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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File Number 0-24634
TRACK DATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
22-3181095
(I.R.S. Employer Identification No.)
56 Pine Street
New York, NY 10005
(Address of principal executive offices)
(212) 422-4300
(Registrant's telephone number)
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 past 12 months (or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of July 31, 2002 there were
52,465,260 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
--------------------
See pages 2-11
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
See pages 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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See page 17
PART II. OTHER INFORMATION
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See page 18
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
June 30, December 31,
2002 2001
---------- ------------
Unaudited Derived from
Audited
Financial
Statements
ASSETS
CASH AND EQUIVALENTS $ 5,575 $ 5,687
ACCOUNTS RECEIVABLE - net 2,404 1,813
DUE FROM CLEARING BROKER - 735
DUE FROM BROKER 72,817 14,813
MARKETABLE SECURITIES 30,115 45,623
FIXED ASSETS - at cost (net of accumulated depreciation) 3,856 4,583
EXCESS OF COST OVER NET ASSETS ACQUIRED 1,900 1,920
NET DEFERRED INCOME TAX ASSETS 878 -
OTHER ASSETS 1,354 1,746
-------- -------
TOTAL $118,899 $76,920
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 4,691 $ 3,099
Note payable - bank 1,117 1,865
Notes payable - other 941 918
Due to clearing broker 335 -
Trading securities sold but not yet purchased 92,593 46,409
Capital lease obligations 242 480
Net deferred income tax liabilities - 805
Other liabilities, including income taxes 463 183
-------- -------
Total liabilities 100,382 53,759
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 300,000,000 shares
authorized; issued and outstanding - 52,627,240
shares in 2002 and 54,739,695 shares in 2001 526 547
Additional paid-in capital 15,875 18,585
Accumulated other comprehensive income 1,246 3,676
Retained earnings 870 353
-------- -------
Total stockholders' equity 18,517 23,161
-------- -------
TOTAL $118,899 $76,920
======== =======
See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands, except earnings per share)
(Unaudited)
2002 2001
------- -------
SERVICE FEES AND REVENUE $26,375 $33,714
------- -------
COSTS AND EXPENSES:
Direct operating costs 14,169 15,774
Selling and administrative expenses 9,471 9,898
Marketing and advertising 457 809
Writedown of investments in private companies 516 -
Gain on sale of investments in affiliate - (949)
Loss (gain) on marketable securities 306 (989)
Interest expense (income) - net 593 (122)
------- -------
Total 25,512 24,421
------- -------
INCOME BEFORE EQUITY IN NET INCOME
OF AFFILIATE AND INCOME TAXES 863 9,293
EQUITY IN NET INCOME OF AFFILIATE - 276
------- -------
INCOME BEFORE INCOME TAXES 863 9,569
INCOME TAXES 346 2,679
------- -------
NET INCOME $ 517 $ 6,890
======= =======
BASIC AND DILUTED NET INCOME PER SHARE $.01 $.11
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 53,416 62,332
======= =======
ADJUSTED DILUTIVE SHARES OUTSTANDING 53,957 62,590
======= =======
See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands, except earnings per share)
(Unaudited)
2002 2001
------- -------
SERVICE FEES AND REVENUE $13,239 $16,322
------- -------
COSTS AND EXPENSES:
Direct operating costs 7,702 7,859
Selling and administrative expenses 4,636 4,961
Marketing and advertising 168 480
Writedown of investments in private companies 516 -
Gain on sale of investment in affiliate - (393)
Gain on marketable securities (747) (721)
Interest expense (income) - net 223 (77)
------- -------
Total 12,498 12,109
------- -------
INCOME BEFORE INCOME TAXES 741 4,213
INCOME TAXES 297 2,679
------- -------
NET INCOME $ 444 $ 1,534
======= =======
BASIC AND DILUTED NET INCOME PER SHARE $.01 $.03
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 52,857 60,779
======= =======
ADJUSTED DILUTIVE SHARES OUTSTANDING 52,987 61,081
======= =======
See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
SIX MONTHS ENDED JUNE 30, 2002
(in thousands)
(Unaudited)
Accumulated
Additional Other Compre-
Common Paid-in Comprehensive Retained hensive
Stock Capital Income Earnings Loss
------ --------- -------------- --------- -------
BALANCE, JANUARY 1, 2002 $547 $18,585 $3,676 $353
Net income 517 $ 517
Stock options and warrants
exercised 2 198
Purchase and retirement of
treasury stock (16) (2,977)
Contribution of stock by
Chairman (7) 7
Tax effect of stock options
exercised 62
Reclassification adjustment
For gain on marketable
securities -
net of taxes (87) (87)
Unrealized loss on
Marketable securities -
net of taxes (2,343) (2,343)
-------
Comprehensive loss $(1,913)
---- ------- ------ ---- =======
BALANCE, JUNE 30, 2002 $526 $15,875 $1,246 $870
==== ======= ====== ====
See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(in thousands)
(Unaudited)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 517 $ 6,890
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 991 1,415
Deferred taxes - 2,679
Equity in net income of affiliate - (276)
Writedown of investments in private companies 516 -
Gain on sale of Innodata and Edgar Online common stock (124) (1,257)
Changes in operating assets and liabilities:
Accounts receivable and due from clearing broker 479 (152)
Due from broker (58,015) -
Marketable securities 11,412 (10,494)
Other assets (160) 594
Accounts payable and accrued expenses 1,592 (189)
Securities sold, but not yet purchased 46,184 33,487
Other liabilities 308 19
-------- --------
Net cash provided by operating activities 3,700 32,716
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (235) (589)
Proceeds from sale of Innodata and Edgar Online common stock 170 1,468
Loans from others - 30
-------- --------
Net cash (used in) provided by investing activities (65) 909
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (238) (513)
Net (payments) proceeds on note payable - bank (749) 977
Net proceeds from notes payable - other 23 40
Net payments on loans from employee savings program (1) (36)
Purchase of treasury stock (2,982) (6,323)
Proceeds from exercise of stock options 210 48
-------- --------
Net cash used in financing activities (3,737) (5,807)
-------- --------
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH (10) 4
-------- --------
NET (DECREASE) INCREASE IN CASH (112) 27,822
CASH, BEGINNING OF PERIOD 5,687 6,506
-------- --------
CASH, END OF PERIOD $ 5,575 $ 34,328
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 684 $ 211
Income taxes 45 19
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquisitions financed by capital leases $ - $ 123
See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2002, and the results of operations for the three
and six month periods ended June 30, 2002 and 2001, and of cash flows for
the six months ended June 30, 2002 and 2001. The results of operations for
the six months ended June 30, 2002 are not necessarily indicative of
results that may be expected for any other interim period or for the full
year.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 2001 included
in the Company's Annual Report on Form 10-K. The accounting policies used
in preparing these financial statements are the same as those described in
the December 31, 2001 financial statements. See Note 12 with respect to new
business commenced in 2002.
2. During the six months ended June 30, 2002, options to purchase 220,150
shares were exercised at prices of $0.50 to $1.50, aggregating net proceeds
to the Company of $200,000.
3. During the six months ended June 30, 2002, 1,682,605 shares of the
Company's common stock were purchased at a cost of $2,993,000.
4. 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 $158,000 and $154,000 for
the six months ended June 30, 2002 and 2001, respectively.
5. Advertising costs, charged to operations when incurred, were $457,000 and
$809,000 for the six months ended June 30, 2002 and 2001, respectively.
6. Until May 7, 2001, when the Company's Chairman and CFO resigned as officers
and directors of Innodata Corporation, the Company accounted for its
investment in Innodata using the equity method under which the Company's
share of the affiliate's earnings was included in its results of
operations. The Company's investment in Innodata has been accounted for as
available for sale securities after such date. As of June 30, 2002, the
Company owned 1,904,656 shares of Innodata common stock, or approximately
9% of its outstanding common stock. See Note 7.
7. Marketable securities consists of the following (in thousands):
June 30, December 31,
2002 2001
Edgar Online - Available for sale securities - at market $ 1,380 $ 2,209
Innodata - Available for sale securities - at market 2,533 5,800
Trading securities - at market 26,202 37,614
------- -------
$30,115 $45,623
======= =======
Trading securities sold but not yet purchased - at market $92,593 $46,409
======= =======
The Company owns 696,800 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. The Company
carries the investment at $1,380,000, the market value at June 30, 2002.
The difference between the cost of $9,000 and fair market value of these
securities, net of $549,000 in deferred taxes, or $822,000 is classified as
a component of accumulated other comprehensive income included in
stockholders' equity.
The Company owns 1,904,656 shares of Innodata, a provider of digital
content outsourcing services. The Company carries the investment at
$2,533,000, the market value at June 30, 2002. The difference between the
cost of $1,826,000 and fair market value of these securities, net of
$283,000 in deferred taxes, or $424,000 is classified as a component of
accumulated other comprehensive income included in stockholders' equity.
The Company engages in arbitrage trading activity in which it seeks to
fully cover open positions in its trading accounts during each month with
covering positions that expire in succeeding months. As part of this
activity, the Company has significant positions in stocks and options and
receives significant proceeds from the sale of trading securities sold but
not yet purchased. As of June 30, 2002, trading securities had a long
market value of $26,202,000 with a cost of $23,145,000 or a net unrealized
gain of $3,057,000. Securities sold but not yet purchased, had a short
market value of $92,593,000 with a cost/short proceeds of $88,388,000, or a
net unrealized loss of $4,205,000. The Company expects that its June 30,
2002 positions will be closed during the third quarter of 2002 and that
other positions with the same strategy will be established. The Company has
pledged its holdings in Edgar Online and Innodata as collateral for its
trading accounts. In addition, the Company's Chairman has pledged
approximately 17 million shares of his holdings in the Company's common
stock as collateral for these accounts. The Company is paying its Chairman
at the rate of 2% per annum on the value of the collateral pledged. Such
payments aggregated $97,000 for the six months ended June 30, 2002. During
the six months ended June 30, 2002, the Company's broker-dealer subsidiary
paid to the Company's Chairman $41,000 in net commissions for trades in his
personal trading account that added liquidity to the Track ECN (See Note
12).
In the fourth quarter of 2001, the Company expanded its arbitrage trading
program to include a greater risk profile trading program. The greater risk
portion of the trading program incurred a pre-tax loss of $1,400,000 in the
first quarter of 2002. The Company has continued its arbitrage trading
program but has discontinued the greater risk trading program. The
Company's Chairman contributed 650,000 shares of Company stock owned by him
to the capital of the Company upon discontinuance of this program.
At December 31, 2001, trading securities had a long market value of
$37,614,000 with a cost of $38,325,000, or a net unrealized loss of
$711,000. Securities sold but not yet purchased, had a short market value
of $46,409,000 with a cost/short proceeds of $47,129,000, or a net
unrealized gain of $720,000.
8. Earnings 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 dilutive common shares outstanding.
There was no effect on earnings per share as a result of potential
dilution. The calculation takes into account the shares that may be issued
upon exercise of stock options and warrants, reduced by the shares that may
be repurchased with the funds received from the exercise, based on the
average price during the period.
9. Segment Information--The Company 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. The Company
provides a proprietary, fully integrated Internet-based online trading and
market data system, myTrack, for the individual trader and proTrack, for
the professional institutional traders. The Company provides real-time
financial market data, fundamental research, charting and analytical
services to institutional and individual investors through dedicated
telecommunication lines and the Internet. The Company also disseminates
news and third-party database information from more than 100 sources
worldwide. The Company's operations are classified in two business
segments: Internet-based online trading and market data services to the
non-professional individual investor community, and online trading and
market data services to the institutional professional investment
community. The Company commenced operations of its Track ECN (Electronic
Communications Network) in the second quarter of 2002. The operations of
the ECN are included in the Professional Market segment. The Company also
engages in arbitrage trading. See Note 7.
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
(in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Revenues
Professional Market $ 8,323 $ 8,939 $15,880 $17,679
Non-Professional Market 4,916 7,383 10,495 16,035
------- ------- ------- -------
Total $13,239 $16,322 $26,375 $33,714
======= ======= ======= =======
Income (loss) before unallocated
amounts, equity in net income
of affiliate and income taxes:
Professional Market $1,310 $ 2,883 $ 2,726 $ 5,119
Non-Professional Market (69) 693 543 3,231
Unallocated amounts:
Depreciation and amortization (508) (554) (991) (1,117)
Writedown of investments (516) - (516) -
Gain (loss) on marketable securities
and sale of investment in affiliate 747 1,114 (306) 1,938
Interest (expense) income, net (223) 77 (593) 122
------ ------- ------- -------
Income before equity in net
income of affiliate and income taxes 741 4,213 863 9,293
Equity in net income of affiliate - - - 276
------ ------- ------- -------
Income before taxes $ 741 $ 4,213 $ 863 $ 9,569
====== ======= ======= =======
10. 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. In the event of a decline in the market value of the securities
in a margin account, the Company is required to either obtain additional
collateral from the customer 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. The Company's Chairman and CEO has a margin loan
of approximately $3.6 million as a customer of the Company's broker-dealer
which is collateralized by 7.2 million of the Company's shares owned by him
and which is also subject to such indemnity in the event the clearing
broker were to sustain losses.
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. The Company
monitors required margin levels daily and, pursuant to such guidelines,
requires the customer to deposit additional collateral or to reduce
positions when necessary.
11. 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 June 30, 2002, TDSC was required to maintain minimum net capital, in
accordance with SEC rules, of $1 million and had total net capital of
$1,248,000, or approximately $248,000 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.
12. During the second quarter of 2002, the Company commenced operations of its
Track ECN that enables traders to display and match limit orders for
stocks. The Company encourages broker-dealers and market makers to become
subscribers to its ECN by paying a commission of up to $.005 per share for
adding liquidity (limit orders added to the ECN order book) and charges
$.007 per share for taking liquidity (those who execute against an existing
bid or offer on the ECN). The Company pays $.002 of the $.005 per share
each month and pays the remainder only out of the Company's collections of
charges to subscribers and non-subscribers who took liquidity that month.
The Company has met certain resistance in the payment of its fees by
non-subscribers who access the Track ECN through Nasdaq's SuperSoes
automated execution system. All methods of collecting its charges are being
pursued, including the filing of arbitration cases against those parties
who continue to access liquidity and refuse to pay the bills. The Company
has recognized as revenues only that portion of its billing that has not
been contested by users. The Company believes that it will prevail in these
arbitration cases, but revenue recognition will be deferred until such
cases are settled. It is anticipated that these parties will attempt to
delay the arbitration process for as long as possible.
13. Comprehensive (loss) income is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Net income $ 444 $1,534 $ 517 $ 6,890
Unrealized (loss) gain on marketable
securities-net of taxes (1,808) 3,575 (2,343) 3,449
Reclassification adjustment for
gain on marketable securities
- net of taxes (35) - (87) -
------- ------- -------- -------
Comprehensive (loss) income $(1,399) $5,109 $(1,913) $10,339
======= ======= ======== =======
Track Data Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months ended June 30, 2002 and 2001
Revenues for the three months ended June 30, 2002 and 2001 were $13,239,000
and $16,322,000, respectively, a decrease of 19%. The Company's Professional
Market segment had revenues for the three months ended June 30, 2002 and 2001 of
$8,323,000 and $8,939,000, respectively, a decrease of 7% for this segment. The
Company's Non-Professional Market segment had revenues of $4,916,000 and
$7,383,000 for the three months ended June 30, 2002 and 2001, respectively, a
decrease of 33% for this segment. Since August 2001, the Company has experienced
a decline in revenues and profits from its Professional Market segment due
principally to a reduction in customers' staffing that has continued during the
first half of 2002. This downtrend is expected to continue for the remainder of
2002. The decline in revenues was partially offset by an increase in revenue of
$1,070,000 from the Company's new Track ECN. In addition, the Non-Professional
Market Segment has experienced a significant decline in revenues from its retail
trading business. The rate of decline increased in the fourth quarter of 2001 as
a result of new day trader rules instituted by the NASD. These rules qualified a
large number of customers as day traders and required that greater equity
balances be maintained by such customers.
Direct operating costs were $7,702,000 for the three months ended June 30,
2002 and $7,859,000 for the similar period in 2001, a decrease of 2%. Direct
operating costs as a percentage of revenues were 58% in 2002 and 48% in 2001.
Without giving effect to unallocated depreciation and amortization expense, the
Company's Professional Market segment had $4,518,000 and $3,203,000 of direct
costs for the three months ended June 30, 2002 and 2001, respectively. Direct
operating costs as a percentage of revenues for the Professional segment were
54% in 2002 and 36% in 2001. The increased dollars and percentage in 2002 in the
Professional segment is due to certain fixed costs that could not be reduced
commensurate with the reduced revenues, as well as costs associated with the
Company's new Track ECN, including commissions to its subscribers. The Company's
Non-Professional Market segment had $2,791,000 and $4,184,000 in direct costs
for the three months ended June 30, 2002 and 2001, respectively. Direct
operating costs as a percentage of revenues for the Non-Professional segment
were 57% in 2002 and 2001. Direct operating costs include direct payroll, direct
telecommunication costs, computer supplies, depreciation, equipment lease
expense and the amortization of software development costs, costs of clearing,
back office payroll, other direct broker-dealer expenses and ECN customer
commissions.
Selling and administrative expenses were $4,636,000 and $4,961,000 for the
three months ended June 30, 2002 and 2001, respectively, a decrease of 7%.
Selling and administrative expenses as a percentage of revenues was 35% in 2002
and 30% in 2001. Without giving effect to unallocated depreciation and
amortization expense, selling and administrative expenses for the Professional
Market segment were $2,413,000 and $2,780,000 in the 2002 and 2001 periods,
respectively. For the Professional Market segment selling and administrative
expenses as a percentage of revenues was 29% in 2002 and 31% in 2001. Selling
and administrative expenses for the Non-Professional segment were $2,108,000 and
$2,099,000 in the 2002 and 2001 periods, respectively. For the Non-Professional
segment selling and administrative expense as a percentage of revenue was 43% in
2002 and 28% in 2001. The percentage increase in 2002 compared to 2001 was
principally due to certain fixed costs that could not be reduced commensurate
with the reduced revenues.
Marketing and advertising costs were $168,000 in 2002 and $480,000 in 2001.
The Non-Professional segment of the Company incurred $87,000 in 2002 and
$406,000 in 2001. The Company has continued to reduce advertising for its retail
brokerage business. The Professional Market segment spent $81,000 in 2002 and
$73,000 in 2001.
The Company wrote down its investments in two privately held companies in
the aggregate amount of $516,000.
The Professional Market segment realized $1,310,000 in income before
unallocated amounts, equity in net income of affiliate and income taxes in 2002
compared to $2,883,000 in 2001. The Non-Professional Market segment realized a
loss of $69,000 in 2002 compared to income of $693,000 in 2001 before
unallocated amounts, equity in net income of affiliate and income taxes.
In 2002, the Company realized a gain of $747,000 and in 2001, a gain of
$1,114,000 on the sale of certain shares of Edgar Online, Inc., Innodata
Corporation and other marketable securities.
Interest expense in 2002 was $223,000 compared to interest income of
$77,000 in 2001. The increase in 2002 is due principally to interest on margin
debt in connection with the Company's arbitrage trading program.
As a result of the above mentioned factors, the Company realized income
before income taxes of $741,000 in the 2002 period compared to $4,213,000 in
2001.
Taxes have been provided at an anticipated annualized rate of 40% for 2002.
The tax rate for the second quarter of 2001 was approximately 64% to adjust for
taxes not recognized in the first quarter.
The Company realized net income of $444,000 in 2002 compared to $1,534,000
in 2001.
Six Months ended June 30, 2002 and 2001
Revenues for the six months ended June 30, 2002 and 2001 were $26,375,000
and $33,714,000, respectively, a decrease of 22%. The Company's Professional
Market segment had revenues for the six months ended June 30, 2002 and 2001 of
$15,880,000 and $17,679,000, respectively, a decrease of 10% for this segment.
The Company's Non-Professional Market segment had revenues of $10,495,000 and
$16,035,000, respectively, for the six months ended June 30, 2002 and 2001, a
decrease of 35% for this segment. Since August 2001, the Company has experienced
a decline in revenues and profits from its Professional Market segment due
principally to a reduction in customers' staffing that has continued during the
first half of 2002. This downtrend is expected to continue for the remainder of
2002. The decline in revenues was partially offset by an increase in revenue of
$1,070,000 from the Company's new Track ECN. In addition, the Non-Professional
Market Segment has experienced a significant decline in revenues from its retail
trading business. The rate of decline increased in the fourth quarter of 2001 as
a result of new day trader rules instituted by the NASD. These rules qualified a
large number of customers as day traders and required that greater equity
balances be maintained by such customers.
Direct operating costs were $14,169,000 for the six months ended June 30,
2002 and $15,774,000 for the similar period in 2001, a decrease of 10%. Direct
operating costs as a percentage of revenues were 54% in 2002 and 47% in 2001.
Without giving effect to unallocated depreciation and amortization expense, the
Company's Professional Market segment had $7,744,000 and $6,867,000 of direct
operating costs for the six months ended June 30, 2002 and 2001, respectively.
Direct operating costs as a percentage of revenues for the Professional segment
were 49% in 2002 and 39% in 2001. The Company's Non-Professional Market segment
had $5,638,000 and $7,961,000 in direct costs for the six months ended June 30,
2002 and 2001, respectively. Direct operating costs as a percentage of revenues
for the Non-Professional segment were 54% in 2002 and 50% in 2001. The increased
percentage in 2002 is due to certain fixed costs that could not be reduced
commensurate with the reduced revenues, and in the Professional segment, the
additional costs of the Company's new Track ECN, including commissions to its
subscribers.
Selling and administrative expenses were $9,471,000 and $9,898,000 for the
six months ended June 30, 2002 and 2001, respectively, a decrease of 4%. Selling
and administrative expenses as a percentage of revenues was 36% in 2002 and 29%
in 2001. Without giving effect to unallocated depreciation and amortization
expense, selling and administrative expenses for the Professional Market segment
were $5,110,000 and $5,611,000 in the 2002 and 2001 periods, respectively. For
the Professional Market segment selling and administrative expenses as a
percentage of revenues was 32% in 2002 and 2001. Selling and administrative
expenses for the Non-Professional segment were $4,157,000 and $4,116,000 in the
2002 and 2001 periods, respectively. For the Non-Professional segment selling
and administrative expense as a percentage of revenue was 40% in 2002 and 26% in
2001. The percentage increase in 2002 compared to 2001 was principally due to
certain fixed costs that could not be reduced commensurate with the reduced
revenues.
Marketing and advertising costs were $457,000 in 2002 and $809,000 in 2001.
The Non-Professional segment of the Company incurred $158,000 in 2002 and
$727,000 in 2001. The Company has continued to reduce advertising for its retail
brokerage business. The Professional Market segment spent $299,000 in 2002 and
$82,000 in 2001. The increase in 2002 was attributable to marketing related to
the Company's new proTrack online trading for professionals.
The Company wrote down its investments in two privately held companies in
the aggregate amount of $516,000.
The Professional Market segment realized $2,726,000 in income before
unallocated amounts, equity in net income of affiliate and income taxes in 2002
compared to $5,119,000 in 2001. The Non-Professional Market segment realized
income of $543,000 in 2002 compared to $3,231,000 in 2001 before unallocated
amounts, equity in net income of affiliate and income taxes.
In 2002, the Company realized a loss of $306,000 and in 2001, a gain of
$1,938,000 on the sale of certain shares of Edgar Online, Inc., Innodata
Corporation and other marketable securities. In the fourth quarter of 2001, the
Company expanded its arbitrage trading program to include a greater risk profile
trading program. The greater risk portion of the trading program incurred a
pre-tax loss of $1,400,000 in the first quarter of 2002. The Company has
continued its arbitrage trading program but has discontinued the greater risk
trading program.
Interest expense in 2002 was $593,000 compared to interest income of
$122,000 in 2001. The increase in 2002 is due principally to interest on margin
debt in connection with the Company's arbitrage trading program.
As a result of the above mentioned factors, the Company realized income
before equity in net income from an affiliate and income taxes of $863,000 in
the 2002 period compared to income of $9,293,000 in 2001.
The equity in net income of an affiliate, Innodata, was $276,000 in 2001.
The Company no longer accounts for its investment in Innodata under the equity
method.
Taxes have been provided at an anticipated annualized rate of 40% for 2002
and 28% in 2001. The lower rate in 2001 was due principally to the utilization
of tax loss carryforwards.
The Company realized net income of $517,000 in 2002 compared to $6,890,000
in 2001.
Liquidity and Capital Resources
During the six months ended June 30, 2002, cash provided by operating
activities was $3,700,000 compared to $32,716,000 in 2001. The decrease in 2002
was due to reduced operating income and also to net purchases of trading
securities compared to the 2001 period that included net proceeds from
marketable securities of approximately $23,000,000. Cash flows used in investing
activities in 2002 was $65,000 compared to $909,000 provided by investing
activities in 2001 due to significantly reduced proceeds from sales of Innodata
and Edgar Online common stock. Cash flows used in financing activities,
principally for the purchase of treasury stock, was $3,737,000 in 2002 compared
to $5,807,000 in 2001.
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 June 30, 2002, the
Company had outstanding borrowings under the line of $1,117,000. The Company
believes that its line of credit is sufficient for the Company's present cash
requirements.
The Company has significant positions in stocks and options and receives
significant proceeds from the sale of trading securities sold but not yet
purchased under the arbitrage trading strategy described in Note 7 of Notes to
Condensed Consolidated Financial Statements. The Company expects that its June
30, 2002 positions will be closed during the third quarter of 2002 and that
other positions with the same strategy will be established. In the fourth
quarter of 2001, the Company expanded its arbitrage trading program to include a
greater risk profile trading program. The greater risk portion of the trading
program incurred a pre-tax loss of $1,400,000 in the first quarter of 2002. The
Company has continued its arbitrage trading program but has discontinued the
greater risk trading program.
Since August 2001, the Company has experienced a decline in revenues and
profits from its Professional Market segment due principally to a reduction in
customers' staffing that has continued during the first half of 2002. This
downtrend is expected to continue through the remainder of 2002. In addition,
the Company experienced a decline in revenues from its retail trading business
in the fourth quarter of 2001 after new day trader rules were instituted by the
NASD. These revenues have not been replaced. The Company reduced its advertising
costs in 2002 and does not expect to increase advertising for the remainder of
2002. During the first half of 2002, the Company repurchased under its buy back
program approximately 1.7 million shares of its common stock for approximately
$3 million. No major capital expenditures are anticipated beyond the normal
replacement of equipment and additional equipment to meet customer requirements.
During the second quarter of 2002, the Company commenced operations of its
Track ECN that enables traders to display and match limit orders for stocks. The
Company encourages broker-dealers and market makers to become subscribers to its
ECN by paying a commission of up to $.005 per share for adding liquidity (limit
orders added to the ECN order book) and charges $.007 per share for taking
liquidity (those who execute against an existing bid or offer on the ECN). The
Company pays $.002 of the $.005 per share each month and pays the remainder only
out of the Company's collections of charges to subscribers and non-subscribers
who took liquidity that month. The Company has met certain resistance in the
payment of its fees by non-subscribers who access the Track ECN through Nasdaq's
SuperSoes automated execution system. All methods of collecting its charges are
being pursued, including the filing of arbitration cases against those parties
who continue to access liquidity and refuse to pay the bills. The Company has
recognized as revenues only that portion of its billing that has not been
contested by users. The Company believes that it will prevail in these
arbitration cases, but revenue recognition will be deferred until such cases are
settled. It is anticipated that debtors will attempt to delay the arbitration
process for as long as possible.
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 position.
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. In the event
of a decline in the market value of the securities in a margin account, the
Company is required to either obtain additional collateral from the customer 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.
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company monitors required
margin levels daily and, pursuant to such guidelines, requires the customer to
deposit additional collateral or to reduce positions when necessary.
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-Q 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-Q will in fact occur.
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 June 30, 2002, $1,117,000 was outstanding under the
credit facility. Changes in the prime interest rate during fiscal 2002 will have
a positive or negative effect on the Company's interest expense. Such exposure
will increase should the Company maintain higher levels of borrowing during
2002.
The Company has significant positions in stocks and options and receives
significant proceeds from the sale of trading securities sold but not yet
purchased under the arbitrage trading strategy described in Note 7 of Notes to
Condensed Consolidated Financial Statements. The Company's arbitrage trading
strategy is to fully cover its open positions during each month with covering
option positions that expire in succeeding months. The Company expects that its
June 30, 2002 positions will be closed during the third quarter of 2002 and that
other positions with the same strategy will be established. In the fourth
quarter of 2001, the Company expanded its arbitrage trading program to include a
greater risk profile trading program. The greater risk portion of the trading
program incurred a pre-tax loss of $1,400,000 in the first quarter of 2002. The
Company is continuing its arbitrage trading program but has discontinued the
greater risk trading program. In connection with the arbitrage trading program,
the Company incurs margin loans. The Company is exposed to interest rate change
market risk with respect to these margin loans. Such exposure will increase
should the Company maintain higher levels of borrowing during 2002.
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.
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings. Not Applicable
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Item 2. Changes in Securities. Not Applicable
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Item 3. Defaults upon Senior Securities. Not Applicable
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Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
---------------------------------------------------
Item 5. Other Information. None
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Item 6. (a) Exhibits.
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99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) There were no reports on Form 8-K filed during the second quarter
of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRACK DATA CORPORATION
Date: 8/12/02 /s/
------- ----------------------------------
Barry Hertz
Chairman of the Board
Chief Executive Officer
Date: 8/12/02 /s/
------- ----------------------------------
Martin Kaye
Chief Operating Officer
Principal Financial Officer
EXHIBIT 99
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Track Data Corporation on Form 10-Q
for the quarter ended June 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), we, Barry Hertz, Chief Executive
Officer of the Company and Martin Kaye, Chief Financial Officer of the Company,
certify, to the best of our knowledge, pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. the Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/
----------------------------
Barry Hertz
Chief Executive Officer
August 12, 2002
/s/
----------------------------
Martin Kaye
Chief Financial Officer
August 12, 2002