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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 MARCH 31, 2003
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.)
95 ROCKWELL PLACE
BROOKLYN, NY 11217
(Address of principal executive offices)
(212) 522-7373
(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 by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes / / No /x/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of April 30, 2003 there were
50,497,457 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
See pages 2-10
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
See pages 11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------------
See page 16
Item 4. Controls and Procedures
-------------------------
See page 16
PART ll. OTHER INFORMATION
- -------- -----------------
See page 18
TRACK DATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Unaudited Derived from
audited
financial
statements
ASSETS
CASH AND EQUIVALENTS $ 6,063 $ 5,491
ACCOUNTS RECEIVABLE - net 1,658 3,861
DUE FROM CLEARING BROKER 207 324
DUE FROM BROKER 24,901 20,111
MARKETABLE SECURITIES 25,776 11,021
FIXED ASSETS - at cost (net of accumulated depreciation) 2,514 2,846
EXCESS OF COST OVER NET ASSETS ACQUIRED 1,900 1,900
OTHER ASSETS 955 862
------- -------
TOTAL $63,974 $46,416
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 4,478 $ 4,338
Note payable - bank - 1,030
Notes payable - other 476 870
Trading securities sold but not yet purchased 39,470 19,725
Capital lease obligations 51 83
Net deferred income tax liabilities 65 295
Other liabilities, including income taxes 190 468
------- -------
Total liabilities 44,730 26,809
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 300,000,000
shares authorized; issued and
outstanding - 50,573,457 shares in 2003
and 50,912,475 shares in 2002 506 509
Additional paid-in capital 14,814 15,019
Accumulated other comprehensive income 390 735
Retained earnings 3,534 3,344
------- -------
Total stockholders' equity 19,244 19,607
------- -------
TOTAL $63,974 $46,416
======= =======
See notes to condensed consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands, except earnings per share)
(unaudited)
2003 2002
-------- -------
SERVICE FEES AND REVENUE $10,695 $13,136
-------- -------
COSTS AND EXPENSES:
Direct operating costs 6,354 6,467
Selling and administrative expenses 4,291 4,835
Marketing and advertising 78 289
(Gain)loss on marketable securities (369) 1,053
Interest expense - net 25 370
------- -------
Total 10,379 13,014
------- -------
INCOME BEFORE INCOME TAXES 316 122
INCOME TAXES 126 49
------- -------
NET INCOME $ 190 $ 73
======= =======
BASIC AND DILUTED NET INCOME PER SHARE $.00 $.00
==== ====
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 50,714 53,904
======= =======
ADJUSTED DILUTIVE SHARES OUTSTANDING 50,714 54,856
======= =======
See notes to condensed consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2003
(in thousands)
(unaudited)
ACCUMULATED
ADDITIONAL OTHER COMPRE-
COMMON PAID-IN COMPREHENSIVE RETAINED HENSIVE
STOCK CAPITAL INCOME EARNINGS LOSS
BALANCE, JANUARY 1, 2003 $509 $15,019 $ 735 $3,344
Net income 190 $ 190
Purchase and retirement of
treasury stock (3) (205)
Unrealized loss on marketable
securities - net of taxes (345) (345)
-----
Comprehensive loss $(155)
---- ------- ----- ------ =====
BALANCE, MARCH 31, 2003 $506 $14,814 $ 390 $3,534
==== ======= ===== ======
See notes to condensed consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(in thousands)
(unaudited)
2003 2002
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 190 $ 73
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 376 495
Gain on sale of Innodata and Edgar
Online common stock - (59)
Deferred taxes - 49
Changes in operating assets and liabilities:
Accounts receivable and due
from clearing broker 2,320 150
Due from broker (4,790) (37,497)
Marketable securities (15,330) 5,259
Other assets (103) (57)
Accounts payable and accrued expenses 140 457
Securities sold, but not yet purchased 19,745 32,421
Other liabilities (284) (41)
-------- --------
Net cash provided by operating activities 2,264 1,250
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (40) (93)
Proceeds from sale of Innodata
and Edgar Online common stock 1 101
-------- --------
Net cash (used in) provided
by investing activities (39) 8
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (32) (137)
Net (payments) borrowings on note payable - bank (1,030) 3
Net (payments) borrowings on notes payable - other (394) 12
Purchase of treasury stock (208) (2,291)
Proceeds from exercise of stock options - 188
Net proceeds on loans from employee savings program 10 27
-------- --------
Net cash used in financing activities (1,654) (2,198)
-------- --------
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH 1 1
-------- --------
NET INCREASE (DECREASE) IN CASH 572 (939)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 5,491 5,687
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 6,063 $ 4,748
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 55 $ 428
Income taxes 437 45
See notes to condensed consolidated financial statements
TRACK DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(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 March 31, 2003, and the results of operations and of cash
flows for the three months ended March 31, 2003 and 2002. The results of
operations for the three months ended March 31, 2003 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, 2002 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, 2002 financial statements.
2. During the three months ended March 31, 2003, the Company purchased 339,018
shares of its common stock at a cost of $208,000.
3. 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 $79,000 and $79,000 for the
three months ended March 31, 2003 and 2002, respectively.
4. Advertising costs, charged to operations when incurred, were $78,000 and
$289,000 for the three months ended March 31, 2003 and 2002, respectively.
5. Marketable securities consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
Edgar Online - Available for
sale securities - at market $ 619 $ 1,231
Innodata - Available for sale
securities - at market 1,855 1,818
Trading securities - at market 23,302 7,972
------- -------
Marketable securities $25,776 $11,021
======= =======
Trading securities sold but
not yet purchased - at market $39,470 $19,725
======= =======
The Company owns 695,800 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 $619,000, the market value at March 31, 2003. The
difference between the cost of $9,000 and market value of these securities,
net of $244,000 in deferred taxes, or $366,000 is classified as a component
of accumulated other comprehensive income included in stockholders' equity.
The Company owns 1,892,726 shares of Innodata, a provider of digital
content outsourcing services. The Company carries the investment at
$1,855,000 the market value at March 31, 2003. The difference between the
cost of $1,815,000 and market value of these securities, net of $16,000 in
deferred taxes, or $24,000 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 option positions that expire in succeeding months. As of March 31,
2003, trading securities had a long market value of $23,302,000 with a cost
of $23,473,000, or a net unrealized loss of $171,000. Securities sold but
not yet purchased, had a short market value of $39,470,000 with a
cost/short proceeds of $39,519,000, or a net unrealized gain of $49,000.
The Company expects that its March 31, 2003 positions will be closed during
the second quarter of 2003 and that other positions with the same strategy
will be established. The Company pledged its holdings in EOL and Innodata
as collateral for its trading accounts. In addition, the Company's Chairman
pledged approximately 10 million shares of his holdings in the Company's
common stock as collateral for these accounts. The Company is paying its
Chairman a fee at the rate of 2% per annum on the value of the collateral
pledged. Such payments aggregated $12,000 and $59,000 for the three months
ended March 31, 2003 and 2002, respectively.
In the fourth quarter of 2001, the Company expanded its arbitrage trading
program to include a greater risk profile trading program. In the first
quarter of 2002, the greater risk portion of the trading program incurred a
pre-tax loss of $1,400,000. The Company continued its arbitrage trading
program but has discontinued the greater risk trading program.
At December 31, 2002, trading securities had a long market value of
$7,972,000 with a cost of $8,403,000, or a net unrealized loss of $431,000.
Securities sold but not yet purchased, had a short market value of
$19,725,000 with a cost/short proceeds of $19,973,000, or a net unrealized
gain of $248,000.
6. 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, reduced by the shares that may be
repurchased with the funds received from the exercise, based on the average
price during the period.
7. Accounting for Stock Options--On December 31, 2002, the FASB issued SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
SFAS 148 amends the disclosure provisions of SFAS 123 and APB Opinion No.
28, "Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting
policy with respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial statements.
The adoption of SFAS 148 disclosure requirements did not have an effect on
the Company's consolidated financial statements. At March 31, 2003, the
Company has seven stock-based employee compensation plans. The Company
accounts for those plans under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
SFAS 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
THREE MONTHS ENDED MARCH 31,
2003 2002
(in thousands, except earnings per share)
Net income, as reported $ 190 $ 73
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (236) (431)
----- -----
Net loss, as adjusted $ (46) $(358)
===== =====
Earnings (loss) per share:
Basic and diluted --as reported $.00 $.00
Basic and diluted --as adjusted $.00 $(.01)
In January, 2003, the Company granted five-year options to officers,
directors and employees to purchase an aggregate of 1,400,350 shares at
prices of $1.00 - $1.25 vesting over two years. The weighted average fair
value of the options was $.55 per share. 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 four years
in 2003 and 2002; risk free interest rate of 2.7% in 2003 and 4% in 2002;
expected volatility of 137% in 2003 and 135% in 2002; and a zero dividend
yield. The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future results.
8. Segment Information--The Company is a financial services company that
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 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, proTrack,
for the professional institutional traders, and myTrack, for the individual
trader. The Company also operates Track ECN, an electronic communications
network that enables traders to display and match limit orders for stocks.
The Company's operations are classified in two business segments: (1)
market data services and trading, including ECN services since February
2002, to the institutional professional investment community, and (2)
Internet-based online trading and market data services to the
non-professional individual investor community. The Company also engages in
arbitrage trading. See Note 5.
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 ENDED MARCH 31,
2003 2002
Revenues
Professional Market $ 6,826 $ 7,557
Non-Professional Market 3,869 5,579
------- -------
Total $10,695 $13,136
======= =======
Income before unallocated
amounts and income taxes:
Professional Market $ 285 $ 1,416
Non-Professional Market 63 612
Unallocated amounts:
Depreciation and amortization (376) (483)
Gain (loss) on marketable securities 369 (1,053)
Interest expense, net (25) (370)
------- -------
Income before income taxes $ 316 $ 122
======= =======
9. 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. The Company's Chairman and CEO has a margin loan of approximately
$3.5 million as a customer of the Company's broker-dealer which is
collateralized by 14 million of the Company's shares owned by him and which
is also subject to such indemnity by the Company in the event the clearing
broker were to sustain losses.
The Company and its clearing broker seek to control the risks associated
with customer activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal guidelines.
The Company and its clearing broker monitor required margin levels daily
and, pursuant to such guidelines, require the customer to deposit
additional collateral or to reduce positions when necessary.
10. 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 March 31, 2003, TDSC was required to maintain minimum net capital, in
accordance with SEC rules, of $1 million and had total net capital of
$2,737,000, or approximately $1,737,000 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.
11. Comprehensive loss is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
2003 2002
Net income $ 190 $ 73
Unrealized loss on marketable
securities-net of taxes (345) (535)
Reclassification adjustment
for gain on marketable
securities - net of taxes - (52)
----- -----
Comprehensive loss $(155) $(514)
===== =====
12. The Company's common stock is listed on Nasdaq's National Market System.
The Company has received a delisting notice from Nasdaq because it has not
maintained a closing bid price of at least $1.00 that is required for
continued listing. The continued listing of the Company's shares on the
National Market System depends on a possible deferral of the minimum bid
price requirement that is now being considered by the SEC and Nasdaq. Any
deferral that is adopted by the SEC and Nasdaq is expected not to extend
beyond September 8, 2003, and may terminate before then. Nasdaq has
informed the Company that its listing will be maintained until July 7, 2003
if it continues to meet all initial listing criteria except the minimum bid
price. Should the Company's shares be delisted from the National Market
System, the Company expects that, subject to certain conditions, its shares
may be listed on the Nasdaq SmallCap Market until September 8, 2004 whether
or not the Company's shares meet the minimum bid price requirement.
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.
TRACK DATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
Track Data Corporation (the "Company") is a financial services company that
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 owns Track Data Securities Corp. ("TDSC"), 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, proTrack, for the professional institutional
traders, and myTrack, for the individual trader. The Company also operates
Track ECN, an electronic communications network that enables traders to display
and match limit orders for stocks. The Company's operations are classified in
two business segments: (1) Professional Market -- Market data services and
trading, including ECN services, to the institutional professional investment
community, and (2) Non-Professional Market -- Internet-based online trading and
market data services to the non-professional individual investor community. The
Company also engages in arbitrage trading.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Revenues for the three months ended March 31, 2003 and 2002 were
$10,695,000 and $13,136,000, respectively, a decrease of 19%. The Company's
Professional Market segment had revenues for the three months ended March 31,
2003 and 2002 of $6,826,000 and $7,557,000, respectively, a decrease of 10% for
this segment. The Company's Non-Professional Market segment had revenues of
$3,869,000 and $5,579,000, respectively, for the three months ended March 31,
2003 and 2002, a decrease of 31% for this segment. Since 2001, the Company has
experienced a decline in revenues from its market data services to the
Professional Market segment due principally to a reduction in customers'
staffing. Management expects this trend to continue through 2003, negatively
impacting revenues and profits. The decline in Professional segment revenues
was partially offset by revenues of $773,000 from the Company's Track ECN that
commenced operations in the second quarter of 2002. In addition, the Company
continues to experience a significant decline in revenues and profits from its
retail trading and market data businesses in its Non-Professional segment as
individual investors leave the market, curtail trading or trade with
competitors.
Direct operating costs were $6,354,000 for the three months ended March 31,
2003 and $6,467,000 for the similar period in 2002, a decrease of 2%. Direct
operating costs as a percentage of revenues were 59% in 2003 and 49% in 2002.
Without giving effect to unallocated depreciation and amortization expense, the
Company's Professional Market segment had $3,559,000 and $3,227,000 of direct
costs for the three months ended March 31, 2003 and 2002, respectively, an
increase of 10%. Direct operating costs as a percentage of revenues for the
Professional segment were 52% in 2003 and 43% in 2002. The increased dollars
and percentage in 2003 in the Professional segment is due to costs associated
with the Company's new Track ECN, including commissions to its subscribers and
clearing costs, as well as certain fixed costs that were not reduced
commensurate with the reduced revenues from its market data business. Without
giving effect to unallocated depreciation and amortization expense, the
Company's Non-Professional Market segment had $2,515,000 and $2,847,000 in
direct costs for the three months ended March 31, 2003 and 2002, respectively, a
decrease of 12%. Direct operating costs as a percentage of revenues for the
Non-Professional segment were 65% in 2003 and 51% in 2002. The increased
percentage in the Non-Professional segment reflects the fact that this segment
has a fixed costs that were not reduced commensurate with the reduced revenues.
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 and other
direct broker-dealer expenses and, in 2003, ECN customer commissions and
clearing.
Selling and administrative expenses were $4,291,000 and $4,835,000 in the
2003 and 2002 periods, respectively, a decrease of 11%. Selling and
administrative expenses as a percentage of revenues was 40% in 2003 and 37% in
2002. Without giving effect to unallocated depreciation and amortization
expense, selling and administrative expenses for the Professional Market segment
were $2,950,000 and $2,697,000 in the 2003 and 2002 periods, respectively, an
increase of 9%. For the Professional Market segment selling and administrative
expenses as a percentage of revenues was 43% in 2003 and 36% in 2002. The
dollar and percentage increase was due to selling and administrative expenses
associated with the revenues from the new Track ECN. Without giving effect to
unallocated depreciation and amortization expense, selling and administrative
expenses for the Non-Professional segment were $1,244,000 and $2,049,000 in the
2003 and 2002 periods, respectively, a decrease of 39%. For the
Non-Professional segment selling and administrative expense as a percentage of
revenue was 32% in 2003 and 37% in 2002. The decrease in dollars and percent
was due to a greater allocation of indirect costs to the Professional segment
based on its greater level of revenues.
Marketing and advertising costs were $78,000 in 2003 and $289,000 in 2002.
The Professional Market segment spent $31,000 in 2003 and $218,000 in 2002. The
Non-Professional segment incurred marketing costs of $47,000 in 2003 and $71,000
in 2002.
The Professional Market segment realized $285,000 in income before
unallocated amounts and income taxes in 2003 compared to income of $1,416,000 in
2002. The Non-Professional Market segment realized $63,000 in income in 2003
and $612,000 in 2002 before unallocated amounts and income taxes.
In 2003 and 2002, the Company recognized a gain of $369,000 and a loss of
$1,053,000, respectively, on the sale of certain shares of Edgar Online, Inc.
and Innodata Corporation, and from other marketable securities due to its
arbitrage trading strategy. In the fourth quarter of 2001, the Company expanded
its arbitrage trading program to include a greater risk profile trading program.
In the first quarter of 2002, the greater risk trading program resulted in a
pre-tax loss of $1,400,000. The Company continued its arbitrage trading program
but discontinued the greater risk trading program.
Net interest expense in 2003 was $25,000 compared to net interest expense
of $370,000 in 2002. The decrease in interest expense in 2003 is due principally
to significantly lower levels of margin debt in connection with the Company's
arbitrage trading program.
As a result of the above-mentioned factors, the Company realized net income
of $190,000 in the 2003 period compared to $73,000 in 2002.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2003, cash provided by operating
activities was $2,264,000 compared to $1,250,000 for the same period in 2002.
The increase in 2003 was principally due to collection of accounts receivable.
Cash flows used in investing activities in 2003 was $39,000, compared to $8,000
provided by investing activities in 2002 due to proceeds from sales of Innodata
and Edgar Online common stock. Cash flows used in financing activities was
$1,654,000 in 2003, principally from net payments on bank and other notes,
compared to $2,198,000 in 2002, principally for the purchase of treasury stock.
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 market data service receivables and is required
to maintain a compensating balance of 10% of the outstanding loans. At March
31, 2003, the Company had no borrowings under the line. The Company believes
that its line of credit is sufficient for the Company's cash requirements for
the next 12 months.
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 5 of Notes to
Condensed Consolidated Financial Statements. The Company expects that its March
31, 2003 positions will be closed during the second quarter of 2003 and that
other positions with the same strategy will be established. The level of
trading activity is substantially dependent on the value of the shares of Track
Data pledged by its CEO, and Innodata and Edgar Online common stock that is held
as collateral. In the fourth quarter of 2001, the Company expanded its
arbitrage trading program to include a greater risk profile trading program. In
the first quarter of 2002, the greater risk portion of the trading program
resulted in a pre-tax loss of $1,400,000. The Company continued its arbitrage
trading program but discontinued the greater risk trading program.
Since 2001, the Company has experienced a decline in revenues and profits
from its Professional Market segment due principally to a reduction in
customers' staffing. This downtrend is continuing in 2003. In addition, the
Company experienced a significant decline in revenues from its retail trading
business. Retail investors have left the market, curtailed trading or are
trading with competitors.
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.
During the fourth quarter of 2002, under Nasdaq's new SuperMontage trading
system, many liquidity takers were avoiding the Track ECN due to its higher than
average fee of $.007 per share. This resulted in a significant decline in ECN
daily volume. Effective January 1, 2003, new pricing was instituted that pays
subscribers $.0023 per share for adding liquidity and charges $.0029 for taking
liquidity in an effort to regain market share. This reduces profit margin
potential. Based on lower pricing and reduced volumes, the Company does not
presently anticipate significant revenues and profits from Track ECN in 2003.
During the year ended December 31, 2002, the Company repurchased under its
buy back program approximately 3.4 million shares of its common stock for $4
million. The Company authorized an additional buy back of up to 2 million
shares. During the first quarter of 2003, the Company repurchased approximately
339,000 shares for $208,000. No major capital expenditures are anticipated
beyond the normal replacement of equipment and additional equipment to meet
customer requirements.
The Company is subject to legal proceedings and claims that 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.
In connection with the Company's broker-dealer operations, certain customer
securities activities are transacted on a margin basis. The Company's 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 $3.5 million as a
customer of the Company's broker-dealer that is collateralized by 14 million of
the Company's shares owned by him and which is also subject to such indemnity by
the Company in the event the clearing broker were to sustain losses. The
Company and its clearing broker seek to control the risks associated with
customer activities by monitoring required margin levels daily and, pursuant to
such guidelines, requiring the customer to deposit additional collateral or to
reduce positions when necessary.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
At December 31, 2002, the Company had operating lease obligations
aggregating $2,318,000 pursuant to which payments are due as follows:
$1,153,000 in 2003; $615,000 in 2004; $311,000 in 2005; $188,000 in 2006 and
$51,000 in 2007. There are no significant changes in such commitments as of
March 31, 2003.
In connection with the Company's broker-dealer operations, certain customer
securities activities are transacted on a margin basis. The Company's 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 $3.5 million as a
customer of the Company's broker-dealer that is collateralized by 14 million of
the Company's shares owned by him and which is also subject to such indemnity by
the Company in the event the clearing broker were to sustain losses. The
Company and its clearing broker seek to control the risks associated with
customer activities by monitoring required margin levels daily and, pursuant to
such guidelines, requiring the customer to deposit additional collateral or to
reduce positions when necessary.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results when different assumptions are utilized. We believe that our
principal critical accounting policies are described below. For a detailed
discussion on the application of these and other accounting policies, see Note A
of Notes to Consolidated Financial Statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
REVENUE RECOGNITION
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. Until December 31, 2002, the Company encouraged broker-dealers and
market makers to become subscribers to its ECN by paying a commission of up
to $5.00 per thousand shares for adding liquidity (limit orders added to
the ECN order book) and charged $7.00 per thousand shares for taking
liquidity (those who execute against an existing bid or offer on the ECN).
The Company met resistance in the payment of its fees by certain
non-subscribers who accessed 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 refuse to pay for the services. The Company has recognized as revenues
only that portion of its billing that has been paid or agreed to be paid by
users. The accounting policy used for revenue recognition for the ECN
through December 31, 2002 can result and has resulted in revenues
recognized after the period of service.
Commencing January 1, 2003, the Company changed its pricing model to
charge a significantly lower fee of $2.90 per thousand shares from the
previous fee of $7.00 per thousand shares. This has allowed collection from
many market participants who previously refused to pay. Further, the
Company operates within Nasdaq's SuperMontage system on a basis that allows
it to reject orders received from market participants that do not pay for
services. Accordingly, the revenue recognition with respect to transactions
after January 1, 2003 was changed to recognizing revenue as services are
performed.
MARKETABLE SECURITIES
The Company classifies its investments in Innodata and Edgar Online as
available for sale securities. The Company carries these investments at
fair value, based on quoted market prices, and unrealized gains and losses,
net of taxes, are included in accumulated other comprehensive income, which
is reflected as a separate component of stockholders' equity. Realized
gains and losses are recognized in the consolidated statement of income
when realized. The Company reviews these holdings on a regular basis to
evaluate whether or not each security has experienced an
other-than-temporary decline in fair value. If the Company believes that an
other-than-temporary decline exists in the marketable securities, the
equity investments are written down to market value and an investment loss
is recorded in the consolidated statement of income.
LONG-LIVED ASSETS
In assessing the recoverability of the Company's goodwill and other
intangibles, the Company must make assumptions regarding estimated future
discounted cash flows to be generated by the assets to determine the fair
value of the respective assets. If these estimated cash flows and related
assumptions change in the future, the Company may be required to record an
impairment charge in the consolidated statement of income.
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.
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 March 31, 2003, the Company had no borrowings under
the credit facility. Changes in the prime interest rate during fiscal 2003 will
have a positive or negative effect on the Company's interest expense on
borrowings, if any. Such exposure will increase should the Company maintain
higher levels of borrowing during 2003.
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 5 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
March 31, 2003 positions will be closed during the second quarter of 2003 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. In the first quarter of 2002, the greater
risk portion of the trading program incurred a pre-tax loss of $1,400,000. The
Company continued its arbitrage trading program but 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 2003. The level
of trading in the arbitrage trading account is dependent on the value of Track
Data common stock pledged by its CEO, and Innodata and Edgar Online common stock
which is used as collateral. The price of these stocks declined during 2002 and
2003.
The Company has investments in Innodata and Edgar Online, 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.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and the
operation of our "disclosure controls and procedures" (as such term is
defined in Rules 13a-14(c) under the Securities Exchange Act of 1934). This
evaluation took place as of a date within 90 days prior to the filing date
of this quarterly report ("Evaluation Date"). Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as
of the Evaluation Date, the disclosure controls and procedures are
reasonably designed and effective to ensure that (i) information required
to be disclosed by us in the reports we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and (ii) such
information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could significantly affect
such controls.
PART II. OTHER INFORMATION
--------- ------------------
Item 1. Legal Proceedings. Not Applicable
-----------------
Item 2. Changes in Securities and Use of Proceeds. Not Applicable
-----------------------------------------
Item 3. Defaults upon Senior Securities. Not Applicable
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable
---------------------------------------------------
Item 5. Other Information. None
-----------------
Item 6. (a) Exhibits.
--------
99 Certification Pursuant to18 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 first
quarter of 2003.
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: 5/13/03 /s/
---------------------------------
Barry Hertz
Chairman of the Board
Chief Executive Officer
Date: 5/13/03 /s/
---------------------------------
Martin Kaye
Chief Operating Officer
Principal Financial Officer
CERTIFICATION
I, Barry Hertz, CEO of Track Data Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Track Data
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in the
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/
------------------------------------
Barry Hertz, CEO
(principal executive officer)
CERTIFICATION
I, Martin Kaye, CFO of Track Data Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Track Data
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in the
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/
--------------------------------
Martin Kaye, CFO
(principal financial officer)