UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended January 31, 2000
[ ] TRANSITION REPORT UNDER 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.
(Name of small business issuer 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
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended January 31, 2000 were
$11,690,840.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant on April 4, 2000 (computed by reference
to the closing market price of such stock on such date) was approximately
$15,686,719.
The number of shares of common stock, par value $0.01 per share,
outstanding as of April 4, 2000 was 11,476,388 shares.
Documents Incorporated by Reference
None
Transitional Small Business Disclosure Format (check one):
Yes ____ No __X__
FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING AND ARE MADE PURSUANT
TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. WHEN USED IN THIS REPORT, THE WORDS "BELIEVES," "PLANS,"
"ESTIMATES," "EXPECTS," "INTENDS," "ANTICIPATES," "MAY," "WILL," "SHOULD,"
"COULD," "UPCOMING" AND SIMILAR EXPRESSIONS, TO THE EXTENT USED, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS ARE BASED
LARGELY ON CURRENT EXPECTATIONS AND BELIEFS CONCERNING FUTURE EVENTS THAT ARE
SUBJECT TO SUBSTANTIAL RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS SUGGESTED HEREIN. FACTORS THAT MAY CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S
ABILITY TO DEVELOP AND SUCCESSFULLY MARKET THE PRODUCTS AND SERVICES DESCRIBED
IN THIS REPORT (AND THE COSTS ASSOCIATED THEREWITH); THEIR ACCEPTANCE IN THE
MARKETPLACE; TECHNICAL DIFFICULTIES OR ERRORS IN THE PRODUCTS AND/OR SERVICES;
MARKET PRESSURE TO LOWER SUBSTANTIALLY COMMISSIONS ON THE EQUITY TRADES
DESCRIBED AS A RESULT OF SUCH SERVICES BEING PROVIDED AT LOW OR NO ADDITIONAL
COSTS BY BROKERAGES, FINANCIAL INSTITUTIONS AND OTHER FINANCIAL COMPANIES TO
THEIR CUSTOMERS, OR FOR OTHER MARKET REASONS; THE COMPANY'S CUSTOMER AND ACTIVE
PROSPECT BASE CONTAINING A SUBSTANTIALLY LOWER NUMBER OF INTERESTED CUSTOMERS
THAN THE COMPANY ANTICIPATES; THE FAILURE TO CONSUMMATE THE PENDING MERGER WITH
OMEGA RESEARCH, INC. ("OMEGA RESEARCH") AT ALL (OR ON A TIMELY BASIS) DUE TO
REGULATORY ISSUES OR OTHER REASONS; DIFFICULTY INTEGRATING THE TWO COMPANIES
FROM TECHNOLOGY, OPERATIONAL AND MARKETING ASPECTS; POTENTIAL NASD OR OTHER
BROKER-DEALER REGULATORY ISSUES ARISING FROM THE MERGER AND/OR THE CONDUCT OF A
BROKERAGE BUSINESS; THE SUCCESS (AND COST) OF NEW MARKETING STRATEGIES AS A
RESULT OF THE MERGER; UNFAVORABLE CRITICAL REVIEWS; INCREASED COMPETITION
(INCLUDING PRODUCT AND PRICE COMPETITION); THE LEVEL OF MARKET DEMAND FOR
REAL-TIME DECISION SUPPORT TOOLS, REAL-TIME DATA AND/OR ON-LINE BROKERAGE
SERVICES AND/OR WEBSITE SERVICES GENERALLY; THE SCALABILITY, PERFORMANCE
FAILURES AND RELIABILITY OF OMEGA RESEARCH'S REAL-TIME DATA SERVICES; THE
ENTRANCE OF NEW COMPETITORS INTO THE MARKET; TIMING AND SIGNIFICANCE OF
ADDITIONAL NEW PRODUCT AND SERVICE INTRODUCTIONS BY THE COMPANY AND ITS
COMPETITORS; GENERAL ECONOMIC AND MARKET FACTORS, INCLUDING CHANGES IN
SECURITIES AND FINANCIAL MARKETS; THE ADEQUACY OF WORKING CAPITAL, CASH FLOWS
AND AVAILABLE FINANCING TO FUND THE NEW BUSINESS MODEL WITH OMEGA RESEARCH; AND
OTHER RISKS AND UNCERTAINTIES INDICATED THROUGHOUT THIS REPORT AND FROM TIME
TO TIME IN THE COMPANY'S RELEASES AND FILINGS INCLUDING WITHOUT LIMITATION
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
As used in this report, the terms "we," "us," "our," the "Company" and
"OnlineTrading.com" mean onlinetradinginc.com corp. and the term "common stock"
means onlinetradinginc.com corp.'s common stock, $.01 par value per share
(unless context indicates a different meaning).
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
We provide financial brokerage services primarily to experienced
investors and small to mid-sized financial institutions through a variety of
communication mediums, including the Internet. Unlike our name suggests, we are
not merely an online financial brokerage firm which allows clients to
trade directly over the Internet. We provide a full range of brokerage services
including access to the various securities markets via our computerized
infrastructure. This enhances our ability to obtain the simplest, most direct
execution of orders for our clients at the best possible price. In addition, as
a result of the technology we use, our registered representatives and clients
have access to the most up-to-date electronic information on stocks, market
indices, analysts' research and news. Our manner of executing trades using our
computerized infrastructure eliminates middlemen (like traditional market makers
and other broker-dealers) to save costs and increase investing efficiency. We
believe we have a strategic advantage over existing discount, deep discount, and
Internet brokerage firms as a result of our commitment to provide the best
stock execution prices to our clients and our combination of information
and research tools.
Given our pending merger with Omega Research, Inc., as discussed below,
we expect to increase our online brokerage services.
We were incorporated in Florida in September 1995 as Online Trading,
Inc. In February 1999, we changed our name from Online Trading Inc. to
onlinetradinginc.com corp. In June 1999, we acquired the world wide web domain
name www.onlinetrading.com and subsequently registered to do business under the
fictitious name OnlineTrading.com.
On June 11, 1999, we successfully completed our initial public offering
(the "IPO") by issuing 2,587,500 shares of common stock public offering price of
$7.00 per share with net proceeds to the Company of approximately $15,810,891.
On December 6, 1999, we completed the purchase of the principal assets
of Newport Discount Brokerage, Inc. ("Newport"), a National Association of
Securities Dealers, ("NASD") registered broker-dealer. The purchase added over
7,700 clients to our existing client base, along with approximately $470 million
in client assets. The transaction also included the employment of Newport's
current staff.
On January 19, 2000, we entered into a merger agreement (the "Merger
Agreement") with Omega Research, Inc. ("Omega Research"). Founded in 1982, Omega
Research is a leading provider of real-time trading strategy tools for investors
and traders ("traders"). In October 1999, Omega Research acquired
Window On WallStreet Inc. ("WindowOnWallStreet"). WindowOnWallStreet offers
traders trading strategy tools as well as streaming real-time charts, quotes and
news. The strategic combination of these companies is expected to create a
seamlessly-integrated trading platform that should deliver an Internet-based
solution to the active trader that includes powerful trading strategy tools,
streaming real-time market quotes and news, and high-speed electronic order
execution.
Pursuant to the Merger Agreement, a newly-formed holding company named
OnlineTrading.com Group, Inc. ("OnlineTrading.com Group") will own 100% of the
issued and outstanding capital stock of Omega Research and OnlineTrading.com.
Upon completion of the merger, as a result of share exchanges between
OnlineTrading.com Group and each of Omega Research and OnlineTrading.com, and
the listing of OnlineTrading.com Group shares, OnlineTrading.com Group will be
the sole publicly-traded company in the group, with its outstanding shares of
common stock listed on The Nasdaq National Market. OnlineTrading.com Group,
based upon the exchange ratio set forth in the Merger Agreement, would initially
be owned between 62% and approximately 57% (on a fully diluted basis) by Omega
Research's shareholders and between 38% and approximately 43% (on a fully
diluted basis) by OnlineTrading.com's shareholders. The precise percentages will
be determined by the formulae set forth in the Merger Agreement. The initial
eight-member Board of Directors of OnlineTrading.com Group would consist of five
directors designated by Omega Research (two of whom would be independent
directors), and three directors designated by OnlineTrading.com (one of whom
would be an independent director). Closing of the Merger Agreement is
conditioned upon and subject to the filing and effectiveness of a registration
statement on Form S-4, the approval of the shareholders of each of Omega
Research and OnlineTrading.com, and the satisfaction of other conditions
precedent.
OUR INDUSTRY
The Securities Industry Association ("SIA") reported that, as of early
1999, over 48% of all U.S. households owned equities or stock mutual funds.
According to Robertson Stephens, both the New York Stock Exchange, ("NYSE") and
National Association of Securities Dealers Automated Quotation System,
("Nasdaq") experienced record increases in transaction volumes during 1999.
Transaction volume on the NYSE was 209 billion shares, representing a 24%
increase over 1998 volume of 169 billion shares. Likewise, transaction volume on
Nasdaq increased 37% to 271 billion shares in 1999 up from 198 billion shares in
1998.
The SIA report also indicated that the online brokerage segment of the
industry experienced record growth within the past three years and that growth
of the online brokerage segment is expected to continue. In the year 2000, the
percentage of investors who trade online is projected to grow from 11% to 28%.
According to the SIA, by 2003 online brokerage accounts are projected to make up
approximately 50 percent of total brokerage accounts representing an increase in
customer assets from $111 billion to $3.1 trillion.
OUR BUSINESS
General Financial Brokerage Services.
We provide financial brokerage services to individuals and small to
mid-sized institutions (such as hedge funds, money managers, mutual funds and
pension funds). To support the investment services provided to these investors,
we effect transactions in equity securities strictly on an agency basis. This
means that we always charge only an agreed upon commission and never earn income
from marking up or marking down our clients' equity transactions. Our customer
accounts are carried on a "fully disclosed" basis by our clearing firms. Our
clearing agreements provide that our clients' securities positions and credit
balances carry insurance that is supplemental to standard SIPC protection.
We take great pride in the fact that we execute our clients' equity
transactions on an agency basis only--as opposed to a principal basis. That is,
we act as the agent for our clients directly in the market. When brokerage firms
perform a transaction on a principal basis, they are permitted to accept a
client's order to purchase, immediately purchase the securities in the market
for the firm, and then sell the securities to the client with a mark-up. We do
not mark-up our clients' equity transactions.
We also do not allow other brokerage firms to mark-up our clients'
equity transactions. We provide our non-internet clients with access to the
financial markets via our professionally staffed trading desks. Our trading
desks are directly connected to the national stock exchanges and electronic
communication networks ("ECNs"). ECNs, such as Archipelago, Island and NexTrade,
eliminate the brokerage industry "middlemen" by directly matching anonymous
buyers and sellers participating on the network. Our registered representatives
are committed to using our trading desks to obtain the fastest execution and
best possible price at the time the clients' orders are taken. In addition, as a
result of the technology we use, we can access the most up-to-date electronic
news information and research reports.
Internet-Based Brokerage Services
Through our Internet site, our clients currently have online access to
their account information and our order execution systems. This electronic
access enables our clients to review the securities positions in their
portfolio, review their recent trading activity, obtain stock quotes, confirm
their buying power and/or margin balances (if applicable) and enter orders for
execution. In addition to providing information for their particular accounts,
we provide our clients with pertinent market information regarding timely
analysts' reports, relevant earnings reports sorted by those companies that
exceeded earnings expectations and those that fell below expected earnings. We
also provide our clients with information about the overnight markets and the
futures markets, stocks that are trading before the market opens, and major
company news through the Internet.
We use the Internet in various ways to help expand our business. First,
we use the Internet to help our registered representatives serve our clients
better through the dissemination of information to clients simultaneously. This
allows our registered representatives to efficiently serve more clients. In
addition, we use the Internet to serve an ever-growing number of investors who
want to implement their trading and investment decisions without calling a
registered representative.
We currently provide two systems for trading and investing over the
Internet. The "basic" Internet system is a "browser-based" program maintained by
one of our clearing firms. This system provides the client with basic
transaction functions and account information and is primarily used by our less
active and less experienced traders.
Our "advanced" Internet system is known as O.R.D.E.R.S.(TM)
O.R.D.E.R.S. is a sophisticated information, execution and routing program that
provides clients with real-time NASDAQ Level II quotes and the ability to direct
OTC orders to a particular ECN. At this time, clients requesting the
O.R.D.E.R.S. system must meet minimum suitability requirements of experience and
financial condition.
Proprietary Trading
We operate a small proprietary trading department separate and distinct
from all customer commission business. This department operates as a profit
center under strict internal controls. Pursuant to an internal policy, the
department trades only equity securities, equity options and index equities on
both a long and short basis, with no one position constituting greater than 40%
of our funds allocated for proprietary trading. The intra-day position limit
guideline is 15,000 shares for an individual position and 40,000 shares in the
aggregate. The intra-day dollar limit guideline is $750,000.00 for an individual
position and $2,500,000.00 in the aggregate. The overnight position limit
guideline is 10,000 shares for an individual position and 30,000 shares in the
aggregate. The overnight dollar limit guideline is $500,000.00 for an individual
position and $1,500,000.00 in the aggregate.
We charge the proprietary trading desk commission rates above our
costs, and we pay the department a percentage of the trading profits generated.
We never fill clients' orders from the firm's inventories. Our long inventory
positions represent our ownership of securities. Conversely, our short inventory
positions represent obligations to deliver specified securities at the current
market price. Accordingly, both long and short inventory positions may result in
losses or gains as market values of securities fluctuate. To reduce the risk of
losses, long and short positions are revalued to the current market price each
day and are continuously monitored by one of our registered principals.
Our Business Strategy
We believe that we have been successful in creating a new level of
service in the brokerage industry. We use technology to provide experienced
clients access, through our professionally staffed trading desk and the
Internet, to an execution system directly connected to the financial markets.
Our strategy is designed to provide our clients with the best possible execution
price and access to relevant market information. As a result, our strategy
allows us to take advantage of opportunities that exist in the financial
brokerage industry for firms that are able to provide their clients with the
overall cost-savings created by (1) access to professional-type trade
executions, (2) access to up-to-date market information, and (3) the convenience
of trading over the Internet. OnlineTrading.com was founded on the principal
philosophy of providing our clients with the best execution prices along with
the most relevant market information and investment research. We consistently
analyze new technologies and communication mediums that will enable us to better
serve our clients. We are committed to offer our clients the simplest, most
direct form of stock trading.
Our goal is to become a leader in the financial brokerage industry. We
intend to achieve our goal by:
- targeting experienced traders and small to mid-sized financial
institutions who typically (1) execute more trades per year than other
categories of investors, (2) require access to market information, and (3)
require fast execution of their orders;
- providing value to our clients at the lowest overall cost, including
access to our trading desk which enables them to realize the best available
execution price;
- providing our clients with value-added services, including access
to registered representatives and up-to-date market
information; and
- providing technologically innovative solutions to satisfy client needs,
including efficient trading directly over the Internet, access to trading
strategy tools and real-time market information.
We are actively pursuing additional technologies to service the rapidly
evolving financial services industry. Specifically, our planned merger with
Omega Research will expand our ability to provide technology which will enable
our clients to trade equity securities more efficiently and systematically via
the Internet. We are also exploring other solutions to improve our products and
services to satisfy the needs of our clients.
The decision to merge with Omega Research was based on a number of
factors that we feel will benefit our existing clients and greatly enhance our
ability to attract new clients. After the merger is completed, we expect to
offer preferred access to Omega Research's powerful trading strategy tools and
real-time market data services.
Omega Research's products automate trading strategies developed by the
user and generate "buy" and "sell" signals based upon user-developed strategies.
In addition, the programs allow users to historically test and refine their
strategies. Omega Research also delivers real-time market data via the Internet.
Omega Research has recently launched WindowOnWallStreet.com, an Internet-based,
monthly subscription service that delivers streaming real-time charts, quotes
and news. Omega Research is currently developing TradeStation.com, an
Internet-based analytics platform that will combine streaming real-time charts,
quotes and news with the premium trading strategy tools of Omega Research's
TradeStation. TradeStation.com is expected to be integrated with our electronic
order-execution services.
STRATEGIC RELATIONSHIPS
We currently utilize the services of several clearing firms for all
custody and clearing issues associated with brokerage transactions. We realize
the following benefits from these relationships:
- quality safekeeping and protection on the net equity (cash and
securities) on all accounts;
- elimination of significant self-clearing regulatory requirements and the
associated overhead costs;
- ability to participate in initial public offerings and other investment
banking transactions; and
- ability to participate in a large database of no-load mutual funds.
Our relationship with Instinet Corporation affords us access to
information and enables our clients to trade directly and anonymously with other
brokerage firms, money managers, professional traders and large financial
institutions. Through our relationship with Instinet Corporation our clients are
also able to trade equities before the market opens at 9:30 a.m. and after the
market closes at 4:00 p.m. As a result, our clients are able to take advantage
of trading and investment opportunities occurring outside of the traditional
market hours.
In addition to our relationship with Instinet Corporation, we have
relationships with several other ECNs, including Archipelago, Island and
NexTrade. These relationships allow us to provide our clients with direct access
to multiple avenues of execution.
COMPETITION
The market for discount brokerage services, and particularly electronic
brokerage services, is rapidly evolving, intensely competitive and has few
barriers to entry. We expect competition to continue and intensify in the
future. We encounter direct competition from numerous other brokerage firms,
many of which provide electronic brokerage services which we currently do not
provide. These competitors include discount brokerage firms like Charles Schwab
& Co., Inc. and Quick & Reilly, Inc., as well as electronic brokerage firms such
as E*Trade Group, Inc., Ameritrade, CyperCorp., TradeScape, and ABWatley. We
also encounter competition from established full-commission brokerage firms as
well as financial institutions, mutual fund sponsors and other organizations,
some of which provide electronic brokerage services.
We believe that the principal competitive factors affecting the market
for our brokerage services are speed and accuracy of order execution, price and
reliability of trading systems, quality of client service, amount and timeliness
of information provided, ease of use, and ability to provide clients with
innovative products and services. Due to our trading systems and our decision to
merge with Omega Research, we believe that we should be able to compete
effectively with respect to each of these factors, as related to active trader
accounts.
However, a number of our competitors have significantly greater
financial, technical, marketing and other resources. Some of our competitors
also offer a wider range of services and financial products and have greater
name recognition and more extensive client bases. These competitors may be able
to respond more quickly to new or changing opportunities, technologies, and
client requirements, and may be able to undertake more extensive promotional
activities, offer more attractive terms to clients, and adopt more aggressive
pricing policies. Moreover, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties or may consolidate to enhance their services and products. We expect
that new competitors will emerge and may acquire significant market share.
There can be no assurance that we will be able to compete effectively
with current or future competitors or that the competitive pressures we face
will not harm our business.
GOVERNMENT REGULATION
Broker-Dealer Regulation
The securities industry is subject to extensive regulation under
federal and state law. The Securities Exchange Commission ("SEC") is the federal
agency responsible for administering the federal securities laws. In general,
broker-dealers are required to register with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). We are a broker-dealer
registered with the SEC. Under the Exchange Act, every registered broker-dealer
that does business with the public is required to be a member of and is subject
to the rules of the NASD. The NASD has established Conduct Rules for all
securities transactions among broker-dealers and private investors, trading
rules for the over-the-counter markets, and operational rules for its member
firms. The NASD conducts examinations of member firms, investigates possible
violations of the federal securities laws and its own rules, and conducts
disciplinary proceedings involving member firms and associated individuals. The
NASD administers qualification testing for all securities principals and
registered representatives for its own account and on behalf of the state
securities authorities.
In addition to the traditional rules outlined above, additional
regulations, more specifically related to online brokerage firms, may be
implemented in the future. A recent report by SEC Commissioner Laura S. Unger
made certain recommendations to the SEC relating to issues of suitability, best
execution, market data, systems capacity, investor education, chat rooms,
privacy and portals.
We are also subject to regulation under state law. We are currently
registered as a broker-dealer in every state and in the District of Columbia. An
amendment to the federal securities laws prohibits the states from imposing
substantive requirements on broker-dealers which exceed those imposed under
federal law. The recent amendment, however, does not preclude the states from
imposing registration requirements on broker-dealers that operate within their
jurisdiction or from sanctioning these broker-dealers for engaging in
misconduct.
Net Capital Requirements; Liquidity
As a registered broker-dealer and member of the NASD, we are subject to
the Net Capital Rule. The Net Capital Rule, which specifies minimum net capital
requirements for registered broker-dealers, is designed to measure the general
financial integrity and liquidity of a broker-dealer and requires that at least
a minimum part of its assets be kept in relatively liquid form. In general, net
capital is defined as net worth (assets minus liabilities), plus qualifying
subordinated borrowings and certain discretionary liabilities, and less certain
mandatory deductions that result from excluding assets that are not readily
convertible into cash and from valuing conservatively certain other assets.
Among these deductions are adjustments (called "haircuts"), which reflect the
possibility of a decline in the market value of an asset prior to disposition.
Failure to maintain the required net capital may subject a firm to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies and ultimately could require the firm's
liquidation. The Net Capital Rule prohibits payments of dividends, redemption of
stock, the prepayment of subordinated indebtedness and the making of any
unsecured advance or loan to a shareholder, employee or affiliate, if the
payment would reduce the firm's net capital below a certain level.
The Net Capital Rule also provides that the SEC may restrict for up to
20 business days any withdrawal of equity capital, or unsecured loans or
advances to shareholders, employees or affiliates ("capital withdrawal") if the
capital withdrawal, together with all other net capital withdrawals during a
30-day period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer. In addition, the Net Capital Rule provides that the total
outstanding principal amount of a broker-dealer's indebtedness under certain
subordination agreements, the proceeds of which are included in its net capital,
may not exceed 70% of the sum of the outstanding principal amount of all
subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those of our operations
that require the intensive use of capital, such as the financing of client
account balances, and also could restrict our ability to pay dividends, repay
debt and repurchase shares of our outstanding stock. A significant operating
loss or any unusually large charge against net capital could adversely affect
our ability to expand or even maintain our present levels of business, which
could harm our business.
We are a member of SIPC. SIPC provides protection of up to $500,000 for
each client, subject to a limitation of $100,000 for cash balances, in the event
of the financial failure of a broker-dealer. Our clients' accounts are carried
on the books and records of our clearing firms. Our clearing firms have obtained
insurance for the benefit of our clients' accounts that is supplemental to SIPC
protection.
Additional Regulation
Due to the increasing popularity and use of the Internet and other
online services, various regulatory authorities are considering laws and/or
regulations with respect to the Internet or other online services covering
issues such as user privacy, pricing, content copyrights and quality of
services. In addition, the growth and development of the market for online
commerce may prompt more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. Moreover, the
recent increase in the number of complaints by online traders could lead to more
stringent regulations of online trading firms and their practices by the SEC,
NASD and other regulatory agencies. Furthermore, the applicability to the
Internet and other online services of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes and personal
privacy is uncertain and may take years to resolve. Also, as our services are
available over the Internet in multiple states and foreign countries, and as we
have numerous clients residing in these states and foreign countries, these
jurisdictions may claim that our company is required to qualify to do business
as a foreign corporation in each such state and foreign country. While our
company is currently registered as a broker-dealer in every state, we are
qualified to do business as a foreign corporation in only a few states; failure
by our company to qualify as a broker-dealer in other jurisdictions or as an
out-of-state or "foreign" corporation in a jurisdiction where it is required to
do so could subject our company to taxes and penalties for the failure to
qualify. Our business could be harmed by new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business or the applications of existing laws and
regulations to the Internet and other online services.
EMPLOYEES
As of January 31, 2000, we employed a total of 68 full-time employees,
of which 6 are engaged in executive management, 32 in trading activities, 9 in
client services/back office, 9 in office personnel, and 12 in information
technology. The employees are operating from the following branch locations:
Boca Raton, FL
Boston, MA
Osterville, MA
Pittsburgh, PA
Hudson, OH
No employee is covered by a collective bargaining agreement or is
represented by a labor union. We consider our employee relations to be
excellent. We also have entered into independent contractor arrangements with
other individuals on an as-needed basis to assist with programming and
developing proprietary technologies.
ITEM 2 - DESCRIPTION OF PROPERTY
Our principal executive offices are located in an approximately 11,800
square foot facility in Boca Raton, Florida. This facility is occupied pursuant
to a lease expiring February 28, 2007 at a current annual rent of approximately
$164,000 plus escalations. We also lease approximately 1,200 square feet of
office space for our branch office in Osterville, Massachusetts. This space is
occupied pursuant to a lease expiring on November 30, 2003, at an annual rent of
$24,000, with an option to renew for an additional five-year term. We
lease approximately 1,300 square feet of office space for our branch office in
Pittsburgh, Pennsylvania. This space is occupied pursuant to a month-to-month
lease at a monthly rent of $1,783. We lease approximately 750 square feet of
office space for our branch office in Hudson, Ohio. This office is occupied
pursuant to a month-to-month lease at a monthly rent of $500.
We have a branch office in Boston, Massachusetts; however, we are not a
party to any lease agreement. The registered representatives established in that
office have entered into the lease agreements and are responsible for the lease
obligations.
The existence of these branch offices, and the manner in which they are
set up, are helpful in the event of certain system failures (e.g., natural
disasters, power failures, etc.). In the event that an office experiences such a
system failure, one or more of our other offices could continue to service
clients through its facilities. By way of example and not limitation, our phone
system has the ability to re-route calls to different locations in the event the
phone system for one location were to fail. To date, our existing facilities
have proven adequate to support our operations. However, if needed, we believe
that we could obtain suitable additional facilities on commercially
reasonable terms.
ITEM 3 - 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, where the matter is currently pending.
We believe the case to be without merit. The Whighams' lawsuit alleges
excessive trading and commissions, violation of Massachusetts General Laws c.93A
ss. and c.110A ss.ss.101 and 102 and violation of NASD conduct rules. The
Whigham's seek total alleged damages of $566,345 plus interest, costs, fees and
treble damages. We intend to present a vigorous defense and to seek
reimbursement for certain costs associated with our defense.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended January 31, 2000.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The common stock, has been quoted under the symbol "LINE" on The Nasdaq
SmallCap Market since completion of the IPO in June 1999.
The high and low closing sales prices based on actual transactions for
the Company's Common Stock on the Nasdaq SmallCap Market during each of
the quarters presented are as follows:
Closing Sales Price
-----------------------------------------
High Low
------------------ ------------------
1999:
Second Quarter 16 15/16 8
(commencing June 11,
1999)
Third Quarter 14 1/2 7 7/16
Fourth Quarter 12 5/8 7 3/4
2000:
First Quarter
(through April 4) 10 1/8 6 1/16
(b) As of March 27, 2000, there were 79 holders of record of the Common
Stock based on information provided by our transfer agent. The number
of stockholders does not reflect the actual number of individual or
institutional stockholders that hold our stock because certain stock is
held in the name of nominees. Based on the best information available
to us by the transfer agent, there are approximately 1,813 beneficial
holders of the Company's Common Stock.
(c) The Company has not declared or paid cash dividends on our Common
Stock. We currently intend to retain future earnings, if any, for use
in our business and do not anticipate paying any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon a number of
factors, including future earnings, the success of our business
activities, capital requirements, the general financial condition and
future prospects of our business, general business conditions and such
other factors as the Board of Directors may deem relevant.
USE OF PROCEEDS
We completed our IPO by issuing 2,587,500 shares of common stock
(including 337,500 shares to cover over-allotments), on June 11, 1999. The
shares of common stock were issued in a registered offering pursuant to a
Registration Statement on Form SB-2 (File No. 333-75119; effective date June 11,
1999).
From the effective date of the IPO through the date hereof, the Company
has utilized a portion of the $15,810,891 net proceeds as follows:
Sales & Marketing $ 50,000
Website Enhancement & Programming 349,000
Increase Net Capital 1,500,000
Additional Management & Personnel 60,000
Expansion Client Services 15,000
Network Expansion & Upgrade 10,000
Year 2000 Readiness and Testing 25,000
Working Capital 120,000
Acquisitions 2,000,000
----------------
Total use of proceeds to date $ 4,129,000
================
The balance of the net proceeds has been invested in short-term
commercial paper and 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-MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere herein.
OVERVIEW
We provide financial brokerage services primarily to experienced
investors and small to mid-sized financial institutions through a variety of
communication mediums, including the Internet. Unlike our name suggests, we are
not merely a real time online financial brokerage firm, which allows clients to
trade directly over the Internet. We provide a full range of brokerage services
including direct access to the various securities markets via our computerized
infrastructure. This enhances our ability to obtain the simplest, most direct
execution of orders for our clients at the best possible price. In addition, as
a result of the technology we use, our registered representatives and clients
have access to the most up-to-date electronic information on stocks, market
indices, analysts' research and news. Our manner of executing trades using our
computerized infrastructure eliminates middlemen (like traditional market makers
and other broker-dealers) to save costs and increase investing efficiency.
RECENT DEVELOPMENTS
On December 6, 1999, we completed the purchase of the principal assets
of Newport. The purchase added over 7,700 clients to our existing client base,
along with approximately $470 million in client assets. The transaction also
included the employment of Newport's current staff. The total consideration paid
by the Company in connection with this acquisition included cash of $2,682,000
and up to 125,000 shares of the Company's common stock. The cash consideration
is payable as follows: (i) $2,182,000 to Newport; (ii) $250,000 to Robert
Scarpetti, Newport's President and sole shareholder, in exchange for a 15 year
non-compete agreement and (iii) $250,000 to Raymond Chodkowski, a key Newport
employee, in exchange for a 15 year non-compete agreement. Issuance and delivery
of the common stock consideration is contingent upon the acquired assets
achieving certain revenue goals and maintaining customer accounts within one
year from closing. More specifically, the total shares deliverable under the
agreement shall be reduced by the greater of (i) the percentage that the gross
revenue from all Newport accounts acquired at closing is less than $3,000,000
over the first one-year period; or (ii) .0009 for each dollar of account
value lost due to the closing of Newport's Pennsylvania office over the first
one-year period.
On January 19, 2000, we entered into the Merger Agreement with Omega
Research. Pursuant to the Merger Agreement, a newly-formed holding company will
own 100% of the issued and outstanding capital stock of Omega Research and
OnlineTrading.com. Upon completion of the merger, as a result of share exchanges
between OnlineTrading.com Group and each of Omega Research and
OnlineTrading.com, and the listing of OnlineTrading.com Group shares,
OnlineTrading.com Group will be the sole publicly-traded company in the group,
with its outstanding shares of common stock listed on The Nasdaq National
Market. OnlineTrading.com Group, based upon the exchange ratio set forth in the
Merger Agreement, would initially be owned between 62% and approximately 57% (on
a fully diluted basis) by Omega Research's shareholders and between 38% and
approximately 43% (on a fully diluted basis) by OnlineTrading.com's
shareholders. The precise percentages will be determined by the formulae set
forth in the Merger Agreement. The initial eight-member Board of Directors of
OnlineTrading.com Group would consist of five directors designated by Omega
Research (two of whom would be independent directors), and three directors
designated by OnlineTrading.com (one of whom would be an independent director).
Closing of the Merger Agreement is conditioned upon and subject to the filing
and effectiveness of a registration statement on Form S-4, the approval of the
shareholders of each of Omega Research and OnlineTrading.com, and the
satisfaction of other conditions precedent.
YEAR ENDED JANUARY 31, 2000 COMPARED WITH YEAR ENDED JANUARY 31, 1999
REVENUE
Total Revenues. The Company's total revenues for the year ended January
31, 2000 ("Fiscal 2000") were $11,690,840 an increase of 95% from $5,992,064 for
the year ended January 31, 1999 ("Fiscal 1999").
Commission Revenue. Commission revenue increased by $3,946,008 or 71%
from $5,525,427 for Fiscal 1999 to $9,471,435 for Fiscal 2000. The increase was
the result of opening two new branch offices, the acquisition of the principal
assets of Newport and the increase in client base. During Fiscal 2000, the new
branch offices generated commission revenue of $891,425, while our other
branches increased commission revenues by $383,738 from Fiscal 1999. The
acquisition of the principal assets, consisting of the right, title and interest
in and to its clients of Newport, increased commission revenue by $459,455. The
balance of the increase was due to the expansion in our customer base from
approximately 750 accounts to 1,200 accounts.
Investment Gains (Losses). Our proprietary trading profits increased by
$800,998 to $1,129,493 for Fiscal 2000 as compared to a $328,495 for Fiscal
1999. The increase in trading profits was the result of several factors namely,
greater short term stock volatility, a better trading environment, record share
volumes adding to liquidity and better technology for order execution.
Interest and Dividends. Interest and dividend income increased by
$567,957, primarily as a result of the Company's increased cash position
available for investment and the prevailing interest rates.
Interest-Revenue Sharing. Interest-revenue sharing represents a revenue
sharing agreement with our clearing firm. Interest-revenue sharing increased by
$193,813 to $295,934 for Fiscal 2000 as compared to $102,121 for Fiscal 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.
Other Revenues. Other revenues increased by $190,000 primarily from
an arbitration settlement received by the Company in
July 1999.
EXPENSES
Total Operating Expenses. Total operating expenses increased by
70% from $5,832,041 for Fiscal 1999 to $9,908,110 for Fiscal 2000.
Employee Compensation and Benefits. Employee compensation and related
benefits increased by $1,983,477, or 59%, from $3,356,688 for Fiscal 1999 to
$5,340,165 for Fiscal 2000. Included in this amount is commissions paid to the
Company's brokers and traders which increased $2,426,884 from $1,144,616 for
Fiscal 1999 to $3,571,500 for Fiscal 2000 as a result of the increased
commission revenue. We anticipate this expense to continue to increase to the
extent, if any, we expand our business and customer base. In addition, the
Company has expanded its back office and customer support staff due to the
increased trading volume, acquired fifteen employees from Newport and has hired
additional executive staff including a general counsel, a chief financial
officer, a chief technical officer, and a director of internet sales. The
increase in broker commissions and compensation for new staff was offset
somewhat by a significant decline in officer compensation. In addition, the
percentage of employee compensation and related benefits to revenue decreased
from 56% for Fiscal 1999 to 46% for Fiscal 2000.
Clearing and Other Transaction Costs. Clearing and other transaction
costs represent the cost to execute and clear customer trades. These expenses
increased by $1,010,229, or 50%, from $2,002,055 for Fiscal 1999 to $3,012,284
for Fiscal 2000, primarily as a result of the increase in our volume of
transactions. However, these costs decreased from 36% of commission revenue for
Fiscal 1999 to 32% of commission revenue for Fiscal 2000 as a result of changes
in the charges to us by the clearing firm.
Occupancy and Administrative. Occupancy and administrative expenses
consist primarily of advertising, telephone and communication, rent, and
professional fees. Occupancy and administrative expenses increased $686,434 from
$406,814 for Fiscal 1999 to $1,093,248 for Fiscal 2000. This increase primarily
resulted from advertising in a national business publication, increased
telephone and communication expenses due to the increased customer activity,
leasing of additional office equipment and furniture to facilitate our
expansion, increased professional fees for costs incurred relating to the
proposed merger with Omega Research, and licenses and registrations for the
additional offices and registered representatives.
Product Development. Product development represents those costs
relating to the development of electronic order routing and execution software.
Interest Expense. Interest expense increased $15,297 from $36,566 for
Fiscal 1999 to $51,863 for Fiscal 2000 primarily due to the recording of margin
interest charged to our proprietary accounts as interest expense as opposed to
netting with interest revenue as earned by our accounts.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $101,245 from $29,918 for Fiscal 1999 to $131,163 for Fiscal
2000. The increase is the result of $246,790 additional fixed assets being
placed into service during Fiscal 2000 and the amortization of the intangible
assets aquired from the Newport acquisition.
Income Taxes. The Company recorded a provision for income taxes of
$702,224 for Fiscal 2000 as compared to $52,080 for Fiscal 1999. The effective
tax rate was 39% for Fiscal 2000 and 33% for Fiscal 1999.
As a result of the above, net income improved from $107,943 for Fiscal
1999 to $1,080,506 for Fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000, the Company had cash and cash equivalents of
$15,127,790, consisting of money market funds and short term commercial paper.
Cash provided by operating activities was $2,078,352 and $837,167 for
Fiscal 2000 and Fiscal 1999, respectively. The increase in cash provided by
operations in Fiscal 2000 was primarily the result of an increase in the
Company's net income of $972,563 for Fiscal 2000 and an increase in our income
tax liability of $614,911 as a result of our increased net income.
Cash used in investing activities was $2,912,497 and $74,558 for Fiscal
2000 and Fiscal 1999, respectively. The primary use of cash in investing
activities was $2,682,000 for the acquisition of the principal assets of
Newport. In addition, the Company expended $234,097 for the purchase of office
furniture and computer equipment. During Fiscal 1999, the Company expended
$48,891 for the purchase of office furniture and equipment.
Cash provided by financing activities was $14,955,991 and $25,000 for
Fiscal 2000 and Fiscal 1999, respectively. The primary source of funds was
$15,810,891 from the Company's initial public offering and $360,000 from
issuance of subordinated loans. The primary use of funds was $885,000 for the
repayment of all outstanding subordinated loans and $330,000 for the redemption
of the outstanding preferred stock.
As a result, the Company had a net increase in cash and cash
equivalents of $14,121,846 for Fiscal 2000 and $787,609 for Fiscal 1999.
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 $112,075 representing a portion of the total
furniture and computer equipment to be received. The balance of the equipment
totaling $180,450 was not received as of January 31, 2000 and accordingly, not
included in the statement of financial condition. The lease is to be paid over
36 months with an estimated monthly payment expected to commence on April 1,
2000 of $8,698 with a final payment of 7% of the original invoice amounts.
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 January 31, 2000 and 1999, the Company had net capital of
$14,051,801 and $902,078, which was $13,914,699 and $802,078 in excess of the
minimum required of $137,102 and $100,000 respectively.
The Company currently anticipates that its available cash resources,
including the net proceeds from the IPO, 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.
FORWARD-LOOKING INFORMATION
Statements contained in this report regarding the Company's future
operations, growth strategy, future performance and results and 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 in 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 effected by any delay or failure to close the pending merger
with Omega Research, and 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 attract new customers and (5) successfully integrate operations with Omega
Research, and execute in a timely fashion the objectives of that merger. There
can be no assurance that the Company will be successful in completing its
proposed expansion, or, if completed, that it will be successful in efficiently
managing its growth in order to maximize potential transaction volume.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements of the Company required by Regulation S-B are
attached to this Report. Reference is made to Item 13 below for an index to the
financial statements and financial statement schedules.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 8, 2000, the Company terminated its relationship with the
accounting firm of Ahearn, Jasco + Company, P.A. as independent auditor of the
Company's financial statements. The termination of the relationship with Ahearn,
Jasco + Company, P.A. was not the result of any disagreements between the
Company and Ahearn, Jasco + Company, P.A. on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure. On
February 8, 2000, the Company retained the accounting firm of Arthur Andersen
LLP as its new independent auditor to audit the Company's financial statements
for the fiscal year ended January 31, 2000. The decision to change accounting
firms to audit the Company's financial statements was approved by the Company's
Board of Directors on February 8, 2000.
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions held with
respect to each Director and Executive Officer:
NAME AGE POSITION
Andrew A. Allen 40 Chief Executive Officer,
Chairman of the Board and Director
E. Steven zum Tobel 33 President, Treasurer and Director
Farshid Tafazzoli 27 Chief Information Officer, Director
Derek J. Hernquist 28 Vice President of Operations,
Secretary and Director
Anthony M. Palermo 35 Chief Financial Officer
Lothar Mayer 60 Director
Eldren P. Nalley 80 Director
Robert A. Scarpetti 41 Director
ANDREW A. ALLEN. Mr. Allen is our Chairman, Chief Executive Officer and a
co-founder. He co-founded the Company in September 1995.Mr. Allen has over
20 years experience working in various capacities in the brokerage
industry from sales, marketing, trading, operations, and training at the
following firms: Prudential Securities; Speer, Leads & Kellogg; Oppenheimer &
Company, and Schonfeld Securities, LLC. Mr. Allen was also a member of the
Chicago Board of Options Exchange ("CBOE") from 1985 to 1995 and served on
CBOE Appeals Committee.
E. STEVEN ZUM TOBEL. Mr. zum Tobel is our President. Mr. zum Tobel has over 12
years experience relating to the brokerage industry with areas of expertise
in financial reporting, compliance, and operations as a certified public
accountant and managing partner of zum Tobel & Ling, LLP, an audit and tax
practice specializing in the brokerage industry, and as Vice President of
Securities Consultants International LLC, a national brokerage consulting
firm. Mr. zum Tobel received a B.A. degree in finance and an MBA with a
concentration in finance from Florida Atlantic University.
FARSHID TAFAZZOLI. Mr. Tafazzoli is our Chief Information Officer and a
co-founder. He co-founded our company in September 1995. Mr. Tafazzoli has
over six years experience as a systems specialist in the brokerage industry
including positions with Spear, Leeds & Kellogg, the largest specialist firm on
the New York Stock Exchange, and Gulfstream Partners. Mr.Tafazzoli received a
B.S.in Administrative Studies from Nova Southeastern University.
DEREK J. HERNQUIST. Mr.Hernquist is our Vice President of Operations. Mr.
Hernquist has over seven years experience in the brokerage industry beginning
with Olde Discount Brokerage and later in his own trading and investing
partnership. Mr.Hernquist received a B.A. in finance from the University of
Arizona.
ANTHONY M. PALERMO. Mr. Palermo is our Chief Financial Officer. Mr. Palermo
has over 11 years experience as a certified public accountant with Ahearn,
Jasco + Company, P.A. Mr.Palermo has a B.B.A. degree in accounting from Florida
Atlantic University.
ROBERT SCARPETTI. Mr. Scarpetti is a Director and employee of the Company.
Mr. Scarpetti has over 15 years experience in the brokerage industry as
president of Newport Discount Brokerage, Inc., an NASD registered broker-dealer.
In December of 1999, in connection with the Company's acquisition of the
principal assets of Newport, Mr. Scarpetti joined us as an employee and
Director.
LOTHAR MAYER. Mr. Mayer is a Director of the company. Mr. Mayer is the
President of Liberty Hardware Manufacturing Corp., a subsidiary of Masco Corp.
(NYSE: MAS). Mr. Mayer has held this position for over 21 years. Mr. Mayer
is also a chartered and certified public accountant.
ELDREN P. NALLEY. Mr. Nalley is a Director of the company. He is currently
retired but, in addition to serving on our board, serves on the board of
directors of Invacare Corp. (NYSE: IVC) and Royal Appliance Manufacturing
(NYSE: RAM). Mr. Nalley has served on the boards of Invacare and Royal
Appliance for over twenty years.
There is no family relationship between any of the officers, key
employees and directors.
Directors hold their offices until the next annual meeting of our
shareholders and until their successors have been duly elected and qualified or
their earlier resignation, removal from office or death. Officers serve at the
pleasure of the Board of Directors and until the first meeting of the Board of
Directors following the next annual meeting of our shareholders and until their
successors have been chosen and qualified.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Company and written representations that no Forms 5 were required when
applicable, the Company believes that during the fiscal year ended January 31,
2000 all Section 16(a) filing requirements applicable to its officers, directors
and greater than ten-percent beneficial owners were complied with, except with
respect to the Forms 3 for Messrs. Scarpetti and Nalley which were filed late on
April 4, 2000 due to an administrative oversight.
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
The following table summarizes all compensation paid by us during the
fiscal years ended January 31, 1999 and January 31, 2000 for our Chief Executive
Officer and each other executive officer whose annual compensation exceeded
$100,000 during said fiscal years (collectively the "Named Executive Officers").
Our directors do not receive compensation for serving in this capacity.
Annual Compensation
-------------------------------
Fiscal Salary Bonus All Other
Name and Principal Position Year $ $(1) Compensation
- ---------------------------- ---------- --------- ------------ -------------
Andrew Allen 2000 200,000 - -
Chairman and Chief Executive 1999 74,000 525,000 -
Officer
Farshid Tafazzoli 2000 193,333 - -
Chief Information Officer, 1999 72,000 293,100 -
Director
E. Steven zum Tobel 2000 120,000 - -
President, Treasurer and 1999 60,000 55,000 26,000(3)
Director (2)
Derek J. Hernquist 2000 38,662 - 495,473(4)
Vice President of Operations,1999 60,000 82,000 -
Secretary and Director
(1) We paid $1,460,000 in management bonuses for Fiscal 1999 and $602,000
for Fiscal 1998. Pursuant to new employment agreements effective as of
February 1, 1999 for the fiscal year ended January 31, 2000, the
compensation of executive shareholder management has been set and
limitations have been placed on the amount of bonuses executive
shareholder management may receive. See "EMPLOYMENT AGREEMENTS" below.
(2) Mr. zum Tobel began his employment with the company in March 1998.
(3) Represents the value of shares issued in connection with Mr.zum Tobel's
employment.
(4) Represents commissions earned on the Company's net proprietary trading
gains and losses.
EMPLOYMENT AGREEMENTS
We have entered into five-year employment agreements with Messrs. Allen
and Tafazzoli which provide for an annual base compensation of $200,000 each
and entered into three-year employment agreements with Messrs. zum Tobel and
Hernquist which provide for an annual base compensation of $120,000 and $50,000,
respectively. These individuals may receive bonuses as the Board of Directors
may in its sole discretion from time to time determine. Notwithstanding the
foregoing, the employment agreements limit the aggregate amount of bonuses
that may be paid to said employees to 5% of pre-tax earnings. Moreover,
Messrs. Allen, Tafazzoli, zum Tobel, and Hernquist have agreed not to
receive any bonuses until such time as the company earns $3,300,000 in pre-tax
earnings in any fiscal year.
The employment agreements provide for employment on a full-time basis
and contain a provision that the employee will not compete or engage in a
business competitive with our current or anticipated business during the term of
the employment agreement and for a period of one year thereafter.
The employment agreements of Messrs. Allen and Tafazzoli contain
change-in-control provisions. These provisions allow the employee to receive
certain additional compensation upon termination of employment following a
change in control of the Company. Mr. Tafazzoli has agreed to waive said rights
in connection with the pending merger with Omega Research, and Mr. Allen has
agreed to an alternative arrangement given his post-merger departure discussed
below.
Mr. zum Tobel received 444,444 shares of common stock in connection
with his employment. However, a portion of these shares are subject to
redemption by the Company at Mr. zum Tobel's cost basis if Mr. zum Tobel
resigns from his employment or is terminated for cause prior to February 28,
2001.
Upon closing of the merger with Omega Research, the current
employment agreements of Messrs. Tafazzoli, zum Tobel and Hernquist shall be
replaced by new two-year employment agreements which shall provide for
annual base compensation of $200,000.00, $150,000.00 and $100,000.00
respectively. Due to personal family matters, Mr. Allen has decided to
resign upon closing of the merger with Omega Research. In connection with such
resignation, Mr. Allen's employment agreement shall be terminated. Mr.
Allen has agreed to waive all rights under his employment agreement in exchange
for a severance agreement pursuant to which Mr. Allen shall receive
$200,000 upon closing and on $200,000.00 on each of the first and second
anniversaries of the closing.
STOCK OPTION PLAN
Under our 1999 Stock Option Plan (the "1999 Plan"), 1,000,000 shares of
common stock are reserved for issuance upon exercise of the options. The 1999
Plan is designed to serve as an incentive for retaining qualified and competent
directors, employees, consultants and independent contractors. Options will be
granted to certain persons in proportion to their contributions to the overall
success of the Company as determined by the Board of Directors or a committee
thereof in its sole discretion.
Our Board of Directors, or a committee thereof, administers and
interprets the 1999 Plan and is authorized to grant options thereunder to all
eligible employees, including our directors and executive officers (whether
current or former employees), as well as consultants and independent
contractors. The 1999 Plan provides for the granting of both "incentive stock
options" (as defined in Section 422 of the Internal Revenue Code of 1986, as
amended) and nonstatutory stock options. Incentive stock options may only be
granted, however, to employees. Options can be granted under the 1999 Plan on
the terms and at the prices determined by the Board, or a committee thereof,
except that the per share exercise price of incentive stock options granted
under the 1999 Plan will not be less than the fair market value of the common
stock on the date of grant and, in the case of an incentive stock option granted
to a 10% shareholder, the per share exercise price will not be less than 110% of
the fair market value as defined in the 1999 Plan. The per share exercise price
of nonstatutory stock options granted under the 1999 Plan will not be less than
85% of the fair market value of the common stock on the date of grant.
Options under the 1999 Plan that would otherwise qualify as incentive
stock options will not be treated as incentive stock options to the extent that
the aggregate fair market value of the shares covered by the incentive stock
options which are exercisable for the first time by any individual during any
calendar year exceeds $100,000.
Options granted under the 1999 Plan will be exercisable after the
period or periods specified in the option agreement. Incentive stock options
granted to employees will vest in equal installments over a period of five years
commencing on the first anniversary of the date of grant. Options granted under
the 1999 Plan are not exercisable after the expiration of ten years from the
date of the grant and are not transferable other than by will or by the laws of
descent and distribution. Adjustments in the number of shares subject to options
granted under the 1999 Plan can be made by the Board of Directors or the
appropriate committee in the event of a stock dividend or recapitalization
resulting in a stock split-up, combination or exchange of shares.
Options Granted During Fiscal Year End January 31, 2000
All options granted to the Named Executive Officers are stated in the
table below. No options have been exercised by any of the Named Executive
Officers. All of the options granted to such officers and directors terminate
on the ten-year anniversary of their grant dates.
Percent of
Total
Number of Options Exercise or
Securities Granted to Base Price
Underlying Options Employees in ($)(sh) Expiration
Name Granted Fiscal Year Date
- -------------- ------------------ ---------------- -------------- --------------
Andrew Allen -- -- -- -
Farshid Tafazzoli -- -- -- -
E. Steven zum Tobel -- -- -- -
Derek J. Hernquist -- -- --
Anthony M. Palermo 12,500 3% $7.00 06/11/2009
Aggregate Option Exercises During Fiscal Year End January 31, 2000 and Fiscal
Year End Option Values
The following table provides information regarding the value of all
unexercised options held at January 31, 2000 by the Named Executive Officers
measured in terms of the closing market price of the Company's Common Stock on
January 31, 2000. No Named Executive Officer exercised any stock options during
the fiscal year end January 31, 2000.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options At January 31, 2000 At January 31, 2000 (1)
Exercisable Unexercisable Exercisable Unexercisable
------------- -------------- -------------- -------------
Andrew Allen -- -- -- --
Farshid Tafazzoli -- -- -- --
E. Steven zum Tobel -- -- -- --
Derek J. Hernquist -- -- -- --
Anthony M. Palermo -- 12,500 -- $33,594
(1) Based on a per share price of $9.6875 on January 31, 2000, which was
the closing market price of the Company's Common Stock on the last day
of the Company's fiscal year, less the exercise price.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding beneficial
ownership of our common stock as of March 15, 2000, by (1) each person who owns
beneficially more than 5% of our outstanding common stock, (2) each of the Named
Executive Officers, and (3) all directors and executive officers as a group.
Shares Beneficially Owned (1)
-------------------------------------
Name and Address of Beneficial Owner(2) Number Percent
- ------------------------------------------ --------------- ---------------------
Andrew A. Allen (3) 2,725,926 23.4%
Farshid Tafazzoli (4) 2,725,926 23.4
E. Steven zum Tobel (5) 444,444 3.9
Derek J. Hernquist 266,666 2.3
Benedict S. Gambino 2,725,926 23.4
Anthony M. Palermo - 0
Lothar Mayer (6) 22,500 0
Eldren P. Nalley (7) 10,000 0
Robert A. Scarpetti - 0
All Directors and executive officers as
a group (8 persons) 6,162,962 53.4%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") that deem shares to be
beneficially owned by any person.
(2) The business address of all employee directors, executive officers and
Mr. Nalley is c/o the Company, 2700 North Military Trail, Suite 200,
Boca Raton, Florida 33431. The business address of Mr. Mayer is 5200
Town Center Circle, Suite 105, Boca Raton, Florida 33486.
(3) Includes shares held Andrew A. Allen Family Limited Partnership.
(4) Shares held by Tafazzoli Family Limited Partnership.
(5) Includes shares which may be redeemed by us if Mr. Zum Tobel terminates
his employment with the Company on or before February 28, 2001.
Shares held by zum Tobel Family Limited Partnership.
(6) Shares held by Mayer Investments, LP.
(7) Shares held by Eldren P. Nalley Declaration of Trust DTD.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS BY SHAREHOLDERS
In December 1998, Benedict Gambino, one of our shareholders, renewed a
subordinated loan to us in the amount of $400,000. The outstanding principal
balance and accrued interest was paid in full to Mr. Gambino on November 30,
1999.
The Company was a co-underwriter of its initial public offering,
therefore, it was necessary for the primary shareholders of the Company to
provide temporary subordinated loans to the Company during the days prior to
the consummation of the initial public offering. On June 6, 1999, Messrs.
Allen, Tafazzoli, and Gambino loaned the Company $100,000 each and Mr. zum
Tobel loaned the Company $60,000. All of these loans including interest at a
rate of 7% per annum were repaid on June 23, 1999.
RIGHT TO REDEEM SHARES OF STEVEN ZUM TOBEL
In February 1998, we issued 444,444 shares of common stock to Steven
zum Tobel as additional consideration for Mr. zum Tobel agreeing to join us.
Pursuant to the terms of Mr. zum Tobel's employment agreement, we may redeem a
portion of these shares at Mr. zum Tobel's cost basis in the event Mr. zum
Tobel resigns from his employment or is terminated with cause, as defined
in the Employment Agreement, on or before February 28, 2001. See "Management --
Employment Agreements."
Redeemed Preferred Stock
On July 14, 1999, the Company redeemed the then outstanding preferred
stock held by Mr. Gambino for 110% of the stated value, or $330,000.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents Filed as part of this Report:
(1) Financial Statements
Report of Independent Certified Public Accountants by Arthur Andersen
LLP
Independent Auditors' Report of Ahearn, Jasco + Company, P.A.
Statements of Financial Condition as of January 31, 2000 and 1999
Statements of Income for the Years Ended January 31, 2000 and 1999
Statements of Stockholders' Equity for the Years Ended January 31, 2000
and 1999
Statements of Cash Flows for the Years Ended January 31, 2000 and 1999
Notes to Financial Statements
(2) Financial Statement Schedule
The financial statement schedules have been omitted
because the required information is not present or
not present in amounts sufficient to require
submission of the schedule or because the information
is included in the consolidated financial statements
or notes thereto.
(3) Exhibits
EXHIBIT DESCRIPTION
2.1 Asset Purchase Agreement dated September 21, 1999(3)
2.2 Agreement and Plan of Merger and Reorganization dated January 19,
2000(4)
2.3 Amendment to Agreement and Plan of Merger and Reorganization dated
March 7, 2000
3.1 Registrant's Amended and Restated Articles of Incorporation, as
amended(1)
3.2 Registrant's Amended and Restated Bylaws(1)
4.1 Form of Representative's Warrant(1)
4.2 Form of Registrant's Common Stock Certificate(1)
4.3 Designations, Preferences, Rights and Limitations for Series A
Redeemable Preferred Stock(1)
10.1 1999 Stock Option Plan(1)
10.2 Employment Agreement with Farshid Tafazzoli*(1)
10.3 Employment Agreement with Andrew Allen*(1)
10.4 Employment Agreement with E. Steven zum Tobel*(1)
10.5 Employment Agreement with Derek Hernquist*(1)
10.6 Office Lease dated August 13, 1998 between Registrant and
Highwoods/Florida Holdings, L.P.(1)
10.7 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers(1)
10.8 Clearing Agreement with Bear Stearns Securities Corp.(1)
10.9 Addendum to Andrew A. Allen's Employment Agreement*(2)
10.10 Addendum to Farshid Tafazzoli's Employment Agreement*(2)
10.11 Employment Agreement with Robert Scarpetti*(3)
10.12 Non-Compete Agreement with Robert Scarpetti(3)
10.13 Employment Agreement with Raymond Chodkowski* (3)
10.14 Non-Compete Agreement with Raymond Chodkowski(3)
16.1 Letter on Change in Certifying Accountant (5)
27 Financial Data Schedule
--------------------------------------
* Compensation Plan or Arrangement
(1) Previously filed as part of Registration Statement No. 333-75119 on Form
SB-2
(2) Previously filed as part of Form 10-QSB for the quarter ended April 30, 1999
(3) Previously filed as part of Form 8-K on December 21, 1999
(4) Previously filed as part of Form 8-K on January 19, 2000
(5) Previously filed as part of Form 8-K on February 11, 2000
(4) Reports on Form 8-K
On December 21, 1999, a Current Report on Form 8-K
was filed with the Commission reporting the
acquisition of certain assets of Newport Discount
Brokerage, Inc.
On January 28, 2000, a Current Report on Form 8-K was
filed with the Commission reporting the Agreement and
Plan of Merger and Reorganization with Omega
Research, Inc.
On February 11, 2000, a Current Report on Form 8-K
was filed with the Commission reporting the change in
the Company's independent auditor.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Andrew A. Allen
-------------------------------------------------
Andrew A. Allen
Chairman of the Board of Directors and
Chief Executive Officer
Dated: April 6, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Andrew A. Allen Chairman of the Board, April 6, 2000
- ---------------------------------------Chief Executive Officer
Andrew A. Allen and Director
/s/ E. Steven zum Tobel President and Director April 6, 2000
- ---------------------------------------
E. Steven zum Tobel
/s/ Farshid Tafazzoli Chief Information Officer April 6, 2000
- ----------------------------------------and Director
Farshid Tafazzoli
/s/ Derek J. Hernquist Vice President of April 6, 2000
- ----------------------------------------operations, Secretary
Derek J. Hernquist and Director
/s/ Anthony M. Palermo Chief Financial Officer April 6, 2000
- ----------------------------------------
Anthony M. Palermo
/s/ Lothar Mayer Director April 6, 2000
- ----------------------------------------
Lothar Mayer
/s/ Eldren P. Nalley Director April 6, 2000
- ----------------------------------------
Eldren P. Nalley
/s/ Robert A. Scarpetti Director April 6, 2000
- ----------------------------------------
Robert A. Scarpetti
<PAGE>
ONLINETRADINGINC.COM CORP.
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 through F-2
FINANCIAL STATEMENTS
Statements of Financial Condition F-3
Statements of Income F-4
Statement of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6 through F-7
NOTES TO FINANCIAL STATEMENTS F-8 through F-19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To onlinetradinginc.com corp.:
We have audited the accompanying statement of financial condition of
onlinetradinginc.com corp. (a Florida Corporation, formerly doing business as
Online Trading, Inc.) as of January 31, 2000, and the related statements of
income, changes in stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of onlinetradinginc.com corp. as
of January 31, 2000, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.
/s/Arthur Andersen LLP
Arthur Andersen LLP
Fort Lauderdale, Florida,
March 15, 2000.
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors onlinetradinginc.com corp.
We have audited the accompanying statement of financial condition of
onlinetradinginc.com corp. (the "Company") as of January 31, 1999, and the
related statements of income, changes in stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of onlinetradinginc.com corp. as
of January 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/AHEARN, JASCO + COMPANY, P.A.
---------------------------------------
AHEARN, JASCO + COMPANY, P.A.
Certified Public Accountants
Pompano Beach,Florida
March 2, 1999, except for Note 10, for
which the date is March 25, 1999
F-2
<PAGE>
ONLINETRADINGINC.COM CORP.
STATEMENTS OF FINANCIAL CONDITION
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
2000 1999
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,127,790 $ 1,005,944
Receivable from clearing organization 759,183 572,433
Securities owned, at market value 155,012 381,084
Other current assets 103,987 15,583
-------------- --------------
TOTAL CURRENT ASSETS 16,145,972 1,975,044
PROPERTY AND EQUIPMENT, net 400,776 136,146
INTANGIBLE ASSET, net 2,592,600 -
OTHER ASSETS 221,456 43,398
-------------- --------------
TOTAL ASSETS $ 19,360,804 $ 2,154,588
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease $ 39,944 $ -
Accounts payable and accrued liabilities 1,291,317 948,422
Income taxes payable 653,141 38,230
Securities sold but not yet purchased, at market value 25,938 -
-------------- --------------
TOTAL CURRENT LIABILITIES 2,010,340 986,652
-------------- --------------
DEFERRED INCOME TAXES 34,300 15,400
-------------- --------------
CAPITAL LEASE PAYABLE, net of current portion 72,131 -
-------------- --------------
SUBORDINATED LOANS - 525,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 15)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; issued and
outstanding, none in 2000 and 300 shares of Series A, stated value
$1,000, voting, redeemable at 110% of par stated value in 1999 - 300,000
Common stock, $0.01 par value; 100,000,000 shares authorized;
issued and outstanding, 11,476,388 in 2000 and 8,888,888 and 1999 114,763 88,888
Additional paid-in capital 15,943,179 103,063
Retained earnings 1,186,091 135,585
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 17,244,033 627,536
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,360,804 $ 2,154,588
============== ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
ONLINETRADINGINC.COM CORP.
STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
2000 1999
-------------- --------------
REVENUES:
Commissions $ 9,471,435 $ 5,525,427
Net dealer inventory and investment gains and losses 1,129,493 328,495
Interest and dividends 603,978 36,021
Interest revenue sharing 295,934 102,121
Other 190,000 -
-------------- --------------
TOTAL REVENUES 11,690,840 5,992,064
-------------- --------------
OPERATING EXPENSES:
Employee compensation and benefits 5,340,165 3,356,688
Clearing and other transaction costs 3,012,284 2,002,055
Occupancy and administration 1,093,248 406,814
Product development 279,387 -
Interest expense 51,863 36,566
Depreciation and amortization 131,163 29,918
-------------- --------------
TOTAL OPERATING EXPENSES 9,908,110 5,832,041
-------------- --------------
INCOME BEFORE INCOME TAXES 1,782,730 160,023
PROVISION FOR INCOME TAXES 702,224 52,080
-------------- --------------
NET INCOME $ 1,080,506 $ 107,943
============== ==============
EARNINGS PER SHARE:
Basic $ 0.10 $ 0.01
============== ==============
Diluted $ 0.10 $ 0.01
============== ==============
Weighted average common shares outstanding - basic 10,522,889 8,857,230
============== ==============
Weighted average common shares outstanding - diluted 10,630,263 8,857,230
============== ==============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
ONLINETRADINGINC.COM CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Series A
Preferred Stock Common Stock Additional
------------------------ -------------------------
------------------------ -------------------------
Shares Amount at Shares Amount at Paid-In Retained
Issued Stated Value Issued Par Value Capital Earnings Total
---------- ------------- ------------- ----------- -------------- ------------- -------------
BALANCE, January 31, 1998 300 $ 300,000 8,444,444 $ 84,444 $ 81,507 $ 27,642 $ 493,593
Common stock granted to officer - - 444,444 4,444 21,556 - 26,000
Net income - - - - - 107,943 107,943
---------- ------------- ------------- ----------- -------------- ------------- -------------
BALANCE, January 31, 1999 300 300,000 8,888,888 88,888 103,063 135,585 627,536
Issuance of common stock for cash - - 2,587,500 25,875 15,785,016 - 15,810,891
Redemption of preferred stock (300) (300,000) - - - (30,000) (330,000)
Options and warrants granted to
non-employees - - - - 55,100 - 55,100
Net income - - - - - 1,080,506 1,080,506
---------- ------------- ------------- ----------- -------------- ------------- -------------
BALANCE, January 31, 2000 - $ - 11,476,388 $ 114,763 $ 15,943,179 $ 1,186,091 $ 17,244,033
========== ============= ============= =========== ============== ============= =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
ONLINETRADINGINC.COM CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,080,506 $ 107,943
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 131,163 29,918
Common stock granted to officer - 26,000
Loss on disposal of assets 38,706 -
Deferred income taxes 18,900 13,850
Changes in operating assets and liabilities:
Receivable from clearing organization (186,750) (271,533)
Securities owned at market value 226,072 302,251
Other current assets (88,404) (15,022)
Other assets (125,585) -
Accounts payable and accrued expenses 342,895 737,312
Income taxes payable 614,911 38,230
Securities sold but not yet purchased, at market value 25,938 (131,782)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,078,352 837,167
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 3,600 -
Cash paid for intangible asset (2,682,000) -
Purchase of property and equipment (234,097) (48,891)
Other assets - (25,667)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (2,912,497) (74,558)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 15,810,891 -
Proceeds from issuance of common stock warrants 100 -
Proceeds from issuance of subordinated loans 360,000 25,000
Repayment of subordinated loans (885,000) -
Redemption of preferred stock (330,000) -
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,955,991 25,000
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,121,846 787,609
CASH AND CASH EQUIVALENTS, beginning of year 1,005,944 218,335
-------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 15,127,790 $ 1,005,944
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 75,279 $ -
============== ==============
Cash paid for interest $ 57,806 $ 35,831
============== ==============
</TABLE>
(continued)
F-6
ONLINETRADINGINC.COM CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
(continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
During the year ended January 31, 2000, the Company acquired $112,075 of office
furniture and equipment through a capital lease. During the year ended January
31, 2000, the Company granted 40,000 options valued at $55,000 to acquire a
domain name.
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE>
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Online Trading, Inc. was incorporated in the State of Florida
on September 7, 1995 and operates as a registered securities broker/dealer
under the rules of the National Association of Securities Dealers
("NASD"). In February 1999, the Company changed its name to
onlinetradinginc.com corp.(the "Company"). The Company is headquartered
in Boca Raton, Florida and has branch offices in Massachusetts,
Pennsylvania and Ohio.
The Company manages its customer accounts through Bear Stearns
Securities Corp., and US Clearing Corporation (collectively, the "Clearing
Firms") on a fully disclosed basis. The Clearing Firms provide services,
handle the Company's customers' funds, hold securities, and remits monthly
activity statements to the customers on behalf of the Company. The amount
receivable from brokers and dealers relates to commissions earned by the
Company for trades executed by the Clearing Firms on behalf of the
Company.
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 and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Marketable Securities
Marketable securities are valued at market value and securities
not readily marketable (if any) are valued at fair value as determined by
the board of directors. The resulting difference between cost and market
(or fair value) is included in the statements of income.
Property and Equipment
Furniture, equipment and leasehold improvements are recorded at
cost and depreciated over the estimated useful lives of those assets using
the straight-line and accelerated methods. Expenditures for routine
maintenance and repairs are charged to expenses as incurred.
Intangible Asset
The intangible asset is a result of the acquisition as described
in Note 13, and is being amortized on a straight-line basis over five
years.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. For the years ended January 31, 2000 and
1999, there were no write-downs in value.
Securities Transactions
Proprietary securities transactions in regular-way trades are
recorded on the trade date, as if they settled. Profit and loss arising
from all securities transactions entered into for the account and risk of
the Company are recorded on a trade date basis. Customers' securities
transactions are reported on a settlement date basis to the customer with
related commission income and expenses reported on a trade date basis.
F-8
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commissions
Commissions and related clearing expenses are recorded on a
trade-date basis as securities transactions occur.
Advertising
The costs of advertising, promotion, and marketing programs are
charged to operations in the year incurred. Such expense items totaled
$103,000 and $30,382, respectively, for the years ended January 31, 2000
and 1999.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments
purchased with an original maturity of three months or less. Cash and cash
equivalents consist primarily of money market funds and commercial paper
with an original maturity of three months or less. The Company
occasionally maintains cash balances in financial institutions in excess
of the federally insured limits.
Fair Value of Financial Instruments
Cash, accounts receivable, and accounts payable and accrued
expenses are reflected in the financial statements at cost, which
approximates fair value because of the short-term maturity of those
instruments. The fair value of the Company's subordinated loans payable,
as described in Note 7, and the Company's capital lease obligation, as
described in Note 8, are the same as the recorded amounts because rates
and terms approximate current market conditions.
Income Taxes
The Company accounts for income taxes in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," which requires the recognition of deferred tax
liabilities and assets at currently enacted tax rates for the expected
future tax consequences of events that have been included in the financial
statements and tax returns.
Earnings Per Share
Earnings per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share," which requires companies with complex capital
structures or common stock equivalents to present both basic and diluted
earnings per share ("EPS") on the face of the income statement. Basic EPS
is calculated as income available to common stockholders divided by the
weighted average number of common shares outstanding during the period.
Diluted EPS is calculated using the "if converted" method for convertible
securities and the treasury stock method for options and warrants as
previously prescribed by Accounting Principles Board Opinion No. 15,
"Earnings Per Share."
F-9
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income"
the Company is required to report its comprehensive income. Other
comprehensive income refers to revenue, expenses, gains, and losses that
under accounting principles generally accepted in the United States are
included in comprehensive income but are excluded from net income, as
these amounts are recorded directly as and adjustment to stockholders'
equity. A statement of comprehensive income is not presented since the
Company had no items of other comprehensive income. Comprehensive income
is the same as net income for all periods presented herein.
Segment Information
The Company adopted SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," effective January 31, 1999. SFAS
No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual and interim
financial reports to shareholders. It also establishes standards for
related disclosures about an enterprise's business segments, products,
services, geographic areas and major customers. The Company operates its
business as a single segment. As a result, no additional disclosure was
required.
Recent Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB")
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 has not yet
determined the impact SFAS No. 133 will have on its financial position
or results of operations when such statement is adopted.
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 January
31, 2000, the Company had net capital of $14,051,801, which was
$13,914,699 in excess of its required net capital of $137,102.
NOTE 3 - PENSION PLAN
The Company had maintained a "SIMPLE" retirement plan for all
eligible employees. Eligible employees may contribute up to $500 per month
for which the Company will match dollar-for-dollar, up to 3% of the
employees' compensation. Contributions by the Company under this plan
totaled $39,928 and $46,987 for the years ended January 31, 2000 and 1999,
respectively. Effective December 31, 1999, the Company decided to
terminate the plan.
F-10
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 3 - PENSION PLAN (continued)
Effective January 15, 2000, the Company started a defined
contribution 401(k) plan. Eligible employees can contribute up to 15% of
their eligible salary for which the Company will match fifty percent up to
$2,500. Contributions by the Company under this plan totaled $6,658 for
the year ended January 31, 2000.
NOTE 4 - SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET PURCHASED
Securities owned and securities sold but not yet purchased
consist of marketable trading and investment securities at quoted market
values. These securities consist of the following:
<TABLE>
<S> <C> <C> <C> <C>
2000 1999
------------------------------ ------------------------------
Sold Sold
Not Yet Not Yet
Owned Purchased Owned Purchased
------------- -------------- ------------- --------------
Corporate stocks $ 5,200 $ 25,938 $ 224,428 $ -
Obligations of U.S. Government 149,812 - 156,656 -
------------- -------------- ------------- --------------
Total $155,012 $ 25,938 $ 381,084 $ -
============= ============== ============= ==============
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 31,
2000 and 1999:
2000 1999
----------- ----------
Computers, software, and equipment $ 307,915 $ 145,009
Furniture and fixtures 122,784 36,651
Leasehold improvements 38,773 14,521
----------- ----------
Total cost 469,472 196,181
Less: Accumulated depreciation (68,696) (60,035)
----------- ----------
Property and equipment, net $ 400,776 $ 136,146
=========== ==========
Depreciation expense for the years ended January 31, 2000 and
1999 was $39,236 and $29,918, respectively.
F-11
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at January 31, 2000 and
1999 consist of the following:
2000 1999
---------------- -------------
<TABLE>
<S> <C> <C>
Accounts payable $ 497,694 $ 163,074
Accrued liabilities:
Research fees 177,918 124,828
Payroll, and related expenses 521,115 644,148
Clearing deposit 50,000 -
Professional fees and other 44,590 16,372
---------------- -------------
Total $1,291,317 $ 948,422
================ =============
</TABLE>
NOTE 7 - SUBORDINATED LOANS
The borrowings under subordinated agreements as of January 31,
1999 is as follows:
<TABLE>
<S> <C>
Subordinated equity loan with a shareholder, unsecured, at a rate of 5%
with a scheduled maturity on February 11, 2002. This loan was paid in full
on November 30, 1999. $400,000
Subordinated loan, unsecured, at a rate of 5% with a scheduled maturity on
February 1, 2000. This loan was paid in full on July 2, 1999.
100,000
Subordinated loan, unsecured, at a rate of 6%. This loan was paid in full
on its scheduled maturity of August 31, 1999. 25,000
--------------
$ 525,000
==============
</TABLE>
By being designated as subordinated, these loans were available
in computing net capital under the SEC's uniform net capital rule at
January 31, 1999.
NOTE 8 - 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 $112,075 representing a portion of
the total furniture and computer equipment to be received. The balance of
the equipment totaling $180,450 was not received as of January 31, 2000
and accordingly, not included in the statement of financial condition. The
lease is to be paid over 36 months with an estimated monthly payment
expected to commence on April 1, 2000 of $8,698 with a final payment of 7%
of the original invoice amounts.
F-12
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 8 - CAPITAL LEASE (continued)
Anticipated future minimum payments based on the amount of
furniture and equipment received are as follows:
Year ending
January 31,
- -----------------------------------------
2001 $ 39,944
2002 39,944
2003 39,944
2004 7,845
-------------
Total payments 127,677
Less: amount representing interest (15,602)
-------------
Original capitalized cost $112,075
=============
NOTE 9 - INCOME TAXES
A summary of the income tax provision for the years ended January
31, 2000 and 1999 is as follows:
<TABLE>
<S> <C> <C>
2000 1999
------------- ------------
Current taxes:
Federal $ 587,587 $29,730
State 95,737 8,500
------------- ------------
Total current taxes 683,324 38,230
------------- ------------
Deferred tax provision:
Federal 16,000 10,800
State 2,900 3,050
------------- ------------
Total deferred tax provision 18,900 13,850
------------- ------------
Total income tax provision $ 702,224 $52,080
============= ============
</TABLE>
F-13
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (continued)
Temporary differences between the reported amounts in the
financial statements and tax bases of assets and liabilities that give
rise to the deferred income tax liabilities relate to the following:
<TABLE>
<S> <C> <C>
2000 1999
------------- -----------
Property and equipment, due to differences in
depreciation $ 60,000 $ 15,400
Intangible asset, due to differences in amortization (25,700) -
------------- -----------
Net deferred income tax liability $ 34,300 $ 15,400
============= ===========
</TABLE>
The effective income tax rate varied from the statutory Federal
tax rate as follows:
<TABLE>
<S> <C> <C>
2000 1999
--------- ----------
Federal statutory rate 35.0% 34.0%
State income taxes, net of federal income tax effect 4.5 5.3
Other, including permanent differences, non-deductible
Adjustments to deferred taxes
expenses and the effect of the rate brackets (.1) (6.8)
--------- ----------
Effective income tax rate 39.4% 32.5%
========= ==========
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY
(a) Capital Stock
On March 24, 1999, the shareholders and Directors affected an
amendment to the Company's articles of incorporation to change the number
of authorized common shares to 30,000,000 with a par value per share of
$0.01 and to change the number of authorized preferred shares to 1,000,000
with a par value of $0.01 per share. Prior to that date, the Company had
1,000 authorized common shares with no par value and authorized preferred
shares of 300,000 with a stated value per share of $1,000. All of the
shares outstanding at that date were converted into 8,000,000 shares of
the new $0.01 par value common stock, and into 300 shares of Series A
preferred stock, stated value $1,000 per share.
On April 3, 1999, a stock split of 11.11111 shares for each 10
shares of common stock outstanding was effected. All of the common shares
outstanding at that date were converted into 8,888,888 shares.
On May 8, 1999, the shareholders and Directors affected an
amendment to the Company's articles of incorporation to change the number
of authorized common shares to 100,000,000 with a par value per share of
$0.01. The effect of the stock split has been retroactively reflected in
the accompanying financial statements.
Each holder of the new $0.01 par value common stock is entitled
to one vote for each share held on all matters presented to a vote of
shareholders, including the election of directors.
F-14
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (continued)
Holders of common stock have no cumulative voting rights or
preemptive rights to purchase or subscribe for any stock or other
securities, and there are no conversion rights or redemption or sinking
fund provisions with respect to this stock.
The Company's Directors have the authority to issue 1,000,000
shares of the new $0.01 par value preferred stock in one or more series
and to fix, by resolution, conditional, full, limited or no voting powers,
and the designations, preferences and relative, participating, optional or
other special rights, if any, and the qualifications, limitations or
restrictions thereof, if any, including the number of shares in the series
(which the Board may increase or decrease as permitted by Florida law),
liquidation preferences, dividend rates, conversion or exchange rights,
redemption provisions of the shares constituting any series and such other
special rights and protective provisions with respect to any class or
series as the Board may deem advisable without any further vote or action
by the shareholders. Any shares of preferred stock so issued could have
priority over the common stock with respect to dividend or liquidation
rights or both and could have voting and other rights of shareholders.
The Board has authorized and issued a Series A preferred with the
following terms: 300 shares with a stated value of $1,000 per share, one
vote per share, and redeemable at 110% of stated value at the option of
the Company. In July 1999, the Company redeemed all of the then
outstanding preferred stock.
(b) Initial Public Offering
The Company completed its initial public offering (the "IPO") by
issuing 2,587,500 shares of common stock (including 337,500 shares to
cover over-allotments), $0.01 par value (the "IPO Shares") on June 11,
1999. The IPO shares were issued in a registered offering pursuant to a
Registration Statement on Form SB-2 (Commission File No. 333-75119;
effective date June 11, 1999) through a syndicate of underwriters, the
principal representatives of which were Werbel-Roth Securities, Inc.,
onlinetradinginc.com corp., Seaboard Securities, Inc. and The Agean Group,
Inc.
The IPO shares were offered and sold by the underwriters at an
initial public offering price of $7.00 per share, resulting in aggregate
gross offering proceeds of $18,112,500, net concession and management fee
proceeds for participation in the underwriting of the IPO of $189,867 and
net proceeds to the Company of $15,810,891.
The Company incurred offering expenses in connection with this
offering as follows:
Underwriting discounts and commissions $ 1,539,563
Expenses paid to/for underwriters 486,461
Other offering expenses 465,452
---------------
$ 2,491,476
===============
Except for the concessions earned by the Company as a result of
participating in the underwriters syndicate, none of the above expenses
were paid either directly or indirectly to directors, officers, general
partners of the Company or its associates, or to persons owning more than
10% of any class of equity security of the Company or to affiliates of the
Company.
In conjunction with the IPO, the Company issued 225,000 warrants
to the underwriters for $100. The warrants have an exercise price of
$11.55 (165% of the $7.00 IPO price).
F-15
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 11 - EARNINGS PER SHARE
Weighted average shares outstanding for the years ended January
31, 2000 and 1999 are calculated as follows:
<TABLE>
<S> <C> <C>
2000 1999
------------- ------------
Weighted average shares outstanding (basic) 10,522,889 8,857,230
Impact of dilutive options and warrants after
applying the treasury stock method 107,374 -
------------- ------------
Weighted average shares outstanding (diluted) 10,630,263 8,857,230
============= ============
Options and warrants outstanding which are not included in the calculation of
diluted earnings per share because of their impact
is antidultive 384,000 -
============= ============
</TABLE>
NOTE 12 - STOCK OPTIONS
In June 1999, the Company adopted the 1999 Stock Option Plan.
Pursuant to the terms of this plan, employees, non-employee directors,
consultants and independent contractors are eligible to receive options to
purchase common stock. Up to 1,000,000 shares may be issued under the plan
and will be drawn from either authorized but previously unissued shares or
from treasury shares. Options granted under this plan are granted at the
fair market value of the common stock at the date of grant. In general,
the employee options become exercisable over a five-year period beginning
June 11, 2000. All options expire ten years after the date of grant.
The Company has granted the following options:
<TABLE>
<S> <C> <C> <C> <C>
Option Price Per Share
---------------------------------------
Type Shares Low High Weighted
- ---------------------------------------- ------------- ------------- ------------ ------------
Employee 390,500 $ 7.00 $ 11.93 $ 8.37
Non-employee directors 40,000 $ 7.00 $ 11.31 $ 9.16
Non-employee consultants 40,000 $ 13.50 $ 13.50 $ 13.50
</TABLE>
No stock options have been exercised during the year ended
January 31, 2000.
The Company, as permitted by SFAS No. 123, applies the APB
Opinion No. 25 for options granted to employees. Accordingly, no
compensation is recognized for such grants to the extent their exercise
price is equal to the fair market value of the underlying stock at the
date of grant. Had compensation cost for the Company's stock options been
based on fair value at the grant dates consistent with the methodologies
of SFAS No. 123, the Company's pro forma net income (and pro forma
earnings per share on a diluted basis) for the year ended January 31, 2000
would have been $919,424 (.07 per share). The fair value of each option
grant is estimated on the date of grant using the Black-Scholes model with
the following assumptions: risk free interest rate - 6%; dividend yield -
0%; volatility factor - 70%; and weighted average life (years) - 5.
F-16
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 13 - ACQUISITION
On December 6, 1999, the Company acquired certain intangible
assets of Newport Discount Brokerage, Inc. ("Newport") pursuant to an
Asset Purchase Agreement dated September 21, 1999 (the "Asset Purchase
Agreement"). Pursuant to the Asset Purchase Agreement, the Company
purchased all of Newport's right, title and interest in and to its
clients. The total consideration paid by the Company in connection with
this acquisition included cash of $2,682,000 and up to 125,000 shares of
the Company's common stock.
Issuance and delivery of the common stock consideration is
contingent upon the acquired assets achieving certain revenue goals and
maintaining customer accounts within one year from closing. For accounting
purposes, the transaction was treated as a purchase. The Company recorded
an intangible asset of $2,682,000 in connection with this acquisition,
which is being amortized over five years. Amortization expense for the
year ending January 31, 2000 was $89,400.
NOTE 14 - CONCENTRATIONS AND CREDIT RISKS
Financial Instruments With Off-Balance Sheet Risk
The Company will periodically sell securities that it does not
currently own and will therefore be obligated to purchase such securities
at a future date. The Company has recorded these obligations in the
financial statements at January 31, 2000, at market values of the related
securities. As of January 31, 1999, the Company had none of these
transactions outstanding.
The Company's customer securities activities are transacted on
either a cash or margin basis. In margin transactions, the Company extends
credit to its customers, subject to various regulatory and internal margin
requirements, collateralized by cash and securities in the customers'
accounts. In connection with these activities, the Company executes and
clears 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
the Company to significant off-balance-sheet risk in the event margin
requirements are not sufficient to fully cover losses that customers may
incur. In the event the customer fails to satisfy its obligations, the
Company may be required to purchase or sell financial instruments at
prevailing market prices to fulfill the customer's obligations.
The Company seeks to control the risks associated with its
customer activities by requiring customers to maintain margin collateral
in compliance with various regulatory and internal guidelines. The Company
and its clearing firm monitor required margin levels daily and, pursuant
to such guidelines, require the customers to deposit additional collateral
or to reduce positions when necessary.
The Company's customer financing and securities settlement
activities require the Company to pledge customer securities as collateral
in support of various secured financing sources such as bank loans and
securities loaned. In the event the counterparty is unable to meet its
contractual obligation to return customer securities pledged as
collateral, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its customers
obligations. The Company 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, the
Company establishes credit limits for such activities and monitors
compliance on a daily basis.
F-17
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 14 - CONCENTRATIONS AND CREDIT RISKS (continued)
Concentrations of Credit Risk
The Company is engaged in various trading and brokerage
activities in which counterparties primarily include broker-dealers,
banks, and other financial institutions. In the event counterparties do
not fulfill their obligations, the Company may be exposed to risk. The
risk of default depends on the creditworthiness of the counterparty or
issuer of the instrument. It is the Company's policy to review, as
necessary, the credit standing of each counterparty.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is obligated under four non-cancelable operating
leases for office space with expiration dates ranging from February 2000
to February 2007. The Company subleases space to three unrelated entities
in its corporate headquarters. On March 2, 1999, the Company entered into
a three year operating lease for office furniture and equipment.
Rent expense for the years ended January 31, 2000 and 1999 was as
follows:
2000 1999
-------------- --------------
Base rent - office space $ 259,655 $ 119,705
Sublease income (118,975) (14,300)
Base rent - furniture & equipment 73,020 -
-------------- --------------
Rent expense, net $ 213,700 $ 105,405
============== ==============
As of January 31, 2000, future minimum rental payments required
under the leases are as follows:
Year ending Rental Sublease Net Minimum
January 31, Payments Payments Payments
- ------------------- ----------------- -------------- ------------------
2001 $ 381,216 $ 119,300 $ 261,916
2002 394,546 124,072 270,474
2003 340,335 129,034 211,301
2004 335,983 134,196 201,787
2005 321,379 139,564 181,815
Thereafter 703,567 308,718 394,849
----------------- -------------- ------------------
$ 2,477,026 $ 954,884 $ 1,522,142
================= ============== ==================
F-18
ONLINETRADINGINC.COM CORP.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2000 AND 1999
- --------------------------------------------------------------------------------
NOTE 15 - COMMITMENTS AND CONTINGENCIES (continued)
Litigation
The Company has been named in a civil action by a former
customer alleging excessive trading and commissions, violation of
Massachusetts General Laws c.93A ss. and c.110A ss.ss.101 and 102 and
violation of NASD conduct rules. The claimant is seeking total alleged
damages of $566,345 plus interest, costs, fees, and treble damages. The
Company's attorneys moved the case to the United States District Court for
the District of Massachusetts, Eastern Division, where the matter is
currently pending and awaiting ruling on our motion to compel arbitration.
The case is in the early stages and no estimate of a potential
liability against the Company, if any, can be determined at this time.
Management believes the case to be completely without merit and intend to
present a vigorous defense and to seek reimbursement for all costs and
fees associated with our defense.
In addition, from time to time, the Company may become engaged in
ordinary routine litigation and/or arbitration incidental to its business.
The Company does not believe that such ordinary routine
litigation/arbitration would have a material adverse effect on its
financial position or results of operations.
F-19
<PAGE>
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This First Amendment ("Amendment") hereby amends effective March 7,
2000 the Agreement and Plan of Merger and Reorganization (the "Plan of Merger"),
dated January 19, 2000, by and among Omega Research, Inc., a Florida corporation
("Omega"), onlinetradinginc.com corp., a Florida corporation ("Online"), Online
Trading Group, Inc., a Florida corporation("Newco"), Omega Acquisition
Corporation, a Florida corporation and wholly owned subsidiary of Newco ("Omega
Merger Sub"), and Onlinetrading Acquisition Corporation, a Florida corporation
and wholly owned subsidiary of Newco ("Online Merger Sub"). Capitalized terms
not otherwise defined herein shall have the respective meanings set forth in the
Agreement.
WHEREAS, the parties entered into the Agreement on January 19, 2000;
and
WHEREAS, the parties desire to amend the terms of the Agreement to
incorporate the terms herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree that the
Agreement shall be amended as follows:
1. Section 1.4 (a) shall be amended and restated in its entirety to read
as follows:
"(a) At the Effective Time, the Articles of
Incorporation (the "Omega Articles of Incorporation")
of Omega Merger Sub, as in effect immediately prior
to the Effective Time, shall be the Articles of
Incorporation of the Omega Surviving Corporation;
provided, however, that Article I of the Omega
Articles of Incorporation shall be amended to read as
follows: "The name of the corporation is Omega
Research, Inc."
2. Section 1.4 (c) shall be amended and restated in its entirety to read
as follows:
"(c) At the Effective Time, the Articles of
Incorporation (the "Online Articles of
Incorporation") of Online Merger Sub, as in effect
immediately prior to the Effective Time, shall be the
Articles of Incorporation of the Online Surviving
Corporation; provided, however, that Article I of the
Online Articles of Incorporation shall be amended to
read as follows: "The name of the corporation is
OnlineTrading.com, Inc."
<PAGE>
G:\DMS\72521\13003\0280835.01
2
3. The parties hereto hereby authorize and consent to the
filing of an amendment to the Articles of Incorporation of Newco pursuant to
which Article I of the Articles of Incorporation shall be amended to change the
name of Newco to "OnlineTrading.com Group, Inc." and, upon such filing with the
Secretary of State of the State of Florida, all references to "Online Trading
Group, Inc." in the Agreement and any and all other agreements and instruments
entered into between or among the parties hereto in connection therewith shall
be modified to reflect the name change to "OnlineTrading.com Group, Inc."
4. Except as otherwise specifically set forth in this
Amendment, the Agreement shall remain in full force and effect in accordance
with the terms thereof. This Amendment shall be governed by and construed in
accordance with the laws of the State of Florida. This Amendment may be executed
by one or more of the parties hereto on any number of separate counterparts and
all said counterparts taken together, shall be deemed to constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered effective as of the day and year first written
above.
ONLINETRADINGINC.COM CORP. OMEGA RESEARCH, INC.
By: /s/ Steven zum Tobel By: /s/ Ralph L. Cruz
Name: Steven zum Tobel Name: Ralph L. Cruz
Title: President Title: Co-Chief Executive Officer
ONLINE TRADING GROUP, INC. OMEGA ACQUISITION CORPORATION
By: /s/ Ralph L. Cruz By: /s/ Ralph L. Cruz
Name: Ralph L. Cruz Name: Ralph L. Cruz
Title: Co-Chief Executive Officer Title: Co-Chief Executive Officer
ONLINETRADING ACQUISITION CORPORATION
By: /s/ Ralph L. Cruz
Name: Ralph L. Cruz
Title: Co-Chief Executive Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 15,127,790
<RECEIVABLES> 759,183
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 155,012
<PP&E> 400,776
<TOTAL-ASSETS> 19,360,804
<SHORT-TERM> 39,944
<PAYABLES> 1,291,317
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 25,938
<LONG-TERM> 72,131
0
0
<COMMON> 114,763
<OTHER-SE> 17,129,270
<TOTAL-LIABILITY-AND-EQUITY> 19,360,804
<TRADING-REVENUE> 1,129,493
<INTEREST-DIVIDENDS> 603,978
<COMMISSIONS> 9,471,435
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 51,863
<COMPENSATION> 5,340,165
<INCOME-PRETAX> 1,782,730
<INCOME-PRE-EXTRAORDINARY> 1,782,730
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,080,506
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
