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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report under section 13 or 15(d) of the securities exchange act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
-----------------
/ / Transition report under section 13 or 15(d) of the securities exchange
act of 1934
COMMISSION FILE NUMBER 0-24634
TRACK DATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-3181095
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
56 PINE STREET
NEW YORK, NEW YORK 10005
(Address of principal executive offices) (Zip Code)
(212) 943-4555
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON
STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /X/
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price of the Company's Common Stock on
February 28, 1998 of $1.56 per share. $3,238,578
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
14,206,917 SHARES OF COMMON STOCK, $.01 PAR VALUE, AS OF FEBRUARY 28, 1998
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
[SEE INDEX TO EXHIBITS]
PART I
ITEM 1. BUSINESS
On March 31, 1996, Track Data Corporation ("Track"), a principal
stockholder of Global Market Information, Inc. ("Global"), merged into Global
and the name of Global was changed to Track Data Corporation ("TDC" or the
"Company"). Pursuant to the merger (the "Merger"), Global issued 12,000,000
shares of its common stock in exchange for all of the outstanding stock of
Track. Global, as the surviving corporation, assumed all of Track's assets,
liabilities and obligations.
On November 7, 1997, Barry Hertz, Chairman and principal stockholder of
the Company, transferred his 100% ownership in Newsware, Inc. ("NW") to the
Company for no consideration. NW owed Mr. Hertz approximately $1,025,000,
which was contributed to capital prior to this transaction, and NW owed the
Company approximately $1,200,000, net of reserves, at the time of this
transaction. NW is a provider of on-line news information services.
For accounting purposes, the Merger in 1996 and subsequently the
contribution of NW in 1997 were treated as combinations of entities under
common control similar to pooling-of-interests. Accordingly, the historical
financial position and results of operations of Track, Global and Newsware
have been combined for all periods presented.
Track Data Corporation has been a supplier of electronically delivered
financial information since 1981. TDC provides real-time financial market
data, financial data bases, historical information, analytical services and
data manipulation tools, through a sophisticated private data network to high
end users in the equity/options/futures trading marketplace. TDC delivers
information on equities, options, futures, commodities, listed bonds, fixed
income securities and foreign currencies from all North American exchanges and
from the principal exchanges in Europe, Latin America and the Far East. In
addition, TDC disseminates news and third party data base information from
more than 100 sources worldwide.
The Company maintains more than a dozen offices worldwide, with executive
offices located at 56 Pine Street, New York, New York 10005 and at 95 Rockwell
Place, Brooklyn, New York 11217. Its telephone number is 212-943-4555 or
718-522-7373.
The Company's services consist of the following:
- - MarkeTrack is a real-time quote processing and analytical system that
provides domestic and international market information, dynamically updating
quotelines, options and futures displays, real-time spreadsheets, tick-by-tick
updating graphics, news services and third party databases, user-defined
screen layouts, access to back office order and execution services, and over
20 years of graphical price history.
- - OpTrack and TOG services provide real-time screening and analytical
services relative to equity and index options, and to futures and non-equity
options, targeted to traders and strategists in the options, futures and
derivatives markets.
- - Dial/Data provides electronic access to daily and historical price data
on worldwide exchanges, primarily to individual investors who do not need
real-time information.
- - Track OnLine and MarkeTrack 98 are quotation systems that provide
current or delayed price quotations, access to third party data base services,
scrolling news headlines, dynamically updated prices, the ability to
manipulate screen displays, and current best bids and offers by Nasdaq market
makers. Track OnLine and MarkeTrack 98 provide real-time access to those who
use such information in their daily work.
- - NewsWatch and NewsWeb provide a consolidated feed of multiple news
sources on a real-time basis that affords users the benefit of knowing and
reacting first to events that may affect them in their business or
investments.
- - The Company's AIQ Systems Division develops and markets PC based
financial investment software for individual and professional users.
MARKETRACK
TDC's MarkeTrack offers significant real-time quote processing and
analytical features, and has become distinguished over time for its ability to
consistently deliver real-time, market sensitive information. The service
provides domestic and international market information, dynamically updating
quotelines, options and futures displays, real-time spreadsheets, tick-by-tick
updating graphics, more than 30 news services and third party databases,
user-defined screen layouts, access to back office order and execution
services, and over 20 years of graphical price history. It allows users to
calculate theoretical values of options and determine the most beneficial
investment strategy through calculating returns on alternative investments,
including options and futures. In addition, users are able to download
real-time data to both Microsoft Excel and Lotus 1-2-3 spreadsheet
applications which allows the users to create individually tailored financial
applications to meet specific needs without additional programming.
The service gives investment professionals the ability to easily and
rapidly analyze, on a single service terminal, large volumes of real-time
prices, third party databases, historical information and news services to
support split second trading decisions. It runs under Windows NT, DOS and UNIX
operating systems on a wide variety of personal computer and workstation
platforms.
Pricing and Customers. Customers are charged a monthly service fee and a
communications or location charge which varies typically with the location and
size of the customer's installation. Service charges vary with the number and
types of functions to which an individual subscribes, and are typically
between $300 and $600 per month per user. Typically subscribers who execute a
subscriber agreement contract that specifies both term and quantity of users
may receive pricing discounts for multi-year contracts. Such agreements allow
subscribers to receive services at a known cost and ensure TDC of a recurring
revenue stream into the future.
TDC currently serves over 3,000 customers in trading and institutional
investment management positions. Customers include floor traders, block
traders, market makers, OTC traders, options specialists, head traders,
arbitrageurs and hedge fund managers.
OPTRACK AND TOG
TDC's OpTrack and TOG services provide real-time screening and analytical
services relative to equity and index options, and to futures and non-equity
options. Both of these services are targeted to sophisticated professionals,
both traders and strategists, in the options, futures and derivatives markets.
OpTrack identifies trading opportunities such as covered writes, spreads,
butterflies, overvalued/undervalued options, and many others, in a real-time
environment, scanning the "universe" of options, or just a group of
instruments selected by the user. OpTrack is also used by retail options
specialists in advising brokers on recommended strategies for their clients
based upon client objectives, such as maximizing return on investment. OpTrack
is used by thousands of traders, advisers and brokers in its various modes of
delivery.
TOG is used by non-equity options traders and derivatives specialists in
banks, hedge funds and trading firms. This service offers sophisticated types
of analyses of non-equity and non-listed over-the-counter options. These
include interest rate caps, floors and swaps, also exotics, knockouts,
lookbacks, and Asian priced options. Users have the ability to create
artificial strategies or "synthetic" positions, and to analyze their risk.
DIAL/DATA SERVICE
TDC's Dial/Data service provides historical and end-of-day pricing data
for all U.S., Canadian and European exchange-traded equities and related
instruments, futures, equity options, futures options, mutual funds, bonds,
government issues, money markets and indexes. In addition, fundamental data is
provided for equity issues such as splits, dividends, and earnings per share.
News headlines and full text stories from some of TDC's news vendors can also
be delivered to Dial/Data customers. Dial/Data is primarily marketed through
independent software vendors who provide analytical and charting programs for
analyzing financial information. The Company's AIQ division, Equis
International, Omega Research, Windows on Wall Street and other independent
software vendors include Dial/Data access as an integral part of the software
that they market. The Company encourages these vendors of charting software,
through the payment of royalties, to make their software compatible with the
Company's Dial/Data market information, and to advise customers by inserts and
other means that they may select Dial/Data as their source of market
information by contacting Dial/Data and entering into a month to month
subscription agreement. A customer that has subscribed to Dial/Data accesses
the service directly using the vendor's software program through modems on
their PC's and is billed for the Dial/Data service directly by the Company.
Access to the Company's database is provided by using telecommunications
networks and the Internet. The networks currently being used to provide local
access are Compuserve Data Network, Autonet or SprintNet. The Dial/Data
service is also available through the Internet. Although the software can
operate on real-time information, customers primarily apply their charting
techniques to historical information and there is substantially less emphasis
on up-to-the-minute information for this service than there is for other
services provided by the Company.
Pricing and Customers. Customers who subscribe to Dial/Data have the
option of either paying a flat monthly rate which ranges from $15 to $125
depending on the type of data received, or being billed on a per quote basis.
Customers outside the continental U.S. are also billed a per-minute connection
charge. Customers pay for their services primarily by permitting the Company
to charge their credit cards. Customers may terminate Dial/Data services at
any time. At December 31, 1997, 1996 and 1995 there were approximately 25,000,
23,500 and 20,000 customers of the Dial/Data service, respectively.
TRACK ONLINE AND MARKETRACK 98 SERVICES
The Track OnLine and MarkeTrack 98 services provide current or delayed
price quotations, access to third party data base services, scrolling news
headlines, dynamically updating prices, the ability to manipulate screen
displays, and current best bids and offers by Nasdaq market makers. Customers
receive the service by telephone connection with the Company through
telecommunications networks such as Compuserve Data Network or Autonet. The
Track OnLine service is also available through the Internet. Track OnLine and
MarkeTrack 98 are designed primarily for high net worth individual investors
and financial planners who actively buy and sell stocks, options or futures,
but who are generally not professional traders.
MarkeTrack 98 provides dynamic applications including: Scrolling news
headlines, customized monitor displays, times and sales, option display,
future chains, select tickers, DDE links and fundamental quotes. The system
also offers news, price and volume alerts, news recall, historical pricing,
market statistics, volatility summaries, and historical transaction logs all
in the basic package. Available add-on services include real-time and
historical charting with technical studies, over a dozen additional news
sources, Nasdaq Level II, and financial databases covering earnings estimates,
institutional holdings, fundamental data and market synopsis.
Pricing and Customers. Customers are charged at a flat monthly rate which
depends on the services they select or on per minute usage at $0.29 per minute
with a minimum $15 charge per month. Monthly charges range from $15 to $400.
The Company has entered into agreements with national network carriers that
provide for a fixed monthly payment by the Company for communication services
without regard to the duration of connections. Customers pay for their
services primarily by permitting the Company to charge their credit cards. The
customers may select month to month, six month or one year agreements.
Discounts are offered for six month and one year commitments. As of December
31, 1997, 1996 and 1995 the Company had approximately 1,500, 1,400 and 1,200
monthly rate users, respectively.
NEWSWATCH AND NEWSWEB SERVICES
The market focus of NewsWatch and NewsWeb is the business professional
who "must know first." It may be a trader, banker, research analyst,
investment relations professional, corporate executive, or any "knowledge
worker" who needs real-time information for making day to day business
decisions. The service provides enterprise wide solutions to corporations
needing to deliver external/internal real-time information to their "knowledge
workers," leveraging internal networks and/or intranets. The service includes
a high-speed consolidated news ticker, an NT-resident database with full-text
indexing, access to a variety of third-party databases, and multiple
domestic/international exchanges, all via a state of the art user-friendly
presentation environment.
NewsWeb is a browser-based interface, bringing all the advantages of our
news collection and delivery service to the web environment. It is
particularly appropriate for corporations who are comfortable with browser
technology and need access to real-time business news for their end-user
population via an internal intranet or the World Wide Web.
Pricing and Customers. Customers are charged a monthly service fee and a
communications or location charge, which varies typically with the location
and size of the customer installation. Service charges vary with the number
and types of functions/news sources to which the user subscribes. A typical
installation is approximately $300/month at the 5-user level and is scaled
down with increased users at a location.
AIQ SYSTEMS DIVISION
TDC's AIQ Systems division is an industry leader in developing artificial
intelligence (AI) based stock market analysis and charting software for
personal computers. By simulating the reasoning of top market technicians,
AIQ's "Expert Systems" delivers trading signals and valuable market insight,
as well as state-of-the-art technical charting and screening capabilities.
AIQ's customer list consists of thousands of individual and professional
investors, world-wide, who rely on AIQ's accurate and unique timing
information for their daily trading decisions.
AIQ currently publishes three primary expert systems for market trading.
AIQ MarketExpert is an introductory level charting and analysis package that
can be downloaded free of charge from AIQ's award winning web site,
WWW.AIQ.COM. MarketExpert includes a data downloader and a free month of data
from TDC's Dial/Data service. AIQ StockExpert is an intermediate level
analysis system that includes AIQ's market timing model, as well as hundreds
of powerful stock timing tools. StockExpert retails for $498. AIQ's most
popular product is AIQ TradingExpert for Windows. This advanced analysis
package includes market timing, stock timing, and industry group analysis
capabilities. TradingExpert retails for $695. AIQ also develops a full line of
add-on modules for fundamental analysis, news retrieval, and data correlation.
In addition, AIQ offers educational services including: the Opening Bell
Monthly educational newsletter, bi-annual educational seminars and workshops,
and a full line of educational video tapes.
MARKETING
MarkeTrack, OpTrack and TOG compete in several highly competitive
segments of the on-line real-time financial information marketplace: equity,
options and futures trading; and the investment management segments of the
professional investment community. The equities, options and futures trading
segment of this market is comprised of approximately 30,000 professionals who
spend an estimated $150 million per year on financial information, and the
investment management segment is comprised of approximately 60,000
professionals who spend an estimated $320 million per year on financial
information. TDC's focus is on the premium end of these trading markets,
appealing to institutional sales people, arbitrageurs, market makers and
traders. TDC estimates that the premium segment of the trading market consists
of approximately 16,000 terminals, of which its share is approximately 18%.
These services, as well as NewsWatch and NewsWeb services, are marketed
primarily through a dedicated sales force, including 15 full-time regional
sales persons in the U.S. and an international sales staff of 4 full-time
sales persons. All services and new business are sold directly, often as a
result of on-site presentations and service demonstrations.
In addition to its dedicated sales force, TDC maintains relationships
with a number of brokerage firms which actively sell TDC's services to the
money management side of the industry for "soft dollars." In a soft dollar
arrangement the brokerage firm pays TDC for services delivered to the money
managers. These brokerage firms are typically also customers of TDC.
TDC has ongoing advertising, direct mail, and public relations programs
to promote product recognition and educate potential new customers in its
targeted markets. In addition, the services are exhibited at major industry
trade shows each year.
All newly released service offerings and features are announced to
existing users via an inherent TDC system broadcast capability and through
corporate newsletters. In addition, TDC plans to maintain a competitive
pricing strategy for its services.
The major marketing effort for the Dial/Data service is directed towards
the software vendors who offer analytic programs for the individual investor,
including the Company's AIQ Systems division. By agreeing to provide royalties
to these vendors, the Company seeks to encourage these vendors to make their
programs compatible with the Company's data bases, and to encourage customers
to select the Company's data bases in preference to data bases made available
by others. Such agreements typically are terminable upon 90 days' notice after
one year and provide for payment by the Company to the vendor of amounts based
on the Company's monthly data base charges to its customers. The Company
understands that its competitors enter into similar arrangements with such
vendors. The Company also seeks to gain the support of vendors by continually
upgrading the flexibility, scope and convenience of its service and by
adopting pricing systems which are attractive to the vendors' customers.
The Track OnLine service is sold through four full-time salespersons and
is marketed through print advertising and direct mail.
AIQ Systems markets its software products through direct mail, the
internet, print advertising and seminars.
LIMITED PROPRIETARY INFORMATION
The financial information which is made available by the Company for its
MarkeTrack, Track OnLine, Dial/Data and Newsware services can be purchased
From third party sources and is not proprietary. The Company maintains
proprietary economic and historical financial databases. The Company protects
its proprietary information with standard secrecy agreements.
MarkeTrack, NewsWatch, Dial/Data and Track OnLine are registered service
marks owned by the Company. AIQ has registered trademarks of StockExpert,
MarketExpert, and TradingExpert as well as Opening Bell for its newsletter.
COMPETITION
The Company competes with many other providers of electronically
transmitted financial information. The Company competes in its varied service
offerings to varying extents through price and quality of service.
The Company offers its MarkeTrack, OpTrack and TOG in a highly
competitive market in which it competes with other distributors of financial
and business information, many of which have substantially greater financial
resources. TDC competes, among other things, on the basis of the quality and
reliability of its data, the speed of delivery and on the flexibility of its
services. In the equity, options and futures trading segments, and the
investment management segment, TDC's competitors include Bloomberg Financial,
Shark Information, owned by ADP, and Bridge Data. To a lesser degree, these
TDC services compete with ADP Financial, ILX, a Thomson Financial Services
company, and Quotron, a Reuters company, who dominate the retail brokerage
market segment. There can be no assurance that TDC will not encounter
increased competition in the future, which could limit the Company's ability
to maintain or increase its market share or maintain its margins, and which
could have a material adverse effect on TDC's business, financial condition or
operating results.
Competitors to the Dial/Data service include Interactive Data Corp., The
Dow Jones Retrieval Service, Compuserve, Telescan and Commodity Systems, Inc.
The Company competes in this market based on price, the quality and
reliability of its data, the extent and breadth of historical information,
ease of access and the negotiation of agreements with vendors that provide
royalty arrangements they find attractive. Some of the Company's competitors
provide both software and data services. The Company competes with such full
service providers by attempting to enter into agreements with vendors of
superior software.
The Track OnLine service competes with several relatively well
established companies including, Data Broadcasting Corporation and
Bonneville/Market/Ensign 5. Competition is based on price and on the
interactivity and other features that are offered to customers. The Company
believes that its prices are competitive and that other features of its
service compare favorably with competitive offerings.
The Company offers its Newsware services in a highly competitive market
in which it competes with other distributors of news information, many of
which have substantially greater financial resources. Newsware competes, among
other things, on the basis of the quality and reliability of its data, the
speed of delivery and on the flexibility of its services. Newsware's principal
competitors are NewsEdge Corp., Retrieval Technologies, Inc. and WavePhore's
Newscast service.
Competitors of AIQ include Equis International (MetaStock), Omega
Research (SuperCharts), Windows on Wall Street, and many others. Generally,
these competitors' products can be classified as "charting" packages. They
concentrate their resources on general charting (graphical) and stock market
back-testing capabilities, rather than the pre-programmed market analysis
offered by the AIQ products. Due to this approach, which tends to be less
support intensive, they compete at a lower price range of between $250 and
$450 per unit, as compared to AIQ Systems which sells its most popular
software product, "Trading Expert," for $695.
RESEARCH AND DEVELOPMENT
The Company has not made significant expenditures for research and
development, although expenditures were incurred to continue to enhance the
service offerings for each of the Company's services based on customer
requests and the Company's knowledge of the marketplace and competition.
EMPLOYEES
The Company employed approximately 250 persons on a full time basis as of
December 31, 1997. The Company believes that its relationship with its
employees is satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 56 Pine Street, New
York, New York. The Company maintains office space and data centers at
locations in New York, NY, Brooklyn, NY and Chicago, IL. The Brooklyn, NY
location is leased from a family partnership controlled by the Company's
Chairman and Chief Executive Officer. The annual rental of approximately
36,000 square feet is approximately $480,000. The Company believes that the
terms of this lease are at least as favorable to it as terms which it would
have obtained in a comparable transaction with unaffiliated persons.
The Company leased its New York, NY property from another family
partnership until the sale of that property in February 1998. The Company
currently leases this property comprising 33,600 square feet from an
unaffiliated third party for a seven year period with base rent of $487,000,
subject to annual increases of 2.5% plus payment for electric and a share of
increases in taxes.
The Company's offices in Chicago, IL, Los Angeles, CA, San Francisco, CA,
Boston, MA, Incline Village, NV, Philadelphia, PA, Dallas, TX, Minneapolis,
MN, Boca Raton, FL and Toronto and Montreal, Canada with aggregate annual
rentals of $489,000 expire at various dates through 2002. The Company also
maintains a full service office in London, England under a lease for annual
rentals of $81,000 expiring in 1999.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending to which the Company is a party
or of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted on at the December 18, 1997 Annual
Meeting of Stockholders. The total shares voted were 13,604,225.
FOR AGAINST ABSTAIN WITHHELD
---------- ---------- ------- --------
ELECTION OF DIRECTORS: 13,558,575 45,650
E. Bruce Fredrikson 13,558,575 45,650
Barry Hertz 13,558,575 45,650
Martin Kaye 13,558,575 45,650
Morton Mackof 13,550,075 54,150
Alan Schnelwar 13,558,575 45,650
Todd Solomon 13,550,075 54,150
Jack Spiegelman 13,550,075 54,150
APPOINTMENT OF AUDITORS 13,577,975 17,550 8,700
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market System
under the symbol "TRAC." On February 28, 1998, there were 72 stockholders of
record of the Company's Common Stock based on information provided by the
Company's transfer agent. Virtually all of the Company's publicly held shares
are held in "street name" and the Company believes the actual number of
beneficial holders of its Common Stock to be approximately 1,400.
The following table sets forth the high and low sales prices for the
Company's Common Stock as reported on Nasdaq NMS.
COMMON STOCK SALE PRICE
--------------------------
HIGH LOW
------- ------
1996
- --------------
First Quarter 5-3/8 3-1/2
Second Quarter 5 2-1/2
Third Quarter 3-1/8 1-1/4
Fourth Quarter 1-3/4 1
1997
- --------------
First Quarter 1-7/8 1
Second Quarter 2-1/4 1-5/32
Third Quarter 1-11/16 1-1/4
Fourth Quarter 1-1/2 1-1/8
Dividends
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment of
dividends, if any, on the Common Stock is within the discretion of the Board
of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors. Prior to the
Merger, Track paid dividends to its sole stockholder.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
------- ------- ---------- ------- -------
(In thousands)
SERVICE FEES AND REVENUE $47,631 $48,031 $ 45,162 $40,825 $33,911
------- ------- ---------- ------- -------
OPERATING COSTS AND EXPENSES:
Direct operating costs 25,629 26,283 25,409 21,690 18,126
Selling and administrative expenses 19,410 20,530 23,273 19,272 15,468
Deferred compensation expense - 295 2,946 901 -
Interest expense (net of interest income) 719 1,008 950 628 586
------- ------- ---------- ------- -------
Total 45,758 48,116 52,578 42,491 34,180
------- ------- ---------- ------- -------
INCOME (LOSS) FROM OPERATIONS 1,873 (85) (7,416) (1,666) (269)
OTHER INCOME (EXPENSE) - 288 468 93 (40)
------- ------- ---------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY IN NET
(LOSS) INCOME OF AFFILIATE 1,873 203 (6,948) (1,573) (309)
INCOME TAXES (BENEFIT) 299 526 (708) (62) 105
------- ------- ---------- ------- -------
INCOME (LOSS) BEFORE
EQUITY IN NET (LOSS)
INCOME OF AFFILIATE 1,574 (323) (6,240) (1,511) (414)
EQUITY IN NET (LOSS)
INCOME OF AFFILIATE (1,146) (184) 422 89 218
------- ------- ---------- ------- -------
NET INCOME (LOSS) $ 428 $ (507) $ (5,818) $(1,422) $ (196)
======= ======= ========== ======= =======
BASIC AND DILUTED NET
INCOME (LOSS) PER SHARE $.03 $(.03) $(.42) $(.11) $(.02)
==== ===== ===== ===== =====
WEIGHTED AVERAGE
SHARES OUTSTANDING 14,555 14,622 13,911 12,849 12,240
======= ======= ========== ======= =======
DECEMBER 31, 1997 1996 1995 1994 1993
------- ------- ---------- ------- -------
(In thousands)
TOTAL ASSETS $18,312 $20,679 $ 26,297 $25,494 $16,732
TOTAL LIABILITIES 11,683 14,743 21,540 15,613 11,516
STOCKHOLDERS' EQUITY 6,629 5,936 4,757 9,881 5,216
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company provides real-time financial market data, fundamental
research, charting and analytical services to both institutional and
individual investors. The Company also redistributes news and third party data
base information from more than 100 sources worldwide. The Company's lead
products include MarkeTrack, Dial/Data, Track OnLine, NewsWatch and NewsWeb.
Its AIQ Systems division provides expert systems software, including
artificial intelligence products for market timing and stock selection.
YEAR ENDED DECEMBER 31, 1997 AND 1996
Revenues for the year ended December 31, 1997 and 1996 were $47,631,000
and $48,031,000, respectively.
Direct operating costs were $25,629,000 for 1997 and $26,283,000 for the
similar period in 1996. Direct operating costs as a percentage of revenues
were 54% in 1997 and 55% in 1996. Direct operating costs include direct
payroll, direct telecommunication costs, computer supplies, depreciation,
equipment lease expense and the amortization of software development costs.
Selling and administrative expenses were $19,410,000 and $20,530,000 in
the 1997 and 1996 periods, respectively, a decrease of 5% in the 1997 period
from the 1996 period. Selling and administrative expenses as a percentage of
revenues was 41% in 1997 and 43% in 1996. The dollar and percentage decrease
primarily reflects a reduction of approximately $900,000 in salary expense, as
well as reductions in advertising, communications and other office expenses,
offset by a charitable contribution of Innodata common stock of $690,000.
Deferred compensation expense was $295,000 in 1996 related to the
Company's phantom stock plan which was discontinued as of March 31, 1996.
Net interest expense decreased to 719,000 in the 1997 period compared to
$1,008,000 in 1996 due to decreased borrowings.
Other income was $288,000 in 1996, resulting principally from Innodata
Corporation common stock placed in a trust to satisfy obligations to
employees. The gain represents the difference between the carrying value of
such securities and the market price at date of disposition.
The income tax expense in the 1996 period of $526,000 is due principally
to an increase in the Company's deferred tax valuation allowance and in both
1997 and 1996, losses from Newsware for which no tax benefit was available to
the Company.
As a result of the above mentioned factors, the Company realized income
before equity in net loss of an affiliate of $1,574,000 in the 1997 period
compared to a loss before equity in net loss of an affiliate of $(323,000) in
1996.
The equity in net loss from an affiliate, Innodata Corporation, was
$1,146,000 in the 1997 period and $184,000 in 1996. The 1997 loss included a
significant charge by the affiliate for restructuring costs and an asset
impairment write-down as well as losses on foreign currency futures contracts.
As a result of this loss the Company's net income was reduced to $428,000 for
the year ended December 31, 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996, the Company's revenues were
$48,031,000, an increase of 6% over revenues for the similar period in 1995 of
$45,162,000. The increase in revenues is primarily attributable to an increase
in the subscriber base for the Company's Dial/Data service.
Direct operating costs were $26,283,000 for the year ended December
31,1996 and $25,409,000 for the similar period in 1995, an increase of 3%.
Direct operating costs as a percentage of revenues was 55% in 1996 and 56% in
1995.
Selling and administrative expenses were $20,530,000 and $23,273,000 in
the years 1996 and 1995, respectively, a decrease of 12%. Selling and
administrative expenses as a percentage of revenues was 43% in 1996 and 52% in
1995. The dollar and percentage decrease primarily reflects a charitable
contribution expense of approximately $800,000 in 1995, a reduction of
approximately $1,200,000 in salary expense for the Company's Chairman in 1996
as compared to 1995, reduced salaries and bonuses of $400,000, the write off
of approximately $200,000 in Track Data Japan that closed operations during
1995 and operating expenses for the Japan offices in 1995 with no such
expenses in 1996.
The Company incurred deferred compensation expense of $295,000 in 1996
and $2,946,000 in 1995. This change relates to the Company's phantom stock
plan which was discontinued as of March 31, 1996. The underlying 835,905
shares of the Company's common stock and 74,281 shares of Innodata Corporation
common stock to which certain employees were vested were placed in a trust for
the benefit of the participants. Accordingly, future changes in the market
price of the respective stocks will not be reflected as changes in deferred
compensation expense.
Other income was $288,000 for the year ended December 31, 1996 and
$468,000 for the year ended December 31, 1995. The income in 1995 and 1996
resulted principally from gains from Innodata Corporation common stock given
as charitable contributions in 1995, and gains from Innodata shares given to
the Company's Phantom Stock Plan Trust in 1996. The gain represents the
difference between the carrying value of such securities and the market price
at date of disposition.
The income tax expense in the 1996 period of $526,000 is due principally
to an increase in the Company's deferred tax valuation allowance. In 1995, the
income tax benefit was lower than the federal statutory rate as the loss
incurred by Track and Newsware as S corporations provided no corporate tax
benefit.
As a result of the above mentioned factors, the Company realized a net
loss of $507,000 in 1996 compared to a loss of $5,818,000 in 1995, which
included equity in the net loss of an affiliate of $184,000 in 1996 and equity
in net income from that affiliate of $422,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1997 and 1996 cash provided by
operating activities was $6,108,000 and $4,106,000, respectively. The increase
was due principally to increased income from operations. Cash flows used in
investing activities was $1,488,000 and $1,165,000 for the years ended
December 31, 1997 and 1996, respectively. Purchases of fixed assets decreased
by $412,000 in 1997 compared to 1996, offset by increased payments of related
party debt. Cash used in financing activities was $4,094,000 and $4,855,000
for the years ended December 31, 1997 and 1996, respectively. The decrease
in 1997 is primarily due to lower payments on bank debt offset by increased
purchases 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 principal stockholder.
Interest is charged at 1.75% above the bank's prime rate and is due on demand.
The Company may borrow up to 80% of eligible accounts receivable and is
required to maintain a compensating balance of 10% of the outstanding loans.
The line of credit is sufficient for the Company's cash requirements. There
are no major capital expenditures anticipated beyond the normal replacement of
equipment and additional equipment to meet customer requirements.
The Company has initiated a program to prepare computer systems and
applications for the Year 2000. The Company expects to incur internal staff
costs as well as consulting and other expenses related to infrastructure and
facilities enhancements necessary to prepare the systems for the Year 2000. A
portion of such costs are not likely to be incremental costs to the Company,
but rather will represent the redeployment of existing information technology
resources. The Company is also communicating with customers and suppliers with
whom it conducts business to help identify and resolve the Year 2000 issue. It
is possible that if all aspects of the Year 2000 issues are not adequately
resolved by these parties, the Company's future business operations and, in
turn, its financial position and results of operations could be negatively
impacted. Management has not yet quantified the Year 2000 compliance and other
related expenses, however, management believes these costs will not have a
material affect on its financial position.
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.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
TRACK DATA CORPORATION AND SUBSIDIARIES
Independent Auditors' Report II-7
Consolidated Balance Sheets as of December 31, 1997 and 1996 II-8
Consolidated Statements of Operations for the three years ended II-9
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the three II-10
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the three years ended II-11
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements II-12-21
INNODATA CORPORATION AND SUBSIDIARIES - SIGNIFICANT SUBSIDIARY
Independent Auditors' Reports II-22-23
Consolidated Balance Sheets as of December 31, 1997 and 1996 II-24
Consolidated Statements of Operations for the three years ended II-25
December 31, 1997
Consolidated Statements of Stockholders' Equity for the three II-26
years ended December 31, 1997
Consolidated Statements of Cash Flows for the three years II-27
ended December 31, 1997
Notes to Consolidated Financial Statements II-28-36
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Track Data Corporation
We have audited the accompanying consolidated balance sheets of Track Data
Corporation and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Track Data
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Grant Thornton LLP
Melville, New York
February 27, 1998
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
ASSETS
CASH AND EQUIVALENTS $ 579,214 $ 65,589
ACCOUNTS RECEIVABLE - net of allowance for doubtful accounts of
$159,000 in 1997 and $154,000 in 1996 (Note A) 1,955,142 1,642,631
FIXED ASSETS - at cost (net of accumulated depreciation) (Notes A, B and H) 8,876,718 9,656,201
SOFTWARE - at cost (net of accumulated amortization of $5,650,952 in 1997
and $5,488,946 in 1996) (Note A) 231,967 370,482
DATABASE COSTS - at cost (net of accumulated amortization of $970,050 in
1997 and $808,342 in 1996) (Note A) 647,171 808,880
INVESTMENT IN AFFILIATE (Notes A, C and L) 741,285 2,577,662
DUE FROM RELATED PARTIES (Note D) 246,867 217,746
EXCESS OF COST OVER NET ASSETS ACQUIRED (Note A) 3,312,613 3,581,029
NET DEFERRED INCOME TAX ASSETS (Notes A and G) 585,000 320,000
OTHER ASSETS 1,136,654 1,438,657
----------- -----------
TOTAL $18,312,631 $20,678,877
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 4,408,042 $ 4,544,317
Note payable - bank (Note E) 2,373,199 2,787,082
Acquisition notes payable - 208,333
Notes payable - other (Note F) 664,824 2,444,357
Capital lease obligations (Note H) 3,121,502 4,185,017
Unearned revenues (Note A) 200,077 255,614
Other liabilities, including income taxes (Notes G and I) 915,554 317,768
----------- -----------
Total liabilities 11,683,198 14,742,488
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes H and L)
STOCKHOLDERS' EQUITY (Notes A, I, J, K and L)
Common stock - $.01 par value; 30,000,000 shares authorized; issued and
outstanding - 14,308,967 shares in 1997 and 14,782,552 shares in 1996 143,090 147,826
Additional paid-in capital 14,417,325 14,125,989
Foreign currency translation adjustment 22,999 44,085
Deficit (7,953,981) (8,381,511)
----------- -----------
Total stockholders' equity 6,629,433 5,936,389
----------- -----------
TOTAL $18,312,631 $20,678,877
=========== ===========
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
SERVICE FEES AND REVENUE (Note A) $47,630,842 $48,030,735 $45,161,850
----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Direct operating costs 25,628,664 26,283,146 25,408,571
Selling and administrative expenses 19,409,969 20,529,636 23,273,086
Deferred compensation expense (Note I) - 294,893 2,946,128
Interest expense (net of interest income
of $41,630, $148,788 and $225,134
in 1997, 1996 and 1995, respectively) 719,246 1,008,083 950,084
----------- ----------- -----------
Total 45,757,879 48,115,758 52,577,869
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,872,963 (85,023) (7,416,019)
----------- ----------- -----------
OTHER INCOME:
Gain on securities - 288,419 452,518
Other - - 15,627
----------- ----------- -----------
- 288,419 468,145
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY IN NET
(LOSS) INCOME OF AFFILIATE 1,872,963 203,396 (6,947,874)
INCOME TAXES (BENEFIT) (Notes A and G) 299,433 525,969 (707,926)
----------- ----------- -----------
INCOME (LOSS) BEFORE EQUITY
IN NET (LOSS) INCOME
OF AFFILIATE 1,573,530 (322,573) (6,239,948)
EQUITY IN NET (LOSS) INCOME
OF AFFILIATE (Notes A and C) (1,146,000) (184,355) 421,627
----------- ----------- -----------
NET INCOME (LOSS) $ 427,530 $ (506,928) $(5,818,321)
=========== =========== ===========
BASIC AND DILUTED NET INCOME
(LOSS) PER SHARE (Note A) $.03 $(.03) $(.42)
==== ===== =====
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 14,555,000 14,622,000 13,911,000
=========== =========== ===========
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNREALIZED
GAIN ON FOREIGN
ADDITIONAL AVAILABLE- CURRENCY RETAINED
COMMON PAID-IN FOR-SALE TRANSLATION EARNINGS
STOCK CAPITAL SECURITIES ADJUSTMENT (DEFICIT)
-------- ----------- ----------- ------------ -----------
BALANCE, JANUARY 1, 1995 $138,635 $ 9,487,344 $ 112,230 $ 109,855 $ 32,436
Contribution of common
stock to charity 1,000 599,000
Issuance of common stock to
Company pension plan 200 104,800
Purchase and retirement
of treasury stock (65) (22,504)
Foreign currency
translation adjustment (50,338)
Unrealized gain on available-
for-sale securities 62,571
Net loss (5,818,321)
-------- ----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1995 139,770 10,168,640 174,801 59,517 (5,785,885)
Issuance of common stock to
Trust in satisfaction of Track
phantom stock plan 8,359 3,836,703
Issuance of common stock in
satisfaction of bonus obligation 624 233,377
Purchase and retirement of
treasury stock (927) (112,731)
Foreign currency translation
adjustment (15,432)
Dividend paid to Track sole
stockholder (2,088,698)
Realized gain on transfer of
affiliate shares to Trust (174,801)
Net loss (506,928)
-------- ----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996 147,826 14,125,989 - 44,085 (8,381,511)
Contribution of loan
payable to stockholder 1,025,313
Purchase and retirement of
treasury stock (4,736) (733,977)
Foreign currency translation
adjustment (21,086)
Net income 427,530
-------- ----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 $143,090 $14,417,325 $ - $ 22,999 $(7,953,981)
======== =========== =========== ============ ===========
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 427,530 $ (506,928) $(5,818,321)
Adjustments to reconcile net income (loss) to net
cash provided by
operating activities:
Depreciation and amortization 3,656,987 3,580,610 4,310,552
Equity in net loss (income) of affiliate 1,146,000 184,355 (421,627)
Deferred compensation - 294,893 2,946,128
Profit sharing and charitable contributions paid in stock 397,800 - 889,983
Loss (gain) on contribution of stock of affiliate 292,577 - (95,851)
Gain on sale of marketable securities - (335,340) (283,804)
Loss on investment in Track Data Japan - - 179,976
Deferred taxes (265,000) 727,419 (731,919)
Provision for doubtful accounts - - 455,000
Other 33,137 52,185 (40,883)
Changes in operating assets and liabilities:
Accounts receivable (312,511) 553,906 (405,822)
Other assets 227,967 (147,380) 407,378
Accounts payable and accrued expenses 33,598 70,818 739,605
Other liabilities 469,998 (368,688) (101,799)
----------- ----------- -----------
Net cash provided by operating activities 6,108,083 4,105,850 2,028,596
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (591,531) (1,003,600) (1,885,269)
Payments from related parties 14,909 748,661 2,319,124
Payments to related parties (949,895) (777,073) (2,413,681)
Payment from (to) others 48,167 (25,450) 84,148
Proceeds from sale of marketable securities - - 557,297
Purchase of marketable securities (10,000) (76,931) -
Purchase of shares of affiliate - (30,650) -
Acquisition costs - - (2,175,582)
----------- ----------- -----------
Net cash used in investing activities (1,488,350) (1,165,043) (3,513,963)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (2,782,015) (2,756,554) (2,348,426)
Net (payments) proceeds from note payable - bank (413,883) (1,657,369) 841,254
Net (payments) proceeds on notes payable - other (18,231) (27,045) 35,724
Net proceeds (payments) on loans from employee
savings program 66,991 (49,932) 129,586
Payments of acquisition notes (208,333) (250,000) (250,000)
Purchase of treasury stock (738,713) (113,658) (22,569)
----------- ----------- -----------
Net cash used in financing activities (4,094,184) (4,854,558) (1,614,431)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE DIFFERENCES
ON CASH (11,924) (39,156) (48,407)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 513,625 (1,952,907) (3,148,205)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 65,589 2,018,496 5,166,701
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 579,214 $ 65,589 $ 2,018,496
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 698,093 $ 910,113 $ 1,010,821
Income taxes 18,094 31,629 139,969
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Equipment acquisitions financed by capital leases $ 1,717,311 $ 2,401,000 $ 3,531,746
Payment of dividend by distribution
of related party receivables - 2,088,698 -
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION--Track Data Corporation
("TDC") and its subsidiaries (the "Company") provide sophisticated market
information services to the investment community and news services to the
investment community and to corporate environments under continuing contracts,
and lease dedicated communication lines to customers which link such customers
to databases on a real-time basis. The Company, like other entities involved
in businesses similar to leasing, uses a non-classified balance sheet because
such presentation appropriately reflects the Company's operations. Its
operating cycle is not the conventional one-year period.
On March 31, 1996, Track Data Corporation ("Track"), a principal stockholder
of Global Market Information, Inc. ("Global"), merged into Global and the name
of Global was changed to Track Data Corporation ("TDC" or the "Company").
Pursuant to the merger (the "Merger"), Global issued 12,000,000 shares of its
common stock in exchange for all of the outstanding stock of Track. Global, as
the surviving corporation, assumed all of Track's assets, liabilities and
obligations.
On November 7, 1997, the Chairman and principal stockholder of the Company
transferred his 100% ownership in Newsware, Inc. ("NW") to the Company for no
consideration. NW owed the Chairman approximately $1,025,000, which was
contributed to capital prior to this transaction, and NW owed the Company
approximately $1,200,000, net of reserves, at the time of this transaction. NW
is a provider of on-line news information services.
For accounting purposes, the Merger in 1996 and the subsequent contribution of
NW in 1997 (collectively, the "Mergers") were treated as combinations of
entities under common control similar to pooling-of-interests. Accordingly,
the historical financial position and results of operations of Track, Global
and Newsware have been combined for all periods presented.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements of the
Company include the accounts of TDC and its 63 percent-owned subsidiary, Fast
Track Systems, Inc. All significant intercompany transactions and accounts
have been eliminated in consolidation.
FIXED ASSETS--Fixed assets are depreciated on a straight-line basis over their
estimated useful lives which are as follows:
ESTIMATED USEFUL LIVES
CATEGORY (in years)
Equipment 3-10
Furniture and fixtures 10
Transportation equipment 4
Leasehold improvements are amortized on a straight-line basis over the
respective lease term or estimated useful life, whichever is less.
SOFTWARE AND DATABASE COSTS--Costs of internally developed software are
capitalized from the time technological feasibility has been established and
are amortized at the greater of the ratio that current gross revenues bear to
the total of current and anticipated future gross revenues or the
straight-line method, generally five years. Other software costs are amortized
on a straight-line basis over their estimated useful lives, generally five
years. Database costs are amortized on a straight-line basis over their
estimated useful lives of ten years. Management assesses the recoverability of
its software development and database costs based principally upon a
comparison of the carrying value of the asset to the undiscounted expected
future cash flows to be generated by the asset, plus estimated salvage value
less any applicable costs. If management concludes that the asset is impaired,
its carrying value is adjusted to its fair value.
EXCESS OF COST OVER NET ASSETS ACQUIRED--The unamortized excess of the
purchase price of acquired businesses over the fair value of net assets on the
dates of acquisition amounts to $3,312,613 and $3,581,028, net
of accumulated amortization of $1,081,292 and $812,877 as of December 31, 1997
and 1996, respectively. The unamortized excess is being amortized on the
straight-line basis over ten to fifteen years. Management assesses the
recoverability of the remaining unamortized costs based principally upon a
comparison of the carrying value of the asset to the undiscounted expected
future cash flows to be generated by the asset. If management concludes that
the asset is impaired, its carrying value is adjusted to its net realizable
value.
REVENUE RECOGNITION--The Company recognizes revenue as services are performed.
Billings in advance of services provided are recorded as unearned revenues.
All other revenues collected in advance of services are deferred until
services are rendered.
FOREIGN CURRENCY TRANSLATION--The Company has several divisions which operate
in foreign countries for which the functional currency is not U.S. dollars.
Balance sheet accounts are translated at the exchange rates in effect at
December 31, 1997 and 1996, and the income statement accounts are translated
at the weighted average rates prevailing during the years ended December 31,
1997, 1996 and 1995. Unrealized foreign exchange gains and losses resulting
from this translation are included as a separate component of stockholders'
equity.
INCOME TAXES--Through the date of the Mergers, Track and Newsware had elected
to be treated as S Corporations. As a result, federal and certain state income
taxes attributable to Track or Newsware were payable by their stockholders.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Income
tax expense (benefit) is the tax payable or refundable for the period plus or
minus the change during the period in deferred tax assets and liabilities.
Deferred taxes have been provided for temporary differences between financial
and tax reporting.
INVESTMENT IN AFFILIATE--The Company's investment in Innodata Corporation
("Innodata"), a publicly traded company whose Chairman is also the Chairman of
the Company, is accounted for using the equity method under which the
Company's share of the affiliate's earnings (or losses) is included in its
results of operations. Innodata performs data entry, coding, indexing and
abstracting services tailored to customer requirements.
STATEMENTS OF CASH FLOWS--For financial statement purposes (including cash
flows), the Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
USE OF ESTIMATES--In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company has estimated the fair value
of financial instruments using available market information and other
valuation methodologies in accordance with SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." Management of the Company believes that
the fair value of financial instruments, consisting of accounts receivable and
payable, notes payable and capital lease obligations, approximate carrying
value due to the short payment terms associated with its accounts receivable
and payable and the interest rates associated with its notes payable and
capital lease obligations.
EARNINGS PER SHARE--In 1997, the Company adopted SFAS No. 128, "Earnings Per
Share," which requires public companies to present basic earnings per share
and, if applicable, diluted earnings per share. In accordance with SFAS
No.128, all comparative periods have been restated as of December 31, 1997.
Basic earnings per share is based on the weighted average number of common
shares outstanding without consideration of potential common stock. Diluted
earnings per share is based on the weighted average number of common and
potential common shares outstanding. The calculation takes into account the
shares that may be issued upon exercise of stock options, reduced by the
shares that may be repurchased with the funds received from the exercise,
based on the average price during the year.
NEW PRONOUNCEMENTS NOT YET ADOPTED--In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for the Company's fiscal year ending December 31, 1998. The
statement addresses the reporting and displaying of comprehensive income and
its components. Earnings per share will only be reported for net income and
not for comprehensive income. Adoption of SFAS No. 130 relates to disclosure
within the financial statements and is not expected to have a material effect
on the Company's financial statements.
B. FIXED ASSETS
Fixed assets consist of the following at December 31, 1997 and 1996:
1997 1996
Equipment $30,981,623 $28,846,940
Telephone system 642,103 589,832
Furniture and fixtures 941,206 904,643
Transportation equipment 92,241 105,980
Leasehold improvements 1,956,391 1,947,461
----------- -----------
34,613,564 32,394,856
Less accumulated depreciation
and amortization 25,736,846 22,738,655
----------- -----------
Fixed assets - net $ 8,876,718 $ 9,656,201
=========== ===========
Equipment financed by capital leases has a net carrying value of $5,910,644
and $6,445,636 at December 31, 1997 and 1996, respectively. Depreciation and
amortization expense (including assets held under capital leases) for the
years ended December 31, 1997, 1996 and 1995 was $3,023,594, $2,908,573 and
$2,965,853, respectively.
C. INVESTMENT IN AFFILIATE
As discussed in Note A, the Company has an equity interest in Innodata of 14%,
28% and 28% at December 31, 1997, 1996 and 1995, respectively, which is
carried at the Company's equity in the underlying net assets. In December
1997, the Company reduced its holdings in Innodata to 14% by making a
charitable contribution of such shares.
Summarized information for Innodata is as follows:
1997 1996 1995
Total assets $10,029,247 $12,416,296 $12,538,694
Total liabilities 4,775,114 2,938,825 2,791,039
Revenues 20,116,935 20,536,448 20,767,405
Net (loss) income (4,200,218) (602,498) 1,511,388
The Company's equity in the net (loss) income of Innodata for the years ended
December 31, 1997, 1996 and 1995 was $(1,146,000), $(184,355) and $421,627,
respectively.
D. DUE FROM RELATED PARTIES
The amounts due from related parties consists of:
1997 1996
Majority stockholder (a) $ 54,620 $ 69,529
Hertz Investors Group I (a)(c) 11,837 11,150
Hertz Investors Group II (b)(c) 147,829 116,317
Track Leasing (a)(c) 23,724 20,393
Other 8,857 357
-------- --------
Total $246,867 $217,746
======== ========
(a) Noninterest-bearing and unsecured.
(b) Bears interest at 2.5% and is unsecured.
(c) Related by ownership controlled by the Company's Chairman.
Interest income recognized on amounts due from related parties was $23,063,
$18,750 and $67,300 for the years ended December 31, 1997, 1996 and 1995,
respectively.
E. NOTE PAYABLE - BANK
The note payable - bank bears interest at 1.75% above the bank's prime rate
(8.50% at December 31, 1997) and is due on demand. The note is collateralized
by substantially all of the Company's assets and is guaranteed by its
principal stockholder. The Company may borrow up to 80% of eligible accounts
receivable and is required to maintain a compensating cash balance of not less
than 10% of the outstanding loan obligation. At December 31, 1997 and at times
during the year, the Company did not meet these requirements. These
requirements were waived by the bank for the year ended December 31, 1997.
F. NOTES PAYABLE - OTHER
Notes payable - other consist of the following at December 31, 1997 and 1996:
1997 1996
Related parties $ - $1,761,303
Other 664,824 683,054
-------- ----------
Total $664,824 $2,444,357
======== ==========
RELATED PARTIES--The loans payable to related parties were due to various
individuals and entities related by ownership controlled by the Company's
Chairman at interest rates ranging from 6 to 9.5 percent per annum.
Interest expense on amounts due to related parties was $62,048, $174,582 and
$157,585 for the years ended December 31, 1997, 1996 and 1995, respectively.
OTHER--Notes payable - other (i) are due on demand, (ii) bear interest at
rates ranging from 9 to 10 percent per annum, and (iii) approximately $140,000
is guaranteed by the Company's Chairman.
G. INCOME TAXES
The components of the provision for income taxes are as follows:
1997 1996 1995
Federal:
Current $ 355,000 $162,000 $ -
Deferred (225,000) 285,000 (350,000)
---------- -------- ----------
Total federal 130,000 447,000 (350,000)
--------- -------- ----------
State and local:
Current 209,433 29,000 23,993
Deferred (40,000) 49,969 (381,919)
---------- -------- ----------
Total state and local 169,433 78,969 (357,926)
--------- -------- ----------
Provision for (benefit from) income taxes $ 299,433 $525,969 $(707,926)
========= ======== ==========
Reconciliation of the U.S. statutory rate with the Company's effective tax
rate is summarized as follows:
1997 1996 1995
Federal statutory rate 34.0% 34.0% (34.0)%
State and local income taxes 15.4 - -
Subchapter S losses not available to
the Company 14.2 376.5 28.0
Utilization of net operating loss carryforward (23.6) (469.7) -
Increase in valuation allowance - 2,735.0 -
Other 1.2 86.5 (4.8)
---- ------- -----
Effective rate 41.2% 2,762.3% (10.8)%
==== ======= =====
The components of the Company's net deferred taxes are as follows:
1997 1996 1995
Deferred tax assets:
Net operating loss carryforwards $ 669,000 $ 810,600 $ 986,000
Deferred compensation 1,491,500 1,491,500 298,573
Excess tax basis over book basis of investment 157,000 - -
Other (principally reserves for uncollectible accounts) 327,500 326,278 73,156
---------- ----------- ----------
2,645,000 2,628,378 1,357,729
Less valuation allowance 1,000,000 1,000,000 -
---------- ----------- ----------
1,645,000 1,628,378 1,357,729
---------- ----------- ----------
Deferred tax liabilities:
Unrealized gain on Innodata shares - (70,890) -
Accelerated depreciation for tax (745,000) (742,288) (76,310)
Excess of book basis over cost of investment in affiliate - (143,590) (40,000)
Amortization of software and database costs
deducted for tax, not for financial reporting (315,000) (351,610) (204,000)
---------- ----------- ----------
(1,060,000) (1,308,378) (320,310)
---------- ----------- ----------
Net deferred tax asset $ 585,000 $ 320,000 $1,037,419
========== =========== ==========
The valuation allowance in 1997 and 1996 reduces total deferred tax assets to
an amount management believes will likely be realized. As of December 31,
1997, the Company has net operating loss carryforwards for Federal income tax
purposes totaling approximately $1,375,000 which expire $785,000 in 2010 and
$590,000 in 2011. These net operating losses may be limited to annual use
based on IRS regulations.
H. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various lease agreements covering office space
and computer equipment. The lease agreements for office space contain
escalation clauses based principally on increases in real estate taxes,
building maintenance and utility costs. A summary of such commitments as of
December 31, 1997 follows:
OPERATING LEASESES
----------------------------------
YEAR ENDING OFFICE COMPUTER CAPITAL
DECEMBER 31, SPACE EQUIPMENT TOTAL LEASES
1998 $1,219,809 $ 836,176 $2,055,985 $1,912,085
1999 1,007,840 538,434 1,546,274 1,170,568
2000 935,364 165,437 1,100,801 387,964
2001 926,711 17,940 944,651 -
2002 799,535 10,465 810,000 -
Thereafter 1,271,099 - 1,271,099 -
---------- ---------- ---------- ----------
Total $6,160,358 $1,568,452 $7,728,810 3,470,617
========== ========== ==========
Less amounts representing
interest 349,115
----------
Capital lease obligations $3,121,502
==========
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to
$1,609,920, $1,613,846 and $1,589,347 for office space and $1,570,977,
$1,943,633 and $2,547,965 for computer equipment, respectively.
The Company leased its office facilities in Brooklyn and Manhattan from
limited partnerships owned by the Company's principal stockholder and members
of his family. The Manhattan building was sold in 1998 and the property is now
leased from an unaffiliated third party. The Company also guarantees the
partnership's mortgage on the Brooklyn premises, having an unpaid balance of
$1,750,020 at December 31, 1997. Certain financial covenants required in the
mortgage have not been met. The partnership and the Company intend to
renegotiate the terms of the mortgage. The Company paid these partnerships
aggregate rent of $988,500, $979,857 and $978,077 for the years ended December
31, 1997, 1996 and 1995. The Brooklyn lease provides for the Company to pay
$480,000 per annum. Other rentals aggregate approximately $1,000,000 per
annum.
I. DEFERRED COMPENSATION AND SAVINGS PLANS
Track had a deferred compensation plan pursuant to which certain employees are
entitled to payments after termination of their employment. The plan was based
on these employees having phantom stock units in Track. As the phantom stock
units included a certain ownership in Global and Innodata, two publicly traded
subsidiaries of Track, certain employees elected to receive a portion of their
Track vested phantom units in shares of Global and Innodata. At December 31,
1994, the aggregate fair value of such benefit was $886,944. In March 1995,
6,460 of such shares were distributed to a participant.
In December 1995, the Board of Directors agreed to satisfy all obligations to
participants under the phantom stock plan by committing to pay upon
termination of employment 729,600 shares of Global, in addition to the
aforementioned shares of Innodata and Global. Accordingly, at December 31,
1995 the fair value of these shares was recorded as deferred compensation
expense of $3,100,800 to recognize the obligation to participants at the
quoted market price on that date. These shares were placed in a trust as of
March 31, 1996 in accordance with terms of the Merger.
In addition, the Company has an employee savings plan under which employees
may make deposits to the savings plan and receive interest at the prime rate.
Amounts due to employees under the plan aggregated $300,355 at December 31,
1997.
J. CAPITAL STOCK
COMMON STOCK--In August 1994, the Company sold, pursuant to a public offering,
1,380,000 shares of its common stock at $5.00 per share and 1,380,000 warrants
("Redeemable Warrants") at $.125 per warrant and realized net proceeds from
the offering, after all expenses, of approximately $5,544,000. The Redeemable
Warrants expired without exercise on August 10, 1997.
In connection with the offering, the Company sold to the underwriter for
nominal consideration the right to purchase up to 120,000 shares of common
stock at $7.625 per share through August 9, 1999. The underwriter's right to
purchase common stock contains piggy-back registration rights through August
10, 2000 with respect to the underlying securities and a one-time demand
registration right through August 10, 1999 at the Company's expense.
PREFERRED STOCK--The Company is authorized to issue up to 1,000,000 shares of
$.01 par value preferred stock. The Board of Directors is authorized to fix
the terms, rights, preferences and limitations of the preferred stock and to
issue the preferred stock in series which differ as to their relative terms,
rights, preferences and limitations. No preferred shares have been issued.
COMMON STOCK RESERVED--At December 31, 1997, the Company reserved for issuance
2,056,250 shares of its common stock as follows: (a) 1,936,250 shares pursuant
to the Company's Stock Option Plans and options issued which were not granted
under the plans; and (b) 120,000 shares issuable upon exercise of
underwriter's warrants.
K. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS--The Company adopted, with stockholder approval, the 1994, 1995
and 1996 Stock Option Plans (the "1994 Plan," "1995 Plan," "1995 DD Plan" and
the "1996 Plan") which provide for the granting of options to purchase not
more than an aggregate of 300,000, 500,000, 50,000 and 800,000 shares of
common stock, respectively, subject to adjustment under certain circumstances.
Such options may be incentive stock options ("ISOs") within the meaning of the
Internal Revenue Code of 1986, as amended, or options that do not qualify as
ISOs ("Non-Qualified Options").
The option exercise price per share for a Non-Qualified Option may not be less
than 85% of the fair market value per share of common stock on the date of
grant and for an ISO may not be less than the fair market value per share of
common stock on the date of grant (110% of such fair market value for an ISO,
if the grantee owns stock possessing more than 10% of the combined voting
power of all classes of the Company's stock). Options may be granted under the
Stock Option Plan to all officers, directors and employees of the Company and,
in addition, Non-Qualified Options may be granted to other parties who perform
services for the Company. No options may be granted under the 1994 Plan after
March 31, 2004, under the 1995 Plan and 1995 DD Plan after May 15, 2005, and
under the 1996 Plan after July 8, 2006.
The Stock Option Plans may be amended from time to time by the Board of
Directors of the Company. However, the Board of Directors may not, without
stockholder approval, amend the Stock Option Plans to increase the number of
shares of common stock which may be issued under the Stock Option Plans
(except upon changes in capitalization as specified in the Stock Option
Plans), decrease the minimum exercise price provided in the Plans or change
the class of persons eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation." Accordingly, no compensation expense has been recognized for
stock options granted to employees. Had compensation cost for the Company's
stock option grants been determined based on the fair value at the grant date
for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net income (loss) and income (loss) per share would have
been changed to the pro forma amounts as follows: net income would have been
$277,052, or $.02 per share, in 1997, and net loss would have been $(776,623),
or $(.05) per share, in 1996 and $(6,034,233), or $(.43) per share, in 1995.
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; risk free interest rate of 6.4%
in 1997, 6.4% in 1996 and of 6.2% in 1995; expected volatility of 25%; and a
zero dividend yield. The effects of applying SFAS No. 123 in this proforma
disclosure are not indicative of future disclosures. SFAS No. 123 does not
apply to awards prior to 1995.
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED- FAIR
PER SHARE REMAINING AVERAGE AVERAGE VALUE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE DATE OF
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE GRANT
---------------- ----------- ----------- ---------- ----------- ---------- --------
Balance 1/1/95 $ 4.75 - 5.0625 488,750 3 $ 5.00 81,250 $ 5.00
===========
Canceled $ 5.00 (44,334) 3 $ 5.00
Repriced $ 4.75 - 5.00 (362,416)
Repriced $ 3.00 362,416 3 $ 3.00 $ .76
Granted $ 5.00 - 6.00 75,000 4 $ 5.13 $ 1.60
-----------
Balance 12/31/95 $ 3.00 362,416 2 $ 3.00 202,746 $ 3.00
$ 5.00 - 6.00 157,000 3 $ 5.09 37,000 $ 5.30
----------- -----------
519,416 239,746
===========
Canceled $ 2.00 - 5.00 (59,166) 3 $ 3.33
Granted and
repriced $ 1.50 - 2.00 570,900 4 $ 1.94 $ .50
-----------
Balance 12/31/96 $ 1.50 - 3.00 896,150 3 $ 2.35 614,311 $ 2.44
$ 5.00 - 6.00 135,000 2 $ 5.10 71,666 $ 5.17
----------- -----------
1,031,150 685,977
===========
Canceled $ 2.00 - 3.00 (99,600) 4 $ 2.19
Granted $ 2.00 242,500 5 $ 2.00 $ .50
-----------
Balance 12/31/97 $ 1.50 - 3.00 1,039,050 3 $ 2.29 776,716 $ 2.41
$ 5.00 - 6.00 135,000 2 $ 5.10 113,332 $ 5.17
----------- -----------
1,174,050 890,048
=========== ===========
The options have a term of five years. No options have been exercised to date.
The above table includes options to purchase 286,250 shares which were not
granted pursuant to any plan, but contain the same conditions as those
provided in the Plans.
L. RETIREMENT PLAN AND CONTRIBUTIONS
RETIREMENT PLAN--The Company has a profit sharing plan which qualifies under
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
employees who have completed six months of service. Company contributions to
the plan are discretionary and vest at a rate of 20% after three years of
service, and 20% each year thereafter until employees are fully vested after 7
years. The accrued contribution at December 31, 1997 is $72,000 and is
included in accounts payable. Contributions to the plan for the years ended
December 31, 1997, 1996 and 1995 were $54,468, $72,000 and $132,317,
respectively.
CONTRIBUTIONS- In 1997, the Company made a charitable contribution of 600,000
shares of common stock of Innodata. In 1995, the Company made a charitable
contribution of 100,000 shares of common stock of the Company and 50,000
shares of common stock of Innodata.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Brooklyn, New York
We have audited the accompanying consolidated balance sheet of Innodata
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innodata
Corporation and subsidiaries as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year
then ended in conformity with generally accepted accounting principles.
Grant Thornton LLP
Parsippany, New Jersey
March 4, 1998
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Brooklyn, New York
We have audited the accompanying consolidated balance sheet of Innodata
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innodata
Corporation and subsidiaries as of December 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Margolin, Winer & Evens LLP
Garden City, New York
March 14, 1997
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,969,852 $ 2,097,193
Accounts receivable-net of allowance for doubtful
accounts of $195,000 in 1997
and $140,000 in 1996 (Note 10) 3,188,920 3,718,283
Prepaid expenses and other current assets 825,586 1,130,510
Deferred income taxes (Notes 1 and 3) 136,000 220,000
----------- -----------
TOTAL CURRENT ASSETS 6,120,358 7,165,986
FIXED ASSETS-NET (NOTES 1, 2 AND 11) 2,909,619 3,617,939
GOODWILL (NOTES 1 AND 11) 410,076 1,159,946
OTHER ASSETS 589,194 472,425
----------- -----------
TOTAL $10,029,247 $12,416,296
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 5) $ 122,450 $ 208,298
Accounts payable and accrued expenses 1,507,866 1,279,519
Accrued salaries and wages 641,186 625,479
Estimated loss on foreign currency contracts (Note 6) 1,400,000 -
Taxes, other than income taxes 357,008 278,569
----------- -----------
TOTAL CURRENT LIABILITIES 4,028,510 2,391,865
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 5) 79,604 195,960
----------- -----------
DEFERRED INCOME TAXES (NOTES 1 AND 3) 667,000 351,000
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 6, 7 AND 8)
STOCKHOLDERS' EQUITY (NOTES 6, 7, 8 AND 12):
Common stock, $.01 par value-authorized 20,000,000 shares;
issued 1,521,736 shares 15,217 15,217
Additional paid-in capital 8,870,731 8,855,131
(Deficit) retained earnings (3,449,218) 751,000
----------- -----------
5,436,730 9,621,348
Less: treasury stock - at cost; 26,400 shares
in 1997 and 13,833 shares in 1996 (182,597) (143,877)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,254,133 9,477,471
----------- -----------
TOTAL $10,029,247 $12,416,296
=========== ===========
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
REVENUES (NOTE 10) $20,116,935 $20,536,448 $20,767,405
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Direct operating costs 16,007,051 16,783,595 14,044,067
Selling and administrative expenses 5,283,891 4,799,739 4,344,793
Restructuring costs and impairment of assets (Note 11) 1,500,000 - -
Unrealized loss on foreign currency contracts (Note 6) 1,400,000 - -
Interest expense 85,595 36,383 18,476
Interest income (59,384) (123,771) (151,319)
----------- ----------- -----------
TOTAL 24,217,153 21,495,946 18,256,017
----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (4,100,218) (959,498) 2,511,388
PROVISION FOR INCOME TAXES (BENEFIT) (NOTES 1 AND 3) 100,000 (357,000) 1,000,000
----------- ----------- -----------
NET (LOSS) INCOME $(4,200,218) $ (602,498) $ 1,511,388
=========== =========== ===========
BASIC (LOSS) INCOME PER SHARE (NOTES 1 AND 9) $(2.80) $(.40) $1.02
====== ===== =====
DILUTED (LOSS) INCOME PER SHARE (NOTES 1 AND 9) $(2.80) $(.40) $.97
====== ===== =====
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONAL UNREALIZED (DEFICIT)
PAID-IN LOSS ON RETAINED TREASURY
SHARES AMOUNT CAPITAL SECURITIES EARNINGS STOCK TOTAL
--------- ------- ----------- ----------- ----------- --------- -----------
JANUARY 1, 1995 1,492,424 $14,924 $ 8,527,302 $ (56,735) $ (157,890) $ - $ 8,327,601
Net income - - - - 1,511,388 - 1,511,388
Unrealized gain on
available-for-sale
securities - - - 52,543 - - 52,543
Purchase of
treasury stock - - - - - (143,877) (143,877)
--------- ------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1995 1,492,424 14,924 8,527,302 (4,192) 1,353,498 (143,877) 9,747,655
Net loss - - - - (602,498) - (602,498)
Issuance of
common stock
upon exercise
of stock
options 7,645 76 65,692 - - - 65,768
Issuance of
common stock
as partial
acquisition costs 21,667 217 193,736 - - - 193,953
Warrant costs
for consulting
arrangement - - 68,401 - - - 68,401
Redemption
of available-for-
sale securities - - - 4,192 - - 4,192
--------- ------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1996 1,521,736 15,217 8,855,131 - 751,000 (143,877) 9,477,471
Net loss - - - - (4,200,218) - (4,200,218)
Warrant costs
for consulting
arrangement - - 15,600 - - - 15,600
Purchase of
treasury stock - - - - - (38,720) (38,720)
--------- ------- ----------- ----------- ----------- --------- -----------
DECEMBER 31, 1997 1,521,736 $15,217 $ 8,870,731 $ - $(3,449,218) $(182,597) $ 5,254,133
========= ======= =========== =========== =========== ========= ===========
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ----------- -----------
OPERATING ACTIVITIES:
Net (loss) income $(4,200,218) $ (602,498) $ 1,511,388
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 1,321,555 1,372,731 972,669
Restructuring costs and impairment of assets 1,500,000 - -
Unrealized loss on foreign currency contracts 1,400,000 - -
Deferred income taxes 400,000 (150,000) 240,000
Changes in operating assets and liabilities:
Accounts receivable 529,363 1,380,498 (2,299,781)
Prepaid expenses and other current assets 304,924 (479,251) (462,274)
Other assets (116,769) (271,413) (46,957)
Accounts payable and accrued expenses (104,330) 187,764 (103,117)
Accrued salaries and wages 15,707 100,991 211,029
Taxes, other than income taxes 78,439 84,457 93,727
Income taxes payable - (726,194) 537,938
------------ ----------- -----------
Net cash provided by operating activities 1,128,671 897,085 654,622
------------ ----------- -----------
INVESTING ACTIVITIES:
Expenditures for fixed assets (1,015,088) (1,231,273) (1,193,973)
Payments in connection with acquisition - (410,646) -
Short-term investments - 1,240,000 -
------------ ----------- -----------
Net cash used in investing activities (1,015,088) (401,919) (1,193,973)
------------ ----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 577,000 626,014 -
Proceeds from exercise of stock options - 65,768 -
Purchase of treasury stock (38,720) - (143,877)
Payments of borrowings (779,204) (656,409) (111,986)
Redemption of preferred stock - - (2,000)
------------ ----------- -----------
Net cash (used in) provided by financing activities (240,924) 35,373 (257,863)
------------ ----------- -----------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (127,341) 530,539 (797,214)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 2,097,193 1,566,654 2,363,868
------------ ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 1,969,852 $ 2,097,193 $ 1,566,654
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 85,595 $ 35,238 $ 14,963
Income taxes - 922,789 222,062
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION - Innodata Corporation and
subsidiaries (the "Company") performs data entry, data conversion, scanning,
imaging and document management services, indexing and abstracting, and
typesetting services tailored to customer requirements. The Company also
offers medical transcription services to health care providers. The Company's
services are principally performed in production facilities located in the
Philippines, Sri Lanka, India and the United States. The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned. All intercompany transactions and balances
have been eliminated in consolidation.
On March 25, 1998, a one-for-three reverse stock split becomes effective.
All share and per share amounts have been restated to reflect such stock
split.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION - Revenue is recognized in the period in which the
service is performed.
WORK-IN-PROCESS - Work-in-process, included in other current assets,
consists of actual labor and certain other costs incurred for uncompleted and
unbilled projects.
FOREIGN CURRENCY - The functional currency for the Company's production
operations located in the Philippines, India and Sri Lanka is U.S. dollars.
As such, transactions denominated in Philippine pesos, Indian and Sri Lanka
rupees were translated to U.S. dollars at rates which approximate those in
effect on transaction dates. Monetary assets and liabilities denominated in
foreign currencies at December 31, 1997 and 1996 were translated at the
exchange rate in effect as of those dates. In 1997, the Company recognized a
gain of $125,000 resulting from such foreign currency translation. Exchange
gains and losses in 1996 and 1995 resulting from such transactions were
immaterial.
STATEMENT OF CASH FLOWS - For financial statement purposes (including
cash flows), the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. During 1996, the Company leased equipment under capital leases
for approximately $237,000. Supplemental disclosure of non-cash investing and
financing activities is as follows:
1996
Acquisition costs $ 563,771
Common stock issued (153,125)
---------
Payments in connection with acquisition $ 410,646
=========
DEPRECIATION - Depreciation is provided on the straight-line method over
the estimated useful lives of the related assets which are as follows:
ESTIMATED USEFUL
CATEGORY LIVES
Equipment 3-5 years
Furniture and fixtures 10 years
Leasehold improvements are amortized on the straight-line basis over the
shorter of their estimated useful lives or the lives of the leases.
INCOME TAXES - Deferred taxes are determined based on the difference
between the financial statement and tax basis of assets and liabilities, using
enacted tax rates, as well as any net operating loss or tax credit
carryforwards expected to reduce taxes payable in future years.
GOODWILL - Goodwill arising from acquisition costs exceeding net assets
acquired is being amortized on a straight-line basis over a 15 year period.
Management assesses the recoverability of the remaining unamortized costs
based principally upon a comparison of the carrying value of the asset to the
undiscounted expected future cash flows to be generated by the asset whenever
events or changes in circumstances indicate that the carrying amount may not
be recoverable. If management concludes that the asset is impaired, its
carrying value is adjusted to its net realizable value. See Note 11.
ACCOUNTING FOR STOCK-BASED COMPENSATION - The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," which became effective in
1996. As permitted by SFAS No. 123, the Company has elected to continue to
account for employee stock options under APB No. 25, "Accounting for Stock
Issued to Employees."
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has estimated the fair
value of financial instruments using available market information and other
valuation methodologies in accordance with SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." Management of the Company believes that
the fair value of financial instruments for which estimated fair value has not
been specifically presented is not materially different than the related
carrying value. Determinations of fair value are based on subjective data and
significant judgment relating to timing of payments and collections and the
amounts to be realized. Different assumptions and/or estimation methodologies
might have a material effect on the fair value estimates. Accordingly, the
estimates of fair value are not necessarily indicative of the amounts the
Company would realize in a current market exchange.
(LOSS) INCOME PER SHARE - In 1997, the Company adopted SFAS No. 128,
"Earnings Per Share," which requires public companies to present basic
earnings per share and, if applicable, diluted earnings per share. In
accordance with SFAS No.128, all comparative periods have been restated as of
December 31, 1997. Basic earnings per share is based on the weighted average
number of common shares outstanding without consideration of potential common
stock. Diluted earnings per share is based on the weighted average number of
common and potential common shares outstanding. The calculation takes into
account the shares that may be issued upon exercise of stock options, reduced
by the shares that may be repurchased with the funds received from the
exercise, based on average prices during the year. In addition, earnings
per share have been restated to reflect a one-for-three reverse stock split
that is effective on March 25, 1998.
2. FIXED ASSETS
Fixed assets, stated at cost less accumulated depreciation and
amortization, consist of the following:
DECEMBER 31, 1997 1996
Equipment $6,095,004 $6,092,985
Furniture and fixtures 372,566 375,465
Leasehold improvements 472,574 401,987
---------- ----------
Total 6,940,144 6,870,437
Less accumulated depreciation
and amortization 4,030,525 3,252,498
---------- ----------
$2,909,619 $3,617,939
========== ==========
As of December 31, 1997 and 1996, the net book value of fixed assets
located at the Company's production facilities in the Philippines, India and
Sri Lanka was approximately $1,600,000 and $1,513,000, respectively. In
addition, equipment financed by capital leases has a net book value of
$228,000 at December 31, 1997.
3. INCOME TAXES
The significant components of the provision for (benefit from) income
taxes are as follows:
1997 1996 1995
Current income tax expense (benefit):
Foreign $ - $ - $ 10,000
Federal (300,000) (159,000) 535,000
State and local - (48,000) 215,000
--------- --------- ----------
(300,000) (207,000) 760,000
Deferred income tax expense (benefit) 400,000 (150,000) 240,000
--------- --------- ----------
Provision for (benefit from) income taxes $ 100,000 $(357,000) $1,000,000
========= ========= ==========
Reconciliation of the U.S. statutory rate with the Company's effective
tax rate is summarized as follows:
1997 1996 1995
Federal statutory rate (34.0)% (34.0)% 34.0%
Effect of:
Valuation allowance 34.0 - -
State income taxes (net of federal
tax benefit) - (5.4) 6.1
Other 2.4 2.2 (0.3)
----- ----- ----
Effective rate 2.4% (37.2)% 39.8%
===== ====== ====
As of December 31, 1997 and 1996, the composition of the Company's net
deferred taxes is as follows:
1997 1996
Deferred income tax assets:
Allowances not currently deductible $ 247,000 $ 105,000
Expenses not deductible until paid 161,000 115,000
Net operating loss carryforward 500,000 700,000
--------- -----------
908,000 920,000
Less: valuation allowance (772,000) -
--------- -----------
136,000 920,000
--------- -----------
Deferred income tax liabilities:
Foreign source income, not taxable
unless repatriated (415,000) (815,000)
Depreciation and amortization (252,000) (236,000)
--------- -----------
(667,000) (1,051,000)
--------- -----------
Net deferred income tax liability $(531,000) $ (131,000)
========= ===========
The valuation allowance in 1997 reduces total deferred tax assets to an
amount management believes will likely be realized. The Company's net
operating loss carryforward for federal income tax purposes of approximately
$1,500,000 expires in 2012. These net operating losses may be limited to
annual use based on IRS regulations.
4. ACQUISITION
On January 2, 1996, the Company acquired certain assets of International
Imaging, Inc. ("II"). II is located in Azusa, California and provides imaging
and document management systems and scanning/conversion services. The
purchase price consisted of $40,000 cash and 16,667 shares of the Company's
restricted common stock. The Company also paid approximately $300,000 of II's
outstanding lease obligations.
5. LONG-TERM DEBT
Long-term debt is as follows:
1997 1996
Equipment leases, at 9.6% to 13.5% $226,335 $365,846
Acquisition notes - subordinated, at prime - 91,667
-------- --------
226,335 457,513
Less: deferred interest 24,281 53,255
-------- --------
Total 202,054 404,258
Less: current portion of long-term debt 122,450 208,298
-------- --------
Long-term debt $ 79,604 $195,960
======== ========
Aggregate maturities of long-term debt are as follows:
1998 $138,960
1999 61,306
2000 19,298
2001 6,771
--------
$226,335
========
6. COMMITMENTS AND CONTINGENT LIABILITIES
LINE OF CREDIT - The Company has a line of credit with a bank in the
amount of $2 million. The line is collateralized by the assets of the Company.
Interest is charged at 2% above the bank's prime rate and is due on demand.
The line is presently unused.
LEASES - The Company is obligated under various operating lease
agreements for office and production space. The agreements contain escalation
clauses and requirements that the Company pay taxes, insurance and maintenance
costs. The lease agreements for production space in the Philippines, which
expire through 2001, contain provisions pursuant to which the Company may
cancel the leases at any time. The annual rental for the leased space in the
Philippines is approximately $500,000. For the years ended December 31, 1997,
1996 and 1995, rent expense totaled approximately $940,000, $825,000 and
$500,000, respectively.
At December 31, 1997, future minimum annual rental commitments on
noncancellable leases are as follows:
1998 $ 357,000
1999 362,000
2000 170,000
2001 173,000
2002 40,000
----------
$1,102,000
==========
EMPLOYMENT AGREEMENTS - The Company entered into a three-year
employment agreement on August 19, 1997 pursuant to which a member of the
Company's Board is to serve as President and CEO of the Company. He will be
paid at the rate of $200,000 per annum with any bonuses and future increases
at the discretion of the Board of Directors. In addition, each December 31
during the term of the agreement he will receive 10,333 options to purchase
common stock of the Company at then prevailing market prices. In consideration
of the signing of the agreement he was granted five year options as follows:
10,000 options at $3.00 per share; 16,666 at $6.00; 23,333 at $9.00; 30,000 at
$12.00; and 33,333 at $21.00. The options are exercisable upon the earliest
to occur of (i) ninety days before the expiration of the five year term; (ii)
the date the market price is at least $7.50 for ten consecutive trading days;
or (iii) in the event of a sale of the Company where a third party acquires
more than 50% of the Company.
The Company had an employment agreement with its former President and
CEO. This agreement was replaced by a new three-year agreement expiring
September 30, 2000 that provides for a salary of $100,000 for the year ended
September 30, 1998 and $75,000 per annum thereafter. He will serve as Vice
Chairman of the Board and in executive capacities as designated by the CEO or
the Board of Directors.
OTHER COMMITMENTS - The Company has a commitment to purchase a perpetual
license for certain production process software for cash totaling $70,000 and
11,666 shares of the Company's common stock. Payment is contingent upon the
successful completion and testing of the software, expected to occur during
1998.
As of December 31, 1997, the Company's wholly-owned subsidiary has
foreign currency forward contracts to purchase $2,600,000 in Philippine pesos
on various dates through June 1998. These contracts, as well as certain
foreign currency contracts that became due during 1997 and remain unpaid, have
an estimated fair value at December 31, 1997 of approximately $1,400,000 less
than their contractual amount. The bank has brought an action in the
Philippines to recover such amounts. While such contracts are presently in
dispute, the Company recognized the total unrealized loss in 1997.
Employees at the Company's Manila facilities voted to join a union. The
Company has a collective bargaining agreement with the rank and file employees
at its Manila facility which provides for approximately 10% wage increases per
annum plus one-half of any government mandated increases through March 31,
2001.
PHILIPPINE PENSION REQUIREMENT - The Philippine government enacted
legislation requiring businesses to provide a lump-sum pension payment to
employees working at least five years and who are employed by the Company at
age 60. Those eligible employees are to receive approximately 59% of one
month's pay for each year of employment with the Company. The terms of the
collective bargaining agreement provide benefits similar to the government.
Based on actuarial assumptions and calculations in accordance with SFAS No.
87, "Employers' Accounting for Pensions," the liability for the future payment
is insignificant at December 31, 1997. Under the legislation, the Company is
not required to fund future costs, if any.
7. CAPITAL STOCK
COMMON STOCK AND REDEEMABLE WARRANTS - In August and September 1993 the
Company sold pursuant to a public offering 563,500 shares of its common stock
and certain warrants ("Redeemable Warrants") and realized net proceeds after
all expenses of the offering of $6,752,585. The Redeemable Warrants expired
on August 9, 1997.
In connection with the offering, the Company sold to the underwriter for
nominal consideration warrants to purchase up to 49,295 shares of common stock
at $23.43 per share through August 9, 1998. The underwriter's warrants contain
piggy-back registration rights for a period of seven years with respect to the
underlying securities and a demand registration right for a period of five
years for two registration filings, one of which is at the Company's expense.
PREFERRED STOCK - The Board of Directors is authorized to fix the terms,
rights, preferences and limitations of the preferred stock and to issue the
preferred stock in series which differ as to their relative terms, rights,
preferences and limitations. During 1995, the Company redeemed its Series A
and Series B preferred stock for an aggregate consideration of $2,000.
COMMON STOCK RESERVED - At December 31, 1997, the Company reserved for
issuance 767,948 shares of its common stock as follows: (a) 701,987 shares
pursuant to the Company's Stock Option Plans (including 120,333 options issued
to the Company's Chairman and its President which were not granted under the
plans); (b) 49,295 shares issuable upon exercise of underwriter's warrants;
and (c) 16,666 shares issuable upon exercise of warrants issued to
consultants.
8. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company adopted, with stockholder approval, 1993, 1994, 1995 and 1996
Stock Option Plans (the "1993 Plan," "1994 Plan," "1994 DD Plan," "1995 Plan"
and the "1996 Plan") which provide for the granting of options to purchase not
more than an aggregate of 87,500, 105,000, 17,500, 200,000 and 166,666 shares
of common stock, respectively, subject to adjustment under certain
circumstances. Such options may be incentive stock options ("ISOs") within
the meaning of the Internal Revenue Code of 1986, as amended, or options that
do not qualify as ISOs ("Non-Qualified Options").
The option exercise price per share may not be less than the fair market
value per share of common stock on the date of grant (110% of such fair market
value for an ISO, if the grantee owns stock possessing more than 10% of the
combined voting power of all classes of the Company's stock). Options may be
granted under the Stock Option Plan to all officers, directors and employees
of the Company and, in addition, Non-Qualified Options may be granted to other
parties who perform services for the Company. No options may be granted under
the 1993 Plan after April 30, 2003, under the 1994 Plan and 1994 DD Plan,
after May 19, 2004, under the 1995 Plan, after May 16, 2005 and under the 1996
Plan, after July 8, 2006.
The Plans may be amended from time to time by the Board of Directors of
the Company. However, the Board of Directors may not, without stockholder
approval, amend the Plans to increase the number of shares of common stock
which may be issued under the Plans (except upon changes in capitalization as
specified in the Plans), decrease the minimum exercise price provided in the
Plans or change the class of persons eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation." Accordingly, no compensation expense has been recognized for
stock options granted to employees. Had compensation cost for the Company's
stock option grants been determined based on the fair value at the grant date
for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS No.
123, the Company's net loss would have been $(4,359,807), or $(2.90) per
share, in 1997, $(738,987), or $(.49) per share, in 1996 and net income would
have been $1,496,341, or $.96 per share, diluted, in 1995. The fair value of
options at date of grant was estimated using the Black-Scholes pricing model
with the following weighted average assumptions: expected life of four years;
risk free interest rate of 6.4% in 1997 and 1996, and 6.2% in 1995; expected
volatility of 40%; and a zero dividend yield. The effects of applying SFAS
No. 123 in this disclosure are not indicative of future disclosures. SFAS No.
123 does not apply to awards prior to 1995.
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED WEIGHTED FAIR
PER SHARE REMAINING AVERAGE AVERAGE VALUE,
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE DATE OF
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE GRANT
---------------- ------------ ----------- --------- ----------- --------- ---------
Balance 1/1/95 $ 7.89 - 9.75 140,121 3 $ 8.22
$ 12.60 - 17.85 44,200 3 $ 14.76
-----------
184,321 47,930 $ 10.98
==========
Canceled $ 7.89 - 13.89 (8,091)
Granted $ 10.14 - 13.89 91,516 4 $ 11.73 $ 4.71
-----------
Balance 12/31/95 $ 7.89 - 9.75 132,696 2 $ 8.25
$ 10.14 - 17.85 135,050 2 $ 12.93
-----------
267,746 120,098 $ 10.38
==========
Canceled $ 9.03 (166)
Granted $ 6.93 - 11.79 29,666 4 $ 9.18 $ 3.66
Exercised $ 7.89 - 9.03 (7,646)
-----------
Balance 12/31/96 $ 6.93 - 9.75 138,717 2 $ 8.13 111,513 $ 8.88
$ 10.14 - 17.85 150,883 2 $ 12.69 89,157 $ 13.17
----------- ----------
289,600 200,670
==========
Canceled $ 7.89 - 13.89 (48,883)
Granted $ 3.00 - 6.00 100,000 5 $ 3.63 $ 1.26
Granted $ 9.00 - 21.00 86,666 5 $ 13.44 $ .18
-----------
Balance 12/31/97 $ 3.00 - 9.75 246,192 4 $ 6.42 115,969 $ 8.16
$ 10.14 - 21.00 181,191 3 $ 14.10 93,996 $ 12.96
----------- ----------
427,383 209,965
============ ==========
The majority of options granted prior to 1997 become exercisable
one-third on each of the first three anniversary dates. Option grants in 1997
become exercisable the earlier of (i) ninety days before the expiration of the
five year term; (ii) the date the market price is at least $7.50 for ten
consecutive trading days; or (iii) in the event of a sale of the Company where
a third party acquires more than 50% of the Company.
WARRANTS
In connection with a consulting agreement on December 18, 1995, the
Company issued a warrant to purchase 16,666 shares at a price of $11.44 per
share. The warrant is exercisable commencing December 18, 1996 and expires in
2000.
9. (LOSS) INCOME PER SHARE
1997 1996 1995
Net (loss) income $(4,200,218) $ (602,498) $1,511,388
=========== ========== ==========
Weighted average common
shares outstanding 1,501,043 1,503,196 1,482,824
Dilutive effect of outstanding
warrants and options - - 75,172
----------- ---------- ----------
Adjusted for dilutive computation 1,501,043 1,503,196 1,557,996
=========== ========== ==========
Basic (loss) income per share $(2.80) $(.40) $1.02
====== ===== =====
Diluted (loss) income per share $(2.80) $(.40) $.97
====== ===== ====
Reference is made to Notes 7 and 8 with respect to options and warrants
that would have been dilutive in 1997 and 1996 had there not been a loss in
those years.
10. REVENUES AND ACCOUNTS RECEIVABLE
During 1997, 1996 and 1995, one customer that is comprised of twelve
affiliated companies, accounted for 14%, 24% and 29% of the Company's
revenues, respectively. No other customer accounted for 10% or more of the
Company's revenues. Further, in 1997, 1996 and 1995, export revenues, all of
which were derived from European customers, accounted for 22%, 19% and 18%,
respectively, of total revenues.
A significant amount of the Company's revenues are derived from customers
in the publishing industry. Accordingly, the Company's accounts receivable
generally include significant amounts due from such customers.
11. RESTRUCTURING COSTS AND IMPAIRMENT OF ASSETS
During the second quarter of 1997 management implemented a plan to reduce
the Company's U.S. based overhead. The principal actions were to eliminate
U.S. production for the publishing division and merge the east and west coast
imaging operations into one facility on the west coast. The restructuring
costs consist of estimated losses on leases and severance pay totaling
approximately $325,000, while the impairment costs consist of a write-off of
goodwill in connection with the imaging business totaling approximately
$700,000 and fixed assets related to both the imaging and publishing
businesses totaling approximately $475,000.
12. SUBSEQUENT EVENT
The Company filed an Information Statement, distributed to stockholders
on March 4, 1998, pursuant to which 56% of stockholders approved a
one-for-three reverse stock split effective on March 25, 1998. All share and
per share amounts have been restated to reflect such split.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
NAME AGE POSITION
- ------------------- --- ------------------------------------------------
Barry Hertz 48 Chairman of the Board, Chief Executive Officer
Alan Schnelwar 58 Senior Vice President and Director
Martin Kaye 50 Vice President - Finance, Secretary and Director
E. Bruce Fredrikson 60 Director
Morton Mackof 50 Director
Jack Spiegelman 59 Director
On March 31, 1996, Track Data Corporation ("Track") merged (the "Merger")
into Global Market Information, Inc. ("Global"). Upon consummation of the
Merger, the name Global was changed to Track Data Corporation ("TDC" or the
"Company").
BARRY HERTZ has served as the Company's Chairman and Chief Executive
Officer since its inception. In April 1994 he was elected Secretary of the
Company and served until August 1994. Mr. Hertz also founded Track in 1981. He
was Track's sole owner and its Chief Executive Officer until its merger with
Global. He holds a Masters degree in Computer Science from New York University
(1973) and a B.S. degree in Mathematics from Brooklyn College (1971). Mr.
Hertz is also Chairman of Innodata Corporation ("Innodata"), a public company
co-founded by Mr. Hertz, of which TDC is a principal stockholder and which is
engaged in the data entry and conversion business.
ALAN SCHNELWAR has been a Vice President of Track in charge of the
Dial/Data service since 1988, and was elected President of the Company in
August 1994. He served as President until March 1996 and became its Senior
Vice President upon the Merger. He holds a B.S. degree in Civil Engineering
from the City University of New York (1967).
MARTIN KAYE has been Vice President-Finance and Director of the Company
since April 1994. He was elected Secretary of the Company in August 1994. Mr.
Kaye is a certified public accountant and has served as Chief Financial
Officer of Innodata since October 1993 and was appointed as a Director in
March 1995. He had been an audit partner with Deloitte & Touche LLP for more
than five years until his resignation in 1993. Mr. Kaye holds a B.B.A. in
accounting from Baruch College (1970).
DR. E. BRUCE FREDRIKSON has been a Director of the Company since June
1994. He is currently a professor of finance at Syracuse University School of
Management where he has taught since 1966 and has previously served as
chairman of the finance department. Dr. Fredrikson has a B.A. in economics
from Princeton University and a M.B.A. and a Ph.D. in finance from Columbia
University. He serves as director of Eagle Finance Corp., a company which
acquires and services non-prime automobile installment sales contracts. He is
also an independent general partner of Fiduciary Capital Partners, L.P. and
Fiduciary Capital Pension Partners, L.P. He is also a director of Innodata.
MORTON MACKOF has been a Director of the Company since April 1994. He is
President and CEO of Third Millennium Technology Inc., a company involved in
information technology consulting and software development. Mr. Mackof became
President of the Company in March 1996 upon the Merger and resigned in
November 1996. He was Executive Vice President of Track since February 1991
and was elected its President in December 1994. From 1986 to 1991, he was
President of Medical Leasing of America, Inc. He holds a B.S. degree in
electrical engineering from Rensselaer Polytechnic Institute (1970) and did
graduate work in computer science. He is also a director of Innodata.
JACK SPIEGELMAN has been a Director of the Company since April 1996.
Since February 1996 he has been a registered representative of J. W. Charles
Securities, Inc. and prior thereto for more than five years was a registered
representative of Fahnestock & Company, Inc. Mr. Spiegelman holds a B.A. in
economics from Brooklyn College (1963).
First Hanover Securities, Inc., the underwriter of the Company's initial
public offering, is entitled to designate one member of the Board of Directors
for five years ending August 10, 1999. To date no such member has been
designated. Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the discretion of the Board. There are no family relationships among
directors or officers.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company or its predecessors, Track and Global, for services to it
during the three fiscal years ended December 31, 1997 to the Company's Chief
Executive Officer and to the executive officers whose aggregate cash and cash
equivalent compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
NUMBER
OF STOCK
FISCAL ANNUAL OPTIONS
NAME AND POSITION YEAR SALARY BONUS TOTAL AWARDED
- --------------------- ------ ---------- ------ ---------- --------
Barry Hertz 1997 $ 350,000 $ - $ 350,000 -
Chairman, CEO 1996 350,000 - 350,000 40,000
1995 1,173,000 - 1,173,000 100,000 (A)
Alan Schnelwar 1997 $ 180,000 $ - $ 180,000 25,000
Senior Vice President 1996 165,000 - 165,000 25,500
1995 170,000 - 170,000 40,000 (A)
(A) Options granted in 1994 and repriced in 1995
The above table does not include certain insurance and other personal
benefits, the total value of which does not exceed $50,000 or 10% of such
person's cash compensation.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
PERCENT OF POTENTIAL REALIZED
TOTAL OPTIONS VALUE AT ASSUMED
GRANTED TO ANNUAL RATES OF
NUMBER OF EMPLOYEES STOCK APPRECIATION
OPTIONS IN FISCAL EXERCISE EXPIRATION FOR OPTION TERM
NAME GRANTED YEAR PRICE DATE 5% 10%
- -------------- --------- -------------- -------- ----------- ------------------- -------
Alan Schnelwar 25,000 10.3% $ 2.00 5/2002 $5,750 $20,500
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR;
FISCAL YEAR END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS
SHARES YEAR END AT FISCAL YEAR END
ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE UNEXERCISABLE UNEXERCISABLE
- -------------- ----------- ----------------- -------------------
Barry Hertz - 140,000/-0- $- /$-
Alan Schnelwar - 65,500/25,000 $- /$-
There are no employment agreements, stock appreciation rights or long-term
incentive plans.
DIRECTORS COMPENSATION
Dr. Fredrikson and Mr. Spiegelman are compensated at the rate of $1,250
and $1,000 per month, respectively, plus out-of-pocket expenses for each
meeting attended. No other director is compensated for his services as
director.
Messrs. Fredrikson and Spiegelman will each receive options to purchase
7,000 and 5,000 shares annually, respectively, under the 1995 Disinterested
Directors' Stock Option Plan as compensation for their services as
administrators of the 1995 Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the Company's fiscal year ended December 31, 1997, Messrs. Hertz,
Schnelwar and Kaye were officers of the Company and were members of the Board
of Directors (there is no compensation committee). Mr. Hertz is Chairman of
Innodata Corporation and Mr. Solomon, a director of the Company until December
1997, was President of Innodata Corporation until September 1997 and is
currently Vice Chairman of Innodata Corporation. Mr. Kaye is chief financial
officer and a director of Innodata Corporation. Mr. Mackof is also a director
of Innodata Corporation.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company believes that during the period from January 1, 1997 through
December 31, 1997 all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten-percent beneficial owners were
complied with.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1997, information
regarding the beneficial ownership of the Company's Common Stock based upon
the most recent information available to the Company for (i) each person known
by the Company to own beneficially more than five (5%) percent of the
Company's outstanding Common Stock, (ii) each of the Company's officers and
directors and (iii) all officers and directors of the Company as a group.
Unless otherwise indicated, each stockholder's address is c/o the Company, 56
Pine Street, New York, New York 10005.
SHARES OWNED BENEFICIALLY (1)
NAME NO. OF SHARES % OF CLASS
- -------------------------------------- ------------- -----------
Barry Hertz (2) 12,013,000 83.7%
Morton Mackof (3) 273,405 1.9%
Alan Schnelwar (4) 71,500 *
Martin Kaye (5) 33,500 *
Jack Spiegelman (6) 6,000 *
E. Bruce Fredrikson (7)
Syracuse University
School of Management
Syracuse, NY 13244 21,000 *
All Officers and Directors as a Group
(six persons)(2)(3)(4)(5)(6)(7) 12,418,405 85.7%
---------------
* = less than 1%
(1) Except as noted otherwise, all shares are owned beneficially and of
record. Based on 14,206,917 shares outstanding.
(2) Consists of 11,509,100 shares owned by Mr. Hertz and 363,900 shares
owned by Trusts established in the names of Mr. Hertz's children. Also
includes 140,000 options which are presently exercisable under the Company's
Stock Option Plans.
(3) Consists of 17,000 shares issuable upon the exercise of presently
exercisable options granted under the Company's Stock Option Plans and 256,405
shares held in the Track Data Phantom Unit Trust to be released upon his
termination of association with the Company, or earlier with approval of the
Board of Directors.
(4) Consists of 6,000 shares owned of record and 65,500 shares issuable
upon the exercise of presently exercisable options granted under the Company's
Stock Option Plans.
(5) Consists of 500 shares owned of record and 33,000 shares issuable
upon the exercise of presently exercisable options granted under the Company's
Stock Option Plans.
(6) Consists of 1,000 shares owned by his wife as to which Mr. Spiegelman
disclaims beneficial interest and 5,000 shares issuable upon the exercise of
presently exercisable options granted under the Company's Stock Option Plans.
(7) Consists of 1,000 shares owned of record and 20,000 shares issuable
upon presently exercisable options granted under the Company's Stock Option
Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TDC guarantees mortgages on two real estate partnerships owned by Mr.
Hertz and members of his family. At December 31, 1997, such mortgages provided
for interest at 10% per annum and had balances of $1,750,000 due May 2000, and
another mortgage for $997,000 which was repaid in 1998.
On November 7, 1997, Barry Hertz, Chairman and principal stockholder of
the Company, transferred his 100% ownership in Newsware, Inc. ("NW") to the
Company for no consideration. NW owed Mr. Hertz approximately $1,025,000,
which was contributed to capital prior to this transaction, and NW owed the
Company approximately $1,200,000, net of reserves, at the time of this
transaction. NW is a provider of on-line news information services. See Note A
to the Financial Statements in Item 8.
See Item 2. "Properties" for information on leases from partnerships
affiliated with Mr. Hertz.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
- ------- ---------------------------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended (1)
3.2 By-Laws (1)
4.2 Specimen of Common Stock certificate (1)
10.1 1994 Stock Option Plan (1)
10.2 Form of indemnity agreement with directors (1)
10.3 Dial Data Marketing Agreement dated April 22, 1993 between TDC and Omega Research Inc.
(subject to request for confidential treatment) (1)
10.4 Dial Data Marketing Agreement dated August 1, 1992 between TDC and Equis International
(subject to request for confidential treatment) (1)
10.5 Agreement dated September 29, 1986 between Hale Systems and CSI/Criterion Software
(subject to request for confidential treatment) (1)
10.6 1995 Stock Option Plan (2)
10.7 1995 Disinterested Directors' Stock Option Plan (3)
10.8 Merger Agreement between the Company and TDC (4)
10.9 1996 Stock Option Plan (5)
23 Consent of Grant Thornton LLP filed herewith
23.1 Consent of Margolin, Winer & Evens LLP filed herewith
27 Financial Data Schedule filed herewith
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
(1) Previously filed as exhibit to Form S-1 Registration Statement No. 33-78570.
(2) Previously filed as Exhibit A to Definitive Proxy for August 10, 1995, Annual Meeting of
Stockholders
(3) Previously filed as Exhibit B to Definitive Proxy for August 10, 1995, Annual Meeting of
Stockholder
(4) Previously filed as Appendix A to Definitive Proxy for March 19, 1996, Special Meeting
of Stockholders
(5) Previously filed as Appendix A to Definitive Proxy for November 7, 1996, Annual Meeting
of Stockholders
(b) Reports on Form 8-K during fourth quarter
Report dated as of November 7, 1997 related to the combination of the Company
and Newsware, Inc.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TRACK DATA CORPORATION
By /s/
----------------------------
Barry Hertz, Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- ------------------- ----------------------------------- --------------
/s/ Chairman of the Board and March 25, 1998
- -------------------
Barry Hertz Chief Executive Officer
/s/ Senior Vice President and Director March 25, 1998
- -------------------
Alan Schnelwar
/s/ Vice President - Finance, Secretary March 25, 1998
- -------------------
Martin Kaye and Director
/s/ Director March 25, 1998
- -------------------
E. Bruce Fredrikson
/s/ Director March 25, 1998
- -------------------
Morton Mackof
/s/ Director March 25, 1998
- -------------------
Jack Speigelman