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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/x/ Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 0-24634
TRACK DATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
56 PINE STREET
NEW YORK, NEW YORK
(Address of principal executive offices)
10005
(Zip Code)
(212) 943-4555
(Registrant's telephone number)
22-3181095
(I.R.S. Employer Identification No.)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
$.01 PAR VALUE
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 twelve 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. /x/
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price of the Company's Common Stock on March
1, 2000 of $7.38 per share. $127,391,000
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
63,483,540 SHARES OF COMMON STOCK, $.01 PAR VALUE, AS OF MARCH 1, 2000
DOCUMENTS INCORPORATED BY REFERENCE
[SEE INDEX TO EXHIBITS]
PART I
ITEM 1. BUSINESS
Track Data Corporation (the "Company" or "TDC") is a financial services company
that offers myTrack, a fully integrated Internet-based online trading and market
data system. The Company provides real-time financial market data, fundamental
research, charting, and analytical services to institutional and individual
investors through dedicated telecommunication lines and the Internet. It also
disseminates news and third party database information from more than 100
sources worldwide.
The Company commenced its Internet-based services to the non-professional
individual investor community in mid 1998 through its myTrack service. As of
March 1, 2000 approximately 100,000 individuals registered for the service.
myTrack delivers free continuously updating quotes, as well as news and
fundamental data. myTrack also offers various packages starting at $19.95 per
month plus exchange fees for real-time quotes and enhanced market data.
myTrack builds on the Company's long history of delivering mission critical
information to the most demanding customers in the investment community. Market
data is delivered direct from the original sources (such as the exchanges) to
the Company's facilities where the data is simultaneously redistributed to its
customers. myTrack operates through the use of a proprietary application
software. Once the user is attached to the Company's host server, the connection
link is constant, like an open telephone connection. This allows the system to
provide dynamically updating stock quotes and news and to immediately respond to
all queries. Utilizing myTrack's built-in trading platform allows the user to
enter a trade that is received by the Company's server instantaneously, as the
connection is the same one that is already connected for myTrack. The Company
believes this is a competitive advantage over other trading systems that require
a new connection to a server every time information is requested or sent.
The Company has offered online trading since June, 1999 through its myTrack
service utilizing Track Securities Corporation ("TSC") as its broker-dealer.
Fees charged by TSC start at $12.95 per trade. TSC is a broker-dealer owned and
operated by a director of the Company. The Company is licensing its myTrack
trading system to a subsidiary of TSC. The Company is receiving $2.25 per trade
pursuant to the agreement. In addition, TSC pays a share of the marketing and
advertising costs incurred by the Company. Further, the Company has applied for
a broker-dealer license and, upon obtaining such license, will terminate the
relationship with TSC and transition the trading accounts from TSC to the
Company's broker-dealer.
See Note H of Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for further information about customers.
On March 31, 1996, Track Data Corporation ("Track"), a principal stockholder of
Global Market Information, Inc. ("Global"), merged into Global (the "Merger")
and the name of Global was changed to Track Data Corporation. On November 7,
1997, Barry Hertz, Chairman and principal stockholder of the Company,
transferred his 100% ownership in Newsware, Inc. ("NW"), a provider of online
news information, to the Company for no further consideration. For accounting
purposes, the Merger in 1996 and the subsequent contribution of NW in 1997 were
treated as combinations of entities under common control similar to
pooling-of-interests. Accordingly, the historical financial position and results
of operations of Track, Global and Newsware have been combined for all periods
presented.
The Company maintains offices in the U.S. and Europe, with executive
offices located at 56 Pine Street, New York, New York 10005 and at 95 Rockwell
Place, Brooklyn, New York 11217. Its telephone number is 212-943-4555 or
718-522-7373.
The Company's services consist of the following:
- - MarkeTrack is a real-time quote processing and analytical system that
provides domestic and international market information, dynamically updating
quotelines, options and futures displays, real-time spreadsheets, tick-by-tick
updating graphics, news services and third party databases, user-defined screen
layouts, access to back office order and execution services, and over 20 years
of graphical price history. MarkeTrack 98 provides similar information to
individuals through the Internet.
- - myTrack and myTrack Pro provide market data similar to MarkeTrack through
the Internet to individual and professional users, respectively. myTrack
provides delayed quotes on United States, Canadian and European stocks, options
and futures exchanges free of charge or with real-time quotes in various pay
plan packages. In addition to real-time quotes, myTrack users may subscribe to a
wide variety of databases and news services that support specific investment
needs. Online trading is offered through the myTrack service.
- - Dial/Data provides electronic access to daily and historical price data on
worldwide exchanges, primarily to individual investors who do not need real-time
information.
- - NewsWatch provides a consolidated feed of multiple news sources on a
real-time basis that affords users the benefit of knowing and reacting quickly
to events that may affect them in their business or investments.
- - AIQ Systems develops and markets PC-based financial investment software
for individual and professional users.
MARKETRACK
MarkeTrack offers significant real-time quote processing and analytical
features, and has become distinguished over time for its ability to consistently
deliver real-time, market sensitive information. The service provides domestic
and international market information, dynamically updating quotelines, options
and futures displays, real-time spreadsheets, tick-by-tick updating graphics,
news services and third party databases, user-defined screen layouts, access to
back office order and execution services, and over 20 years of graphical price
history. It allows users to calculate theoretical values of options and
determine the most beneficial investment strategy through calculating returns on
alternative investments, including options and futures. In addition, users are
able to download real-time data to both Microsoft Excel and Lotus 1-2-3
spreadsheet applications which allows the users to create individually tailored
financial applications to meet specific needs without additional programming.
MarkeTrack 98 provides essentially the same service through the Internet.
The service provides investment professionals the ability to easily and
rapidly analyze, on a single service terminal, large volumes of real-time
prices, third party databases, historical information and news services to
support split second trading decisions. It runs under Windows NT, DOS and UNIX
operating systems on a wide variety of personal computer and workstation
platforms.
Pricing and Customers. Customers are charged a monthly service fee and a
communications or location charge which varies typically with the location and
size of the customer's installation. Service charges vary with the number and
types of functions to which an individual subscribes, and are typically between
$250 and $600 per month per user. Typically subscribers who execute a subscriber
agreement contract that specifies both term and quantity of users may receive
pricing discounts for multi-year contracts. Such agreements allow subscribers to
receive services at a known cost and ensure TDC of a recurring revenue stream
into the future.
MarkeTrack currently serves over 3,000 customers in trading and
institutional investment management positions. Customers include floor traders,
block traders, market makers, OTC traders, options specialists, head traders,
arbitrageurs and hedge fund managers.
MYTRACK AND MYTRACK PRO
myTrack is a fully integrated Internet-based online trading and market data
system. myTrack has offered its software-based online trading system since its
official launch in June 1999. Trading is offered at prices starting at $12.95
per trade. myTrack is delivered over the Internet powered by application-based
software and a constant server connection similar to systems used by
professionals, as compared to most of its competitors that provide their service
over HTML website-based static pages. myTrack trading can also be accessed
through its website, the Palm Pilot and certain cellular phones. Access through
other wireless devices is being developed. myTrack is a software-based system
that runs on Microsoft NT, Linux and Mac platforms. myTrack delivers free
streaming delayed quotes and unlimited free real-time extended quotes, as well
as breaking company news, a trade by trade log, charting for technical analysis
and a proprietary library of intraday market statistics. For $19.98 per month
plus exchange fees, users can subscribe to streaming real-time quotes. A menu
of features, including Nasdaq Level II, is available separately or in value
packages. myTrack Pro is delivered to the professional retail broker market
through the Internet. It uses the myTrack platform and is tailored to the
professional user.
Pricing. Real-time quotes, news, charting and technical analysis are
available in various pay packages from $19.95 per month plus exchange fees to
$95.00 per month plus exchange fees, including Nasdaq Level II.
DIAL/DATA SERVICE
Dial/Data is an Internet-based service that provides historical and
end-of-day pricing data for U.S., Canadian and European exchange-traded equities
and related instruments, futures, equity options, futures options, mutual funds,
bonds, government issues, money markets and indexes. In addition, fundamental
data is provided for equity issues such as splits, dividends, and earnings per
share. News headlines and full text stories from some of TDC's news vendors can
also be delivered to Dial/Data customers. Dial/Data is primarily marketed
through independent software vendors who provide analytical and charting
programs for analyzing financial information. The Company's AIQ division, Equis
International, and other independent software vendors include Dial/Data access
as an integral part of the software that they market. The Company encourages
these vendors of charting software, through the payment of royalties, to make
their software compatible with the Company's Dial/Data market information, and
to advise customers by inserts and other means that they may select Dial/Data as
their source of market information by contacting Dial/Data and entering into a
month to month subscription agreement. During 1999, one of the vendors with a
competing service discontinued referrals and other customers moved from this
service to myTrack, resulting in a significant decline in Dial/Data subscribers.
A customer that has subscribed to Dial/Data accesses the service directly using
the vendor's software program through modems on their PC's and is billed for the
Dial/Data service directly by the Company. Access to the Company's database is
provided by using the Internet. Although the software can operate on real-time
information, customers primarily apply their charting techniques to historical
information and there is substantially less emphasis on up-to-the-minute
information for this service than there is for other services provided by the
Company.
Pricing and Customers. Customers who subscribe to Dial/Data pay a flat
monthly rate which ranges from $15 to $85 depending on the type of data
received. At December 31, 1999, 1998 and 1997, there were approximately 14,000,
22,000 and 25,000 customers of the Dial/Data service, respectively. Customers
pay for their services primarily by permitting the Company to charge their
credit cards. Customers may terminate Dial/Data services at any time.
NEWSWATCH SERVICE
The market focus of NewsWatch is the business professional who "must know
first." It may be a trader, banker, research analyst, investment relations
professional, corporate executive, or any "knowledge worker" who needs real-time
information for making day to day business decisions. The service provides
enterprise wide solutions to corporations needing to deliver external/internal
real-time information to their "knowledge workers," leveraging internal networks
and/or intranets. The service includes a high-speed consolidated news ticker, an
NT-resident database with full-text indexing, access to a variety of third-party
databases, and multiple domestic/international exchanges, all via a state of the
art user-friendly presentation environment.
NewsWatch also provides a browser-based interface, bringing all the
advantages of the Company's news collection and delivery service to the web
environment. It is particularly appropriate for corporations who are comfortable
with browser technology and need access to real-time business news for their
end-user population via an internal intranet or the World Wide Web.
Pricing and Customers. Customers are charged a monthly service fee and a
communications or location charge, which varies typically with the location and
size of the customer installation. Service charges vary with the number and
types of functions/news sources to which the user subscribes. A typical
installation is approximately $300/month at the 5-user level and is scaled down
with increased users at a location.
AIQ SYSTEMS
AIQ Systems is an industry leader in developing artificial intelligence
(AI) based stock market analysis and charting software for personal computers.
By simulating the reasoning of top market technicians, AIQ's "Expert Systems"
delivers trading signals and valuable market insight, as well as
state-of-the-art technical charting and screening capabilities. AIQ's customer
list consists of thousands of individual and professional investors, world-wide,
who rely on AIQ's accurate and unique timing information for their daily trading
decisions.
AIQ currently publishes three primary expert systems for market trading.
AIQ MarketExpert is an introductory level charting and analysis package that can
be downloaded free of charge from AIQ's award winning web site, WWW.AIQ.COM.
MarketExpert includes a data downloader and a free month of data from TDC's
Dial/Data service. AIQ StockExpert is an intermediate level analysis system that
includes AIQ's market timing model, as well as hundreds of powerful stock timing
tools. StockExpert retails for $498. AIQ's most popular product is AIQ
TradingExpert for Windows. This advanced analysis package includes market
timing, stock timing, and industry group analysis capabilities. TradingExpert
retails for $695. AIQ also develops a full line of add-on modules for
fundamental analysis, news retrieval, and data correlation. In addition, AIQ
offers educational services including: the Opening Bell Monthly educational
newsletter, bi-annual educational seminars and workshops, and a full line of
educational video tapes.
In November 1998, AIQ's TradingExpert Pro version 5.0 was introduced to the
marketplace combining its new Expert Design Studio which gives investors the
design and testing tools required to uncover profitable trading systems with
myTrack's delayed and realtime quotes and news and Dial/Data's historical and
end of day data. In addition, the 32-bit TradingExpert Pro contains
state-of-the-art charting, industry group analysis, market timing, reports and
screening, and portfolio management. AIQ offers this package for monthly fees
starting at $59 for delayed quotes and $79 plus exchange fees for real-time
quotes.
In November 1999, AIQ's OptionExpert was introduced. OptionExpert is an
option data and evaluation system that uses the Internet to deliver real-time
option chains, data and analysis. OptionExpert is offered in conjunction with
myTrack's Internet-based online trading and market data system. OptionExpert
delivers the tools necessary to identify, analyze, and track profitable options
strategies. OptionExpert can be used as a stand-alone program, or combined with
AIQ's award winning TradingExpert. AIQ is offering OptionExpert bundled with
myTrack for monthly fees starting at $59 plus exchange fees for real-time data.
Separately, OptionExpert is $39 per month. All packages include unlimited
historical data and news.
MARKETING
MarkeTrack competes in several highly competitive segments of the on-line
real-time financial information marketplace: equity, options and futures
trading; and the investment management segments of the professional investment
community. The equities, options and futures trading segment of this market is
comprised of approximately 30,000 professionals who spend an estimated $150
million per year on financial information, and the investment management segment
is comprised of approximately 60,000 professionals who spend an estimated $320
million per year on financial information. TDC's focus is on the premium end of
these trading markets, appealing to institutional sales people, arbitrageurs,
market makers and traders. TDC estimates that the premium segment of the trading
market consists of approximately 16,000 terminals, of which its share is
approximately 18%.
These services, as well as the NewsWatch service, are marketed primarily
through a dedicated sales force, including 12 full-time regional sales persons
in the U.S. and an international sales staff of 4 full-time sales persons. All
services and new business are sold directly, often as a result of on-site
presentations and service demonstrations.
In addition to its dedicated sales force, TDC maintains relationships with
a number of brokerage firms which actively sell TDC's services to the money
management side of the industry for "soft dollars." In a soft dollar
arrangement the brokerage firm pays TDC in cash for services delivered to the
money managers. These brokerage firms are typically also customers of TDC.
TDC has ongoing advertising, direct mail, and public relations programs to
promote product recognition and educate potential new customers in its targeted
markets. In addition, the services are exhibited at major industry trade shows
each year.
myTrack's Internet-based online trading and market data system is highly
dependent on media advertising, including television campaigns with CNBC and
CNNfn and radio, as well as print ads in newspapers and magazines to attract new
customers. The Company also advertises online with other financial oriented
Internet websites. myTrack also markets its services through direct mail and
telemarketing.
The marketing effort for the Dial/Data service is directed towards the
software vendors who offer analytic programs for the individual investor. By
agreeing to provide royalties to these vendors, the Company seeks to encourage
these vendors to make their programs compatible with the Company's data bases,
and to encourage customers to select the Company's data bases in preference to
data bases made available by others.
AIQ Systems markets its software products through direct mail, the
internet, print advertising and seminars.
LIMITED PROPRIETARY INFORMATION
The financial information which is made available by the Company for its
MarkeTrack, myTrack, myTrack Pro, Dial/Data and NewsWatch services can be
purchased from third party sources and is not proprietary. The Company maintains
proprietary economic and historical financial databases. The Company protects
its proprietary information with standard secrecy agreements.
MarkeTrack, NewsWatch, MarkeTrack 98, myTrack, myTrack Pro and Dial/Data
are registered service marks owned by the Company. AIQ has registered trademarks
for StockExpert, MarketExpert, OptionExpert and TradingExpert, as well as
Opening Bell for its newsletter.
COMPETITION
The Company competes with many other providers of electronically
transmitted financial information. The Company competes in its varied service
offerings to varying extents through price and quality of service.
The Company offers its MarkeTrack service in a highly competitive market in
which it competes with other distributors of financial and business information,
many of which have substantially greater financial resources. TDC competes,
among other things, on the basis of the quality and reliability of its data, the
speed of delivery and on the flexibility of its services. In the equity, options
and futures trading segments, and the investment management segment, TDC's
competitors include Bloomberg Financial and Bridge Information Systems. To a
lesser degree, these TDC services compete with ILX, a Thomson Financial Services
company, and Quotron, a Reuters company, who dominate the retail brokerage
market segment. There can be no assurance that TDC will not encounter increased
competition in the future, which could limit the Company's ability to maintain
or increase its market share or maintain its margins, and which could have a
material adverse effect on TDC's business, financial condition or operating
results.
The Company's myTrack online trading service competes with services offered
by online brokers. The market for brokerage services is rapidly evolving and
intensively competitive. The Company expects competition to continue and
intensify in the future. The Company faces direct competition from other
discount brokerage firms, many of which provide touch-tone telephone and online
brokerage services but do not maintain significant branch networks. The Company
also encounters competition from established full commission brokerage firms
whose pricing and Internet strategies are continuing to evolve and who could
elect to market the same types of services offered by the Company. In addition,
the Company competes with financial institutions, mutual fund sponsors and other
organizations, some of which provide (or may in the future provide) electronic
and other discount brokerage services.
The Company believes its competition consists of large and small brokerage
firms, utilizing the Internet to transact retail brokerage business. Among
these competitors are E*Trade Group, Inc., Charles Schwab & Co., Inc., Quick &
Reilly, Inc., Waterhouse Securities, Inc., Fidelity Brokerage Services, Inc. and
Datek Securities Corp. The Company also faces competition for customers from
full commission brokerage firms, including Morgan Stanley Dean Witter & Co.,
Paine Webber Incorporated and Salomon Smith Barney, as well as financial
institutions and mutual funds.
myTrack's market data service competes with many providers of financial
information over the Internet. It competes on quality and reliability, as well
as speed and price. Principal competitors to myTrack are Signal, DTN, PC Quote,
AT Financial, as well as many other Internet providers of financial information.
Competitors to the Dial/Data service include Interactive Data Corp., The
Dow Jones Retrieval Service, Compuserve, Telescan and Commodity Systems, Inc.
The Company competes in this market based on price, the quality and reliability
of its data, the extent and breadth of historical information, ease of access
and the negotiation of agreements with vendors that provide royalty arrangements
they find attractive. Some of the Company's competitors provide both software
and data services. The Company competes with such full service providers by
attempting to enter into agreements with vendors of superior software.
The Company offers its NewsWatch service in a highly competitive market in
which it competes with other distributors of news information, many of which
have substantially greater financial resources. NewsWatch competes, among other
things, on the basis of the quality and reliability of its data, the speed of
delivery and on the flexibility of its services. NewsWatch's principal
competitors are NewsEdge Corp., Retrieval Technologies, Inc. and WavePhore's
Newscast service.
Competitors of AIQ include Equis International (MetaStock), Omega Research
(SuperCharts), Windows on Wall Street, and many others. Generally, these
competitors' products can be classified as "charting" packages. They concentrate
their resources on general charting (graphical) and stock market back-testing
capabilities, rather than the pre-programmed market analysis offered by the AIQ
products. Due to this approach, which tends to be less support intensive, they
compete at a lower price range of between $250 and $450 per unit, as compared to
AIQ Systems which sells its most popular software product, "TradingExpert," for
$695. AIQ's TradingExpert Pro competes with Omega's TradeStation and MetaStock
Professional.
RESEARCH AND DEVELOPMENT
Expenditures for research and development incurred primarily to establish
technological feasibility of a product or for product enhancement were $364,000,
$356,000 and $392,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
EMPLOYEES
The Company employed approximately 300 persons on a full time basis as of
December 31, 1999. The Company believes that its relationship with its employees
is satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 56 Pine Street, New
York, New York. The Company maintains office space and data centers at locations
in New York, NY, Brooklyn, NY and Chicago, IL. The Brooklyn, NY location is
leased from a family partnership controlled by the Company's Chairman and Chief
Executive Officer. The annual rental of approximately 36,000 square feet is
approximately $540,000. The lease expires in April, 2000. The Company believes
that the terms of this lease are at least as favorable to it as terms which it
would have obtained in a comparable transaction with unaffiliated persons.
The Company leased its New York, NY property from another family
partnership until the sale of that property in February 1998. The Company
currently leases this property comprising 16,800 square feet from an
unaffiliated third party through February 2005 with base rent of $250,000,
subject to annual increases of 2.5% plus payment for electric and a share of
increases in taxes.
The Company's offices in Chicago, IL, Los Angeles, CA, San Francisco, CA,
Boston, MA, Incline Village, NV, Philadelphia, PA, Dallas, TX, Minneapolis, MN,
Boca Raton, FL and Toronto and Montreal, Canada with aggregate annual rentals of
$512,000 expire at various dates through 2004. The Company also maintains a full
service office in London, England under a lease for annual rentals of $72,000
expiring in 2004.
The Company's facilities are fully utilized and are suitable and adequate
for their purpose.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending to which the Company is a party or
of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting on October 21, 1999. The results of
matters voted at that Meeting were reported in Part II, Item 4 of the Company's
Form 10-Q for the period ended September 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market System
under the symbol "TRAC." On February 29, 2000, there were 207 stockholders of
record of the Company's Common Stock based on information provided by the
Company's transfer agent. Virtually all of the Company's publicly held shares
are held in "street name" and the Company believes the actual number of
beneficial holders of its Common Stock to be approximately 8,000.
The following table sets forth the high and low sales prices for the
Company's Common Stock as reported on Nasdaq NMS. The prices give retroactive
effect to two-for-one stock splits paid on November 17, 1999 and December 29,
1999.
COMMON STOCK
-----------
SALE PRICE
----------
HIGH LOW
---- ---
1998
----
First Quarter 7/16 5/16
Second Quarter 2--19/32 11/32
Third Quarter 1--3/16 1/2
Fourth Quarter 2--29/32 19/32
1999
----
First Quarter 3--3/4 1--3/8
Second Quarter 8--1/8 2--25/64
Third Quarter 3--1/32 2--1/8
Fourth Quarter 12 1--19/32
Dividends
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment of
dividends, if any, on the Common Stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements
and financial condition and other relevant factors. Prior to the Merger, Track
paid dividends to its sole stockholder. On October 31, 1999 and December 13,
1999, the Company declared two-for-one stock splits in the form of stock
dividends payable on November 17, 1999 and December 29, 1999 to stockholders of
record on November 10, 1999 and December 22, 1999, respectively.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
(In thousands, except per share data)
SERVICE FEES AND REVENUE $46,620 $46,473 $47,631 $48,031 $45,162
------- ------- ------- ------- -------
COSTS AND EXPENSES:
Direct operating costs 26,989 26,466 25,629 26,283 25,409
Selling and administrative
expenses 19,290 18,147 18,676 19,600 22,143
Marketing and advertising 5,684 1,302 734 930 ,130
Deferred compensation expense - - - 295 2,946
Other income (350) - - (288) (468)
Interest expense (net of
interest income) 270 508 719 1,008 950
------- ------- ------- -------- --------
Total 51,883 46,423 45,758 47,828 52,110
-------- ------- -------- -------- --------
(LOSS) INCOME BEFORE EQUITY IN
NET INCOME (LOSS)
OF AFFILIATE AND
INCOME TAXES (5,263) 50 1,873 203 (6,948)
EQUITY IN NET INCOME (LOSS) OF
AFFILIATE 275 326 (1,146) (184) 422
-------- ------- ------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES
(BENEFIT) (4,988) 376 727 19 (6,526)
INCOME TAXES (BENEFIT) 60 158 299 526 (708)
-------- ------- ------- -------- --------
NET (LOSS) INCOME $(5,048) $ 218 $ 428 $ (507) $(5,818)
======== ======= ======= ======== ========
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE $ (.082) $ .004 $ .007 $ (.009) $ (.105)
======== ======= ======= ======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING 61,229 58,224 58,220 58,488 55,644
======== ======= ======= ======== ========
DECEMBER 31, 1999 1998 1997 1996 1995
(In thousands)
TOTAL ASSETS $25,056 $18,591 $18,312 $20,679 $26,297
TOTAL LIABILITIES 10,060 9,979 11,683 14,743 21,540
STOCKHOLDERS' EQUITY 14,996 8,612 6,629 5,936 4,757
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues for the year ended December 31, 1999 and 1998 were $46,620,000 and
$46,473,000, respectively. The Company continues to grow its myTrack services,
which represents approximately 13% of revenues in 1999 compared to 2% in 1998.
Revenues from such services in the fourth quarter of 1999 were approximately 19%
of total revenues. Total revenues have not grown as customers continue to
transition from higher paying direct connect and dial-up services to lower
paying Internet-based services. Until the Company obtains its own broker-dealer
license, trading revenues include only revenues from the licensing of its
trading system, rather than the full amount of commissions paid by customers.
If full commissions were recognized, total revenues would have been $2,408,000
greater and costs and expenses would have increased by a similar amount. The
Company anticipates obtaining its own license in the second quarter of 2000.
Direct operating costs were $26,989,000 for 1999 and $26,466,000 for the
similar period in 1998. Direct operating costs as a percentage of revenues were
58% in 1999 and 57% in 1998. The percentage increase is due to the increased
costs of Internet communication lines and additional server equipment. Direct
operating costs include direct payroll, direct telecommunication costs, computer
supplies, depreciation, equipment lease expense and the amortization of software
development costs.
Selling and administrative expenses were $19,290,000 and $18,147,000 in the
1999 and 1998 periods, respectively. Selling and administrative expenses as a
percentage of revenues was 41% in 1999 and 39% in 1998. The dollar and
percentage increase primarily reflects an increase in myTrack customer service
and support expenditures. Selling expenses are expected to continue at
increased levels in 2000 for increased customer service personnel.
Marketing and advertising costs increased significantly in 1999 to
$5,684,000 from $1,302,000 in 1998. Marketing costs in 1999 are net of $571,000
received from Track Securities, principally resulting from the increased trading
volume in the fourth quarter, under a licensing agreement. These costs were
incurred in connection with the Company's myTrack online trading (introduced in
June 1999) and market data systems. The Company is currently spending
approximately $1 million per month on marketing and advertising and expects to
continue to spend at this rate or higher in the future.
Net interest expense decreased to $270,000 in the 1999 period compared to
$508,000 in 1998 due to decreased borrowings and increased interest income from
higher invested balances.
The equity in net income from an affiliate, Innodata Corporation, was
$275,000 in 1999 and $326,000 in 1998.
The Company has a valuation allowance of $4,615,000 as management believes
it may not be able to realize all of its net operating loss carryforwards in the
future. The establishment of a valuation allowance results in not recognizing
tax benefits currently. However, in the event such benefits are realized or
determined at a later date to be realizable, such future periods will benefit,
net of amounts credited to paid-in capital, from such change and reflect greater
income or a decreased loss.
The Company realized a net loss of $5,048,000 in 1999 principally due to
marketing and advertising of the Company's myTrack service, as compared to net
income of $218,000 in 1998.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues for the year ended December 31, 1998 and 1997 were $46,473,000 and
$47,631,000, respectively. The revenue decline in 1998 is principally due to a
reduction in the number of customers in traditional direct delivery services, as
customers transition to the Internet with new lower priced offerings such as
myTrack and myTrack Pro.
Direct operating costs were $26,466,000 for 1998 and $25,629,000 for the
similar period in 1997. Direct operating costs as a percentage of revenues were
57% in 1998 and 54% in 1997. The percentage increase is due to the lower
revenues in 1998 and increased costs of Internet communication lines and
additional server equipment.
Selling and administrative expenses were $18,147,000 and $18,676,000 in the
1998 and 1997 periods, respectively. Selling and administrative expenses as a
percentage of revenues was 39% in 1998 and 1997. The decrease primarily
reflects reductions in communications and other office expenses.
Marketing and advertising costs increased to $1,302,000 in 1998 from
$734,000 in 1997 to promote the Company's introduction of its myTrack
Internet-based market data system.
Net interest expense decreased to $508,000 in the 1998 period compared to
$719,000 in 1997 due to decreased borrowings.
The equity in net income from an affiliate, Innodata Corporation, was
$326,000 in 1998, while in 1997 the equity in the net loss of that affiliate was
$1,146,000. The 1997 loss included a significant charge by the affiliate for
restructuring costs and an asset impairment write-down as well as losses on
foreign currency futures contracts.
As a result of the above mentioned factors, the Company realized net income
of $218,000 in 1998 and $428,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, cash used in operating activities
was $747,000 due to the loss incurred in that year compared to cash provided by
operating activities of $2,287,000 in 1998. Cash flows used in investing
activities was $1,116,000 and $360,000 for the years ended December 31, 1999 and
1998, respectively. The increase was principally due to an increase in leasehold
improvements and furniture for additional office space for myTrack customer
service, and no repayments of related party loans. Cash provided by financing
activities was $6,647,000 in 1999 compared to cash used in financing activities
of $1,599,000 in 1998. The increase in 1999 from 1998 is primarily due to
proceeds from the issuance of common stock and exercise of stock options.
The Company has a line of credit with a bank. The line is collateralized by
the assets of the Company and is guaranteed by its principal stockholder.
Interest is charged at 1.75% above the bank's prime rate and is due on demand.
The Company may borrow up to 80% of eligible accounts receivable and is required
to maintain a compensating balance of 10% of the outstanding loans. See Note F
of Notes to Consolidated Financial Statements in Item 8. The line of credit is
sufficient for the Company's cash requirements, however, the Company has spent
and plans to spend substantial amounts for advertising its myTrack
Internet-based online trading and market data system. The Company may seek
additional financing for such efforts or dispose of certain of its marketable
securities. There are no major capital expenditures anticipated beyond the
normal replacement of equipment and additional equipment to meet customer
requirements and additional office space for myTrack customer service.
INFLATION AND SEASONALITY
To date, inflation has not had a significant impact on the Company's
operations. The Company's revenues are not affected by seasonality.
Disclosures in this Form 10-K contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words "believe," "expect," "anticipate" and
other similar expressions generally identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. These forward-looking statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties, including without limitation, changes in external
market factors, changes in the Company's business or growth strategy or an
inability to execute its strategy due to changes in its industry or the economy
generally, the emergence of new or growing competitors, various other
competitive factors and other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
Actual results could differ materially from the results referred to in the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the results referred to in the forward-looking statements
contained in this Form 10-K will in fact occur.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate change market risk with respect to
its credit facility with a financial institution which is priced based on the
prime rate of interest. At December 31, 1999, $2,535,056 was outstanding under
the credit facility. Changes in the prime interest rate during fiscal 2000 will
have a positive or negative effect on the Company's interest expense. Such
exposure will increase accordingly should the Company maintain higher levels of
borrowing during 2000.
The Company has investments in marketable securities consisting principally of
its investments in Innodata Corporation and Edgar Online, Inc., both publicly
traded companies listed on Nasdaq. The market value of such securities is
dependent on future market conditions for these companies over which the Company
has little or no control.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
TRACK DATA CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants II-7
Consolidated Balance Sheets as of December 31, 1999 and 1998 II-8
Consolidated Statements of Operations for the three years ended II-9
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity and Comprehensive II-10
Income (Loss) for the three years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the three years ended II-11
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements II-12-22
INNODATA CORPORATION AND SUBSIDIARIES - SIGNIFICANT SUBSIDIARY
Report of Independent Certified Public Accountants II-23
Consolidated Balance Sheets as of December 31, 1999 and 1998 II-24
Consolidated Statements of Operations for the three years ended II-25
December 31, 1999
Consolidated Statements of Stockholders' Equity for the three years II-26
ended December 31, 1999
Consolidated Statements of Cash Flows for the three years ended II-27
December 31, 1999
Notes to Consolidated Financial Statements II-28-38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Track Data Corporation
We have audited the accompanying consolidated balance sheets of Track Data
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 1999. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Track Data
Corporation and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
Grant Thornton LLP
Melville, New York
February 25, 2000
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
ASSETS
CASH AND EQUIVALENTS $ 5,665,833 $ 883,580
ACCOUNTS RECEIVABLE - net of allowance
for doubtful accounts of
$159,000 in 1999 and 1998 1,541,217 1,916,036
MARKETABLE SECURITIES 3,675,240 -
FIXED ASSETS - at cost (net of
accumulated depreciation) 6,680,952 7,907,694
SOFTWARE AND DATABASE COSTS- at cost
(net of accumulated amortization of
$7,267,312 in 1999 and
$6,929,144 in 1998) 417,292 613,929
INVESTMENT IN AFFILIATE 1,342,285 1,067,285
EXCESS OF COST OVER NET ASSETS ACQUIRED 2,747,523 3,030,068
NET DEFERRED INCOME TAX ASSETS 450,000 450,000
OTHER ASSETS 2,536,119 2,722,428
------------ -----------
TOTAL $ 25,056,461 $18,591,020
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 4,352,959 $ 3,871,702
Note payable - bank 2,535,056 2,138,432
Notes payable - other 762,083 698,148
Capital lease obligations 2,006,094 2,952,177
Other liabilities, including income taxes 403,459 318,598
------------ ----------
Total liabilities 10,059,651 9,979,057
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock -
$.01 par value; 300,000,000
shares authorized; issued and
outstanding - 63,070,056
shares in 1999 and 59,185,604
shares in 1998 630,701 591,856
Additional paid-in capital 24,944,796 15,755,916
Accumulated other comprehensive income 2,205,144 -
Deficit (12,783,831) (7,735,809)
------------ -----------
Total stockholders' equity 14,996,810 8,611,963
------------ -----------
TOTAL $ 25,056,461 $18,591,020
============ ===========
See notes to consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
SERVICE FEES AND REVENUE $46,620,367 $46,473,469 $47,630,842
----------- ----------- -----------
COSTS AND EXPENSES:
Direct operating costs 26,989,354 26,466,143 25,628,664
Selling and administrative expenses 19,290,029 18,147,324 18,676,033
Marketing and advertising 5,684,066 1,302,112 733,936
Gain on real property lease buyout (350,000) - -
Interest expense (net of interest
income of $181,240, $33,355 and
$41,630 in 1999, 1998
and 1997, respectively) 269,940 507,760 719,246
----------- ----------- -----------
Total 51,883,389 46,423,339 45,757,879
----------- ----------- -----------
(LOSS) INCOME BEFORE EQUITY IN NET
INCOME (LOSS) OF
AFFILIATE AND INCOME TAXES (5,263,022) 50,130 1,872,963
EQUITY IN NET INCOME (LOSS) OF
AFFILIATE 275,000 326,000 (1,146,000)
---------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (4,988,022) 376,130 726,963
----------- ----------- -----------
INCOME TAXES 60,000 157,958 299,433
----------- ----------- -----------
NET (LOSS) INCOME $(5,048,022) $ 218,172 $ 427,530
=========== =========== ===========
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE $(.082) $.004 $.007
====== ===== =====
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 61,229,000 58,224,000 58,220,000
=========== =========== ===========
See notes to consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
ACCUMULATED
OTHER COMPRE-
ADDITIONAL COMPRE- HENSIVE
COMMON PAID-IN HENSIVE INCOME
STOCK CAPITAL INCOME DEFICIT (LOSS)
------- ------- ------ ------- -----
BALANCE,
JANUARY 1, 1997 $591,304 $13,682,511 $ 44,085 $ (8,381,511)
Net income 427,530 $ 427,530
Contribution of
loan payable to
stockholder 1,025,313
Purchase and
retirement of
treasury
stock (18,944) (719,769)
Foreign currency
translation
adjustment (21,086) (21,086)
-----------
Comprehensive
income $ 406,444
-------- ---------- --------- ---------- ===========
BALANCE,
DECEMBER 31, 1997 572,360 13,988,055 22,999 (7,935,981)
Net income 218,172 $ 218,172
Stock options
exercised 36,120 2,346,009
Purchase and
retirement of
treasury stock (16,624) (897,148)
Tax effect of
stock options
exercised 319,000
Foreign currency
translation
adjustment (22,999) (22,999)
----------
Comprehensive
income $ 195,173
-------- ---------- -------- ---------- ===========
BALANCE,
DECEMBER 31, 1998 591,856 15,755,916 - (7,735,809)
Net loss (5,048,022) $(5,048,022)
Issuance of common
stock in
exchange for
investment in Net
Earnings Corp. 1,379 498,621
Sale of common stock 19,333 5,181,925
Issuance of common
stock for services 335 93,415
Issuance of options
for services 106,000
Stock options and
warrants exercised 17,873 1,861,863
Purchase and
retirement of
treasury stock (75) (23,038)
Tax effect of stock
options exercised 1,470,094
Unrealized gain on
marketable
securities -
net of taxes 2,205,144 2,205,144
---------
Comprehensive loss $(2,842,878)
==========
-------- ---------- ---------- ------------
BALANCE,
DECEMBER 31, 1999 $630,701 $24,944,796 $2,205,144 $(12,783,831)
======== =========== ========== ============
See notes to consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(5,048,022) $ 218,172 $ 427,530
Adjustments to reconcile net
(loss)income to net
cash (used in)
provided by
operating activities:
Depreciation and amortization 3,650,263 3,743,908 3,656,987
Services performed in exchange
for common stock and options 199,750 - -
Equity in net (income)
loss of affiliate (275,000) (326,000) 1,146,000
Profit sharing and charitable
contributions paid in stock - - 397,800
Loss on contribution of
stock of affiliate - - 292,577
Deferred taxes - 135,000 (265,000)
Other 737 153,381 33,137
Changes in operating assets
and liabilities:
Accounts receivable 374,819 39,106 (312,511)
Other assets (116,203) (111,365) 227,967
Accounts payable
and accrued expenses 481,257 (900,641) 33,598
Other liabilities (14,256) (664,341) 469,998
-------- ---------- ---------
Net cash (used in)
provided by
operating activities (746,655) 2,287,220 6,108,083
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,062,320) (703,258) (591,531)
Proceeds from sales of fixed assets 51,535 154,684 -
Payments from related parties - 201,462 14,909
Payments to related parties (26,602) (7,476) (949,895)
Payments (to) from others (53,087) (5,263) 48,167
Purchase of marketable securities (25,311) - (10,000)
--------- ---------- ----------
Net cash used in
investing activities (1,115,785) (359,851) (1,488,350)
---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments under capital
lease obligations (1,799,470) (1,959,052) (2,782,015)
Net proceeds (payments) on note
payable - bank 396,624 (234,767) (413,883)
Net proceeds (payments) on notes
payable - other 65,117 32,144 (18,231)
Net proceeds on loans from employee
savings program 110,438 32,482 66,991
Payments of acquisition notes - - (208,333)
Proceeds from issuance of
common stock 5,201,258 - -
Proceeds from exercise of
stock options 2,696,059 1,443,706 -
Purchase of treasury stock (23,113) (913,772) (738,713)
--------- -------- ---------
Net cash provided by
(used in) financing
activities 6,646,913 (1,599,259) (4,094,184)
---------- ---------- ----------
EFFECT OF EXCHANGE RATE DIFFERENCES
ON CASH (2,220) (23,744) (11,924)
---------- ---------- ----------
NET INCREASE IN CASH AND EQUIVALENTS 4,782,253 304,366 513,625
CASH AND EQUIVALENTS, BEGINNING OF YEAR 883,580 579,214 65,589
---------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 5,665,833 $ 883,580 $ 579,214
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for: Interest $ 346,697 $ 546,042 $ 698,093
Income taxes 20,289 786,447 18,094
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND
FINANCING ACTIVITIES:
Equipment acquisitions
financed by capital leases $ 853,387 $ 1,783,198 $ 1,717,311
Exercise of stock options 122,412 938,423 -
Issuance of common stock in
exchange for investment in
Net Earnings Corp. 500,000 - -
See notes to consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
A. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION--Track Data Corporation and
its subsidiaries (the "Company") operate in one business segment providing
sophisticated market information and news services to the investment community
and to corporate environments under continuing contracts, and lease dedicated
communication lines to customers which link such customers to databases on a
real-time basis. The Company also offers online trading through its myTrack
Internet-based personal investment service. The Company, like other entities
involved in businesses similar to leasing, uses a non-classified balance sheet
because such presentation appropriately reflects the Company's operations. Its
operating cycle is not the conventional one-year period.
On October 31, 1999 and December 13, 1999, the Company declared two-for-one
stock splits in the form of stock dividends payable on November 17, 1999 and
December 29, 1999 to stockholders of record on November 10, 1999 and December
22, 1999, respectively. The financial statements and notes thereto have been
retroactively adjusted to reflect such stock splits.
Certain reclassifications of prior year amounts were made to conform to the 1999
presentation.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements of the
Company include its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and accounts have been eliminated in consolidation.
FIXED ASSETS--Fixed assets are depreciated on a straight-line basis over their
estimated useful lives which are as follows:
ESTIMATED USEFUL LIVES
CATEGORY (in years)
Equipment 3-10
Furniture and fixtures 10
Transportation equipment 4
Leasehold improvements are amortized on a straight-line basis over the
respective lease term or estimated useful life, whichever is less.
SOFTWARE AND DATABASE COSTS--Certain costs of internally developed software are
capitalized and are amortized at the greater of the ratio that current gross
revenues bear to the total of current and anticipated future gross revenues or
the straight-line method, generally five years. Other software costs are
amortized on a straight-line basis over their estimated useful lives, generally
five years. Costs incurred for internal use software in the preliminary project
stage and for application maintenance are expensed. Costs incurred for
application development are capitalized. Most costs are incurred for upgrades
and enhancements that are constantly upgraded and changed with useful lives of
less than one year. Accordingly, these costs are expensed as incurred. No
development costs have been capitalized during the three years ended December
31, 1999. Database costs are amortized on a straight-line basis over their
estimated useful lives of ten years. Management assesses the recoverability of
its software development and database costs based principally upon a comparison
of the carrying value of the asset to the undiscounted expected future cash
flows to be generated by the asset, plus estimated salvage value less any
applicable costs. If management concludes that the asset is impaired, its
carrying value is adjusted to its fair value.
EXCESS OF COST OVER NET ASSETS ACQUIRED--The excess of the purchase price of
acquired businesses over the fair value of net assets on the dates of
acquisition amounts to $2,747,523 and $3,030,068, net of accumulated
amortization of $1,646,383 and $1,363,838 as of December 31, 1999 and 1998,
respectively. The excess is being amortized on the straight-line basis over ten
to fifteen years. Management assesses the recoverability of the remaining
unamortized costs based principally upon a comparison of the carrying value of
the asset to the undiscounted expected future cash flows to be generated by the
asset. If management concludes that the asset is impaired, its carrying value is
adjusted to its estimated fair value. In the fourth quarter of 1999, management
determined that the remaining life of certain intangible assets should be
reduced from 10 years to 5 years. The effect of this change in estimate is not
material to the Company's results of operations.
REVENUE RECOGNITION--The Company recognizes revenue as services are performed.
Billings in advance of services provided are recorded as unearned revenues. All
other revenues collected in advance of services are deferred until services are
rendered.
FOREIGN CURRENCY TRANSLATION--The Company has several divisions which operate in
foreign countries for which the functional currency is not U.S. dollars. Balance
sheet accounts are translated at the exchange rates in effect at December 31,
1999 and 1998, and the income statement accounts are translated at the weighted
average rates prevailing during the years ended December 31, 1999, 1998 and
1997. Unrealized foreign exchange gains and losses resulting from this
translation are insignificant.
INCOME TAXES--Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense (benefit) is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
INVESTMENT IN AFFILIATE--The Company's investment in Innodata Corporation
("Innodata"), a publicly traded company whose Chairman is also the Chairman of
the Company, is accounted for using the equity method under which the Company's
share of the affiliate's earnings (or losses) is included in its results of
operations. Innodata is a global outsourcing provider of Internet and online
digital content services.
STATEMENTS OF CASH FLOWS--For financial statement purposes (including cash
flows), the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
USE OF ESTIMATES--In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
RESEARCH AND DEVELOPMENT--The Company charges all costs incurred to establish
the technological feasibility of a product or product enhancement to research
and development expense. Research and development expenses were $364,000,
$356,000 and $392,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
MARKETING AND ADVERTISING-- Marketing and advertising costs are charged to
expense when incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company has estimated the fair value of
financial instruments using available market information and other valuation
methodologies in accordance with Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments."
Management of the Company believes that the fair values of financial
instruments, consisting of accounts receivable and payable, notes payable and
capital lease obligations, approximate carrying value due to the short payment
terms associated with its accounts receivable and payable and the interest rates
associated with its notes payable and capital lease obligations.
COMPREHENSIVE INCOME (LOSS)--The Company reports comprehensive income (loss) in
accordance with SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires foreign currency translation adjustments and unrealized gains and
losses on available for sale securities to be included in accumulated other
comprehensive income (loss).
EARNINGS (LOSS) PER SHARE--Basic earnings (loss) per share is based on the
weighted average number of common shares outstanding without consideration of
potential common stock. Diluted earnings (loss) per share is based on the
weighted average number of common and potential dilutive common shares
outstanding. In 1999, such result would be anti-dilutive. There was no affect
on earnings per share in 1998 and 1997 as a result of potential dilution. See
Notes L and M for options and warrants excluded from potential common shares
since they would be anti-dilutive. The calculation takes into account the
shares that may be issued upon exercise of stock options, reduced by the shares
that may be repurchased with the funds received from the exercise, based on the
average price during the year.
B. FIXED ASSETS
Fixed assets consist of the following at December 31, 1999 and 1998:
1999 1998
Equipment $32,853,829 $32,013,293
Telephone system 778,806 679,142
Furniture and fixtures 1,075,880 946,894
Transportation equipment 69,461 95,196
Leasehold improvements 2,169,135 1,948,073
--------- ----------
36,947,111 35,682,598
Less accumulated depreciation
and amortization 30,266,159 27,774,904
---------- -----------
Fixed assets - net $ 6,680,952 $ 7,907,694
=========== ===========
Equipment financed by capital leases has a net carrying value of $4,021,877 and
$5,305,644 at December 31, 1999 and 1998, respectively. Depreciation and
amortization expense (including assets held under capital leases) for the years
ended December 31, 1999, 1998 and 1997 was $2,949,223, $3,112,806 and
$3,023,594, respectively.
C. MARKETABLE SECURITIES
The Company owns 810,572 shares of Edgar Online, Inc. ("EOL"), an Internet-based
supplier of business, financial and competitive intelligence derived from U.S.
Securities and Exchange Commission data. EOL completed a public offering of its
common stock in May 1999. The Company classified a portion of its investment as
available for sale securities in May 1999. The Company carries 498,000 shares of
its investment (the portion eligible for sale within a year) at $3,675,240, the
market value at December 31, 1999, and the remaining 312,572 shares are carried
at cost of $10,000. The difference between the cost and fair market value
($2,205,144) of these securities, net of $1,470,096 in deferred taxes, is
classified as a component of accumulated other comprehensive income included in
stockholders' equity.
D. INVESTMENT IN AFFILIATE
As discussed in Note A, the Company has an equity interest in Innodata of 13%,
14% and 14% at December 31, 1999, 1998 and 1997, respectively, which is carried
at the Company's equity in the underlying net assets.
Summarized information for Innodata is as follows:
1999 1998 1997
Total assets $15,646,000 $10,596,000 $10,029,000
Total liabilities 3,994,000 3,110,000 4,775,000
Revenues 27,490,000 19,593,000 20,117,000
Net income (loss) 2,113,000 2,250,000 (4,200,000)
The Company's equity in the net income (loss) of Innodata for the years ended
December 31, 1999, 1998 and 1997 was $275,000, $326,000 and $(1,146,000),
respectively. The Company owns 633,744 shares of Innodata which are traded on
Nasdaq. The closing price on December 31, 1999 was $7.94 per share.
E. DUE FROM RELATED PARTIES
The amounts due from related parties of $25,422 at December 31, 1999, included
in other assets, consisted of loans made to the Company's Chairman and entities
controlled by him. Interest income recognized on amounts due from related
parties was $0, $5,583 and $23,063 for the years ended December 31, 1999, 1998
and 1997, respectively.
F. NOTE PAYABLE - BANK
The note payable - bank bears interest at 1.75% above the bank's prime rate
(10.5% at December 31, 1999) and is due on demand. The note is collateralized by
substantially all of the Company's assets and is guaranteed by its principal
stockholder. The Company may borrow up to 80% of eligible accounts receivable
and is required to maintain a compensating cash balance of not less than 10% of
the outstanding loan obligation. At December 31, 1999 and at times during the
year, the Company did not meet these requirements. These requirements were
waived by the bank for the year ended December 31, 1999.
G. NOTES PAYABLE - OTHER
Notes payable - other (i) are due on demand, (ii) bear interest at rates ranging
from 9 to 10 percent per annum, and (iii) approximately $140,000 is guaranteed
by the Company's Chairman.
H. SEGMENT INFORMATION
The Company operates in one business segment providing real-time financial
market data, fundamental research, charting, and analytical services to
institutional and individual investors through dedicated telecommunication lines
and the Internet. It also disseminates news and third party database
information from more than 100 sources worldwide. Revenues from foreign sources
are not significant. No customer accounted for 10% of revenues in either market
served by the Company.
The Company's revenues are derived from the following sources:
1999 1998 1997
Institutional and corporate $28,935,000 $29,647,000 $29,494,000
Individual 17,685,000 16,826,000 18,137,000
----------- ----------- -----------
$46,620,000 $46,473,000 $47,631,000
=========== =========== ===========
I. INCOME TAXES
The components of the provision for income taxes are as follows:
1999 1998 1997
Federal:
Current $ 5,000 $ - $ 355,000
Deferred - 115,000 (225,000)
------- -------- ---------
Total federal 5,000 115,000 130,000
------- ------- --------
State and local:
Current 55,000 22,958 209,433
Deferred - 20,000 (40,000)
------- ------- --------
Total state and local 55,000 42,958 169,433
------- -------- --------
Provision for income taxes $60,000 $157,958 $299,433
======= ======== ========
Reconciliation of the U.S. statutory rate with the Company's effective tax rate
is summarized as follows:
1999 1998 1997
Federal statutory rate (34.0)% 34.0% 34.0%
State and local income taxes (1.1) 7.5 15.4
Subchapter S losses not available
to the Company - - 14.2
Utilization of net operating loss
carryforward/back - - (23.6)
Increase in valuation allowance 34.0 - -
Other (.1) 0.5 1.2
---- ---- ----
Effective rate 1.2% 42.0% 41.2%
==== ==== ====
The components of the Company's net deferred taxes are as follows:
1999 1998
Deferred tax assets:
Net operating loss carryforwards $ 5,787,000 $1,669,000
Deferred compensation 995,000 1,354,000
Excess of tax basis over book basis of investment - 11,000
Other (principally reserves for
uncollectible accounts) 250,000 206,000
----------- ----------
7,032,000 3,240,000
Less valuation allowance 4,615,000 2,057,000
----------- ---------
2,417,000 1,183,000
----------- ----------
Deferred tax liabilities:
Unrealized gain on marketable securities (1,506,000) -
Excess of book basis over tax basis of
investment (92,000) -
Accelerated depreciation for tax (267,000) (515,000)
Amortization of software and
database costs deducted for tax,
not for financial reporting (102,000) (218,000)
----------- ----------
(1,967,000) (733,000)
----------- ----------
Net deferred tax asset $ 450,000 $ 450,000
=========== ==========
The valuation allowance reduces total deferred tax assets to an amount
management believes will likely be realized. That portion of the Company's
deferred tax assets ($1,620,000) relating to tax benefits resulting from
employee stock plans will be credited to paid in capital when realizable. At
December 31, 1998, $426,000 of refundable income taxes is included in other
assets. As of December 31, 1999, the Company has net operating loss
carryforwards for Federal income tax purposes totaling approximately $14,467,000
which expire from 2010 to 2019. Certain of these net operating losses may be
limited to annual use based on IRS regulations.
J. COMMITMENTS AND CONTINGENCIES
LEASES--The Company is obligated under various lease agreements covering office
space and computer equipment. The lease agreements for office space contain
escalation clauses based principally on increases in real estate taxes, building
maintenance and utility costs. A summary of such commitments as of December 31,
1999 follows:
OPERATING LEASES
YEAR ENDING OFFICE COMPUTER CAPITAL
DECEMBER 31, SPACE EQUIPMENT TOTAL LEASES
2000 $1,098,044 $ 619,735 $1,717,779 $1,408,372
2001 888,270 358,860 1,247,130 663,607
2002 700,508 138,585 839,093 124,311
2003 531,104 3,716 534,820
2004 358,979 - 358,979
Thereafter 70,625 - 70,625
---------- ---------- ---------- ---------
Total $3,647,530 $1,120,896 $4,768,426 2,196,290
========== ========== ==========
Less amounts representing
interest 190,196
---------
Capital lease obligations $2,006,094
=========
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to
$1,558,996, $1,620,855 and $1,609,920 for office space and $902,687, $983,829
and $1,570,977 for computer equipment, respectively.
The Company leased its office facilities in Brooklyn and Manhattan from limited
partnerships owned by the Company's principal stockholder and members of his
family. The Manhattan building was sold in 1998 and the property has since been
leased from an unaffiliated third party. The Company also guarantees the
partnership's mortgage on the Brooklyn premises, having an unpaid balance of
$1,470,036 at December 31, 1999. Certain financial covenants required in the
mortgage have not been met. The partnership and the Company intend to
renegotiate the terms of the mortgage. The Company paid these partnerships
aggregate rent of $525,000, $530,646 and $988,500 for the years ended December
31, 1999, 1998 and 1997, respectively. The Brooklyn lease provides for the
Company to pay $540,000 per annum through April 2000.
SOFTWARE DEVELOPMENT AGREEMENT--In July 1998, the Company entered into a
software development agreement with Third Millennium Technology, Inc. ("TMT"), a
corporation controlled by a director of the Company. The agreement is for an
initial period of two years and is renewable annually thereafter unless
cancelled. In connection with the agreement, the Company granted TMT a five year
option to purchase 120,000 shares of its common stock at $1.00 per share,
exercisable 60,000 at the end of each of the first two anniversaries. The
Company may terminate this agreement after two years by paying $40,000 plus
continuation of fees provided in the contract for a third year. The Company has
provided notice of such termination. The monthly fees paid to TMT consist of a
declining scale fee per user of the Company's myTrack service and certain
additional fees are payable in connection with revenues from online trading.
Such fees amounted to $101,550 and $21,357 in 1999 and 1998, respectively.
BROKER-DEALER SERVICE AGREEMENT -- In April 1999, the Company began to offer
online trading through its myTrack service utilizing Track Securities
Corporation ("TSC") as its broker-dealer. TSC is a broker-dealer owned and
operated by a director of the Company. The Company is licensing its myTrack
trading system to a subsidiary of TSC. The Company is receiving $2.25 per trade
pursuant to the agreement, which aggregated $590,000 in 1999. In addition, TSC
pays a share of the marketing and advertising costs incurred by the Company,
which aggregated $571,000 in 1999. At December 31, 1999, the amount due from
TSC of $655,483 is included in other assets and was paid in January, 2000.
Further, he has a five-year consulting agreement with the Company pursuant to
which he is to be paid an annual fee of the greater of $50,000 or 5% of the
after-tax earnings, if any, from trading activities. In 1999, the fee was
$37,500. The Company intends to apply for a broker-dealer license and, upon
obtaining such license, will terminate the relationship with TSC and transition
the trading accounts from TSC to the Company's broker-dealer.
LITIGATION--The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the Company's financial statements.
K. DEFERRED COMPENSATION AND SAVINGS PLANS
The Company had a deferred compensation plan pursuant to which certain employees
are entitled to payments after termination of their employment. The plan was
based on these employees having phantom stock units prior to its public
offering. In December 1995, the Board of Directors agreed to satisfy all
obligations to participants under the phantom stock plan by committing to pay
upon termination of employment 61,821 shares of Innodata common stock and
3,004,400 shares of the Company's common stock. These shares were placed in a
trust as of March 31, 1996. In June 1998, the Board of Directors authorized the
distribution of 297,352 shares of the Company's common stock to participants,
510,000 shares in February 1999 and 266,400 shares in June 1999.
In addition, the Company has an employee savings plan under which employees may
make deposits to the savings plan and receive interest at the prime rate.
Amounts due to employees under the plan aggregated $443,275 at December 31,
1999.
L. CAPITAL STOCK
COMMON STOCK--The Company's Board of Directors, with subsequent stockholder
approval, increased the authorized shares of common stock of the Company from 30
million to 60 million in April, 1999; to 75 million in November, 1999; and to
300 million in January 2000. See Note A for two stock splits declared in 1999.
In June 1999, the Company issued 137,928 shares of its common stock valued at
$500,000 to Net Earnings Corp., a privately held Internet-based provider to the
individual and professional investment communities of future dates of public
company earnings reports, dividends, conference calls, IPO/secondary offerings
and other timing information, in exchange for a 10% ownership interest in Net
Earnings. The investment is carried at cost and is included in other assets.
In July 1999, the Company sold pursuant to private placements 1,933,336 shares
of its common stock and realized net proceeds, after expenses, of $5,201,258.
In connection with such sales, the Company also issued three-year warrants to
purchase 603,332 shares of its common stock at $4.22 per share, of which 583,332
are outstanding at December 31, 1999.
In connection with the Company's initial public offering, the Company sold to
the underwriter for nominal consideration the right to purchase up to 480,000
shares of common stock at $1.91 per share through August 9, 1999. Warrants to
purchase 474,000 shares of common stock were exercised. The remaining 6,000
expired.
PREFERRED STOCK--The Company is authorized to issue up to 1,000,000 shares of
$.01 par value preferred stock. The Board of Directors is authorized to fix the
terms, rights, preferences and limitations of the preferred stock and to issue
the preferred stock in series which differ as to their relative terms, rights,
preferences and limitations. No preferred shares have been issued.
COMMON STOCK RESERVED--At December 31, 1999, the Company reserved for issuance
6,644,764 shares of its common stock as follows: (a) 6,061,432 shares pursuant
to the Company's Stock Option Plans and options issued which were not granted
under the plans; and (b) 583,332 shares issuable upon exercise of investors' and
finders' warrants.
M. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS--The Company adopted, with stockholder approval, the 1994, 1995,
1996 and 1998 Stock Option Plans (the "1994 Plan," "1995 Plan," "1995 DD Plan,"
"1996 Plan" and the "1998 Plan") which provide for the granting of options to
purchase not more than an aggregate of 1,200,000, 2,000,000, 200,000, 3,200,000
and 3,200,000 shares of common stock, respectively, subject to adjustment under
certain circumstances. Such options may be incentive stock options ("ISOs")
within the meaning of the Internal Revenue Code of 1986, as amended, or options
that do not qualify as ISOs ("Non-Qualified Options").
The option exercise price per share for a Non-Qualified Option may not be less
than 85% of the fair market value per share of common stock on the date of grant
and for an ISO may not be less than the fair market value per share of common
stock on the date of grant (110% of such fair market value for an ISO, if the
grantee owns stock possessing more than 10% of the combined voting power of all
classes of the Company's stock). Options may be granted under the Stock Option
Plan to all officers, directors and employees of the Company and, in addition,
Non-Qualified Options may be granted to other parties who perform services for
the Company. No options may be granted under the 1994 Plan after March 31, 2004,
under the 1995 Plan and 1995 DD Plan after May 15, 2005, under the 1996 Plan
after July 8, 2006 and under the 1998 Plan after July 9, 2008.
The Stock Option Plans may be amended from time to time by the Board of
Directors of the Company. However, the Board of Directors may not, without
stockholder approval, amend the Stock Option Plans to increase the number of
shares of common stock which may be issued under the Stock Option Plans (except
upon changes in capitalization as specified in the Stock Option Plans), decrease
the minimum exercise price provided in the Plans or change the class of persons
eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation." Accordingly, no compensation expense
has been recognized for stock options granted to employees. Had compensation
cost for the Company's stock option grants been determined based on the fair
value at the grant date consistent with the provisions of SFAS No. 123, the
Company's net income (loss) and income (loss) per share, both basic and diluted,
would have been changed to the pro forma amounts as follows: net loss would have
been $(5,527,000) or $(.09) per share, in 1999, net income would have been
$115,000, or $.002 per share, in 1998, and net income would have been $277,000,
or $.005 per share, in 1997. The fair value of options at date of grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: an expected life of two and one-half years in
1999, three years in 1998 and four years in 1997; risk free interest rate of 6%
in 1999, 5.6% in 1998 and 6.4% in 1997; expected volatility of 107% in 1999, 80%
in 1998 and 25% in 1997; and a zero dividend yield. The effects of applying SFAS
No. 123 in this proforma disclosure are not indicative of future results.
WEIGHTED
AVERAGE
PER SHARE REMAINING WEIGHTED WEIGHTED FAIR
RANGE OF CONTRACTUAL AVERAGE NUMBER AVERAGE VALUE
EXERCISE NUMBER LIFE EXERCISE EXERCIS- EXERCISE DATE OF
PRICES OUTSTANDING (YEARS) PRICE ABLE PRICE GRANT
------- ----------- ----- ------ ------ --------- -------
Balance
1/1/97 $ .38- .75 3,584,600 3 $ .59 2,457,244 $ .61
$1.25-1.50 540,000 2 $1.27 286,664 $1.29
--------- ---------
4,124,600 2,743,908
=========
Canceled $ .50- .75 (398,400) 4 $ .55
Granted $ .50 970,000 5 $ .50 $ .13
---------
Balance
12/31/97 $ .38- .75 4,156,200 3 $ .57 3,106,864 $ .60
$1.25-1.50 540,000 2 $1.28 453,328 $1.29
--------- ---------
4,696,200 3,560,192
=========
Canceled $ .50- .75 (56,300) 2 $ .58
Exercised $ .38-1.26 (3,609,096) 2 $ .66
Granted $ .75-1.25 1,599,000 4 $ .77 $ .18
---------
Balance
12/31/98 $ .38- .75 2,391,088 4 $ .67 811,416 $ .55
$1.00-1.50 238,716 2 $1.25 132,716 $ 1.34
--------- -------
2,629,804 944,132
=======
Canceled $ .50-3.50 (32,200) 2 $1.62
Exercised $ .50-1.50 1,262,472) 3 $ .71
Granted $1.50-7.00 1,778,700 4 $2.65 $1.48
---------
Balance
12/31/99 $ .38- .75 1,243,332 3 $ .69 827,332 $ .65
$1.00-1.75 734,000 2 $1.48 101,000 $1.36
$2.50-7.00 1,136,500 4 $3.27 60,000 $3.09
--------- -------
3,113,832 988,332
========= =======
The options have a term of five years. The above table includes options to
purchase 86,672 shares which were not granted pursuant to any plan, but contain
the same conditions as those provided in the Plans. Amounts due from the
exercise of options in December 1999 and 1998 in the amount of $122,412 and
$938,423, respectively, included in other assets, were received in January 2000
and January 1999, respectively.
N. RETIREMENT PLAN
The Company has a profit sharing plan which qualifies under Section 401(k) of
the Internal Revenue Code. The plan covers substantially all employees who have
completed six months of service. Company contributions to the plan are
discretionary and vest at a rate of 20% after three years of service, and 20%
each year thereafter until employees are fully vested after 7 years.
Contributions to the plan for the years ended December 31, 1999, 1998 and 1997
were $46,084, $35,945 and $54,468, respectively.
O. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(in thousands, except per share)
1999
Revenues $11,656 $11,662 $11,518 $11,784
Net loss (35) (686) (2,340) (1,987)
Basic and diluted net loss per share $(.001) $(.011) $(.038) $(.032)
1998
Revenues $11,816 $11,454 $11,611 $11,592
Net income (loss) 226 41 (3) (46)
Basic and diluted income (loss) per share $.004 $.001 $.000 $(.001)
1997
Revenues $11,918 $11,894 $11,763 $12,056
Net income (loss) 177 (344) 9 586
Basic and diluted income (loss) per share $.003 $(.006) $.000 $.010
P. SUBSEQUENT EVENTS
In January 2000, the Company agreed to acquire approximately 10% of
MainStreetIPO.com ("MS") in exchange for up to 375,000 shares of the Company's
common stock. The companies also agreed to market their services to their
respective members. MS is a privately held company based in New Jersey that has
agreed to merge with Dialysis Corporation of America, a publicly traded company.
MS has established a website on which corporations may conduct IPOs by direct or
underwritten sale to MS members in a Dutch-auction process. Bids submitted by
interested investors will determine IPO pricing. To date, no such offerings
have occurred on the website. The closing of the Company's transaction with MS
is subject to customary terms and conditions.
In January 2000, the Company agreed to acquire approximately 10% of
FlexTrader.com ("FT") in exchange for up to 400,000 shares of the Company's
common stock. The companies also agreed to market their services to their
respective members. FT is a privately held company, based in New York City,
that offers novice and experienced investors customized investment research
tools. The closing, expected to occur in April, is subject to customary terms
and conditions.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Hackensack, New Jersey
We have audited the accompanying consolidated balance sheets of Innodata
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innodata
Corporation and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
Grant Thornton LLP
New York, New York
March 2, 2000
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,380,242 $ 3,535,533
Accounts receivable-net of allowance
for doubtful accounts
of $580,000 in 1999 and
$425,000 in 1998 5,247,428 2,943,422
Prepaid expenses and other current assets 396,743 555,127
Deferred income taxes 540,000 376,000
---------- ----------
Total current assets 9,564,413 7,410,082
FIXED ASSETS-Net 4,891,992 2,669,892
OTHER ASSETS 1,189,472 515,534
---------- ------------
TOTAL $15,645,877 $10,595,508
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 19,629 $ 56,718
Accounts payable and accrued expenses 1,553,585 1,295,347
Accrued salaries and wages 1,529,753 849,608
Income and other taxes 495,628 459,308
---------- ------------
Total current liabilities 3,598,595 2,660,981
----------- ------------
LONG-TERM DEBT, less current portion 5,188 24,089
------------ ------------
DEFERRED INCOME TAXES 390,000 425,000
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-authorized
20,000,000 shares; issued 5,133,943
shares in 1999 and 4,585,206 shares
in 1998 51,339 45,852
Additional paid-in capital 10,908,538 8,860,093
Retained earnings (deficit) 913,186 (1,199,538)
------------ ------------
11,873,063 7,706,407
Less: treasury stock -
at cost; 144,249 shares (220,969) (220,969)
----------- ------------
Total stockholders' equity 11,652,094 7,485,438
------------ ------------
TOTAL $15,645,877 $10,595,508
=========== ============
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
REVENUES $27,490,138 $19,593,353 $20,116,935
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Direct operating costs 17,853,702 13,068,660 16,007,051
Selling and administrative
expenses 6,783,313 4,982,127 5,283,891
Restructuring costs, impairment
of assets and other - 133,141 1,500,000
(Gain) loss on foreign currency
contracts - (487,458) 1,400,000
Interest expense 10,542 77,594 85,595
Interest income (111,143) (98,391) (59,384)
------------ ------------ ------------
Total 24,536,414 17,675,673 24,217,153
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (BENEFIT) 2,953,724 1,917,680 (4,100,218)
PROVISION FOR INCOME TAXES (BENEFIT) 841,000 (332,000) 100,000
------------ ------------ -----------
NET INCOME (LOSS) $ 2,112,724 $ 2,249,680 $(4,200,218)
============ =========== ===========
BASIC INCOME (LOSS $0.45 $0.51 $(0.93)
===== ===== ======
DILUTED INCOME (LOSS) PER SHARE $0.40 $0.50 $(0.93)
====== ===== ======
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS TREASURY
SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL
------ ------ ------- --------- -------- -----
January
1, 1997 4,565,208 $ 45,652 $8,824,696 $751,000 $(143,877) $9,477,471
Net loss - - - (4,200,218) - (4,200,218)
Warrant
costs for
consulting
arrangement - - 15,600 - - 15,600
Purchase of
treasury
stock - - - - (38,720) (38,720)
---------- -------- ---------- ---------- --------- ---------
December
31, 1997 4,565,208 45,652 8,840,296 (3,449,218) (182,597) 5,254,133
Net income - - - 2,249,680 - 2,249,680
Issuance of
common
stock
upon
exercise
of stock
options 19,998 200 19,797 - - 19,997
Purchase of
treasury
stock - - - - (38,372) (38,372)
---------- ------ --------- ----------- -------- ---------
December
31, 1998 4,585,206 45,852 8,860,093 (1,199,538) (220,969) 7,485,438
Net income - - - 2,112,724 - 2,112,724
Issuance of
common
stock
upon
exercise
of stock
options 513,739 5,137 908,324 - - 913,461
Issuance of
common stock
for software
development 34,998 350 68,246 - - 68,596
Income tax
benefit
from exercise
of stock
options - - 1,071,875 - - 1,071,875
---------- ------ ---------- ---------- --------- ----------
December
31, 1999 $5,133,943 $51,339 $10,908,538 $913,186 $(220,969) $11,652,094
========== ======= =========== ======== ========= ===========
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $2,112,724 $2,249,680 $(4,200,218)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and amortization 1,797,031 1,322,721 1,321,555
Tax benefit from exercise
of options 1,071,875 - -
Restructuring costs, impairment
of assets and other - 133,141 1,500,000
Loss (gain) on disposal
of fixed assets 71,630 (74,399) -
(Gain) loss on foreign
currency contracts - (487,458) 1,400,000
Deferred income taxes (199,000) (482,000) 400,000
Changes in operating
assets and liabilities:
Accounts receivable (2,304,006) 419,834 529,363
Prepaid expenses and
other current assets (326,131) 120,459 304,924
Other assets (73,565) 23,660 (116,769)
Accounts payable and
accrued expenses 258,238 (76,805) (104,330)
Liability for foreign
currency contracts - (912,542) -
Accrued salaries and wages 680,145 208,422 15,707
Income and other
taxes payable (210,855) 102,300 78,439
------------ ---------- ----------
Net cash provided by
operating activities 2,878,086 2,547,013 1,128,671
------------ ---------- ----------
INVESTING ACTIVITIES:
Expenditures for fixed assets (3,890,848) (1,024,622) (1,015,088)
Proceeds from disposal of
fixed assets - 182,912 -
----------- ---------- -----------
Net cash used in
investing activities (3,890,848) (841,710) (1,015,088)
--------- --------- ----------
FINANCING ACTIVITIES:
Proceeds from borrowings - - 577,000
Payments of borrowings (55,990) (121,247) (779,204)
Proceeds from exercise of
stock options 913,461 19,997 -
Purchase of treasury stock - (38,372) (38,720)
----------- --------- ----------
Net cash provided by
(used in) financing activities 857,471 (139,622) (240,924)
---------- ---------- ---------
(DECREASE) INCREASE IN CASH AND
EQUIVALENTS (155,291) 1,565,681 (127,341)
CASH AND EQUIVALENTS, BEGINNING
OF YEAR 3,535,533 1,969,852 2,097,193
---------- ---------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 3,380,242 $3,535,533 $ 1,969,852
=========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 10,542 $ 32,524 $ 85,595
Income taxes $ 310,698 $ - $ -
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION - Innodata Corporation and subsidiaries
(the "Company") is a leading provider of Internet and on-line data conversion,
content architecture, and content management services, providing all the
necessary steps to enable its customers to create and disseminate vast amounts
of information both online and via the Internet. The Company's services are
performed in production facilities located in the Philippines, Sri Lanka, India
and the United States. The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned. All
intercompany transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION - Revenue is recognized in the period in which services
are performed.
FOREIGN CURRENCY - The functional currency for the Company's production
operations located in the Philippines, India and Sri Lanka is U.S. dollars. As
such, transactions denominated in Philippine pesos, Indian and Sri Lanka rupees
were translated to U.S. dollars at rates which approximate those in effect on
transaction dates. Monetary assets and liabilities denominated in foreign
currencies at December 31, 1999 and 1998 were translated at the exchange rate in
effect as of those dates. In 1997, the Company recognized a gain of $125,000
resulting from such foreign currency translation. Exchange gains and losses in
1999 and 1998 resulting from such transactions were immaterial.
STATEMENT OF CASH FLOWS - For financial statement purposes (including cash
flows), the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
DEPRECIATION - Depreciation is provided on the straight-line method over
the estimated useful lives of the related assets which are as follows:
ESTIMATED USEFUL
CATEGORY LIVES
Equipment 3-5 years
Furniture and fixtures 5-10 years
Leasehold improvements are amortized on the straight-line basis over the
shorter of their estimated useful lives or the lives of the leases.
INCOME TAXES - Deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and liabilities, using
enacted tax rates, as well as any net operating loss or tax credit carryforwards
expected to reduce taxes payable in future years.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which became effective in 1996.
As permitted by SFAS No. 123, the Company has elected to continue to account for
employee stock options under APB No. 25, "Accounting for Stock Issued to
Employees."
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has estimated the fair
value of financial instruments using available market information and other
valuation methodologies in accordance with SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." Management of the Company believes that the
fair value of financial instruments for which estimated fair value has not been
specifically presented is not materially different than the related carrying
value. Determinations of fair value are based on subjective data and
significant judgment relating to timing of payments and collections and the
amounts to be realized. Different assumptions and/or estimation methodologies
might have a material effect on the fair value estimates. Accordingly, the
estimates of fair value are not necessarily indicative of the amounts the
Company would realize in a current market exchange.
INCOME (LOSS) PER SHARE - Basic earnings (loss) per share is based on the
weighted average number of common shares outstanding without consideration of
potential common stock. Diluted earnings per share is based on the weighted
average number of common and potential common shares outstanding. The
calculation takes into account the shares that may be issued upon exercise of
stock options, reduced by the shares that may be repurchased with the funds and
tax benefits received from the exercise, based on average prices during the
year.
2. FIXED ASSETS
Fixed assets, stated at cost less accumulated depreciation and
amortization, consist of the following:
DECEMBER 31, 1999 1998
Equipment $9,522,707 $6,647,870
Furniture and fixtures 501,768 427,807
Leasehold improvements 1,045,865 678,557
--------- ----------
Total 11,070,340 7,754,234
Less accumulated depreciation
and amortization 6,178,348 5,084,342
---------- -----------
$4,891,992 $2,669,892
========== ===========
As of December 31, 1999 and 1998, the net book value of fixed assets
located at the Company's production facilities in the Philippines, India and Sri
Lanka was approximately $4,217,000 and $1,553,000, respectively. In addition,
equipment financed by capital leases has a net book value of $30,000 at December
31, 1999.
3. INCOME TAXES
The significant components of the provision for (benefit from) income taxes
are as follows:
1999 1998 1997
Current income tax expense (benefit):
Foreign $ - $ 50,000 $ -
Federal 884,000 55,000 (300,000)
State and local 156,000 45,000 -
--------- -------- -----------
1,040,000 150,000 (300,000)
Deferred income tax (benefit) expense (199,000) (482,000) 400,000
---------- ------- -------
Provision for (benefit from) income taxes $ 841,000 $(332,000) $ 100,000
========== ========= =========
During 1998 the Company utilized approximately $1,100,000 of net operating
loss carryforwards, resulting in a tax benefit of $375,000.
Reconciliation of the U.S. statutory rate with the Company's effective tax
rate is summarized as follows:
1999 1998 1997
Federal statutory rate 34.0% 34.0% (34.0)%
Effect of:
Valuation allowance - (35.0) 34.0
Utilization of net operating loss carryforwards
not previously recognized - (19.5) -
State income taxes (net of federal tax benefit) .1 1.6 -
Effect of foreign tax holiday (8.1) - -
Foreign taxes - 2.6 -
Other 2.5 (1.0) 2.4
---- ----- ---
Effective rate 28.5% (17.3)% 2.4%
==== ===== ===
As of December 31, 1999 and 1998, the composition of the Company's net
deferred taxes is as follows:
1999 1998
Deferred income tax assets:
Allowances not currently deductible $ 355,000 $ 266,000
Expenses not deductible until paid 60,000 60,000
Net operating loss carryforwards 225,000 150,000
-------- -------
640,000 476,000
Less: valuation allowance (100,000) (100,000)
-------- --------
540,000 376,000
-------- --------
Deferred income tax liabilities:
Foreign source income, not taxable
unless repatriated (415,000) (415,000)
Depreciation and amortization 25,000 (10,000)
-------- --------
(390,000) (425,000)
-------- --------
Net deferred income tax asset /(liability) $ 150,000 $ (49,000)
========= =========
The valuation allowance reduces total deferred tax assets to an amount
management believes will likely be realized. At December 31, 1999, the Company's
net operating loss carryforward for federal income tax purposes of approximately
$600,000 expires in 2019. These net operating losses may be limited to annual
use based on IRS regulations.
4. LONG-TERM DEBT
Long-term debt is as follows:
1999 1998
Equipment leases, at 9.6% to 13.5% $27,048 $88,581
Less: deferred interest 2,231 7,774
------- ------
Total 24,817 80,807
Less: current portion of long-term debt 19,629 56,718
------- -------
Long-term debt $ 5,188 $24,089
======= =======
Long term debt matures as follows: 2000 - $20,878; 2001 - $6,170.
5. COMMITMENTS AND CONTINGENT LIABILITIES
LINE OF CREDIT - The Company has a line of credit with a bank in the amount
of $2 million. The line is collateralized by accounts receivable. Interest is
charged at 1/2% above the bank's prime rate and is due on demand. The line was
unused at December 31, 1999.
LEASES - The Company is obligated under various operating lease agreements
for office and production space. The agreements contain escalation clauses and
requirements that the Company pay taxes, insurance and maintenance costs. The
lease agreements for production space in the Philippines, which expire through
2004, contain provisions pursuant to which the Company may cancel the leases at
any time. The annual rental for the leased space in the Philippines is
approximately $450,000. For the years ended December 31, 1999, 1998 and 1997,
rent expense totaled approximately $850,000, $700,000 and $940,000,
respectively.
At December 31, 1999, future minimum annual rental commitments on
non-cancellable leases are as follows:
2000 $ 538,000
2001 541,000
2002 468,000
2003 293,000
2004 293,000
Thereafter 1,466,000
---------
$3,599,000
==========
EMPLOYMENT AGREEMENTS - The Company has a three-year employment
agreement through August 2000 with its President and CEO. He is currently paid
at the rate of $270,000 per annum with any bonuses and future increases at the
discretion of the Board of Directors. In addition, each December 31 during the
term of the agreement he is to receive 31,000 options to purchase common stock
of the Company at then prevailing market prices. In consideration of the signing
of the agreement he was granted five year options as follows: 30,000 options at
$1.00 per share; 49,998 at $1.67; 69,999 at $2.00; 90,000 at $2.33; and 99,999
at $5.17. The options are presently exercisable.
The Company has an employment agreement with its former President and CEO
expiring September 30, 2000 that provides for a salary of $75,000 per annum. He
serves as Vice Chairman of the Board and in executive capacities as designated
by the CEO or the Board of Directors.
LITIGATION - The Company is subject to legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the Company's financial statements.
FOREIGN CURRENCY - The Company's production facilities are located in the
Philippines, India and Sri Lanka. To the extent that the currencies of these
countries fluctuate, the Company is subject to risks of changing costs of
production after pricing is established for certain customer projects, although
most arrangements are at-will and can be terminated or renegotiated.
OTHER COMMITMENTS - The Company has a collective bargaining agreement with
certain employees at its Manila facility which provides for approximately 12%
wage increases per annum plus one-half of any government mandated increases
through March 31, 2001.
PHILIPPINE PENSION REQUIREMENT - The Philippine government enacted
legislation requiring businesses to provide a lump-sum pension payment to
employees working at least five years and who are employed by the Company at age
60. Those eligible employees are to receive approximately 59% of one month's
pay for each year of employment with the Company. The terms of the collective
bargaining agreement provide benefits similar to the government. Based on
actuarial assumptions and calculations in accordance with SFAS No. 87,
"Employers' Accounting for Pensions," the liability for the future payment is
insignificant at December 31, 1999. Under the legislation, the Company is not
required to fund future costs, if any.
6. CAPITAL STOCK
COMMON STOCK - The Company's stockholders approved a one-for-three reverse
stock split effective on March 25, 1998. On August 17, 1999, the Board of
Directors declared a three-for-one stock split that was paid on September 9,
1999. All share and per share amounts have been restated to reflect such
splits.
PREFERRED STOCK - The Board of Directors is authorized to fix the terms,
rights, preferences and limitations of the preferred stock and to issue the
preferred stock in series which differ as to their relative terms, rights,
preferences and limitations.
COMMON STOCK RESERVED - At December 31, 1999, the Company reserved for
issuance 2,541,329 shares of its common stock as follows: (a) 2,461,331 shares
pursuant to the Company's Stock Option Plans (including 360,996 options issued
to the Company's Chairman and its President which were not granted under the
plans); and (b) 79,998 shares issuable upon exercise of warrants issued to
consultants.
7. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company adopted, with stockholder approval, 1993, 1994, 1995, 1996 and
1998 Stock Option Plans (the "1993 Plan," "1994 Plan," "1994 DD Plan," "1995
Plan," "1996 Plan" and the "1998 Plan") which provide for the granting of
options to purchase not more than an aggregate of 262,500, 315,000, 52,500,
600,000, 499,998 and 900,000 shares of common stock, respectively, subject to
adjustment under certain circumstances. Such options may be incentive stock
options ("ISOs") within the meaning of the Internal Revenue Code of 1986, as
amended, or options that do not qualify as ISOs ("Non-Qualified Options").
The option exercise price per share may not be less than the fair market
value per share of common stock on the date of grant (110% of such fair market
value for an ISO, if the grantee owns stock possessing more than 10% of the
combined voting power of all classes of the Company's stock). Options may be
granted under the Stock Option Plan to all officers, directors and employees of
the Company and, in addition, Non-Qualified Options may be granted to other
parties who perform services for the Company. No options may be granted under
the 1993 Plan after April 30, 2003, under the 1994 Plan and 1994 DD Plan, after
May 19, 2004, under the 1995 Plan, after May 16, 2005, under the 1996 Plan,
after July 8, 2006 and under the 1998 Plan, after July 8, 2008.
The Plans may be amended from time to time by the Board of Directors of the
Company. However, the Board of Directors may not, without stockholder approval,
amend the Plans to increase the number of shares of common stock which may be
issued under the Plans (except upon changes in capitalization as specified in
the Plans), decrease the minimum exercise price provided in the Plans or change
the class of persons eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation." Accordingly, no compensation expense
has been recognized for stock options granted to employees. Had compensation
cost for the Company's stock option grants been determined based on the fair
value at the grant date for awards in 1999, 1998 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net income would have been $1,503,634
or $.32 per share, basic, and $.28 per share, diluted in 1999, $1,463,259, or
$.33 per share, basic, and $.32 per share, diluted, in 1998, and net loss would
have been $(4,359,807), or $(.97) per share, in 1997. The fair value of options
at date of grant was estimated using the Black-Scholes pricing model with the
following weighted average assumptions: expected life of four years; risk free
interest rate of 5% in 1999 and 1998, and 6.4% in 1997; expected volatility of
107% in 1999 and 1998, and 40% in 1997; and a zero dividend yield. The effects
of applying SFAS No. 123 in this disclosure are not indicative of future
disclosures.
Weighted
Average
Per Weighted Fair
Share Average Weighted Weighted Value,
Range of Number Remaining Average Number Average Date
Exercise Out- Contractual Exercise Exercis- Exercise of
Prices standing Life Price able Price Grant
------- -------- ------- ------ ---------- ------- -------
Balance
1/1/97 $2.31-3.25 416,151 3 $2.71 334,539 $2.96
$3.38-5.95 452,649 3 $4.23 267,471 $4.39
------- -------
868,800 602,010
=======
Canceled $2.63-4.63 (146,649)
Granted $1.00-2.00 300,000 5 $1.21 $0.42
Granted $3.00-7.00 259,998 5 $4.48 $0.06
--------
Balance
12/31/97 $1.00-3.25 738,576 4 $2.14 347,907 $2.72
$3.38-7.00 543,573 3 $4.70 281,988 $4.32
-------- -------
1,282,149 629,895
=======
Canceled $1.25-3.50 (484,098)
Canceled $3.81-7.00 (487,629)
Granted $1.00-2.13 528,897 5 $1.83 $1.33
Granted
and
Repriced $1.67-2.88 801,780 2 $2.11 $0.89
Granted
and
Repriced $5.50 99,999 3 $5.17 $0.66
Exercised $1.00 (19,998)
--------
Balance
12/31/98 $1.00-3.01 1,611,651 3 $1.89 292,488 $1.38
$4.76-5.95 109,449 2 $5.23 9,450 $5.88
--------- ---------
1,721,100 301,938
========
Cancelled $1.00-2.27 (106,347) 3 $1.51
Granted $2.67-8.00 312,300 5 $4.21 $3.27
Exercised $1.00-3.01 (486,739) $1.92
---------
Balance
12/31/99 $1.00-1.88 330,330 2 $1.36 330,330 $1.36
$2.00-3.01 911,435 3 $2.33 514,235 $2.28
$4.76-8.00 198,549 2 $6.47 109,449 $5.23
-------- --------
1,440,314 954,014
========= ========
WARRANTS
In connection with consulting agreements, the Company issued warrants to
purchase 79,998 shares at prices of $3.50 - 3.81 per share.
8. SEGMENT REPORTING
The Company's operations are classified in two business segments; Internet
and on-line data conversion and content management services, and document
imaging services.
Internet and on-line data conversion and content management services
provide all the necessary steps for product development and data conversion to
enable its customers to create and disseminate vast amounts of information both
on-line and via the Internet. Its customers represent an array of Internet
content providers and major electronic publishers of legal, scientific,
educational, and medical information, as well as document-intensive companies
repurposing their proprietary information into electronic resources that can be
referenced via web-centric applications.
During 1998 and 1997, one customer that is comprised of twelve affiliated
companies, accounted for 21% and 16% of the Company's Internet and on-line data
conversion and content management service revenues, respectively. One other
customer accounted for 17%, 13% and 10% of such revenues in 1999, 1998 and 1997,
respectively. No other customer accounted for 10% or more of such revenues.
Further, in 1999, 1998 and 1997, export revenues, all of which were derived from
European customers, accounted for 21%, 22% and 24%, respectively, of such
revenues. A significant amount of the Company's revenues are derived from
customers in the publishing industry. Accordingly, the Company's accounts
receivable generally include significant amounts due from such customers.
The document imaging services segment provides high volume backfile and
day-forward conversion of business documents, technical manuals, engineering
drawings, aperture cards, roll film, and microfiche, providing high quality
computer accessible images and indexing.
During 1999, three customers accounted for 30%, 16% and 12%, respectively,
of the Company's document imaging service revenues, respectively. During 1998
and 1997 one other customer accounted for 53% and 11% of such revenues,
respectively. Another customer accounted for 10% of such revenues in 1997. No
other customer accounted for 10% or more of such revenues.
1999 1998 1997
Revenues
- --------
Internet and on-line services $26,459,447 $17,401,346 $18,032,232*
Document imaging services 1,030,691 2,192,007 2,084,703
---------- ---------- ----------
Total consolidated $27,490,138 $19,593,353 $20,116,935
=========== =========== ===========
*Includes $2,612,000 from journal and book pagination and medical transcription
businesses that were discontinued in 1997.
Income (loss) before income taxes
- ---------------------------------
Internet and on-line services $ 3,523,682 $ 3,151,928(a) $(2,894,158)(c)
Document imaging services (569,958) (1,234,248)(b) (1,206,060)(d)
---------- ----------- -----------
Total consolidated $ 2,953,724 $ 1,917,680 $(4,100,218)
=========== =========== ==========
(a) Includes gain on foreign currency contracts and reversal of previously
estimated liabilities of $736,000.
(b) Includes write off of goodwill of $382,000.
(c) Includes loss on foreign currency contracts and restructuring costs of
$2,107,000.
(d) Includes restructuring costs of $793,000.
1999 1998 1997
Total assets
- -----------------------------
Internet and on-line services $15,437,090 $ 9,520,116 $ 8,703,927
Document imaging services 208,787 1,075,392 1,325,320
----------- ----------- -----------
Total consolidated $15,645,877 $10,595,508 $10,029,247
============ =========== ===========
Capital expenditures
- ---------------------
Internet and on-line services $ 3,881,870 $ 980,218 $ 907,535
Document imaging services 8,978 44,404 107,553
----------- ----------- -----------
Total consolidated $ 3,890,848 $ 1,024,622 $ 1,015,088
=========== =========== ===========
Depreciation and amortization
- -----------------------------
Internet and on-line services $ 1,660,801 $ 1,116,445 $ 1,048,875
Document imaging services 136,230 206,276 272,680
----------- ----------- ----------
Total consolidated $ 1,797,031 $ 1,322,721 $ 1,321,555
=========== =========== ===========
9. INCOME (LOSS) PER SHARE
1999 1998 1997
Net income (loss) $2,112,724 $2,249,680 $(4,200,218)
========== ========== ===========
Weighted average common shares
outstanding 4,675,372 4,435,224 4,503,129
Dilutive effect of outstanding
warrants and options 648,066 94,173 -
--------- --------- ---------
Adjusted for dilutive computation 5,323,438 4,529,397 4,503,129
========= ========= =========
Basic income (loss) per share $.45 $.51 $(.93)
==== ==== =====
Diluted income (loss) per share $.40 $.50 $(.93)
==== ==== =====
Reference is made to Note 7 with respect to options and warrants that would
have been dilutive in 1997 had there not been a loss in that year.
10. RESTRUCTURING COSTS AND IMPAIRMENT OF ASSETS
During the second quarter of 1997 management implemented a plan to reduce
the Company's U.S. based overhead. The principal actions were to eliminate U.S.
production for the publishing services division and merge the east and west
coast document imaging operations into one facility on the west coast. The
restructuring costs consisted of estimated losses on leases and severance pay
totaling approximately $325,000, while the impairment costs consisted of a
write-off of goodwill in connection with the document imaging business totaling
approximately $700,000 and fixed assets related to both the imaging and
publishing services businesses totaling approximately $475,000.
In the fourth quarter of 1998, management determined that its plans to
significantly increase the revenues of the document imaging services segment
were not realized. It was determined that the goodwill associated with the
business could not be recovered. Accordingly, the remaining unamortized amount
of $382,000 was written off at December 31, 1998. Further, certain estimated
liabilities for restructuring and other items totaling $249,000 were deemed in
excess of actual amounts payable and were recognized as income in the fourth
quarter of 1998.
11. FOREIGN CURRENCY CONTRACTS
The Company recognized an unrealized loss of $1,400,000 in 1997 in
connection with foreign currency contracts that were in dispute. The loss
represented the difference between the contract rate for Philippine pesos and
the estimated fair value at December 31, 1997. In the second quarter of 1998,
the Company reached an agreement regarding the disputed currency contracts. This
resulted in a reduction of the estimated liability previously provided by
$487,000 that was recognized as a gain.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(in thousands, except per share)
1997
Revenues $4,663 $5,357 $5,269 $4,828
Net loss (449) (2,415) (1,278) (58)
Net loss per share $(.10) $ (.54) $(.28) $(.01)
1998
Revenues $4,600 $4,200 $5,309 $5,484
Net income 414 636 469 731
Net income per share $.09 $.14 $.11 $.17
Diluted net income
per share $.09 $.14 $.10 $.16
1999
Revenues $5,611 $7,026 $7,073 $7,780
Net income 291 968 585 269
Net income per share $.07 $.21 $.12 $.05
Diluted net income
per share $.06 $.18 $.11 $.05
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
NAME AGE POSITION
- -------------------------- --- --------------------------------------------------
Barry Hertz 50 Chairman of the Board, Chief Executive Officer
Alan Schnelwar 60 Senior Vice President and Director
Martin Kaye 52 Vice President - Finance, Chief Financial Officer,
Secretary and Director
E. Bruce Fredrikson 62 Director
Morton Mackof 52 Director
Jack Spiegelman 61 Director
Stanley Stern 50 Director
On March 31, 1996, Track Data Corporation ("Track") merged (the "Merger")
into Global Market Information, Inc. ("Global"). Upon consummation of the
Merger, the name Global was changed to Track Data Corporation ("TDC" or the
"Company").
BARRY HERTZ has served as the Company's Chairman and Chief Executive
Officer since its inception. In April 1994 he was elected Secretary of the
Company and served until August 1994. Mr. Hertz also founded Track in 1981. He
was Track's sole owner and its Chief Executive Officer until its merger with
Global. He holds a Masters degree in Computer Science from New York University
(1973) and a B.S. degree in Mathematics from Brooklyn College (1971). Mr. Hertz
is also Chairman of Innodata Corporation ("Innodata"), a public company
co-founded by Mr. Hertz, of which TDC is a principal stockholder, and which is a
global outsourcing provider of Internet and on-line digital content services.
ALAN SCHNELWAR has been a Vice President of Track in charge of the
Dial/Data service since 1988, and was elected President of Global in August
1994. He served as President until March 1996 and became the Company's Senior
Vice President upon the Merger. He holds a B.S. degree in Civil Engineering from
the City University of New York (1967).
MARTIN KAYE has been Vice President-Finance, Chief Financial Officer and
Director of the Company since April 1994. He was elected Secretary of the
Company in August 1994. Mr. Kaye is a certified public accountant and has served
as Chief Financial Officer of Innodata since October 1993 and was appointed as a
Director in March 1995. He had been an audit partner with Deloitte & Touche LLP
for more than five years until his resignation in 1993. Mr. Kaye holds a B.B.A.
in accounting from Baruch College (1970).
DR. E. BRUCE FREDRIKSON has been a Director of the Company since June 1994.
He is currently a professor of finance at Syracuse University School of
Management where he has taught since 1966 and has previously served as chairman
of the finance department. Dr. Fredrikson has a B.A. in economics from Princeton
University and a M.B.A. and a Ph.D. in finance from Columbia University. He
serves as director of Eagle Finance Corp., a company which acquires and services
non-prime automobile installment sales contracts. He is also an independent
general partner of Fiduciary Capital Partners, L.P. and Fiduciary Capital
Pension Partners, L.P. He is also a director of Innodata.
MORTON MACKOF has been a Director of the Company since April 1994. He has
been a senior negotiations executive for IBM, Global Services, a division of IBM
since December 1998. He is also President and CEO of Third Millennium
Technology Inc., a company involved in information technology consulting and
software development. Mr. Mackof became President of the Company in March 1996
upon the Merger and resigned in November 1996. He was Executive Vice President
of Track since February 1991 and was elected its President in December 1994.
From 1986 to 1991, he was President of Medical Leasing of America, Inc. He holds
a B.S. degree in electrical engineering from Rensselaer Polytechnic Institute
(1970) and did graduate work in computer science. He is also a director of
Innodata.
JACK SPIEGELMAN has been a Director of the Company since April 1996. Mr.
Spiegelman has been President of Track Securities Corp. since December 1983.
From February 1996 to June 1997, he was a Senior Vice President of J. W. Genesis
Securities, Corp. and prior thereto for more than five years was a Senior Vice
President of Fahnestock & Company, Inc. Mr. Spiegelman holds a B.A. in economics
from Brooklyn College (1963).
STANLEY STERN has been a Director of the Company since May 1999. He
previously served as Director from April 1994 until his resignation in September
1997. He was chief operating officer of Track, and in predecessor positions,
for more than five years. Since the Merger, he was Executive Vice President of
TDC until his resignation in December 1996. Since January 1998, Mr. Stern has
been Chief Operating Officer of Integrated Medical Technologies, Inc., an
Internet-based provider of medical services information. Mr. Stern holds a
B.B.A. from Baruch College (1973). He is also a director of Innodata.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the discretion of the Board. There are no family relationships among
directors or officers.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company believes that during the period from January 1, 1999 through
December 31, 1999 all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten-percent beneficial owners were complied
with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company for services to it during the three fiscal years ended
December 31, 1999 to the Company's Chief Executive Officer and to the executive
officers whose aggregate cash and cash equivalent compensation exceeded
$100,000.
SUMMARY COMPENSATION TABLE
NUMBER
OF STOCK
FISCAL ANNUAL OPTIONS
NAME AND POSITION YEAR SALARY BONUS TOTAL AWARDED
- --------------------- -------- -------- ------- -------- -------
Barry Hertz 1999 $375,000 - $375,000 200,000
Chairman, CEO 1998 375,000 - 375,000 160,000
1997 350,000 - 350,000 -
Alan Schnelwar 1999 $200,000 - $200,000 120,000
Senior Vice President 1998 190,000 - 190,000 100,000
1997 180,000 - 180,000 102,000
The above table does not include certain insurance and other personal
benefits, the total value of which does not exceed $50,000 or 10% of such
person's cash compensation.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
PERCENT OF POTENTIAL REALIZED
TOTAL OPTIONS VALUE AT ASSUMED
GRANTED TO ANNUAL RATES OF
NUMBER OF EMPLOYEES STOCK APPRECIATION
OPTIONS IN FISCAL EXERCISE EXPIRATION FOR OPTION TERM
NAME GRANTED YEAR PRICE DATE 5% 10%
- ---- ------- ----- ----- ----- -- ---
Barry Hertz 200,000 12% $1.50 1/2004 $82,800 $183,000
Alan Schnelwar 120,000 7% $1.50 1/2004 $49,680 $109,800
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR;
FISCAL YEAR END OPTION VALUES
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS AT
SHARES YEAR END FISCAL YEAR END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- --------- -------- ------------- -------------
Barry Hertz 258,536 $536,506 80,000/280,000 $755,200/$2,493,200
Alan Schnelwar 100,000 $460,647 50,000/170,000 $472,000/$1,514,800
There are no employment agreements, stock appreciation rights or long-term
incentive plans.
DIRECTORS COMPENSATION
Dr. Fredrikson and Mr. Stern are compensated at the rate of $1,250 and $833
per month, respectively, plus out-of-pocket expenses for each meeting attended.
No other director is compensated for his services as director.
Messrs. Fredrikson and Stern will each receive options to purchase 7,000
and 5,000 shares annually, respectively, as compensation for their services.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the Company's fiscal year ended December 31, 1999, Messrs. Hertz,
Schnelwar and Kaye were officers of the Company and were members of the Board of
Directors (there is no compensation committee). Mr. Hertz is Chairman of
Innodata and Mr. Kaye is chief financial officer and a director of Innodata.
Messrs. Fredrikson, Mackof and Stern are also directors of Innodata.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 29, 2000, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated, each stockholder's address is c/o the Company, 56 Pine Street, New
York, New York 10005.
SHARES OWNED BENEFICIALLY (1)
NAME NO. OF SHARES % OF CLASS
- ---- ------------- ----------
Barry Hertz (2) 45,691,821 71.7%
Morton Mackof (3) 751,300 1.2%
Alan Schnelwar (4) 110,000 *
Martin Kaye (4) 200,000 *
Jack Spiegelman (5) 64,000 *
E. Bruce Fredrikson (4)
Syracuse University
School of Management
Syracuse, NY 13244 61,000 *
Stanley Stern (6) 58,000 *
All Officers and Directors as a Group
(seven persons)(2)(3)(4)(5)(6) 46,936,121 73.2%
* = less than 1%
(1) Except as noted otherwise, all shares are owned beneficially and of
record. Based on 63,483,540 shares outstanding.
(2) Consists of 43,444,473 shares owned by Mr. Hertz, 1,892,400 shares
owned by Trusts established in the names of Mr. Hertz's children and 94,948
shares held by a family LLC managed by Mr. Hertz who owns 8% of such LLC. Mr.
Hertz disclaims beneficial interest in shares owned by the Trust and 92% of the
family LLC not owned by him. Also includes 260,000 options which are presently
exercisable under the Company's Stock Option Plans.
(3) Consists of 728,000 shares held in the Track Data Phantom Unit Trust
("TD Trust") to be released upon his termination of association with the
Company, or earlier with approval of the Board of Directors. Also includes
23,300 options presently exercisable owned by Third Millennium Technology, Inc.,
a corporation controlled by Mr. Mackof.
(4) Consists of shares issuable upon the exercise of presently exercisable
options granted under the Company's Stock Option Plans.
(5) Consists of 4,000 shares owned by his wife as to which Mr. Spiegelman
disclaims beneficial interest.
(6) Consists of 2,000 shares owned of record and 56,000 shares held in the
TD Trust to be released upon his termination of association with the Company, or
earlier with approval of the Board of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company guarantees a mortgage on real estate owned by a partnership
controlled by Mr. Hertz and members of his family. At December 31, 1999, such
mortgage provided for interest at 10% per annum and had a balance of $1,470,036
due May 2000. See Item 2. "Properties" for information on leases from
partnerships affiliated with Mr. Hertz.
In July 1998, the Company entered into a software development agreement
with Third Millennium Technology, Inc. ("TMT"), a corporation controlled by
Morton Mackof, a director of the Company. The agreement is for an initial period
of two years and is renewable annually thereafter unless cancelled. In
connection with the agreement, the Company granted TMT a five year option to
purchase 120,000 shares of its common stock at $1.00 per share, exercisable
60,000 at the end of each of the first two anniversaries. The Company may
terminate this agreement after two years by paying $40,000 plus continuation of
fees provided in the contract for a third year. The Company has provided notice
of such termination. The monthly fees paid to TMT consist of a declining scale
fee per user of the Company's myTrack service. Additional fees are payable in
connection with revenues from online trading. Fees paid to TMT under this
agreement and for other consulting services totaled $101,550 and $98,132 in 1999
and 1998, respectively.
In April 1999, the Company began to offer online trading through its
myTrack service utilizing Track Securities Corporation ("TSC") as its
broker-dealer. TSC is a broker-dealer owned and operated by Jack Spiegelman, a
director of the Company. The Company is licensing its myTrack trading system to
a subsidiary of TSC. The Company is receiving $2.25 per trade pursuant to the
agreement. In addition, TSC pays a share of the marketing and advertising costs
incurred by the Company. Further, Mr. Spiegelman has a five-year consulting
agreement with the Company pursuant to which he is to be paid an annual fee of
the greater of $50,000 or 5% of the after-tax earnings, if any, from trading
activities. The Company intends to apply for a broker-dealer license and, upon
obtaining such license, will terminate the relationship with TSC and transition
the trading accounts from TSC to the Company's broker-dealer. During 1999, TSC
paid the Company license fees totaling $590,000 and a share of marketing and
advertising cost totaling $571,000.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
- -------
EXHIBIT DESCRIPTION
- ------- -----------
3.1 . Certificate of Incorporation, as amended (1)
3.2 . By-Laws (1)
4.2 . Specimen of Common Stock certificate (1)
10.1. . 1994 Stock Option Plan (1)
10.2. . Form of indemnity agreement with directors (1)
10.3. . 1995 Stock Option Plan (2)
10.4. . 1995 Disinterested Directors' Stock Option Plan (3)
10.5. . Merger Agreement between the Company and Global (4)
10.6. . 1996 Stock Option Plan (5)
10.7. . 1998 Stock Option Plan (6)
23.1. . Consent of Grant Thornton LLP filed herewith regarding Track Data Corporation
23.2. . Consent of Grant Thornton LLP filed herewith regarding Innodata Corporation
27. . . Financial Data Schedule filed herewith
(1) Previously filed as exhibit to Form S-1 Registration Statement No.
33-78570.
(2) Previously filed as Exhibit A to Definitive Proxy for August 10, 1995,
Annual Meeting of Stockholders
(3) Previously filed as Exhibit B to Definitive Proxy for August 10, 1995,
Annual Meeting of Stockholder
(4) Previously filed as Appendix A to Definitive Proxy for March 19, 1996,
Special Meeting of Stockholders
(5) Previously filed as Appendix A to Definitive Proxy for November 7, 1996,
Annual Meeting of Stockholders
(6) Previously filed as Appendix A to Definitive Proxy for November 5, 1998,
Annual Meeting of Stockholders
(b) Reports on Form 8-K during fourth quarter
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRACK DATA CORPORATION
By /s/
-------------------------------------
Barry Hertz, Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Chairman of the Board and March 27, 2000
- ------------------- Chief Executive Officer
Barry Hertz
/s/ Senior Vice President and Director March 27, 2000
- -------------------
Alan Schnelwar
/s/ Vice President - Finance, Chief March 27, 2000
- ------------------- Financial Officer, Secretary and Director
Martin Kaye
/s/ Director March 27, 2000
- -------------------
E. Bruce Fredrikson
/s/ Director March 27, 2000
- -------------------
Morton Mackof
/s/ Director March 27, 2000
- -------------------
Jack Spiegelman
/s/ Director March 27, 2000
- -------------------
Stanley Stern
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 25, 2000, accompanying the consolidated
financial statements of Track Data Corporation which is included in the Annual
Report of Track Data Corporation on Form 10-K for the year ended December 31,
1999. We hereby consent to the incorporation by reference of said report in the
Registration Statements of Track Data Corporation on Forms S-3 (File No.
333-4780, effective July 11, 1996, File No. 333-83167, effective August 16, 1999
and File No. 333-91645, effective February 9, 2000) and on Forms S-8 (File No.
333-4532, effective May 2, 1996, File No. 333-52131, effective May 8, 1998 and
File No. 333-82171, effective July 2, 1999).
GRANT THORNTON LLP
Melville, New York
February 25, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 2, 2000, accompanying the consolidated
financial statements of Innodata Corporation which is included in the Annual
Report of Track Data Corporation on Form 10-K for the year ended December 31,
1999. We hereby consent to the incorporation by reference of said report in the
Registration Statements of Track Data Corporation on Forms S-3 (File No.
333-4780, effective July 11, 1996, File No. 333-83167, effective August 16, 1999
and File No. 333-91645, effective February 9, 2000) and on Forms S-8 (File No.
333-4532, effective May 2, 1996, File No. 333-52131, effective May 8, 1998 and
File No. 333-82171, effective July 2, 1999).
GRANT THORNTON LLP
New York, New York
March 2, 2000