F onn 1 0-K for fiscaJ year ended December 31 , 2006
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`L 0-K l dl Ok.htm FORM 1 0-K FOR FISCAL YEAR ENDED DECEMBER 31, 2006
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`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`WASHINGTON, D.C. 20549
`FORMlO-K
`0 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
`1934
`
`For lhe fiscal year ended DECEMBER J l, 2006
`OR
`
`0 TRANSITION REPORT PURSUANT TO SECTION 13 OR t S(d) OF THE SECURITIES EXCHANGE ACT OF
`1934
`
`For the transition period frotn ___ _ to __ _ _
`
`Commission file number: 0-31049
`
`TradeStation Group, Inc.
`
`(Exact oaJiie of rcgist.-ant as specified in its ChllJ1et·)
`
`Flos·ida
`(State or oth~r .irn'isdiction of
`inror·pomtion or org,,nlzation)
`
`8050 S.W. l01h Street, Suite 400(),
`Plantation, Florida
`(Addr·ess ofpl'indiYdl ~J'l'cutive oflkt:s)
`
`65-0977576
`(f .R.S. Elnploycr
`ld~ntitication N o.)
`
`33324
`{l.ip C ode)
`
`954-652--7000
`(Regisrnmt's telephone number, including area code)
`
`Securities registered pursuant to Section 12(b) ofthe Act:
`
`Title of each class
`Cummon Stock, par· value $.0 I pc.r· Blmre
`
`Name of each exchange on wbkb t·egistered
`NASDAQ 6lobai Sel~dM1u·ket
`
`Securities registered pursuant to Section 12(g) of the Act: None
`
`Indicate by check mark j f the registrant is a well-known seasoned issuer, as defined in Rule 405 ofihe Securities Act
`0 Yes 0 No
`
`Jndieate by checkmarkif tbe registr'd.llt is not required to ftle repot1s pursuant tQ Section 13 or Section 15(d) of lhe Act
`0 Yes 0 No
`
`Lndicate by check mark whether d1e registrant (1) bas f.Lled all reports reql'lired to be filed by Section 13 or 15(d) ofthe
`Securities Exchange Act of 1934 during tlle preceding 12ruontbs (or for such shorter period that the registrant was reql,l.ired to
`file such repons). and (2) has been subject lo such filing requirements fort he past 90 days. 0 Yes 0 No
`
`Indicate by check mark if disclosure of delinquent filers pursuant to Ttem 405 of Regulation S-Kis not contained herein.
`and will uot be conlained, to the best of registrant's !mowledge, in definiti ve proxy or infom1ation statements incorporated b)
`reference in Partll1 of this Fortn 10-K or any amendment to !Jus Fonn 10-K. 0
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`TRADING TECH EXHIBIT 2207
`TRADESTATION v. TRADING TECH
` CBM2015-00161
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`

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`Form 10-K for fiscal year ended December 31, 2006
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`Page 2 of98
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`Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
`See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
`
`Large accelerated filer D
`
`Accelerated filer 0
`
`Non-accelerated filer D
`
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). D Yes 0 No
`
`The aggregate market value of voting stock held by non-affiliates as of June 30, 2006 (based upon the closing price of
`$12.67 per common share as quoted on The NASDAQ Global Select Market on such date), was approximately $343,677,000.
`
`The registrant had 44,755,691 shares of common stock, $.01 par value, outstanding as of March 1, 2007.
`
`DOCUMENTS INCORPORATED BY REFERENCE
`Certain portions of the registrant's definitive proxy statement to be filed within 120 days after December 31, 2006 in
`connection with its 2007 annual meeting of shareholders are incorporated by reference in Part III of this report.
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`Form 1 0-K for fiscal year ended December 31, 2006
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`Page 3 of98
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`Table of Contents
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`TABLE OF CONTENTS
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`PART I
`ITEM 1.
`
`ITEM lA.
`ITEM lB.
`ITEM2.
`ITEM3.
`ITEM 4.
`
`PARTU
`ITEMS.
`
`ITEM6.
`ITEM 7.
`
`lTEM7A.
`ITEMS,
`ITEM9.
`
`ITEM9A.
`lTEM9B.
`
`PARTID
`ITEM 10.
`ITEM 11.
`ITEM 12.
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`ITEM 13.
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`BUSINESS
`Ove•·view and Recent Develonments
`lndust•·v Bacl(ground
`Products and Services
`Sales and Marl<ctiug
`Strategic Relation shills
`Technology Development
`Customer Services and Suup01i ~md Tntining
`ComJlctition
`Intellectual Pronertv
`Govemment ReguJation
`Emuloyecs
`Available Information
`RISK FACTORS
`UNRESOLVEDSTAFFCO~NTS
`PROPERTIES
`LEGAL PROCEEDINGS
`SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
`
`MARKET .FOR REGISTRANT' S COMMON EQUITY, RELATED STOCKHOLDER
`MATTERS AND lSSUERPURCBASES OF EQUITY SECURITJES
`Common Stock Information
`Dividend Poticv
`Recent Sales of Unregistered Secu ritics
`Share Repurchases
`SELECTED FINANCIAL DATA
`MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
`RESULTS OF OPERATIONS
`Oven,iew
`C•·itical Accounting Policies and Estimates
`Results of Operations
`Years Ended December 31,2006 and 2005
`Years Ended December 31,2005 and 2004
`Income Taxes
`V a riab i I itv of Resu Its
`Liquiditv mtd Caoital Resout·ces
`Off-Balance Sheet An·angcmcnts
`Recentlv Issued Accounting Standards
`QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
`FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
`CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
`FINANCIAL DISCLOSURE
`CONTROLS AND PROCEDURES
`OTHER INFORMATION
`
`DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
`EXECUTIVE COMPENSATION
`SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
`AND RELATED STOCKHOLDER MATTERS
`Euuih· Compensation Plan Information
`CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
`
`1
`l
`3
`5
`7
`7
`7
`8
`9
`10
`11
`13
`14
`14
`24
`24
`24
`25
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`26
`26
`26
`26
`27
`28
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`29
`29
`32
`33
`34
`39
`41
`42
`42
`45
`46
`47
`48
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`48
`48
`49
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`50
`50
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`50
`50
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`Fonn 1 0-K for fiscal year ended December 31, 2006
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`ITEM 14.
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`PRINCIPAL ACCOUNTING FEES AND SERVICES
`
`PAR T TV
`ITEM 15.
`
`SIGNATURES
`
`EXBmiTS AND FINANCIAL STATEMENT SCHEDULES
`
`51
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`52
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`56
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`Fonn 1 O~K for fi scal year ended December 31 , 2006
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`price offerings during 2007. TradeStation (both as a subscription service and as a brokerage account trading platform) also
`offers onr Option Station and RadarScreen functions and features. OptionStation. also an award-winning technology. is an
`options trading analysis product for equity. index .and fut ures options that enables traders to explore options lrading strategies.
`Radm·Screen enables tmders to scan secu1ilies markets to identif-y potential buyiog ot selling opportunities based upon the
`traders· own trading strategies.
`
`We ceased marketing our legacy software products in May 2000 and ceased marketing our subscription software services
`in December 2000. Accordingly, iu 2004, 2005 and 2006, and, we C-''PCCL for U1e foreseeable fttture, our brokerage operations
`prod11ced and should continue to ptoduce the majority of our revenues. In 2004. 2005 and 2006, revenues from brokerage
`serv:ices (consisting primarily ofbrokert~-ge commissions and fees and net interest income) accounted for approximately 86%,
`89% and 92%. respectively. of our total consolidated net revenues. and software products and services accounted for
`approximately 14%, I L% and 8%, respectively, of our total consolidated net revenues over thatthree-yeatpetiod.
`
`Sales and M:u·ketiog
`Our marketing jn 2006 co11sisted principally of p1iJlt advertising jn Aclh·e Trac{er, Futures, SFO, and Technical AM4vsis
`of Stocks & Commodities magazines, direct maiJ a11d e-mail, sales seminars, and our Web sites. and television advertising ·on
`financiaJ news cllanHels. The mix and frequency of television, p1int, Web-site, direct-mail and in-person marketing methods
`that we usc to tly to achieve results wiU likely becontinuaUy modified as we test such methods and mi>.1ures and analyze and
`interpret Ole resuJts.
`
`Revenues derived [tom customers ouis\de oflhe UnJted Slates for the years ended December 31, 2006. 2005 and 2004.
`were approximately II %. less than 10% and approximately 12%, respectively. Tntemational revenues are collected in U.S.
`doUars. We condttet no matl<eting, sales or other operations, and maintain no assets. outside of fue United States, other than
`relating lo our start-up operations in London via our United Kingdom subsidiary. 'T'xadeStation Europe Limited.
`
`Strategic Relationships
`Clearing Services. Our brokerage· s cleating sciVices for i11s1 itutional securities accounts. and for all ftnures accounts, are
`currenUy provided by Bear. Stearns Securities COTp. ~md RJ. O'B1ie~1 & Associates, Jne., respectively. pursuant to indusll.)'(cid:173)
`standard clearing agreement's.
`
`Forex Deal Services. Our forex deal services are currently provided through an arrangement witl1 GAIN Capital Group,
`lnc. Forex customers design. test, optimi?.e and automate Uteir forex strateg-ies using TradeStation. lhen. when a deal order is
`to be placed. the customer cotmects direct·ly to GAIN Capital's online deal system. and places the order. GAIN Capital is the
`countctparl.y/principal for each Fore.~ deaJ.
`
`Technology Develotunent
`We believe lbat our success depends, in large part, on our ability to offer unique, internet-based 11-ading technologies with
`state-of-'U1e-art order execution teclmologies, and continuously enhance those teclmologies. as \>Veli as develop and implement
`well-designed and user-fliendly Web sites. To dale., we bave relied primarily on internal development of our products and
`services. We
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`currently perfonn all quality assurance and develop user education and other IIaining materials internally. Tn 2006. 2005 and
`200-t technology development expenses were approximately $5.2 million, $4.5 million and $4.4 miJlion, respectively. As of
`December 3 l. 2006. our technology development team was comprised of 85 people. as compared to 80 as of December 3 1.
`2005, a 6.3% increase.
`
`We view ot1rtechnology development cycle as a four-step process to achieve technological feasibiLity. The flrststep is to
`conceptualize in detail the defining features and functions that we beHeve our targeted market requires from the product or
`service, and to undertake a cost-benefit analysis to determine the proper scope and illtegmtion of sucll fea tures and ftmctions.
`Once the functional requirements of the product or service have been detennined, U1e second step is to teclmicaUy design the
`product or service. The tJtitd step is Oli3 detailed implementalioo. or engineering, ortbis technical design. The foUJtJt step is
`rigorous quality assurance tesLing to ensure tJ1atthe final product or service generally meets the functional requirements
`detenn:ined in the fust step. Several refinements are typically added and tested in the quality assurance phase of development.
`Once tltis process is completed, tecl1nological feasibility has been acltieYed and t11e working model is available for release to
`otlf customers.
`
`The market for stnt{egy lrading soflwarc tools. streaming rcaJ-timc market data and news services, and online order
`execution se1vices is cbaracte1ized by: r<~pidly changing teclmotogy; e\'Olving industry standards in computer hardware,
`programming tools and languages. operating systems. database teclmology and infom1ation detivery systems: changes in
`customer requirements: and frequent new product and service introductions and enhancements. as well as technical
`consolidation of products and services. Our success w ill depend. in pan. upon our ability to develop <u1d maintajn competitive
`technologies and to develop and introduce new products, sen •ices and enhancements in a timely and cost-effective manner that
`meets changing conditions such as evolving customer needs, existing and new competitive product and service offerings,
`emerging industry standards, changing technology, and increased capacity and stability requirements as we grow om· business
`and as minimtun customer acceptability standards for capacity and stability increase in our industty. There can be no assumnce
`that we wiJJ be able to develop. i11troduce and market, on a timely basis, if at aH. products, setVices or e1ll1anccments that
`resp011d to changing market conditions or tlmt will be accepted by customers. Any failure by us to anticipate or to respond
`quickly to cltanging lllarket conditions. or any sjgni ficant delays in the introdt1ction of new products and scJYices or
`enJ1ancements. could cause customers to delay using. or decide against the use of. oar products and services and could have a
`material adverse effect on our busiJJess, fina11cial condition and results of operations.
`
`Customer Services and SuJ>poaiand Ta·aining
`We prov·ide customer services and support aud product-use training in. the following ways:
`Customer Services and Support. Telephone account and technical supp01t setv ice is provided to brokerage customers
`U1rough a trained customer service team. Advanced Easy Language consulting senrices (services that ieclmically assist
`customers in the use of EasyLrmguage to write the customers' own trading strategies) are available from internal resources and
`from unaffiliated, independent EasyLanguage consultants. A substantial amount of te-elmical support illfonm1tion js also
`provided on our Web sites.
`
`Product-use Training. We consider user education important to try to help our customers increase their abtlities lo use our
`products and services fully and effectively. The majority of our trainiJlg materials consist of extensive onUne documentation
`and teclurical assistance infonnation on our Web sites, including online tutorials, as well as in-person trajning semjnars, so that
`our
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