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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, 2000
/ / 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
7, 2001 of $1.00 per share. $36,629,000.
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
64,210,955 shares of common stock, $.01 par value, as of February 28, 2001
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 owns Track Data Securities Corp. ("TDSC"), a registered securities
broker-dealer and member of the National Association of Securities Dealers, Inc.
TDC provides a proprietary, fully integrated Internet-based online trading and
market data system, myTrack. TDC provides real-time financial market data,
fundamental research, charting, and analytical services to institutional and
individual investors through dedicated telecommunication lines and the Internet.
TDC also disseminates news and third-party database information from more than
100 sources worldwide.
The Company has delivered mission critical information to the most
demanding customers in the investment community since 1981. 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.
Since August 2000, the Company has been offering online trading through its
wholly owned broker-dealer subsidiary, TDSC. Prior thereto, the Company offered
online trading since June, 1999 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 licensed its myTrack trading system to a subsidiary
of TSC. The Company received $2.25 per trade pursuant to the agreement. The
Company terminated this relationship with TSC in August 2000 and transferred the
trading accounts from TSC to TDSC. See Item 13, Certain Relationships and
Related Transactions.
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.
TDC's operations are classified in two business segments: Internet-based
online trading and market data services to the non-professional individual
investor community, and market data services to the institutional professional
investment community. See Note H of Notes to Consolidated Financial Statements.
INTERNET-BASED ONLINE TRADING AND MARKET DATA SERVICES TO THE NON-PROFESSIONAL
INDIVIDUAL INVESTMENT COMMUNITY
The evolution of the Internet has fundamentally changed the way in which
many investors manage their financial affairs. The speed, convenience, choice,
cost savings, and information that the Internet offers as an investment tool has
driven investor assets online. TDC anticipates a continuation in this trend.
TDC combined its strength for 20 years in delivering market data and
third-party market information to the professional trading community with a
unique order entry system to create a proprietary trading system, myTrack.
myTrack has offered its software-based online trading system since June 1999.
Since myTrack is a client-server application, it is not restricted by the
limitations of HTML, the primary programming language of the worldwide web. With
trading systems that use HTML, displayed data remains static until a query is
repeated. In contrast, myTrack delivers and automatically updates a continuous,
dynamic stream of live market data to the client's screen. TDC believes this
difference gives myTrack a substantial edge over the web site-based trading
offered by the vast majority of online brokerage firms.
Another advantage myTrack has is that it is a direct access broker. Direct
access means myTrack clients have the choice to have their trades routed
directly to the exchange, market maker, or electronic communication network
("ECN") of their choice. Our smart order routing system will select routing for
those traders who do not wish to select on their own. As a result, TDC believes
trades can be executed more quickly than if the trade is routed through a third
market firm or an online brokerage firm's trading desk, as is the case with a
number of other trading systems. The order entry section can be preset for size
and type of order. The client can use a mouse to click the bid or ask price of a
security and either close out an open position or add to an existing one. If the
user clicks the bid or ask price of the security, the order screen will appear
pre-configured to buy or sell.
myTrack clients may place bids or offers onto an ECN which will also appear
in the Nasdaq Market Maker Level 2 screen with the corresponding price and size
of the order. This gives myTrack clients an advantage in attempting to execute
orders in between the bid and asked prices of Nasdaq securities.
TDC has targeted active traders and other active investors. TDC believes
that myTrack is well-suited to satisfy their requirements. During the second
quarter, TDC expects to release its new trading software, "DayTrader," that will
contain further features and enhancements to satisfy the hyperactive trader
community. TDC has established competitive rates and offered a broad range of
supplementary information and data services. TDC is marketing myTrack by
targeting active traders through advertisements on TV, in print, and online,
plus direct mail, telemarketing, and other marketing. TDC's marketing efforts
include advertisements on financial TV networks, in financial publications, and
various other regional and national publications that have a demographic similar
to myTrack's target market. TDC also advertises and promotes myTrack through
Internet web site and banner advertisements.
myTrack Services
Trading Access: In addition to the myTrack software, users can access
myTrack trading through the myTrack web site, a Palm or other PDA, a
web-enabled cellular phone, or two-way pager. 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 intra-day market statistics.
Commission Rates: Trading is offered at prices starting at $12.95 per
trade. Volume trading rebates can result in trade costs as low as $8.20 per
trade.
myTrack Market Data: myTrack provides access to comprehensive information
on stocks, options, indices, and news, including bid and ask prices, charts,
research and other information for any listed or Nasdaq-traded stock, many
OTC-BB stocks, as well as the ability to establish and track securities, cash,
margin and buying power positions on a real-time basis. myTrack's clients can
arrange the display and configuration of data on their computer screens using a
menu and tool bar, which are generally utilized in the Windows operating system.
Market Data 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 (including Nasdaq Level II) plus exchange
fees. Volume trading can result in rebates equivalent to the service plan
charges.
Customer Service: Client services for all levels of online service,
including trading, administrative, and technical support, are among TDC's
highest priorities. Based on TDC's experience in the industry and client
feedback, the Company believes that providing an effective client service team
to handle client needs is critical to its success. TDC's Client Service
department helps clients get online, handles product and service inquiries and
addresses all brokerage and technical questions. The Client Service department
also conducts various surveys to verify the satisfaction of our clients and to
learn more about client preferences and requirements. Live client support is
available 12 hours a day, from 8:00 AM to 8:00 PM Eastern Time, Monday through
Friday.
Operations:
Clearing and Order Processing
TDC does not hold any funds or securities of its clients nor execute
securities transactions. TDC clears all transactions for its clients, on a fully
disclosed basis, with Penson Financial Services, Inc.
TDC's agreement provides that the clearing broker process all securities
transactions for TDC's clients for a fee. Services of the clearing broker
includes billing and credit control and receipt, custody and delivery of
securities, for which TDC pays a per-ticket charge. TDC has agreed to indemnify
and hold the clearing broker harmless from certain liabilities or claims,
including claims arising from the transactions of its clients, which could be
material in amount. TDC's clearing agreement may be terminated by either party,
upon 45 days' written notice. TDC relies on the operational capacity and the
ability of the clearing broker for the orderly processing of transactions.
Clients' securities transactions are effected on either a cash or margin
basis. In connection with margin transactions, credit is extended to a client,
collateralized by securities and cash in the client's account, for a portion of
the purchase price. The client is charged for margin financing at interest rates
based on the broker call rate plus an additional amount of up to 2.50%. The
broker call rate, also known as the "Call Money Rate," is the prevailing
interest rate charged by banks on secured loans to broker-dealers.
Margin lending is subject to the margin rules of the Board of Governors of
the Federal Reserve System. Margin lending subjects TDC to the risk of a market
decline that would reduce the value of collateral below the client's
indebtedness before the collateral can be sold. Under applicable rules, in the
event of a decline in the market value of the securities in a margin account,
the client is required to deposit additional securities or cash in the account.
Network Infrastructure
TDC's external network consists of a series of routers and other
Internet-networking equipment, myTrack, mail, web and File Transfer Protocol
(ftp) servers; these servers are connected to TDC's internal (i.e. protected)
network. This permits a moderated connection to TDC's intranet, so that any
computer that can connect to the Internet can access authorized services.
Any individual with a personal computer who has a connection to the
Internet and has Windows compatible software can subscribe to myTrack. Once an
account is opened, the client downloads myTrack software and is given a unique
user name and password. The client then logs onto TDC's myTrack servers. The
myTrack servers connect to market data and order servers.
myTrack employs a proprietary protocol to communicate between the client
and the server. Conventional mail, web and ftp servers are used to download
software, provide a public access to a chat function and to exchange mail with
internal mail servers and prevents virus-infected files or messages from
reaching the internal network. Logins to myTrack servers are validated by a
permission server Once the permission server allows the client to establish a
connection to a myTrack server, the connection between the client and server is
maintained until the client requests it be terminated or until the system
determines that the connection is no longer efficient or is inoperable.
TDC's technology is supported by an internal staff of programmers,
developers, and operators 24 hours a day, seven days a week. The programming
staff is supplemented by a team of quality control analysts, web page
developers, technical writers, and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new services.
Software is designed to be versatile and easily adaptable to new and emerging
technologies.
The order servers accept buy/sell or sell short messages from the client
application and qualifies the order according to a number of business rules.
Once an order is qualified, it is sent to the exchange of choice and messages
are sent to update the database. This update offers the client real-time account
positions, buying power and profit and loss calculations. All transactions for
the day are processed for delivery to the clearing firm.
Account Security
TDC uses a combination of proprietary and industry standard security
measures to protect clients' assets. Clients are assigned unique account
numbers, user identifications and passwords. In accordance with standard
industry practices, telephone orders require authentication via personal
identification number/password and/or other personal information. In addition,
TDC's trade processing system is designed to compare the accounts database with
the clearing firm's account information on a daily basis to detect any
discrepancies.
Firewalls and other software limit not only system access to the authorized
users, but also limit the authorized users to specifically approved
applications. This filter-software prevents unauthorized access to critical
areas of the system such as account information. Furthermore, public access
servers, such as e-mail, chat services and the file transfer protocol, are in a
network entirely separate from the rest of TDC's systems.
TDC has implemented special policies relating to the transfer or withdrawal
of funds by clients to prevent unauthorized withdrawals. Checks will only be
made out in the account holder's name and wire transfers will only be sent to a
bank account in the account holder's name.
Securities Regulation
Track Data Securities Corp. is a broker-dealer registered with the SEC and
NASD and is licensed as a broker-dealer in 50 states.
The securities industry in the United States is subject to extensive
regulation under federal and state laws. In addition, the SEC, NASD, other self
regulatory organizations, such as the various stock exchanges, and other
regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of clients
participating in those markets, and not with protecting the interests of the
Company's stockholders.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure, record keeping and the conduct of directors, officers and employees.
Because of the recent increase in the number of complaints by online traders,
the SEC, NASD and other regulatory organizations may adopt more stringent
regulations for online firms and their practices. If TDC fails to comply with
any laws, rules or regulations, the Company could be censured, fined, issued a
cease-and-desist order or TDSC or its officers and employees could be suspended
or expelled.
Net Capital Requirements
The SEC, NASD, and various other regulatory agencies have stringent rules
requiring the maintenance of specific levels of net capital by securities
brokers, including the SEC's uniform net capital rule, which governs TDSC. Net
capital is defined as assets minus liabilities, plus other allowable credits and
qualifying subordinated borrowings less mandatory deductions that result from
excluding assets that are not readily convertible into cash and from valuing
other assets, such as a firm's positions in securities, conservatively. Among
these deductions are adjustments in the market value of securities to reflect
the possibility of a market decline prior to disposition.
As of December 31, 2000, TDSC was required to maintain minimum net capital,
in accordance with SEC rules, of approximately $181,000 and had total net
capital of $345,000, or approximately $164,000 in excess of minimum net capital
requirements.
If TDSC fails to maintain the required net capital TDSC may be subject to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies, which ultimately could require TDSC's
liquidation. In addition, a change in the net capital rules, the imposition of
new rules, a specific operating loss, or any unusually large charge against net
capital could limit those operations of TDSC that require the intensive use of
capital and could limit its ability to expand its business.
Other Internet-Based Market Data Services To Individual Non-Professional Market
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 worldwide
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 or Prochart is an introductory level charting and analysis
package used in conjunction with a professional data feed used by individual
investors, brokers, and institutions worldwide.
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 $995. Recently, AIQ and
myTrack joined forces to give investors the design and testing tools required to
uncover profitable trading systems with myTrack's delayed and real-time 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. AIQ waives the purchase price for users
that sign up for one of these monthly packages.
AIQ's 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.
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.
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 that ranges from $15 to $85, depending on the type of data
received. At December 31, 2000 and 1999, there were approximately 9,000, and
14,000 customers, 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.
Marketing
TDC is marketing myTrack by targeting active traders through advertisements
on TV, in print, and online, plus direct mail, telemarketing, and other
marketing. TDC's marketing efforts include advertisements on financial TV
networks, in financial publications, and various other regional and national
publications that have a demographic similar to myTrack's target market. TDC
also advertises and promotes myTrack through Internet web site and banner
advertisements.
AIQ Systems markets its software products through direct mail, the
Internet, print advertising and seminars.
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 databases,
and to encourage customers to select the Company's databases in preference to
databases made available by others.
Competition
The Company's myTrack online trading service competes with services offered
by online brokers, many of which have substantially greater resources. 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., TD Waterhouse, 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.,
Merrill Lynch, UBS Paine Webber, 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.
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.
Intellectual Property Rights
TDC relies on a combination of copyright, trademark and trade secret laws
and non-disclosure agreements to protect its proprietary technologies, ideas,
know-how and other proprietary information. TDC holds a United States trademark
registration for the myTrack name. TDC has no patents or registered copyrights.
Third parties may copy or otherwise obtain and use TDC's proprietary
technologies, ideas, know-how and other proprietary information without
authorization or independently develop technologies similar or superior to its
technologies. Policing unauthorized use of our technologies and other
intellectual property is difficult, particularly because the global nature of
the Internet makes it difficult to control the ultimate destination or security
of software or other data transmitted.
MARKET DATA SERVICES TO THE INSTITUTIONAL PROFESSIONAL INVESTMENT COMMUNITY
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 that typically varies 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.
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 typically varies 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.
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 2 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 that 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.
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 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.
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.
Research and Development
Expenditures for research and development incurred primarily to establish
technological feasibility of a product or for product enhancement were $324,000,
$364,000 and $356,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Employees
The Company employed approximately 265 persons on a full time basis as of
December 31, 2000. The Company believes that its relationship with its employees
is satisfactory.
Item 2. Properties
The Company's executive offices are located at 56 Pine Street, New York,
New York and 95 Rockwell Place, Brooklyn, 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. The annual rental of approximately 36,000
square feet is approximately $540,000. The lease expires in April 2001. 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 leases its New York, NY 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 maintains sales and/or service offices for its institutional
customers 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 $511,000
expire at various dates through 2004. The Company also maintains a full service
office in London, England under a lease for annual rentals of $149,000 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 26, 2000. 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, 2000.
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 28, 2001, there were 229 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 25,000.
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
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
2000
First Quarter 12--1/4 6
Second Quarter 8--7/32 1--7/64
Third Quarter 2--1/4 15/16
Fourth Quarter 1--15/32 5/8
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,
financial condition, and other relevant factors. 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, 2000 1999 1998 1997 1996
(in thousands, except per share data)
SERVICE FEES AND REVENUE $58,767 $46,620 $46,473 $47,631 $48,031
------- ------- ------- ------- -------
COSTS AND EXPENSES:
Direct operating costs 31,484 26,989 26,466 25,629 26,283
Selling and administrative expenses 21,564 19,290 18,147 18,676 19,895
Marketing and advertising 5,472 5,684 1,302 734 930
Other income (1,429) (350) - - (288)
Interest expense (net of interest income) 288 270 508 719 1,008
------- ------- ------- ------- -------
Total 57,379 51,883 46,423 45,758 47,828
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME
(LOSS) OF AFFILIATE AND INCOME TAXES 1,388 (5,263) 50 1,873 203
EQUITY IN NET INCOME (LOSS) OF AFFILIATE 718 275 326 (1,146) (184)
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 2,106 (4,988) 376 727 19
INCOME TAXES 47 60 158 299 526
------- ------- ------- ------- -------
NET INCOME (LOSS) $ 2,059 $(5,048) $ 218 $ 428 $ (507)
======= ======= ======= ======= =======
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $.03 $(.08) $.00 $.01 $(.01)
==== ===== ==== ==== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 63,660 61,229 58,224 58,220 58,488
======= ======= ======= ======= =======
December 31, 2000 1999 1998 1997 1996
(In thousands)
TOTAL ASSETS $24,479 $25,056 $18,591 $18,312 $20,679
TOTAL LIABILITIES 7,747 10,060 9,979 11,683 14,743
STOCKHOLDERS' EQUITY 16,732 14,996 8,612 6,629 5,936
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Years ended December 31, 2000 and 1999
Revenues for the years ended December 31, 2000 and 1999 were $58,767,000
and $46,620,000, respectively, an increase of 26%. The Company's Professional
Market segment had revenues for the years ended December 31, 2000 and 1999 of
$32,261,000 and $30,482,000, respectively, an increase of 6% for this segment.
The Company's Non-Professional Market segment had revenues of $26,506,000 and
$16,138,000, respectively, for the years ended December 31, 2000 and 1999, an
increase of 64% for this segment. The revenue increase in 2000 is due
principally to myTrack's online trading and market data services. The Company
obtained its own broker-dealer license and its registration in all of the states
by August 2000. Prior thereto, trading revenues include only revenues from the
licensing of its trading system, rather than a full amount of commissions paid
by customers.
Direct operating costs were $31,484,000 for the year ended December 31,
2000 and $26,989,000 for the similar period in 1999, an increase of 17%. Direct
operating costs as a percentage of revenues were 54% in 2000 and 58% in 1999.
The decrease in 2000 is due principally to the greater revenues recognized after
obtaining the broker-dealer license. Without giving effect to unallocated
depreciation and amortization expense, the Company's Professional Market segment
had $14,863,000 and $15,445,000 of direct costs for the years ended December 31,
2000 and 1999, respectively. Direct operating costs as a percentage of revenues
for the Professional segment were 46% in 2000 and 51% in 1999. The Company's
Non-Professional Market segment had $14,475,000 and $9,007,000 in direct costs
for the years ended December 31, 2000 and 1999, respectively. Direct operating
costs as a percentage of revenues for the Non-Professional segment were 55% in
2000 and 56% in 1999. Direct operating costs include direct payroll, direct
telecommunication costs, computer supplies, depreciation, equipment lease
expense and the amortization of software development costs. Since August 2000,
when the Company commenced recording the full commissions from customers, direct
costs include costs of clearing, back office payroll and other direct
broker-dealer expenses.
Selling and administrative expenses were $21,564,000 and $19,290,000 in the
2000 and 1999 periods, respectively, an increase of 12%. Selling and
administrative expenses as a percentage of revenues was 37% in 2000 and 41% in
1999. Without giving effect to unallocated depreciation and amortization
expense, selling and administrative expenses for the Professional Market segment
were $12,893,000 and $12,235,000 in the 2000 and 1999 periods, respectively, an
increase of 5%. For the Professional Market segment selling and administrative
expenses as a percentage of revenues was 40% in 2000 and 41% in 1999. Selling
and administrative expenses for the Non-Professional segment were $8,311,000 and
$6,643,000 in the 2000 and 1999 periods, respectively, an increase of 25%. For
the Non-Professional segment selling and administrative expense as a percentage
of revenue was 31% in 2000 and 41% in 1999. The dollar and percentage increase
in 2000 compared to 1999 was principally due to increased payroll and related
expenses for myTrack's online trading and market data services. Online trading
was first introduced in the second quarter of 1999.
Marketing and advertising costs were $5,472,000 in 2000 and $5,684,000 in
1999. The substantial majority of these costs were incurred by the
Non-Professional segment of the Company which incurred $5,361,000 in 2000 and
$5,451,000 in 1999. Marketing costs in 2000 and 1999 are net of $666,000 and
571,000,respectively, received from Track Securities under a licensing
agreement. These costs were principally incurred in connection with the
Company's myTrack online trading and market data systems. The level of
expenditures in the second half of 2000 was substantially below the
expenditures in the first half of 2000. The Professional Market segment
spent $111,000 in 2000 and $233,000 in 1999.
As a result of the above-mentioned factors, the Professional Market segment
realized $4,395,000 in income before unallocated amounts, equity in net income
of affiliate and income taxes in 2000 compared to income of $2,570,000 in 1999.
The Non-Professional Market segment incurred losses of $1,642,000 in 2000 and
$4,964,000 in 1999 before unallocated amounts, equity in net income of affiliate
and income taxes.
In 1999, the Company relocated certain of its personnel to other office
space and realized a gain on the landlord buy-out of the lease of approximately
$350,000.
In 2000, the Company realized a gain of approximately $1,683,000 on the
sale of certain shares of Edgar Online, Inc., Innodata Corporation and other
marketable securities.
In 2000, the Company wrote off its investment in iAnalyst of $254,000.
As a result of the above mentioned factors, the Company realized income
before equity in net income from an affiliate of $1,388,000 in the 2000 period
compared to a loss of $5,263,000 in 1999. The income realized in 2000 was due
principally to gains realized from the sale of marketable securities and the
increased revenues in the Company's myTrack online trading and market data
systems.
The equity in net income from an affiliate, Innodata Corporation, was
$718,000 and $275,000 in 2000 and 1999, respectively.
The Company has a valuation allowance of $5,727,000 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 net income of $2,059,000 in 2000 principally from
gains on marketable securities and increased revenues from myTrack's online
trading and market data services compared to a net loss of $5,048,000 in 1999
principally due to marketing and advertising of the Company's myTrack service.
Years ended December 31, 1999 and 1998
Revenues for the years ended December 31, 1999 and 1998 were $46,620,000
and $46,473,000, respectively. The Company's Professional Market segment had
revenues for the years ended December 31, 1999 and 1998 of $30,482,000 and
$30,734,000, respectively. The Company's Non-Professional Market segment had
revenues of $16,138,000 and $15,739,000, respectively, for the years ended
December 31, 1999 and 1998. myTrack services represented approximately 13% of
total revenues in 1999 compared to 2% in 1998.
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. Without giving effect to unallocated depreciation
and amortization expense, direct operating costs for the Company's Professional
Market segment were $15,445,000 in 1999 compared to $14,873,000 in 1998. Direct
operating costs as a percentage of revenues for the Professional Market segment
were 51% and 48% for the years ended December 31, 1999 and 1998, respectively.
Direct operating costs for the Company's Non-Professional Market segment were
$9,007,000 and $8,931,000 for 1999 and 1998, respectively. Direct operating
costs as a percentage of revenues for the Non-Professional segment were 56% and
57% for the years ended December 31, 1999 and 1998.
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. Without giving effect
to unallocated depreciation and amortization expense, selling and
administrative expenses for the Professional Market segment were $12,235,000 and
$12,332,000 in the 1999 and 1998 periods, respectively. For the Professional
Market segment selling and administrative expenses as a percentage of revenues
was 40% in 1999 and 1998. Selling and administrative expenses for the Non-
Professional segment were $6,643,000 and $5,365,000 in the 1999 and 1998
periods, respectively, an increase of 24%. Selling and administrative expenses
as a percentage of revenues was 41% and 34% in 1999 and 1998, respectively.
The increase in 1999 was due principally to myTrack payroll costs.
Marketing and advertising costs increased significantly in 1999 to
$5,684,000 from $1,302,000 in 1998. The majority of the increase was incurred
by the Non-Professional market segment which incurred $5,451,000 in 1999
compared to $1,064,000 in the 1998 period. Marketing costs in 1999 are net of
$571,000 received from Track Securities 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 Professional Market
segment incurred $233,000 in 1999 compared to $238,000 in 1998.
As a result of the above-mentioned factors, the Professional Market segment
realized $2,570,000 in income before unallocated amounts, equity in net income
of affiliate and income taxes in 1999 compared to income of $3,291,000 in 1998.
The Non-Professional Market segment incurred a loss of $4,964,000 in 1999
compared to income of $379,000 in 1998 before unallocated amounts, equity in net
income of affiliate and income taxes. The loss incurred in 1999 was due
principally to the marketing and advertising incurred in connection with the
introduction of online trading offered by myTrack.
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.
As a result of the above mentioned factors, the Company realized a loss
before equity in net income
from an affiliate of $5,263,000 in the 1999 period compared to income of $50,000
in 1998. The loss for the year ended December 31, 1999 was due to increased
marketing for the Company's myTrack online trading and market data systems.
The equity in net income from an affiliate, Innodata Corporation, was
$275,000 in 1999 and $326,000 in 1998.
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.
Liquidity and Capital Resources
During the year ended December 31, 2000 cash provided by operating
activities was $1,637,000 compared to cash used in operating activities of
$747,000 in the year ended December 31, 1999. The increase in 2000 was primarily
due to a break even from operating income, after excluding a gain on marketable
securities of $1,683,000, compared to a loss incurred in 1999. Cash flows
provided by investing activities was $811,000 in 2000 principally from the sale
of Innodata and Edgar Online common stock of $1,837,000 compared to $1,116,000
used in investing activities for the year ended December 31, 1999. Cash flows
used in financing activities in the year ended December 31, 2000 was $1,608,000,
principally from repayment of notes payable - bank, compared to cash flows from
financing activities of $6,647,000 in the 1999 period. The 1999 period included
proceeds from the sale of the Company's common stock of $5,201,000 and stock
options and warrants of $2,696,000.
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 Chairman. 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. At December 31, 2000,
the Company had outstanding borrowings under the line of $569,000. The line of
credit is sufficient for the Company's present cash requirements. The Company
reduced its advertising costs in the second half of 2000 and will continue to do
so in the first half of 2001. The Company may seek additional financing and or
dispose of certain of its marketable securities to support increased advertising
costs in the future . There are no major capital expenditures anticipated beyond
the normal replacement of equipment and additional equipment to meet customer
requirements.
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, 2000, $569,000 was outstanding under the
credit facility. Changes in the prime interest rate during fiscal 2001 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 2001.
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. See Notes C and D of Notes to consolidated Financial
Statements.
Item 8. Financial Statements
INDEX TO FINANCIAL STATEMENTS
PAGE
Track Data Corporation and Subsidiaries
Report of Independent Certified Public Accountants II-8
Consolidated Balance Sheets as of December 31, 2000 and 1999 II-9
Consolidated Statements of Operations for the three years ended II-10
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity and Comprehensive II-11
Income (Loss) for the three years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the three years ended II-12
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements II-13-23
Innodata Corporation and Subsidiaries - Significant Subsidiary
Report of Independent Certified Public Accountants II-24
Consolidated Balance Sheets as of December 31, 2000 and 1999 II-25
Consolidated Statements of Operations for the three years ended II-26
December 31, 2000
Consolidated Statements of Stockholders' Equity for the three years II-27
ended December 31, 2000
Consolidated Statements of Cash Flows for the three years ended II-28
December 31, 2000
Notes to Consolidated Financial Statements II-29-36
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, 2000 and 1999,
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, 2000. 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 of America. 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, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/S/ Grant Thornton LLP
Melville, New York
March 1, 2001
Track Data Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 and 1999
2000 1999
ASSETS
CASH AND EQUIVALENTS $ 6,505,756 $ 5,665,833
ACCOUNTS RECEIVABLE -
net of allowance for doubtful
accounts of $159,000 in 2000 and 1999 1,743,941 1,541,217
DUE FROM CLEARING BROKER 774,864 -
MARKETABLE SECURITIES 2,646,348 3,675,240
FIXED ASSETS - at cost (net of accumulated depreciation) 5,743,303 6,680,952
SOFTWARE AND DATABASE COSTS -
at cost (net of accumulated amortization of
$7,444,447 in 2000 and $7,267,312 in 1999) 287,863 417,292
INVESTMENT IN AFFILIATE 1,873,958 1,342,285
EXCESS OF COST OVER NET ASSETS ACQUIRED 2,333,699 2,747,523
NET DEFERRED INCOME TAX ASSETS 450,000 450,000
OTHER ASSETS 2,119,069 2,536,119
------------ ------------
TOTAL $ 24,478,801 $ 25,056,461
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 3,338,112 $ 4,352,959
Note payable - bank 569,321 2,535,056
Notes payable - other 836,203 762,083
Trading securities sold but not yet purchased 1,492,484 -
Capital lease obligations 1,215,826 2,006,094
Other liabilities, including income taxes 294,588 403,459
------------ ------------
Total liabilities 7,746,534 10,059,651
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value;
300,000,000 shares authorized; issued and
outstanding - 64,453,556 shares in 2000
and 63,070,056 shares in 1999 644,536 630,701
Additional paid-in capital 26,136,695 24,944,796
Accumulated other comprehensive income 675,921 2,205,144
Deficit (10,724,885) (12,783,831)
------------ -------------
Total stockholders' equity 16,732,267 14,996,810
----------- -----------
TOTAL $ 24,478,801 $ 25,056,461
============ ============
Track Data Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
SERVICE FEES AND REVENUE $58,766,897 $46,620,367 $46,473,469
----------- ----------- -----------
COSTS AND EXPENSES:
Direct operating costs 31,484,201 26,989,354 26,466,143
Selling and administrative expenses 21,564,337 19,290,029 18,147,324
Marketing and advertising 5,471,661 5,684,066 1,302,112
Gain on marketable securities (782,928) - -
Gain on sales of investment in affiliate (899,835) - -
Write off of investment 253,843 - -
Gain on real property lease buyout - (350,000) -
Interest expense (net of interest income
of $246,610, $181,240 and $33,355
in 2000, 1999 and 1998, respectively) 287,672 269,940 507,760
----------- ----------- -----------
Total 57,378,951 51,883,389 46,423,339
----------- ----------- -----------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF
AFFILIATE AND INCOME TAXES 1,387,946 (5,263,022) 50,130
EQUITY IN NET INCOME OF AFFILIATE 718,000 275,000 326,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 2,105,946 (4,988,022) 376,130
INCOME TAXES 47,000 60,000 157,958
----------- ----------- -----------
NET INCOME (LOSS) $ 2,058,946 $(5,048,022) $ 218,172
=========== =========== ===========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $.03 $(.08) $.00
==== ===== ====
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 63,660,000 61,229,000 58,224,000
=========== =========== ===========
Track Data Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years Ended December 31, 2000, 1999 and 1998
Accumulated Compre-
Additional Other hensive
Common Paid-in Comprehensive Income
Stock Capital Income Deficit (Loss)
BALANCE, JANUARY 1, 1998 $572,360 $13,988,055 $ 22,999 $ (7,953,981)
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
private company 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)
2,058,946 $ 2,058,946
Net income
Issuance of common stock
in exchange for invest-
ment in private companies 3,263 466,580
Sale of common stock 10,000 1,240,000
Stock options and warrants
exercised 6,264 1,209,184
Purchase and retirement of
treasury stock (5,692) (704,383)
Reversal of tax effect
of stock options
exercised (1,019,482)
Unrealized loss on marketable
securities - net of taxes (1,529,223) (1,529,223)
Reclassification adjustment
for gain on marketable
securities, net of tax (434,016)
-----------
Comprehensive income $ 95,707
-------- ----------- ----------- ------------ ===========
BALANCE, DECEMBER 31, 2000 $644,536 $26,136,695 $ 675,921 $(10,724,885)
======== =========== =========== ============
Track Data Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,058,946 $(5,048,022) $ 218,172
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation and
amortization 3,099,033 3,650,263 3,743,908
Services performed in
exchange for common
stock and options - 199,750 -
Equity in net income
of affiliate (718,000) (275,000) (326,000)
Deferred taxes - - 135,000
Write off of investment 253,843 - -
Gain on sale of Innodata
and Edgar Online common stock (1,649,555) - -
Net gain on other marketable
securities (33,208) - -
Net proceeds from
marketable securities 29,529 - -
Other (42,570) 737 153,381
Changes in operating
assets and liabilities:
Accounts receivable
and due from clearing
broker (322,105) 374,819 39,106
Other assets (102,263) (116,203) (111,365)
Accounts payable and
accrued expenses (1,014,847) 481,257 (900,641)
Other liabilities 78,672 (14,256) (664,341)
----------- ----------- -----------
Net cash provided
by (used in)
operating activities 1,637,475 (746,655) 2,287,220
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,024,446) (1,062,320) (703,258)
Proceeds from sales of fixed assets 64,115 51,535 154,684
Payments (to) from related parties - (26,602) 193,986
Payments to others (11,971) (53,087) (5,263)
Proceeds from sale of Innodata and
Edgar Online common stock 1,836,534 - -
Other investments (52,800) (25,311) -
----------- ----------- -----------
Net cash provided
by (used in)
investing activities 811,432 (1,115,785) (359,851)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease
obligations (1,426,970) (1,799,470) (1,959,052)
Net (payments) proceeds on
note payable - bank (1,965,735) 396,624 (234,767)
Net proceeds from notes
payable - other 74,120 65,117 32,144
Net (payments) proceeds on
loans from employee savings program (165,219) 110,438 32,482
Proceeds from issuance of
common stock 1,250,000 5,201,258 -
Proceeds from exercise of
stock options and warrants 1,335,747 2,696,059 1,443,706
Purchase of treasury stock (710,075) (23,113) (913,772)
----------- ----------- -----------
Net cash (used in)
provided by
financing
activities (1,608,132) 6,646,913 (1,599,259)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE
DIFFERENCES ON CASH (852) (2,220) (23,744)
----------- ----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 839,923 4,782,253 304,366
CASH AND EQUIVALENTS, BEGINNING OF YEAR 5,665,833 883,580 579,214
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 6,505,756 $ 5,665,833 $ 883,580
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for: Interest $ 456,485 $ 346,697 $ 546,042
Income taxes 43,648 20,289 786,447
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Equipment acquisitions financed
by capital leases $ 634,623 $ 853,387 $ 1,783,198
Exercise of stock options 1,800 122,412 938,423
Issuance of common stock
for investment in private
companies 469,843 500,000 -
Track Data Corporation and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
A. The Company and Summary of Significant Accounting Policies
Description of Business and Basis of Presentation--Track Data Corporation
("TDC") is a financial services company that owns Track Data Securities Corp., a
registered securities broker-dealer and member of the National Association of
Securities Dealers, Inc. TDC provides a proprietary, fully integrated
Internet-based online trading and market data system, myTrack. TDC provides
real-time financial market data, fundamental research, charting and analytical
services to institutional and individual investors through dedicated
telecommunication lines and the Internet. TDC also disseminates news and
third-party database information from more than 100 sources worldwide. TDC's
operations are classified in two business segments: Internet-based online
trading and market data services to the non-professional individual investor
community, and market data services to the institutional professional investment
community.
Certain reclassifications of prior year amounts were made to conform to the 2000
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: equipment - 3-10 years; furniture
and fixtures - 10 years; and transportation equipment - 4 years. 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, 2000. 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 $2,333,699 and $2,747,523, net of accumulated
amortization of $2,060,207 and $1,646,383 as of December 31, 2000 and 1999,
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.
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. Since obtaining its broker-dealer license in 2000 and registration in
all of the states, the Company earns commissions as an introducing broker for
the transactions of its customers. Commissions and related clearing expenses
are recorded on a trade-date basis as securities transactions occur.
Marketable Securities--The Company accounts for securities owned in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115"). FAS 115
requires investments in debt and equity securities to be classified as either
"held to maturity," "trading," or "available for sale." The accounting
treatment for unrealized gains and losses on those securities is then determined
by the classification chosen. Trading securities transactions are recorded on a
trade-date basis. Securities are valued at market value, and securities not
readily marketable are valued at fair value as determined by management. The
resulting difference between cost and market (or fair value) is included in
trading gains, net. Securities sold, but not yet purchased, consist of trading
securities at market values. The difference between the proceeds received from
securities sold short and the current market value is included in trading gains,
net. Securities available for sale are carried at fair value, with unrealized
gains and losses net of deferred taxes, reported as a separate component of
stockholders' equity, and realized gains and losses, determined on a specific
identification basis, are included in earnings.
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,
2000 and 1999, and the income statement accounts are translated at the weighted
average rates prevailing during the years ended December 31, 2000, 1999 and
1998. 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 is included in its results of operations.
Innodata is a global outsourcing provider of Internet and online digital content
services.
Cash and Cash Equivalents--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
accounting principles generally accepted in the United States of America,
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 $324,000,
$364,000 and $356,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Marketing and Advertising--Marketing and advertising costs are charged to
expense when incurred. Marketing and advertising costs were $5,472,000,
$5,684,000 and $1,302,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Segment Reporting--The Company uses the "management approach" as defined by FAS
No. 131, "Disclosures about Segments of Enterprise and Related Information" for
its segment reporting. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the disclosures about products and services, geographic
areas, and major customers.
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 FAS 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 FAS No. 130, "Reporting Comprehensive Income." FAS 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 are 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 2000 and 1998 as a result of potential dilution. The
calculation takes into account the shares that may be issued upon exercise of
stock options (Note M), 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, 2000 and 1999:
2000 1999
Equipment $33,474,381 $32,853,829
Telephone systems 1,146,224 778,806
Furniture and fixtures 1,082,573 1,075,880
Transportation equipment 69,461 69,461
Leasehold improvements 2,176,059 2,169,135
----------- -----------
37,948,698 36,947,111
Less accumulated depreciation
and amortization 32,205,395 30,266,159
----------- -----------
Fixed assets - net $ 5,743,303 $ 6,680,952
=========== ===========
Equipment financed by capital leases has a net carrying value of $2,927,486 and
$4,021,877 at December 31, 2000 and 1999, respectively. Depreciation and
amortization expense (including assets held under capital leases) for the years
ended December 31, 2000, 1999 and 1998 was $2,506,176, $2,949,223 and
$3,112,806, respectively.
C. Marketable Securities
Marketable securities consists of the following:
2000 1999
Edgar Online - Available for sale securities -at market $1,135,884 $3,675,240
Trading securities - at market 1,510,464 -
---------- ----------
$2,646,348 $3,675,240
========== ==========
Trading securities sold but not yet purchased - at market $1,492,484 $ -
========== ==========
The Company owns 712,600 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 carries the investment at $1,135,884, the
market value at December 31, 2000. The difference between the cost ($9,349) and
fair market value of these securities ($675,921), net of $450,614 in deferred
taxes, is classified as a component of accumulated other comprehensive income
included in stockholders' equity.
Trading securities have a long market value of $1,510,164 with a cost of
$1,416,089, or a net unrealized gain of $94,075. Securities sold but not yet
purchased, have a short market value of $1,492,184 with a cost of $1,457,957, or
a net unrealized loss of $34,227. The Company pledged its holdings in EOL and
Innodata (Note D) as collateral for its trading accounts.
D. Investment in Affiliate
As discussed in Note A, the Company has an equity interest in Innodata of
approximately 11%, 13% and 14% at December 31, 2000, 1999 and 1998,
respectively, which is carried at the Company's equity in the underlying net
assets.
Summarized information for Innodata is as follows:
2000 1999 1998
Total assets $27,946,000 $15,646,000 $10,596,000
Total liabilities 8,630,000 3,994,000 3,110,000
Revenues 50,731,000 27,490,000 19,593,000
Net income 6,168,000 2,113,000 2,250,000
The Company's equity in the net income of Innodata for the years ended December
31, 2000, 1999 and 1998 was $718,000, $275,000 and $326,000, respectively. As
of December 31, 2000, after giving retroactive effect to a two-for-one stock
dividend declared on February 28, 2001 and payable on March 23, 2001, the
Company owned 2,256,980 shares of Innodata which are traded on Nasdaq. The
closing price on December 31, 2000, as adjusted, was $5.50 per share. (See Note
C).
E. Due From Related Parties
The amounts due from related parties of approximately $25,000 at December 31,
2000 and 1999, included in other assets, consisted of loans made to the
Company's Chairman and entities controlled by him.
F. Note Payable - Bank
The note payable - bank bears interest at 1.75% above the bank's prime rate
(9.75% at December 31, 2000) 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.
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
TDC is a financial services company that owns Track Data Securities Corp., a
registered securities broker-dealer and member of the National Association of
Securities Dealers, Inc. TDC provides a proprietary, fully integrated
Internet-based online trading and market data system, myTrack. TDC provides
real-time financial market data, fundamental research, charting, and analytical
services to institutional and individual investors through dedicated
telecommunication lines and the Internet. TDC also disseminates news and
third-party database information from more than 100 sources worldwide. TDC's
operations are classified in two business segments: Internet-based online
trading and market data services to the non-professional individual investor
community, and market data services to the institutional professional investment
community. As of December 31, 2000, all prior period segment data has been
restated to conform to the 2000 presentation.
The accounting policies of the segments are the same as those described in Note
A, Summary of Significant Accounting Policies. Segment data includes charges
allocating corporate overhead to each segment. The Company has not disclosed
asset information by segment as the information is not produced internally.
Substantially all long-lived assets are located in the U.S. The Company's
business is predominantly in the U.S. Revenues and net income from
international operations are not material. Information concerning operations in
its business segments is as follows:
Revenues 2000 1999 1998
Professional Market $32,261,173 $30,482,607 $30,734,365
Non-Professional Market 26,505,724 16,137,760 15,739,104
----------- ----------- -----------
Total $58,766,897 $46,620,367 $46,473,469
=========== =========== ===========
Income (loss) before unallocated amounts, equity in net
income of affiliate and income taxes:
Professional Market $ 4,394,518 $ 2,569,999 $ 3,291,299
Non-Professional Market (1,641,644) (4,963,858) 379,397
Unallocated amounts:
Depreciation and amortization (2,506,176) (2,949,223) (3,112,806)
Gain on marketable securities and
sale of investment in affiliate 1,682,763 - -
Write-off of investment (253,843) - -
Gain on property lease buyout - 350,000 -
Interest expense, net (287,672) (269,940) (507,760)
----------- ----------- -----------
Income (loss) before equity in net income of
affiliate and income taxes 1,387,946 (5,263,022) 50,130
Equity in net income of affiliate 718,000 275,000 326,000
----------- ----------- -----------
Income (loss) before taxes $ 2,105,946 $(4,988,022) $ 376,130
=========== =========== ===========
I. Income Taxes
The components of the provision for income taxes are as follows:
2000 1999 1998
Federal:
Current $ 2,600 $ 5,000 $ -
Deferred - - 115,000
------- ------- --------
Total federal 2,600 5,000 115,000
------- ------- --------
State and local:
Current 44,400 55,000 22,958
Deferred - - 20,000
------- ------- --------
Total state and local 44,400 55,000 42,958
------- ------- --------
Provision for income taxes $47,000 $60,000 $157,958
======= ======= ========
Reconciliation of the U.S. statutory rate with the Company's effective tax rate
is summarized as follows:
2000 1999 1998
Federal statutory rate 34.0% (34.0)% 34.0%
State and local income taxes 2.2 (1.1) 7.5
Increase in valuation allowance - 34.0 -
Utilization of net operating loss carryforwards (34.0) - -
Other - (.1) 0.5
---- ---- ----
Effective rate 2.2% (1.2)% 42.0%
==== ==== ====
The components of the Company's net deferred taxes are as follows:
2000 1999
Deferred tax assets:
Net operating loss carryforwards $ 6,754,000 $ 5,787,000
Deferred compensation 195,000 995,000
Other (principally reserves for uncollectible accounts) 176,000 250,000
----------- -----------
7,125,000 7,032,000
Less valuation allowance (5,727,000) (4,615,000)
----------- -----------
1,398,000 2,417,000
----------- -----------
Deferred tax liabilities:
Unrealized gain on marketable securities (451,000) (1,506,000)
Excess of book basis over tax basis of investment (366,000) (92,000)
Accelerated depreciation for tax (127,000) (267,000)
Amortization of software and database costs
deducted for tax, not for financial reporting (4,000) (102,000)
----------- -----------
(948,000) (1,967,000)
----------- -----------
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 $(2,358,000) relating to tax benefits resulting from
employee stock plans will be credited to paid in capital when realizable. As of
December 31, 2000, the Company has net operating loss carryforwards for Federal
income tax purposes totaling approximately $16,900,000 which expire from 2010 to
2020. 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,
2000 follows:
Operating Leases
Year Ending Office Computer Capital
December 31, Space Equipment Total Leases
2001 $1,150,972 $ 591,262 $1,742,234 $ 910,531
2002 777,580 375,899 1,153,479 372,695
2003 608,176 43,629 651,805 43,204
2004 410,360 - 410,360 -
2005 70,625 - 70,625 -
---------- ---------- ---------- ----------
Total $3,017,713 $1,010,790 $4,028,503 1,326,430
========== ========== ==========
Less amounts representing interest 110,604
----------
Capital lease obligations $1,215,826
==========
Rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to
$1,558,999, $1,558,996 and $1,620,855 for office space and $862,824, $902,687
and $983,829 for computer equipment, respectively.
The Company leases its office facilities in Brooklyn from a limited partnership
owned by the Company's Chairman and members of his family. The Company paid the
partnership rent of $540,000, $525,000 and $530,000 for the years ended December
31, 2000, 1999 and 1998, respectively. The lease provides for the Company to pay
$540,000 per annum through April 1, 2001.
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 former director of the Company. 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, of which 60,000 were exercised. During
2000, the Company terminated this agreement by paying $40,000 and continuing
fees for future services provided in the contract through June 2001. 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 and other consulting services
amounted to $189,442, $101,550 and $98,132 in 2000, 1999 and 1998, respectively.
Broker-Dealer Service Agreement -- From April 1999 to August 2000 when the
Company obtained its own broker-dealer license, the Company offered 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 licensed its myTrack trading system to a
subsidiary of TSC. The Company received $2.25 per trade pursuant to the
agreement, which aggregated $2,280,000 in 2000 and $590,000 in 1999. In
addition, TSC paid a share of the marketing and advertising costs incurred by
the Company, which aggregated $666,000 in 2000 and $571,000 in 1999. At
December 31, 2000 and 1999, the amount due from TSC of $115,640 and $655,483,
respectively, is included in other assets. Further, the director 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 2000 and 1999, the fee was $50,000 and 37,500,
respectively. In August 2000, the Company terminated the relationship with TSC,
except for the director consulting agreement, and transferred all the trading
accounts from TSC to the Company's broker-dealer, Track Data Securities Corp.
Transactions with Clearing Broker and Customers--The Company conducts business
through a clearing broker which settles all trades for the Company, on a fully
disclosed basis, on behalf of its customers. The Company earns commissions as
an introducing broker for the transactions of its customers. In the normal
course of business, the Company's customer activities involve the execution of
various customer securities transactions. These activities may expose the
Company to off-balance-sheet risk in the event the customer or other broker is
unable to fulfill its contracted obligations and the Company has to purchase or
sell the financial instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a cash or
margin basis. In margin transactions, the clearing broker extends credit to the
Company's customers, subject to various regulatory margin requirements,
collateralized by cash and securities in the customers' accounts. However, the
Company is required to either obtain additional collateral or to sell the
customer's position if such collateral is not forthcoming. The Company is
responsible for any losses on such margin loans, and has agreed to indemnify its
clearing broker for losses that the clearing broker may sustain from the
customer accounts introduced by the Company.
Net Capital Requirements-- The SEC, NASD, and various other regulatory agencies
have stringent rules requiring the maintenance of specific levels of net capital
by securities brokers, including the SEC's uniform net capital rule, which
governs TDSC. Net capital is defined as assets minus liabilities, plus other
allowable credits and qualifying subordinated borrowings less mandatory
deductions that result from excluding assets that are not readily convertible
into cash and from valuing other assets, such as a firm's positions in
securities, conservatively. Among these deductions are adjustments in the market
value of securities to reflect the possibility of a market decline prior to
disposition.
As of December 31, 2000, TDSC was required to maintain minimum net capital,
in accordance with SEC rules, of approximately $181,000 and had total net
capital of $345,000, or approximately $164,000 in excess of minimum net capital
requirements.
If TDSC fails to maintain the required net capital it may be subject to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies, which ultimately could require TDSC's
liquidation. In addition, a change in the net capital rules, the imposition of
new rules, a specific operating loss, or any unusually large charge against net
capital could limit those operations of TDSC that require the intensive use of
capital and could limit its ability to expand its business.
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, or sooner upon approval of the Board, 247,284
shares of Innodata common stock, adjusted for a two-for-one stock dividend
declared on February 28, 2001 and payable on March 23, 2001, and 3,004,400
shares of the Company's common stock. These shares were placed in a trust as of
March 31, 1996. The Board of Directors authorized distributions of the
Company's common stock to participants as follows: 2000-449,900 shares;
1999-776,400 shares; and 1998-297,352 shares. In February 2001, the Board
distributed 182,456 shares of Innodata common stock.
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 $278,056 at December 31,
2000.
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. The Company declared two-for-one stock splits in
the form of stock dividends payable on November 17, 1999 and December 29, 1999,
respectively.
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.
The Company registered these shares.
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 433,248
are outstanding at December 31, 2000. The Company registered the shares and the
shares underlying the warrants.
In May 2000, the Company acquired approximately 2% of iAnalyst, Inc. ("IA") and
Silicon Summit Technologies Inc. ("SST"), both privately held companies, in
exchange for an aggregate of 326,280 shares of the Company's common stock. The
Company registered these shares. IA was to provide the individual investor
Internet-based access to independent equity research analysts. SST is a leading
provider of e-finance solutions and services for B4B electronic securities
trading. Further, in May 2000, the Company's preliminary agreements to acquire
10% of MainStreetIPO.com and FlexTrader.com were terminated. As of December 31,
2000, the Company wrote off its investment in IA totaling $253,843.
In December 2000, the Company sold 1 million shares of its common stock in a
private placement for $1.25 per share and granted a three-year option to
purchase 2 million shares at $1.75 per share, exercisable after the first
anniversary. The Company registered these shares and the shares to be issued on
exercise of warrants.
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, 2000, the Company reserved for issuance
8,143,130 shares of its common stock as follows: (a) 5,709,882 shares pursuant
to the Company's Stock Option Plans and options issued which were not granted
under the plans; and (b) 2,433,248 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 FAS 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 FAS 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 income (loss)
would have been $563,000, or $.01 per share, in 2000, $(5,527,000), or $(.09)
per share, in 1999, and net income would have been $115,000, or $.00 per share,
in 1998. 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 three years in 2000, two and one-half years in
1999 and three years in 1998; risk free interest rate of 6% in 2000, 6% in 1999
and 5.6% in 1998; expected volatility of 150% in 2000, 107% in 1999 and 80% in
1998; and a zero dividend yield. The effects of applying FAS No. 123 in this
proforma disclosure are not indicative of future results.
A summary of the Company's Stock Option Plans are as follows:
Weighted
Average
Weighted Fair
Per Share Average Weighted Weighted Value
Range of Remaining Average Average Date
Exercise Number Contractual Exercise Number Exercise of
Prices Outstanding Life (Years) Price Exercisable Price Grant
Balance 1/1/98 $.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
========
Canceled $ .50 - 5.50 (551,500) 2 $2.53
Exercised $ .50 - 6.06 (411,550) 2 $1.23
Granted $1.50 - 6.75 1,974,450 4 $1.79 $1.20
----------
Balance 12/31/00 $.38 - .75 935,282 2 $ .67 935,282 $ .67
$1.00 - 1.75 2,278,050 1 $1.49 244,900 $1.45
$2.50 - 7.00 911,900 3 $3.56 589,650 $3.14
---------- --------
4,125,232 1,769,832
========== =========
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. In February 2001, the
Company granted options to purchase 1,000,000 shares of its common stock at
$1.50 per share to its Chairman. Amounts due from the exercise of options at
December 31, 1999 in the amount of $122,412, included in other assets, was
received in January 2000.
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, 2000, 1999 and 1998
were $52,395, 46,084 and $35,945, respectively.
O. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands, except per share)
2000
Revenues $12,890 $13,033 $14,871 $17,973
Net (loss) income (1,878) (2,743) 1,641 5,039
Basic and diluted net
(loss) income per share $(.03) $(.04) $.03 $.08
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 $(.00) $(.01) $(.04) $(.03)
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, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. 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 of America. 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, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/S/ Grant Thornton LLP
New York, New York
February 23, 2001
(Except for Note 5 as to which the date is February 28, 2001)
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 9,040,207 $ 3,380,242
Accounts receivable-net
of allowance for doubtful
accounts of $884,000 in
2000 and $580,000 in 1999 5,799,102 5,247,428
Prepaid expenses and other
current assets 1,194,158 396,743
Deferred income taxes 839,000 540,000
----------- -----------
Total current assets 16,872,467 9,564,413
PROPERTY AND EQUIPMENT - NET 9,464,056 4,891,992
OTHER ASSETS 1,609,514 1,189,472
----------- -----------
TOTAL $27,946,037 $15,645,877
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 19,629
Accounts payable 3,196,112 1,553,585
Accrued salaries and wages 3,060,282 1,529,753
Income and other taxes 1,110,208 495,628
----------- -----------
Total current liabilities 7,366,602 3,598,595
----------- -----------
LONG-TERM DEBT, less current portion - 5,188
----------- -----------
DEFERRED INCOME TAXES 1,263,000 390,000
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
authorized 75,000,000 shares;
issued - 21,688,214 shares in
2000 and 20,535,772 shares in 1999 216,882 205,356
Additional paid-in capital 12,239,122 10,754,521
Retained earnings 7,081,400 913,186
----------- -----------
19,537,404 11,873,063
Less: treasury stock - at cost;
576,996 shares (220,969) (220,969)
----------- -----------
Total stockholders' equity 19,316,435 11,652,094
----------- -----------
TOTAL $27,946,037 $15,645,877
=========== ===========
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
2000 1999 1998
REVENUES $50,731,476 $27,490,138 $19,593,353
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Direct operating costs 34,457,884 17,853,702 13,068,660
Selling and administrative expenses 7,247,901 6,783,313 4,982,127
Impairment of assets and other - - 133,141
Gain on foreign currency contracts - - (487,458)
Interest expense 42,883 10,542 77,594
Interest income (154,406) ( 111,143) (98,391)
----------- ----------- -----------
Total 41,594,262 24,536,414 17,675,673
----------- ----------- -----------
INCOME BEFORE PROVISION
FOR (BENEFIT FROM) INCOME TAXES 9,137,214 2,953,724 1,917,680
PROVISION FOR (BENEFIT FROM) INCOME TAXES 2,969,000 841,000 (332,000)
----------- ----------- -----------
NET INCOME $ 6,168,214 $ 2,112,724 $ 2,249,680
=========== =========== ===========
BASIC INCOME PER SHARE $.30 $.11 $.13
==== ==== ====
DILUTED INCOME PER SHARE $.26 $.10 $.12
==== ==== ====
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
Additional Retained
Common Stock Paid-in Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
January 1, 1998 18,260,832 $182,608 $ 8,703,340 $(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 79,992 800 19,197 - - 19,997
Purchase of
treasury stock - - - - (38,372) (38,372)
---------- -------- ----------- ---------- --------- -----------
December 31, 1998 18,340,824 183,408 8,722,537 (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 2,054,956 20,548 892,913 - - 913,461
Issuance of common
stock for software
development 139,992 1,400 67,196 - - 68,596
Income tax benefit
from exercise of
stock options - - 1,071,875 - - 1,071,875
---------- -------- ----------- ---------- --------- -----------
December 31, 1999 20,535,772 205,356 10,754,521 913,186 (220,969) 11,652,094
Net income - - - 6,168,214 - 6,168,214
Issuance of common
stock upon exercise
of stock options
and warrants 1,152,442 11,526 689,601 - - 701,127
Income tax benefit
from exercise of
stock options - - 795,000 - - 795,000
---------- -------- ----------- ---------- --------- -----------
December 31, 2000 21,688,214 $216,882 $12,239,122 $7,081,400 $(220,969) $19,316,435
========== ======== =========== ========== ========= ===========
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
2000 1999 1998
OPERATING ACTIVITIES:
Net income $ 6,168,214 $ 2,112,724 $ 2,249,680
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,959,060 1,797,031 1,322,721
Tax benefit from exercise of options 795,000 1,071,875 -
Restructuring costs, impairment of
assets and other - - 133,141
Loss (gain) on disposal of fixed assets 30,447 71,630 (74,399)
(Gain) on foreign currency contracts - - (487,458)
Deferred income taxes 574,000 (199,000) (482,000)
Changes in operating assets and liabilities:
Accounts receivable (551,674) (2,304,006) 419,834
Prepaid expenses and other current assets (977,415) (326,131) 120,459
Other assets (409,034) (73,565) 23,660
Accounts payable and accrued expenses 1,653,394 258,238 (76,805)
Liability for foreign currency contracts - - (912,542)
Accrued salaries and wages 1,530,529 680,145 208,422
Income and other taxes payable 614,580 (210,855) 102,300
----------- ----------- -----------
Net cash provided by operating activities 12,387,101 2,878,086 2,547,013
----------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (7,403,446) (3,890,848) (1,024,622)
Proceeds from disposal of property and equipment - - 182,912
----------- ----------- -----------
Net cash used in investing activities (7,403,446) (3,890,848) (841,710)
----------- ----------- -----------
FINANCING ACTIVITIES:
Payments of borrowings (24,817) (55,990) (121,247)
Proceeds from exercise of stock options 701,127 913,461 19,997
Purchase of treasury stock - - (38,372)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 676,310 857,471 (139,622)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,659,965 (155,291) 1,565,681
CASH AND EQUIVALENTS, BEGINNING OF YEAR 3,380,242 3,535,533 1,969,852
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 9,040,207 $ 3,380,242 $ 3,535,533
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 42,883 $ 10,542 $ 32,524
Income taxes $ 1,018,000 $ 310,698 $ -
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation - Innodata Corporation and subsidiaries
(the "Company") is a leading provider of digital content outsourcing services,
specializing in XML transformations and content enhancement, offering a "single
solution" for companies needing to create high-value, large scale web and
on-line content. 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 and delivered.
Deferred Production Costs - Deferred production costs consist of actual
labor and certain other costs incurred for uncompleted and unbilled services.
Included in prepaid expenses and other current assets at December 31, 2000 and
1999 are deferred production costs totaling $876,000 and $46,000, respectively.
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, 2000 and 1999 were translated at the exchange rate in
effect as of those dates. Exchange losses resulting from such transactions in
2000 totaled approximately $180,000. 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, primarily cash and accounts receivable, 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 Per Share - Basic earnings 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. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost less accumulated depreciation and
amortization, consist of the following:
December 31, 2000 1999
Equipment $12,447,297 $ 9,522,707
Furniture and fixtures 724,893 501,768
Leashold improvements 2,047,891 1,045,865
----------- -----------
Total 15,220,081 11,070,340
Less accumulated depreciation
and amortization 5,756,025 6,178,348
----------- -----------
$ 9,464,056 $ 4,891,992
=========== ===========
As of December 31, 2000 and 1999, the net book value of property and
equipment located at the Company's production facilities in the Philippines,
India and Sri Lanka was approximately $9,046,000 and $4,217,000, respectively.
3. INCOME TAXES
The significant components of the provision for (benefit from) income taxes
are as follows:
2000 1999 1998
Current income tax expense:
Foreign $ 61,000 $ - $ 50,000
Federal 2,040,000 884,000 55,000
State and local 294,000 156,000 45,000
---------- ---------- ---------
2,395,000 1,040,000 150,000
Deferred income tax expense (benefit) 574,000 (199,000) (482,000)
---------- ---------- ---------
Provision for (benefit from) income taxes $2,969,000 $ 841,000 $(332,000)
========== ========== =========
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:
2000 1999 1998
Federal statutory rate 34.0% 34.0% 34.0%
Effect of:
Valuation allowance - - (35.0)
Utilization of net operating loss carryforwards
not previously recognized - - (19.5)
State income taxes (net of federal tax benefit) 1.6 0.1 1.6
Effect of foreign tax holiday, net of foreign
income not deemed permanently reinvested (3.4) (8.1) -
Foreign taxes 0.7 - 2.6
Other (0.4) 2.5 (1.0)
---- ---- -----
Effective rate 32.5% 28.5% (17.3)%
==== ==== =====
As of December 31, 2000 and 1999, the composition of the Company's net
deferred income taxes is as follows:
2000 1999
Deferred income tax assets:
Allowances not currently deductible $ 726,000 $ 355,000
Expenses not deductible until paid 113,000 60,000
Net operating loss carryforwards - 225,000
----------- ---------
839,000 640,000
Less: valuation allowance - (100,000)
----------- ---------
839,000 540,000
----------- ---------
Deferred income tax liabilities:
Foreign source income, not taxable
until repatriated (1,500,000) (415,000)
Depreciation and amortization 237,000 25,000
----------- ---------
(1,263,000) (390,000)
----------- ---------
Net deferred income tax (liability)/asset $ (424,000) $ 150,000
=========== =========
4. COMMITMENTS AND CONTINGENT LIABILITIES
Line of Credit - The Company has a line of credit with a bank in the amount
of $3 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, 2000.
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
2007, 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 $950,000. For the years ended December 31, 2000, 1999 and 1998,
rent expense for office and production space totaled approximately $1,600,000,
$850,000 and $700,000, respectively.
In addition, the Company leases certain equipment under short-term
operating lease agreements. Pursuant to the lease agreements, the Company has
the option to purchase some or all of the equipment at fixed amounts. For the
year ended December 31, 2000, rent expense for equipment totaled approximately
$900,000.
At December 31, 2000, future minimum annual rental commitments on
non-cancellable leases (excluding equipment leases with terms less than one
year) are as follows:
2001 $ 570,000
2002 500,000
2003 295,000
2004 295,000
Thereafter 1,600,000
----------
$3,260,000
==========
Litigation - In response to an arbitration proceeding brought by the
Company against a former customer to collect past due amounts for services
performed, the former customer has filed an amended answer with counterclaims
alleging in substance breach of contract and warranty. These counterclaims seek
compensatory damages of not less than $1,000,000 and punitive damages of
$500,000. The amended answer was filed by the former customer after the New
York State Supreme Court granted the Company's petition to compel arbitration.
Management believes that the counterclaims are without merit, and intends to
vigorously pursue its claims against the former customer.
In addition, the Company is subject to various other legal proceedings and
claims which arise in the ordinary course of business.
While the outcome of these matters is currently not determinable,
management believes their outcome will not have a material adverse effect on 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. However,
most significant contracts contain provisions for price renegotiation.
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, 2000. Under the legislation, the Company
is not required to fund future costs, if any.
5. CAPITAL STOCK
Common Stock - Effective March 25, 1998, the Company's stockholders
approved a one-for-three reverse stock split. On September 9, 1999 and December
7, 2000, the Company paid a three-for-one and a two-for-one stock dividend,
respectively. On February 28, 2001, the Company declared a two-for-one stock
dividend payable on March 23, 2001, and the stockholders increased the number of
common shares the Company is authorized to issue to 75,000,000. The financial
statements and notes thereto, including all share and per share amounts, have
been restated to reflect all 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, 2000, the Company reserved for
issuance 8,942,884 shares of common stock pursuant to the Company's Stock Option
Plans (including 1,099,164 options issued to the Company's Chairman and its
President which were not granted under the plans).
6. 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 1,050,000, 1,260,000, 210,000,
2,400,000, 1,999,992 and 3,600,000 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 2000, 1999 and 1998 consistent with the
provisions of SFAS No. 123, the Company's net income would have been $5.7
million or $.28 per share, basic, and $.25 per share, diluted in 2000, $1.8
million, or $.10 per share, basic, and $.08 per share, diluted, in 1999, and
$1.5 million, or $.08 per share, basic and diluted, in 1998. 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 6% in 2000, 5% in 1999 and 1998, expected volatility
of 115% in 2000 and 107% in 1999 and 1998; and a zero dividend yield. The
effects of applying SFAS No. 123 in this disclosure are not indicative of future
disclosures.
Weighted
Weighted Average
Per Share Average Weighted Weighted Fair
Range of Remaining Average Average Value,
Exercise Number Contractual Exercise Number Exercise Date of
Prices Outstanding Life Price Exercisable Price Grant
Balance 1/1/98 $0.25 - 0.81 2,954,304 4 $0.53 1,391,628 $0.68
$0.85 - 1.75 2,174,292 3 $1.17 1,127,952 $1.08
---------- ---------
5,128,596 2,519,580
=========
Canceled $0.31 - 0.88 (1,936,392)
Canceled $0.95 - 1.75 (1,950,516)
Granted $0.25 - 0.53 2,115,588 5 $0.46 $0.33
Granted and
Repriced $0.42 - 0.72 3,207,120 2 $0.53 $0.22
Granted and
Repriced $1.38 399,996 3 $1.29 $0.17
Exercised $0.25 (79,992)
----------
Balance 12/31/98 $0.25 - 0.75 6,446,604 3 $0.47 1,169,952 $0.34
$1.19 - 1.49 437,796 2 $1.31 37,800 $1.47
---------- ---------
6,884,400 1,207,752
=========
Cancelled $0.25 - 0.57 (425,388) 3 $0.38
Granted $0.67 - 2.00 1,249,200 5 $1.05 $0.82
Exercised $0.25 - 0.75 (1,946,956) $0.48
----------
Balance 12/31/99 $0.25 - 0.47 1,321,320 2 $0.34 1,321,320 $0.34
$0.50 - 0.75 3,645,740 3 $0.58 2,056,940 $0.57
$1.19 - 2.00 794,196 2 $1.62 437,796 $1.31
---------- ---------
5,761,256 3,816,056
=========
Cancelled $0.35 - $2.00 (267,840) 5 $0.85
Granted $1.57 - $2.69 2,729,600 $1.97 $1.58
Exercised $0.25 - $2.00 (902,440) $0.61
---------
Balance 12/31/00 $0.25 - $0.47 1,019,640 2 $0.34 1,019,640 $0.34
$0.50 - $0.75 2,858,632 3 $0.58 2,429,632 $0.56
$1.29 399,996 2 $1.29 399,996 $1.29
$1.56 - $2.25 2,699,108 4 $1.90 295,984 $1.73
$2.50 - $2.69 343,200 5 $2.52 - -
---------- ---------
7,320,576 4,145,252
========== =========
Subsequent to December 31, 2000, the Company granted options to purchase
1,142,000 shares at $5.44 per share.
8. SEGMENT REPORTING
Until December 31, 1999 when the Company phased out its document imaging
services, the Company's operations were classified in two business segments;
Internet and on-line digital content outsourcing services, and document imaging
services.
Internet and on-line digital content outsourcing services provide all the
necessary steps for product development and data conversion to enable its
clients to create and disseminate vast amounts of information both on-line and
via the Internet. Its clients 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.
In 1999 and 1998, one client accounted for 17% and 13%, respectively, of
the Company's digital content outsourcing services' revenues. In addition,
during 1998, one client that is comprised of twelve affiliated companies,
accounted for 21% of such revenues. Further, in 1999 and 1998, export revenues,
all of which were derived from European clients, accounted for 21% and 22%,
respectively, of such revenues.
The document imaging services segment provided 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.
1999 1998
Revenues
Digital content outsourcing services $26,459,447 $17,401,346
Document imaging services 1,030,691 2,192,007
----------- -----------
Total consolidated $27,490,138 $19,593,353
=========== ===========
Income (loss) before income taxes
Digital content outsourcing services $ 3,523,682 $ 3,151,928(a)
Document imaging services (569,958) (1,234,248)(b)
----------- -----------
Total consolidated $ 2,953,724 $ 1,917,680
=========== ===========
(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.
1999 1998
Total assets
Digital content outsourcing services $15,437,090 $ 9,520,116
Document imaging services 208,787 1,075,392
----------- -----------
Total consolidated $15,645,877 $10,595,508
=========== ===========
Capital expenditures
Digital content outsourcing services $ 3,881,870 $ 980,218
Document imaging services 8,978 44,404
----------- -----------
Total consolidated $ 3,890,848 $ 1,024,622
=========== ===========
Depreciation and amortization
Digital content outsourcing services $ 1,660,801 $ 1,116,445
Document imaging services 136,230 206,276
----------- -----------
Total consolidated $ 1,797,031 $ 1,322,721
=========== ===========
In 2000, one client accounted for 54% of the Company's total revenues, and
export revenues, most of which were derived from European clients, accounted for
10% of revenues. A significant amount of the Company's revenues are derived
from clients in the publishing industry. Accordingly, the Company's accounts
receivable generally include significant amounts due from such clients.
9. INCOME PER SHARE
2000 1999 1998
Net income $ 6,168,214 $ 2,112,724 $ 2,249,680
=========== =========== ===========
Weighted average common shares outstanding 20,261,644 18,701,488 17,740,896
Dilutive effect of outstanding warrants and options 3,016,339 2,592,264 376,692
----------- ----------- -----------
Adjusted for dilutive computation 23,277,983 21,293,752 18,117,588
=========== =========== ===========
Basic income per share $.30 $.11 $.13
==== ==== ====
Diluted income per share $.26 $.10 $.12
==== ==== ====
10. IMPAIRMENT OF ASSETS AND OTHER
In the fourth quarter of 1998, management determined that the goodwill
associated with the document imaging services business could not be recovered.
Accordingly, the unamortized amount of $382,000 was written off at December 31,
1998. Further, certain estimated liabilities for restructuring and other items
accrued in 1997 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
In the second quarter of 1998, the Company reached an agreement in
connection with foreign currency contracts that were in dispute. 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)
2000
Revenues $8,839 $9,712 $13,039 $19,141
Net income 258 429 1,468 4,013
Net income per share $.01 $.02 $.07 $.19
Diluted net income per share $.01 $.02 $.06 $.16
1999
Revenues $5,611 $7,026 $7,073 $7,780
Net income 291 968 585 269
Net income per share $.02 $.05 $.03 $.01
Diluted net income per share $.02 $.05 $.03 $.01
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 51 Chairman of the Board, Chief Executive Officer
Martin Kaye 53 Executive Vice President, Chief Financial Officer,
Secretary and Director
Jay Gelman 39 Senior Vice President - Sales
Stanley Stern 50 Senior Vice President - Customer Relations, Director
E. Bruce Fredrikson 63 Director
William Karsh 47 Director
Isaac Schlesinger 54 Director
Jack Spiegelman 62 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.
Martin Kaye has been Executive Vice President, 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).
Jay Gelman has been Senior Vice President - Sales since March 2001 and
prior thereto he was the Company's Vice President of Sales for its institutional
market data business since January 2000. From August 1998 until December 1999,
he served as President of the Company's Newsware division. In 1989, he
co-founded Alliance Distributors, a leading distributor of products manufactured
by Nintendo, Sony, RCA/GE, Electronic Arts, and many other consumer electronic
companies. In December 1997, Take Two Interactive, a public company, bought
Alliance Distributors. Prior thereto he was a salesman for the Company from
1987 through 1989. Mr. Gelman attended Northeastern University and Bernard
Baruch College.
Stanley Stern has been Senior Vice President - Customer Relations since
June 2000 and 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. From January 1998 through May 2000, Mr. Stern had
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.
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 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.
William Karsh has been a Director of the Company since January 2000. Mr.
Karsh is a Senior Vice President in charge of business development and
operations at Knight Securities, L.P., the Nasdaq/non-Nasdaq over-the-counter
equity securities market-making subsidiary of Knight Trading Group, Inc.
(Nasdaq: NITE). He is a member of the Advisory Board at Neovest; the Board of
Directors at Internet Trading Technologies, Inc. and the Board of Advisors at
TheFinancialCafe.com. He was Executive Vice President, Chief Operations and
Administrative Officer at SunAmerica Financial Network Inc., a holding company
within SunAmerica, Inc. (NYSE: AIG) from April 1998 through June 1999. From
January 1991 through March 1998, he was Treasurer and Executive Vice President
of National Discount Brokers Group, Inc. (NYSE: NDB). In January 1994, he also
became Chief Executive Officer and President of NDB. He has a B.A. in
Accounting from Queens (NY) College (1977). He is a certified public
accountant, holds Series 7, 63, 41, 24, 27 licenses and is an arbitrator for the
New York Stock Exchange (NYSE).
Isaac Schlesinger has been a Director of the Company since July 2000.
Since 1975, Mr. Schlesinger has been a managing director and senior officer of
Bishop, Rosen & Co., Inc., members of the New York and American Stock Exchanges,
a retail and institutional brokerage firm. He also serves as C.R.O.P.,
S.R.O.P., M.P. and chief financial officer. Mr. Schlesinger received a BA in
Comparative Literature from Brooklyn College (1977).
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).
In connection with a stock purchase agreement with Knight Trading Group,
Inc. ("Knight") in December 2000, Knight has the right to designate one member
of the Board of Directors for three years. Mr. Karsh has been designated by
Knight. 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, 2000 through
December 31, 2000 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, 2000 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 2000 $375,000 - $375,000 350,000
Chairman, CEO 1999 $375,000 - $375,000 200,000
1998 $375,000 - $375,000 160,000
Jay Gelman 2000 $250,000 - $250,000 280,000
Senior Vice President -
Sales
The above table does not include certain insurance and other personal
benefits, the total value of which does not exceed the lesser of $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 50,000 (A) 2.5% $6.75 3/13/05 $ 93,000 $206,000
300,000 (A) 15.2% 1.50 5/31/05 123,000 276,000
Jay Gelman 30,000 (A) 1.5% $6.75 3/13/05 $ 55,800 $123,600
50,000 (A) 2.5% 1.50 5/31/05 20,500 46,000
200,000 (B) 10.1% 1.50 7/31/05 82,000 184,000
(A) Vesting is over a two-year period.
(B) Vesting is over a four-year period.
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 None - 260,000/450,000 $-0-/$-0-
Jay Gelman None - 85,000/340,000 $-0-/$-0-
There are no employment agreements, stock appreciation rights or long-term
incentive plans.
Directors Compensation
Dr. Fredrikson is compensated at the rate of $1,250 per month, plus
out-of-pocket expenses for each meeting attended. Mr. Schlesinger is
compensated at the rate of $1,500 per meeting attended. No other director is
compensated for his services as director.
Messrs. Fredrikson and Schlesinger received options to purchase 7,000 and
10,000 shares, respectively, as compensation for their services.
Compensation Committee Interlocks and Insider Participation
For the Company's fiscal year ended December 31, 2000, Messrs. Hertz 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
and Stern (for Mr. Stern until Innodata's annual meeting in December 2000) are
also directors of Innodata.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 28, 2001, 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) 27,863,880 43.1%
Martin Kaye (3) 310,000 *
Jay Gelman (4) 162,000 *
Isaac Schlesinger 15,000 *
Jack Spiegelman (5) 86,500 *
E. Bruce Fredrikson (3)
Syracuse University
School of Management
Syracuse, NY 13244 87,500 *
Stanley Stern (6) 89,500 *
All Officers and Directors as a Group
(seven persons)(2)(3)(4)(5)(6) 28,607,380 43.8%
---------------
* = less than 1%
(1) Except as noted otherwise, all shares are owned beneficially and of
record. Based on 64,210,955 shares outstanding.
(2) Consists of 25,205,532 shares owned by Mr. Hertz, 2,138,400 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 425,000 options which are presently exercisable under
the Company's Stock Option Plans.
(3) Consists of shares issuable upon the exercise of presently exercisable
options granted under the Company's Stock Option Plans.
(4) Consists of 7,000 shares owned of record and 155,000 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 and 22,500 shares issuable upon the exercise of
presently exercisable options granted under the Company's Stock Option Plan.
(6) Consists of 22,000 shares owned of record and 35,000 shares held in the
Track Data Phantom Unit Trust to be released upon his termination of association
with the Company, or earlier with approval of the Board of Directors. Also
includes 32,500 shares issuable upon the exercise of presently exercisable options
granted under the Company's Stock Option Plans.
Item 13. Certain Relationships and Related Transactions
In July 1998, the Company entered into a software development agreement
with Third Millennium Technology, Inc. ("TMT"), a corporation controlled by
Morton Mackof, a former director of the Company. 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. During 2000, the Company terminated this agreement
by paying $40,000 and continuing fees for future services provided in the
contract through June 2001. 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 and other
consulting services in 1998 amounted to $189,442, $101,550 and $98,132 in 2000,
1999 and 1998, respectively.
From April 1999 to August 2000, the Company offered 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 licensed its myTrack trading system to a
subsidiary of TSC until August 2000. The Company was receiving $2.25 per trade
pursuant to the agreement, which aggregated $2,280,000 in 2000 and $590,000 in
1999. In addition, TSC paid a share of the marketing and advertising costs
incurred by the Company, which aggregated $666,000 in 2000 and $571,000 in 1999.
At December 31, 2000 and 1999, the amount due from TSC of $115,640 and $655,483,
respectively, is included in other assets. Further, the director 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 2000 and 1999, the fee was $50,000 and
$37,500, respectively. In August 2000, the Company obtained its own
broker-dealer license and, after registration in all states, terminated the
relationship with TSC, except for the director consulting agreement, and
transferred all the trading accounts from TSC to the Company's broker-dealer,
Track Data Securities Corp.
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
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
(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 23, 2001
- ------------------- Chief Executive Officer
Barry Hertz
/s/ Vice President - Finance, Chief March 23, 2001
- ------------------- Financial Officer, Secretary and Director
Martin Kaye
/s/ Senior Vice President - Customer March 23, 2001
- ------------------- Relations and Director
Stanley Stern
/s/ Director March 23, 2001
- -------------------
E. Bruce Fredrikson
Director
- -------------------
William Karsh
/s/ Director March 23, 2001
- -------------------
Isaac Schlesinger
/s/ Director March 23, 2001
- -------------------
Jack Spiegelman
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 1, 2001, 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,
2000. 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, File No. 333-91645, effective February 9, 2000, File No. 333-34696,
effective June 8, 2000 and File No. 333-54296, effective February 9, 2001) 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).
/S/ GRANT THORNTON LLP
Melville, New York
March 1, 2001
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 23, 2001 (except for Note 5 for which
the date is February 28, 2001), 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, 2000. 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, File No. 333-91645, effective February 9, 2000, File No. 333-34696,
effective June 8, 2000 and File No. 333-54296, effective February 9, 2001) 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).
/S/ GRANT THORNTON LLP
New York, New York
February 23, 2001