Form 10-K for fiscal year ended December 31, 2006
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`10-K 1 dl0k.htm FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2006
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`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`WASHINGTON, D.C. 20549
`FORM 10-K
`ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
`1934
`
`For the fiscal year ended DECEMBER 31, 2006
`
`OR
`
`TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
`1934
`
`For the transition period from
`
`to
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`Commission file number: 0-31049
`
`TradeStation Group, Inc.
`
`(Exact name of registrant as specified in its charter)
`
`Florida
`(State or other jurisdiction of
`incorporation or organization)
`
`8050 S.W. 10th Street, Suite 4000,
`Plantation, Florida
`(Address of principal executive offices)
`
`65-0977576
`(I.R.S. Employer
`Identification No.)
`
`33324
`(Zip Code)
`
`954-652-7000
`0/egistrant’s telephone number, including area code)
`
`Securities registered pursuant to Section 12(b) of the Act:
`
`Title of each class
`Common Stock, par value $.01 per share
`
`Name of each exchange on which registered
`NASDAQ Global Select Market
`
`Securities registered pursuant to Section 12(g) of the Act: None
`
`Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
`[] Yes [] No
`
`Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
`[] Yes [] No
`Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
`Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
`file such reports), and (2) has been subject to such filing requirements for the past 90 days. [] Yes [] No
`
`Indicate by check mark if disclosure of delinquent fliers pursuant to Item 405 of Regulation S-K is not contained herein,
`and will not be contained, to the best of registmnt’s knowledge, in definitive proxy/or information statements incorporated by
`reference in Part III of this Form 10-K or any amendment to this Form 10-K. []
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`Form 10-K for fiscal year ended December 31, 2006
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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 []
`
`Accelerated filer []
`
`Non-accelerated filer []
`
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [] Yes [] 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 10-K for fiscal year ended December 31, 2006
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`Page 3 of 98
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`Table of Contents
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`TABLE OF CONTENTS
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`BUSINESS
`Overview and Recent Developments
`Industry Background
`Products and Services
`Sales and Marketing
`Strategic Relationships
`Technology Development
`Customer Services and Support and Training
`Competition
`Intellectual Property
`Government Regulation
`Emplo+ees
`Available Information
`RISK FACTORS
`UNRESOLVED STAFF COMMENTS
`PROPERTIES
`LEGAL PROCEEDINGS
`SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
`
`MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
`MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
`Common Stock Information
`Dividend Polic+
`Recent Sales of Unregistered Securities
`Share Repurchases
`SELECTED FINANCIAL DATA
`MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
`RESULTS OF OPERATIONS
`Overview
`Critical Accounting Policies and Estimates
`Results of Operations
`Years Ended December 31, 2006 and 2005
`Years Ended December 31, 2005 and 2004
`Income Taxes
`Variabilit+ of Results
`Liquidity and Capital Resources
`Off-Balance Sheet Arrangements
`Recentl+ 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
`Equity Compensation Plan Information
`CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
`
`PART I
`ITEM 1.
`
`ITEM 1A.
`ITEM lB.
`ITEM 2.
`ITEM 3.
`ITEM 4.
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`PART II
`ITEM 5.
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`ITEM 6.
`ITEM 7.
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`ITEM 7A.
`ITEM 8.
`ITEM 9.
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`ITEM 9A.
`ITEM 9B.
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`PART III
`ITEM 10.
`ITEM 11.
`ITEM 12.
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`ITEM 13.
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`Form 10-K for fiscal year ended December 31, 2006
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`ITEM 14.
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`PRINCIPAL ACCOUNTING FEES AND SERVICES
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`PART IV
`ITEM 15.
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`SIGNATURES
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`EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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`Form 10-K for fiscal year ended December 31, 2006
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`Table of Contents
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`price offerings during 2007. TradeStation (both as a subscription service and as a brokerage account trading platform) also
`offers our OptionStation and RadarScreen functions and features. OptionStation, also an award-winning technology, is an
`options trading analysis product for equity, index and futures options that enables traders to explore options trading strategies.
`RadarScreen enables traders to scan securities markets to identify potential buying or 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, in 2004, 2005 and 2006, and, we expect, for the foreseeable future, our brokerage operations
`produced and should continue to produce the majority of our revenues. In 2004, 2005 and 2006, revenues from brokerage
`services (consisting primarily of brokerage 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%, 11% and 8%, respectively, of our total consolidated net revenues over that three-year period.
`
`Sales and Marketing
`Our marketing in 2006 consisted principally of print advertising inactive Trader, Uutures, SFO, and TechnicalAnalysis
`of Stocks & Commodities magazines, direct mail and e-mail, sales seminars, and our Web sites, and television advertising on
`financial news channels. The mix and frequency of television, print, Web-site, direct-mail and in-person marketing methods
`that we use to try to aclfieve results will likely be continnally modified as we test such methods and mixtures and analyze and
`interpret the results.
`
`Revenues derived from customers outside of the United States for the years ended December 31, 2006, 2005 and 2004,
`were approximately 11%, less than 10% and approximately 12%, respectively. International revenues are collected in U.S.
`dollars. We conduct no marketing, sales or other operations, and lnaintain no assets, outside of the United States, other than
`relating to our start-up operations in London via our United Kingdom subsidiary, TradeStation Europe Limited.
`
`Strategic Relationships
`Clearing Services. Our brokerage’s cleating services for institutional securities accounts, and for all futures accounts, are
`currently provided by Bear, Stearns Securities Corp. and R.J. O’Brien & Associates, Inc., respectively, pursuant to industry-
`standard clearing agreements.
`
`Forex Deal Services. Our forex deal services are currently provided through an arrangement with GAIN Capital Group,
`Inc. Forex customers design, test, optimize and automate their forex strategies using TradeStation, then, when a deal order is
`to be placed, the customer connects directly to GAIN Capital’s online deal system, and places the order. GAIN Capital is the
`counterparty/principal for each forex deal.
`
`Technology Development
`We believe that our success depends, in large part, on our ability to offer unique, Internet-based trading technologies with
`state-of-the-art order execution technologies, and continuously enhance those technologies, as well as develop and implement
`well-designed and user-friendly Web sites. To date, we have relied primarily on internal development of our products and
`services. We
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`currently perform all quality assurance and develop user education and other training materials internally. In 2006, 2005 and
`2004, technology development expenses were approximately $5.2 million, $4.5 million and $4.4 million, respectively. As of
`December 31, 2006, our technology development team was comprised of 85 people, as compared to 80 as of December 31,
`2005, a 6.3% increase.
`
`We view our technology development cycle as a four-step process to achieve teclmological feasibility. The first step is to
`conceptualize in detail the defining features and functions that we believe our targeted market requires from the product or
`service, and to undertake a cost-benefit analysis to determine the proper scope and integration of such features and functions.
`Once the ftmctional requirements of the product or service have been determined, the second step is to technically design the
`product or service. The third step is the detailed implementation, or engineering, of this technical design. The fourth step is
`rigorous quality assurance testmg to ensure that the final product or service generally meets the functional requirements
`determined in the first step. Several refinements are typically added and tested in the quality assurance phase of development.
`Once this process is completed, technological feasibility has been aclfieved and the working model is available for release to
`our customers.
`
`The market for strategy trading software tools, streaming real-time market data and news services, and online order
`execution services is characterized by: rapidly changing technology; evolving industry standards in computer hardware,
`programming tools and languages, operating systems, database technology and information delivery 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 will depend, in part, upon our ability to develop and maintain competitive
`technologies and to develop and introduce new products, services 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 our business
`and as minimmn customer acceptability standards for capacity and stability increase in our industry. There can be no assurance
`that we will be able to develop, introduce and market, on a tilnely basis, if at all, products, services or enhancements that
`respond to changing market conditions or that will be accepted by customers. Any failure by us to anticipate or to respond
`quickly to changing market conditions, or any significant delays in the introduction of new products and services or
`enhancements, could cause customers to delay using, or decide against the use of, our products and services and could have a
`material adverse effect on our business, financial condition and results of operations.
`
`Customer Services and Support and Training
`We provide customer services and support and product-use training in the following ways:
`Customer Services and Support. Telephone account and technical support service is provided to brokerage customers
`through a trained customer service team. Advanced EasyLanguage consulting services (services that technically assist
`customers in the use of EasyLanguage to write the customers’ own trading strategies) are available from internal resources and
`from unaffiliated, independent EasyLanguage consultants. A substantial amount of technical support information is also
`provided on our Web sites.
`
`Product-use Training. We consider user education important to try to help our customers increase their abilities to use our
`products and services fully and effectively. The majority of our training materials consist of extensive online documentation
`and technical assistance information on our Web sites, including online tutorials, as well as m-person training seminars, so that
`our
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