for the nine months ended October 31, 1999 to net income of $1,541,885 for the
nine months ended October 31, 2000. This represents an increase of 67%.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2000, the Company had cash and cash equivalents of
$16,950,645, consisting of cash and money market funds as compared to
$15,127,790 as of January 31, 2000.
Cash provided by operating activities was $2,190,317 and $1,363,426 for
the nine months ended October 31, 2000 and 1999, respectively.
Cash used in investing activities was $303,045 and $139,394 for the
nine months ended October 31, 2000 and 1999, respectively. The primary use of
cash for the nine months ended October 31, 2000 and 1999 was for the purchase of
property and equipment .
Cash used in financing activities was $64,417 for the nine months ended
October 31, 2000 due to repayment of a capital lease obligation. Cash provided
by financing activities was $15,355,991 for the nine months ended October 31,
1999 due to the issuance of common stock, redemption of preferred stock and
repayment of subordinated loan.
As a result, the Company had an increase in cash and cash equivalents
of $1,822,855 for the nine months ended October 31, 2000 compared to an increase
of $16,580,023 for the nine months ended October 31, 1999.
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The Company is subject to the Securities and Exchange Commission
uniform net capital rule, which requires the maintenance of minimal net capital
as defined. As of October 31, 2000, the Company had net capital of $14,745,197,
which was $14,495,197 in excess of the minimum required. In addition, the
Company's aggregate indebtedness may not exceed 15 times its net capital (i.e.,
its net capital ratio). As of October 31, 2000, the Company had a net capital
ratio of .17 to 1. The Company remains well within the regulatory required
minimums.
On May 11, 2000, National Association of Securities Dealers, Inc.
(NASD) granted a change in business application, which enables the Company to
expand its scope and conduct a commission recapture business. The expanded
business increases the Company's minimum net capital requirement to $250,000 or
1/15 of aggregate indebtedness, whichever is greater. The Company remains well
within these regulatory required minimums and does not anticipate having any
problems meeting these requirements in the future.
The Company currently anticipates that its available cash resources,
including the net proceeds from the Initial Public Offering ("IPO") which was
effective on June 11, 1999, and cash flows from operations will be sufficient to
meet its working capital and anticipated capital expenditure requirements for at
least the next twelve months. However, the Company may need to raise additional
funds in order to support more rapid expansion, develop new or enhanced services
and products, respond to competitive pressures, acquire complementary businesses
or technologies or take advantage of unanticipated opportunities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
FASB Statement No. 133." SFAS No. 137 defers for one year the effective date of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 will now apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet as either assets or liabilities measured at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 effective for the year
ending January 31, 2002. The Company believes that the adoption of SFAS No. 133
will not have a material impact on its financial statements, as it has entered
into no derivative contracts and has no current plans to do so in the future.
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" ("EITF
Issue No. 00-2"), which applies to all web site development costs incurred for
the quarters beginning after June 30, 2000. The consensus states that the
accounting for specific web site development costs should be based on a model
consistent with AICPA Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Accordingly, certain
web site development costs that are currently expensed as incurred may be
capitalized and amortized. The adoption of EITF Issue No. 00-2 did not have a
material impact on the financial statements of the Company.
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FORWARD LOOKING INFORMATION
Statements contained in this report regarding the Company's future
operations, growth strategy, future performance and results and the anticipated
liquidity are forward looking and therefore are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected or suggested in the forward looking statements, including those
discussed on this report and in the Company's other filings with the SEC. In
addition, any forward looking information regarding the operations of the
Company will be affected by management's ability to: (1) complete its expansion
in a timely fashion, (2) manage and operate its facility as expanded, (3)
increase its marketing and sales efforts, (4) maintain its existing customers,
and (5) close its merger transaction with Omega Research, Inc. There can be no
assurance that the Company will be successful in completing its proposed
expansion or pending merger, or, if completed, that it will be successful in
efficiently managing its growth in order to maximize potential transaction
volume.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 11, 2000, Robert A. Whigham, Jr. and Patricia F. Whigham
filed a civil action against onlinetradinginc.com corp., Barry Goodman, Jan
Bevivino, William L. Mark and Bear Stearns Securities Corp. Our attorneys moved
the case to the United States District Court for the District of Massachusetts,
Eastern Division and on May 5, 2000 the United States District Court granted our
motion to compel arbitration and subsequently entered a procedural order
dismissing the Whighams' civil action without prejudice. On September 9, 2000,
the Company received notification from NASD Dispute Resolution, Inc. that the
Whighams had filed a statement of claim and initiated arbitration against all
parties named in the former civil action.
The Whighams have alleged that, during the period from January 1999
through August 1999, their accounts were serviced by an unregistered person,
Barry Goodman, in violation of Massachusetts General Laws c.110A and that the
Company aided and abetted Mr. Goodman in violation of c.110A. The Whighams have
also made allegations of excessive trading, excessive commissions, negligent
supervision and fraud in violation of 18 U.S.C. ss.1962. The Whighams seek total
alleged damages of $561,000 plus interest, costs, fees and treble damages. The
Company intends to present a vigorous defense and to seek reimbursement for
certain costs associated with the Company's defense. The Company believes the
allegations to be without merit; however, there can be no assurance that the
Company's defense of this claim will be successful.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 11, 1999, the U.S. Securities and Exchange Commission declared
effective the Company's Registration Statement on Form SB-2 (SEC File Number
333-75119). The IPO was completed after the sale of 2,250,000 shares of the
Company's common stock for $7.00 per share. The managing underwriter,
Werbel-Roth Securities, Inc., also exercised the 15% over-allotment option on
July 1, 1999 and sold an additional 337,500 shares.
The Company incurred expenses of $2,491,476 in connection with the IPO
and over-allotment. These expenses represented direct payments to others and not
direct or indirect payments to directors or officers of the Company or to
persons owning more than 10% of any class of securities of the Company. Net
proceeds from the IPO, including the over-allotment and the net concession and
management fee were $15,810,891. These proceeds are being used for: sales &
marketing, website enhancement and programming, potential acquisitions,
increasing the Company's net capital, hiring additional management and
personnel, branch office expansion, expansion of client service department,
network expansion and upgrades, and Year 2000 readiness and testing.
From the effective date of the IPO through the date hereof, the Company
has utilized a portion of the proceedings as follows:
Sales & Marketing $ 70,000
Website Enhancement & Programming 860,000
Increase Net Capital 1,500,000
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Additional Management & Personnel 475,000
Expansion Client Services 100,000
Network Expansion & Upgrade 160,000
Year 2000 Readiness and Testing 25,000
Working Capital 120,000
Acquisition & Non-compete Agreements 2,682,000
---------
Total use of proceeds to date $5,992,000
==========
The balance of the net proceeds has been invested in money market
funds. No payments from the use of proceeds were made to officers, directors, or
persons owning more than 10% of any class of securities of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Per Share Earnings (see Note 5 of notes to
financial statements.)
Exhibit 27 - Financial Data Schedule
(b) Form 8-K filing during the quarter ended October 31, 2000.
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
onlinetradinginc.com corp.
December 14, 2000 By:
------------------------ ------------------------------------------------
Date E. Steven zum Tobel, President and Chief
Financial Officer (Signing both in his capacity
as an authorized officer and as Principal
Financial and Accounting Officer of the
Registrant)
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