Back to GetFilings.com
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, 1998
-----------------
/ / 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)
22-3181095
(I.R.S. Employer Identification No.)
DELAWARE
(State or other jurisdiction of incorporation or organization)
56 PINE STREET
NEW YORK, NEW YORK
(Address of principal executive offices)
(212) 943-4555
(Registrant's telephone number)
10005
(Zip Code)
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 26, 1999 of $10.88 per share. $33,933,764
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
14,898,716 SHARES OF COMMON STOCK, $.01 PAR VALUE, AS OF FEBRUARY 28, 1999
DOCUMENTS INCORPORATED BY REFERENCE
[SEE INDEX TO EXHIBITS]
PART I
ITEM 1. BUSINESS
Track Data Corporation (the "Company" or "TDC") operates in one business segment
providing real-time financial market data, fundamental research, charting, and
analytical services to institutional and individual investors through dedicated
telecommunication lines and the Internet. It also disseminates news and third
party database information from more than 100 sources worldwide.
Although the Company has provided similar information to the high-end
professional market over the Internet since 1996, it commenced such services to
the non-professional individual investor community in mid 1998 through its
myTrack service. As of March 1999, over 45,000 individuals have registered for
the service. myTrack delivers free continuously updating quotes, as well as
news and fundamental data. myTrack also offers various pay packages starting at
$19.95 per month plus exchanges fees for real-time quotes and enhanced market
data.
myTrack builds on the Company's long history of delivering mission critical
information to the most demanding customers in the investment community. Market
data is delivered direct from the original sources (such as the exchanges) to
the Company's facilities where the data is simultaneously redistributed to its
customers. Furthermore, the Company's telecommunication lines and Microsoft NT
server environments have been thoroughly tested. TDC's goal is to be the leader
in the market data industry in terms of quality and price. To address customer
concerns, myTrack contains an on-line chat feature that allows its customers to
communicate with each other, with paid hosts who answer questions and monitor
chat conversations, as well as to communicate directly with us. Customers can
comment on bugs, features or make suggestions. All communications are answered
within the day and suggestions for enhancements are considered, many of which
have been implemented since myTrack's introduction. The Company believes this
approach has resulted in a loyal following from subscribers.
Since October 1998, myTrack has offered its members free monthly trading
contests with cash prizes. In addition to creating excitement and generating new
users, the contests have allowed myTrack to test its new trading system
software. The contest provides simulated trading through a drop down order entry
screen from the myTrack monitor screen. The trading contests prompted many users
to request live trading, which the Company expects to offer in April 1999
through an arrangement with Track Securities Corporation ("TSC"), a full service
broker-dealer owned by a director of the Company. The Company has licensed its
online trading software to TSC. It is the Company's intention to apply for a
broker-dealer license as soon as practicable after online trading commences. The
combination of myTrack's market information system and a user-friendly trading
screen is expected to appeal to the on-line investment community.
myTrack operates through the use of a proprietary application software. Once the
user is attached to the Track host server, the connection link is constant, like
an open telephone connection. This allows us to provide dynamically updating
stock quotes and news and to immediately respond to all queries. Utilizing
myTrack's built-in trading platform allows the user to enter a trade that is
received instantaneously, as the connection is the same one that is already
connected for myTrack. The Company believes this is a competitive advantage over
other trading systems that require a new connection to a server every time
information is requested or sent.
myTrack is currently available at no cost to the consumer over the Internet,
offering delayed quotes, with the option of upgrading to real-time paid
services. Although most of the myTrack customers currently use the delayed quote
service for free, the paid subscriber base has been growing at over 20% per
month. The Company believes the myTrack trading platform, which is integrated
into the myTrack monitor screen, will encourage free users to trade through the
system, as well as to upgrade their myTrack subscription to real-time paid
services.
As the Company believes strongly in the Internet as the delivery medium for all
data in the future, it recently introduced myTrack Pro, a service similar to
myTrack but targeted to the professional trading market. This application is
expected to open up an area of opportunity to serve the retail broker, a market
for which the Company's high end product delivered over direct telecommunication
lines was too expensive to be competitive. The Company now delivers market data
over the Internet at prices that are very competitive and at reduced
communication costs for its customers.
See Note G of Notes to Consolidated Financial Statements in Item 8 of this Form
10-K for further information about customers.
On March 31, 1996, Track Data Corporation ("Track"), a principal stockholder of
Global Market Information, Inc. ("Global"), merged into Global 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 further 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 the subsequent contribution of
NW in 1997 were treated as combinations of entities under common control similar
to pooling-of-interests. Accordingly, the historical financial position and
results of operations of Track, Global and Newsware have been combined for all
periods presented.
The Company maintains offices 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. MarkeTrack 98 provides similar information to
individuals through the Internet.
- - myTrack and myTrack Pro provide market data similar to MarkeTrack through
the Internet to individual and professional users, respectively. myTrack
provides delayed quotes on all United States, Canadian and European stocks,
options and futures exchanges free of charge or with real-time quotes in various
pay plan packages. In addition to real-time quotes, myTrack users may subscribe
to a wide variety of databases and news services that support specific
investment needs. Online trading is expected to be offered through the myTrack
service in April 1999. myTrack Pro serves the professional market, principally
retail brokers, through the Internet.
- - Dial/Data provides electronic access to daily and historical price data on
worldwide exchanges, primarily to individual investors who do not need real-time
information.
- - NewsWatch provides a consolidated feed of multiple news sources on a
real-time basis that affords users the benefit of knowing and reacting quickly
to events that may affect them in their business or investments.
- - AIQ Systems develops and markets PC based financial investment software
for individual and professional users.
MARKETRACK
MarkeTrack offers significant real-time quote processing and analytical
features, and has become distinguished over time for its ability to consistently
deliver real-time, market sensitive information. The service provides domestic
and international market information, dynamically updating quotelines, options
and futures displays, real-time spreadsheets, tick-by-tick updating graphics,
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. MarkeTrack 98 provides essentially the same service
through the Internet.
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.
MarkeTrack currently serves over 3,000 customers in trading and institutional
investment management positions. Customers include floor traders, block traders,
market makers, OTC traders, options specialists, head traders, arbitrageurs and
hedge fund managers.
MYTRACK AND MYTRACK PRO
Streaming technology helps set myTrack apart from other online investment
services. Instead of static Web pages that post delayed quote information (which
users must refresh each time they want to see more recent information), myTrack
delivers delayed, yet continually updated quotes. For no charge, users also
receive breaking company news, a trade-by-trade log, charting for technical
analysis and a proprietary library of intraday market statistics. For a monthly
service charge and exchange fees, real-time quotes, Nasdaq Level II and a
variety of optional databases and news services are also available. In addition,
for the first time anywhere, Track Data introduced its proprietary pricing model
called Real-Time Implied Price - that provides free access to prices that are
generally comparable to real-time quotes. Real-Time Implied Prices are derived
from real-time option quotes for the underlying security. This lets individual
investors save money on exchange fees which are levied for real-time quote
access, and provides a significant edge for making quick financial decisions.
myTrack remains active on the user's desktop, continuously tracking both delayed
and real-time stock quotes, mutual funds, market indexes and options. For
example, if a user wants real-time quotes only from Nasdaq, and free delayed
quotes from the NYSE, he or she can easily customize the information viewed on
the screen. To access both free and paid services, users download the myTrack
software from www.mytrack.com. Online trading is expected to be offered through
the myTrack service in April 1999. myTrack Pro is delivered to the professional
retail broker market through the Internet. It uses the myTrack platform and is
tailored to the professional user.
Pricing. Real-time quotes, news, charting and technical analysis are available
in various pay packages from $19.95 per month plus exchange fees to $95.00 per
month plus exchange fees, including Nasdaq Level II.
DIAL/DATA SERVICE
Dial/Data 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, 1998, 1997 and 1996 there were approximately 22,000, 25,000 and
23,500 customers of the Dial/Data service, respectively.
NEWSWATCH SERVICE
The market focus of NewsWatch is the business professional who "must know
first." It may be a trader, banker, research analyst, investment relations
professional, corporate executive, or any "knowledge worker" who needs real-time
information for making day to day business decisions. The service provides
enterprise wide solutions to corporations needing to deliver external/internal
real-time information to their "knowledge workers," leveraging internal networks
and/or intranets. The service includes a high-speed consolidated news ticker, an
NT-resident database with full-text indexing, access to a variety of third-party
databases, and multiple domestic/international exchanges, all via a state of the
art user-friendly presentation environment.
NewsWatch also provides a browser-based interface, bringing all the advantages
of the Company's news collection and delivery service to the web environment. It
is particularly appropriate for corporations who are comfortable with browser
technology and need access to real-time business news for their end-user
population via an internal intranet or the World Wide Web.
Pricing and Customers. Customers are charged a monthly service fee and a
communications or location charge, which varies typically with the location and
size of the customer installation. Service charges vary with the number and
types of functions/news sources to which the user subscribes. A typical
installation is approximately $300/month at the 5-user level and is scaled down
with increased users at a location.
AIQ SYSTEMS
AIQ Systems is an industry leader in developing artificial intelligence (AI)
based stock market analysis and charting software for personal computers. By
simulating the reasoning of top market technicians, AIQ's "Expert Systems"
delivers trading signals and valuable market insight, as well as
state-of-the-art technical charting and screening capabilities. AIQ's customer
list consists of thousands of individual and professional investors, world-wide,
who rely on AIQ's accurate and unique timing information for their daily trading
decisions.
AIQ currently publishes three primary expert systems for market trading. AIQ
MarketExpert is an introductory level charting and analysis package that can be
downloaded free of charge from AIQ's award winning web site, WWW.AIQ.COM.
MarketExpert includes a data downloader and a free month of data from TDC's
Dial/Data service. AIQ StockExpert is an intermediate level analysis system that
includes AIQ's market timing model, as well as hundreds of powerful stock timing
tools. StockExpert retails for $498. AIQ's most popular product is AIQ
TradingExpert for Windows. This advanced analysis package includes market
timing, stock timing, and industry group analysis capabilities. TradingExpert
retails for $695. AIQ also develops a full line of add-on modules for
fundamental analysis, news retrieval, and data correlation. In addition, AIQ
offers educational services including: the Opening Bell Monthly educational
newsletter, bi-annual educational seminars and workshops, and a full line of
educational video tapes.
In November 1998, AIQ's TradingExpert Pro version 5.0 was introduced to the
marketplace combining its new Expert Design Studio which gives investors the
design and testing tools required to uncover profitable trading systems with
myTrack's delayed and realtime quotes and news and Dial/Data's historical and
end of day data. In addition, the 32-bit TradingExpert Pro contains
state-of-the-art charting, industry group analysis, market timing, reports and
screening, and portfolio management. AIQ offers this powerful package for
monthly fees starting at $59 for delayed quotes and $79 plus exchange fees for
real-time quotes.
MARKETING
MarkeTrack competes in several highly competitive segments of the on-line
real-time financial information marketplace: equity, options and futures
trading; and the investment management segments of the professional investment
community. The equities, options and futures trading segment of this market is
comprised of approximately 30,000 professionals who spend an estimated $150
million per year on financial information, and the investment management segment
is comprised of approximately 60,000 professionals who spend an estimated $320
million per year on financial information. TDC's focus is on the premium end of
these trading markets, appealing to institutional sales people, arbitrageurs,
market makers and traders. TDC estimates that the premium segment of the trading
market consists of approximately 16,000 terminals, of which its share is
approximately 18%.
These services, as well as the NewsWatch service, are marketed primarily through
a dedicated sales force, including 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.
With the introduction of myTrack and its Internet based delivery system, the
Company has expanded its media advertising to include television campaigns with
CNBC and CNNfn and radio, as well as print ads in newspapers and magazines. The
Company has also participated in online advertising through alliances with other
Internet sites and in a joint marketing effort as a co-sponsor of a Wall Street
contest with RealTIME Media, Inc. myTrack has also been marketed through direct
mail campaigns. With the introduction of an online trading feature offered
through myTrack, expenditures for marketing and advertising are expected to
increase substantially in 1999.
The marketing effort for the Dial/Data service is directed towards the software
vendors who offer analytic programs for the individual investor. By agreeing to
provide royalties to these vendors, the Company seeks to encourage these vendors
to make their programs compatible with the Company's data bases, and to
encourage customers to select the Company's data bases in preference to data
bases made available by others. Such agreements typically are terminable upon 90
days' notice 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.
AIQ Systems markets its software products through direct mail, the internet,
print advertising and seminars.
LIMITED PROPRIETARY INFORMATION
The financial information which is made available by the Company for its
MarkeTrack, myTrack, myTrack Pro, Dial/Data and NewsWatch services can be
purchased from third party sources and is not proprietary. The Company maintains
proprietary economic and historical financial databases. The Company protects
its proprietary information with standard secrecy agreements.
MarkeTrack, NewsWatch, MarkeTrack 98, myTrack, myTrack Pro and Dial/Data are
registered service marks owned by the Company. AIQ has registered trademarks for
StockExpert, MarketExpert, and TradingExpert as well as Opening Bell for its
newsletter.
COMPETITION
The Company competes with many other providers of electronically transmitted
financial information. The Company competes in its varied service offerings to
varying extents through price and quality of service.
The Company offers its MarkeTrack service in a highly competitive market in
which it competes with other distributors of financial and business information,
many of which have substantially greater financial resources. TDC competes,
among other things, on the basis of the quality and reliability of its data, the
speed of delivery and on the flexibility of its services. In the equity, options
and futures trading segments, and the investment management segment, TDC's
competitors include Bloomberg Financial and Bridge Information Systems. To a
lesser degree, these TDC services compete with ILX, a Thomson Financial Services
company, and Quotron, a Reuters company, who dominate the retail brokerage
market segment. There can be no assurance that TDC will not encounter increased
competition in the future, which could limit the Company's ability to maintain
or increase its market share or maintain its margins, and which could have a
material adverse effect on TDC's business, financial condition or operating
results.
myTrack competes with many providers of financial information over the Internet.
It competes on quality and reliability, as well as speed and price. Principal
competitors to myTrack are Signal, DTN, PC Quote, AT Financial, as well as many
other Internet providers of financial information.
Competitors to the Dial/Data service include Interactive Data Corp., The Dow
Jones Retrieval Service, Compuserve, Telescan and Commodity Systems, Inc. The
Company competes in this market based on price, the quality and reliability of
its data, the extent and breadth of historical information, ease of access and
the negotiation of agreements with vendors that provide royalty arrangements
they find attractive. Some of the Company's competitors provide both software
and data services. The Company competes with such full service providers by
attempting to enter into agreements with vendors of superior software.
The Company offers its NewsWatch service in a highly competitive market in which
it competes with other distributors of news information, many of which have
substantially greater financial resources. NewsWatch competes, among other
things, on the basis of the quality and reliability of its data, the speed of
delivery and on the flexibility of its services. NewsWatch's principal
competitors are NewsEdge Corp., Retrieval Technologies, Inc. and WavePhore's
Newscast service.
Competitors of AIQ include Equis International (MetaStock), Omega Research
(SuperCharts), Windows on Wall Street, and many others. Generally, these
competitors' products can be classified as "charting" packages. They concentrate
their resources on general charting (graphical) and stock market back-testing
capabilities, rather than the pre-programmed market analysis offered by the AIQ
products. Due to this approach, which tends to be less support intensive, they
compete at a lower price range of between $250 and $450 per unit, as compared to
AIQ Systems which sells its most popular software product, "Trading Expert," for
$695. AIQ's newly released Trading Expert Pro competes with Omega's TradeStation
and MetaStock Professional.
RESEARCH AND DEVELOPMENT
Expenditures for research and development were incurred primarily 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. These
expenditures were $2,475,000, $2,322,000 and $2,383,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
EMPLOYEES
The Company employed approximately 250 persons on a full time basis as of
December 31, 1998. 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 16,800 square feet from an unaffiliated third party
through February 2005 with base rent of $244,000, 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 Company held its Annual Meeting on November 5, 1998. The results of matters
voted at that Meeting were reported in Part II, Item 4 of the Company's Form
10-Q for the period ended September 30, 1998.
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, 1999, 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 4,200.
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
------- ------
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
1998
- ----
First Quarter 1-3/4 1-3/16
Second Quarter 10-3/8 1-3/8
Third Quarter 4-3/4 2
Fourth Quarter 11-5/8 2-7/16
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
(in thousands, except per share data)
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
------- -------- -------- -------- --------
SERVICE FEES AND REVENUE $46,473 $47,631 $48,031 $45,162 $40,825
------- -------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Direct operating costs 26,466 25,629 26,283 25,409 21,690
Selling and administrative expenses 19,449 19,410 20,530 23,273 19,272
Deferred compensation expense - - 295 2,946 901
Other income - - (288) (468) (93)
Interest expense (net of interest income) 508 719 1,008 950 628
------- -------- -------- -------- --------
Total 46,423 45,758 47,828 52,110 42,398
------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME
(LOSS) OF AFFILIATE AND INCOME TAXES 50 1,873 203 (6,948) (1,573)
EQUITY IN NET INCOME (LOSS) OF AFFILIATE 326 (1,146) (184) 422 89
------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 376 727 19 (6,526) (1,484)
INCOME TAXES (BENEFIT) 158 299 526 (708) (62)
------- -------- -------- -------- --------
NET INCOME (LOSS) $ 218 $ 428 $ (507) $(5,818) $(1,422)
======= ======== ======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ .01 $ .03 $ (.03) $ (.42) $ (.11)
======= ======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 14,556 14,555 14,622 13,911 12,849
======= ======== ======== ======== ========
DECEMBER 31, 1998 1997 1996 1995 1994
------- -------- -------- -------- --------
(In thousands)
TOTAL ASSETS $18,591 $18,312 $20,679 $26,297 $25,494
TOTAL LIABILITIES 9,979 11,683 14,743 21,540 15,613
STOCKHOLDERS' EQUITY 8,612 6,629 5,936 4,757 9,881
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AND 1997
Revenues for the year ended December 31, 1998 and 1997 were $46,473,000 and
$47,631,000, respectively. The revenue decline in 1998 is principally due to a
reduction in the number of customers in traditional direct delivery services, as
customers transition to the Internet with new lower priced offerings such as
myTrack and myTrack Pro.
Direct operating costs were $26,466,000 for 1998 and $25,629,000 for the similar
period in 1997. Direct operating costs as a percentage of revenues were 57% in
1998 and 54% in 1997. The percentage increase is due to the lower revenues in
1998 and increased costs of Internet communication lines and additional server
equipment. 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 $19,449,000 and $19,410,000 in the 1998
and 1997 periods, respectively. Selling and administrative expenses as a
percentage of revenues was 42% in 1998 and 41% in 1997. The dollar and
percentage increase primarily reflects an increase in advertising, offset by
reductions in communications and other office expenses.
Net interest expense decreased to $508,000 in the 1998 period compared to
$719,000 in 1997 due to decreased borrowings.
The equity in net income from an affiliate, Innodata Corporation, was $326,000
in 1998, while in 1997 the equity in the net loss of that affiliate was
$1,146,000. The 1997 loss included a significant charge by the affiliate for
restructuring costs and an asset impairment write-down as well as losses on
foreign currency futures contracts.
As a result of the above mentioned factors, the Company realized net income of
$218,000 in 1998 and $428,000 in 1997.
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.
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.
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.
Net interest expense decreased to $719,000 in the 1997 period compared to
$1,008,000 in 1996 due to decreased borrowings.
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.
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.
Principally from the loss from an affiliate, the Company's net income was
reduced to $428,000 for the year ended December 31, 1997. The Company realized a
net loss of $507,000 in 1996 due principally to the unusually high tax provision
detailed above.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1998 and 1997 cash provided by operating
activities was $2,287,000 and $6,108,000, respectively. The decrease was due
principally to a reduction in income before minority interest and increased
payments for accounts payable and other liabilities. Cash flows used in
investing activities was $360,000 and $1,488,000 for the years ended December
31, 1998 and 1997, respectively. The decrease was mainly due to a decrease in
payments of related party debt. Cash used in financing activities was $1,599,000
and $4,094,000 for the years ended December 31, 1998 and 1997, respectively. The
decrease in 1998 from 1997 is primarily due to proceeds from the exercise of
stock options in 1998 and decreased capital lease obligation payments in that
year.
The Company has a line of credit with a bank. The line is collateralized by the
assets of the Company and is guaranteed by its principal stockholder. Interest
is charged at 1.75% above the bank's prime rate and is due on demand. The
Company may borrow up to 80% of eligible accounts receivable and is required to
maintain a compensating balance of 10% of the outstanding loans. See Note E of
Notes to Consolidated Financial Statements in Item 8. The line of credit is
sufficient for the Company's cash requirements, however, the Company plans to
spend substantial amounts for advertising its myTrack Internet-based market data
system and online trading. The Company plans to seek additional financing for
such efforts. There are no major capital expenditures anticipated beyond the
normal replacement of equipment and additional equipment to meet customer
requirements.
The Company is in the process of reviewing its products, information systems and
critical suppliers to identify those that may be affected by the year 2000 (Year
2000) issue. Most of the Company's products and networks are substantially Year
2000 compliant already. There is presently certain data provided to customers
from mainframe hardware, which is in the process of moving to a Year 2000
compliant server environment. This is substantially completed. The Company has
sought compliance statements from each of its significant suppliers, most of
which have provided positive assurances regarding their compliance. The Company
will continue to work with those who are not yet Year 2000 compliant. In the
normal course of business, the Company is replacing certain administrative
systems and hardware. The new systems will be Year 2000 compliant and will cost
approximately $500,000, most of which will be capitalized as fixed assets. These
costs are capitalized because they relate to the implementation of new systems
which include substantial new functionality speed and scalability, in addition
to being Year 2000 compliant. All historical and future costs have been and will
continue to be funded out of existing cash and cash flows from operations.
The Company is considering certain contingency plans that are available in the
event of a Year 2000 failure. For example, if any of the direct lines that are
used by the Company's financial network were to fail, it is possible that the
Company could shift customers to its Internet-based products. In another
example, if one data provider fails, it is possible that there is another data
provider that provides substantially similar information that could be
integrated into the Company's data feed. The Company will continue to develop
potential solutions so that it is as prepared as possible in the event of a
failure.
Based upon currently available information, management has no reason to believe
that the Company will not meet its compliance goals and does not anticipate that
the cost of effecting Year 2000 compliance will have a material impact on the
Company's financial condition or results of operations. Nevertheless, achieving
Year 2000 compliance is dependent upon many factors, some of which are not
completely within the Company's control. Should either the Company's internal
systems or the internal systems of one or more of its critical vendors fail to
achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected.
INFLATION AND SEASONALITY
To date, inflation has not had a significant impact on the Company's operations.
The Company's revenues are not affected by seasonality.
Disclosures in this Form 10-K contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition, including in particular, Year 2000
information. These forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
words "believe," "expect," "anticipate" and other similar expressions generally
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of risks and uncertainties,
including without limitation, changes in external market factors, changes in the
Company's business or growth strategy or an inability to execute its strategy
due to changes in its industry or the economy generally, the emergence of new or
growing competitors, various other competitive factors and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission. Actual results could differ materially from
the results referred to in the forward-looking statements. In light of these
risks and uncertainties, there can be no assurance that the results referred to
in the forward-looking statements contained in this Form 10-K will in fact
occur.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate change market risk with respect to its
credit facility with a financial institution which is priced based on the prime
rate of interest. At December 31, 1998, $2,100,000 was outstanding under the
credit facility. Changes in the prime interest rate during fiscal 1999 will have
a positive or negative effect on the Company's interest expense. Such exposure
will increase accordingly should the Company maintain higher levels of borrowing
during 1999.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
- -------------------------------------------------------------------------
TRACK DATA CORPORATION AND SUBSIDIARIES
Independent Auditors' Report II-8
Consolidated Balance Sheets as of December 31, 1998 and 1997 II-9
Consolidated Statements of Operations for the three years ended II-10
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity and Comprehensive II-11
Income for the three years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the three years ended II-12
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements II-13-22
INNODATA CORPORATION AND SUBSIDIARIES - SIGNIFICANT SUBSIDIARY
Independent Auditors' Reports II-23-24
Consolidated Balance Sheets as of December 31, 1998 and 1997 II-25
Consolidated Statements of Operations for the three years ended
December 31, 1998 II-26
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1998 II-27
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998 II-28
Notes to Consolidated Financial Statements II-29-40
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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Melville, New York
February 26, 1999
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
ASSETS
CASH AND EQUIVALENTS $ 883,580 $ 579,214
ACCOUNTS RECEIVABLE - net of allowance for doubtful accounts of
$159,000 in 1998 and 1997 1,916,036 1,955,142
FIXED ASSETS - at cost (net of accumulated depreciation) 7,907,694 8,876,718
SOFTWARE - at cost (net of accumulated amortization of $5,797,385 in 1998
and $5,650,952 in 1997) 128,466 231,967
DATABASE COSTS - at cost (net of accumulated amortization of $1,131,759 in
1998 and $970,050 in 1997) 485,463 647,171
INVESTMENT IN AFFILIATE 1,067,285 741,285
DUE FROM RELATED PARTIES - 246,867
EXCESS OF COST OVER NET ASSETS ACQUIRED 3,030,068 3,312,613
NET DEFERRED INCOME TAX ASSETS 450,000 585,000
OTHER ASSETS 2,722,428 1,136,654
------------ ------------
TOTAL $18,591,020 $18,312,631
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 3,871,702 $ 4,408,042
Note payable - bank 2,138,432 2,373,199
Notes payable - other 698,148 664,824
Capital lease obligations 2,952,177 3,121,502
Unearned revenues 84,586 200,077
Other liabilities, including income taxes 234,012 915,554
------------ ------------
Total liabilities 9,979,057 11,683,198
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 30,000,000 shares authorized; issued and
outstanding - 14,796,401 shares in 1998 and 14,308,967 shares in 1997 147,964 143,090
Additional paid-in capital 16,199,808 14,417,325
Accumulated other comprehensive income - 22,999
Deficit (7,735,809) (7,953,981)
------------ ------------
Total stockholders' equity 8,611,963 6,629,433
------------ ------------
TOTAL $18,591,020 $18,312,631
============ ============
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
----------- ------------ ------------
SERVICE FEES AND REVENUE $46,473,469 $47,630,842 $48,030,735
----------- ------------ ------------
OPERATING COSTS AND EXPENSES:
Direct operating costs 26,466,143 25,628,664 26,283,146
Selling and administrative expenses 19,449,436 19,409,969 20,529,636
Deferred compensation expense - - 294,893
Gain on securities - - (288,419)
Interest expense (net of interest income of $33,355, $41,630 and
$148,788 in 1998, 1997 and 1996, respectively) 507,760 719,246 1,008,083
----------- ------------ ------------
Total 46,423,339 45,757,879 47,827,339
----------- ------------ ------------
INCOME BEFORE EQUITY IN NET INCOME (LOSS) OF
AFFILIATE AND INCOME TAXES 50,130 1,872,963 203,396
EQUITY IN NET INCOME (LOSS) OF AFFILIATE 326,000 (1,146,000) (184,355)
----------- ------------ ------------
INCOME BEFORE INCOME TAXES 376,130 726,963 19,041
INCOME TAXES 157,958 299,433 525,969
----------- ------------ ------------
NET INCOME (LOSS) $ 218,172 $ 427,530 $ (506,928)
=========== ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ .01 $ .03 $ (.03)
=========== ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 14,556,000 14,555,000 14,622,000
=========== ============ ============
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ACCUMULATED COMPRE-
ADDITIONAL OTHER RETAINED HENSIVE
COMMON PAID-IN COMPREHENSIVE EARNINGS (LOSS)
STOCK CAPITAL INCOME (DEFICIT) INCOME
------------- ------------ -------------- ------------ ----------
BALANCE, JANUARY 1, 1996 $ 139,770 $10,168,640 $ 234,318 $(5,785,885)
Net loss (506,928) $(506,928)
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)
Dividend paid to Track sole stockholder (2,088,698)
Realized gain on transfer of affiliate shares
to Trust (174,801) (174,801)
Foreign currency translation adjustment (15,432) (15,432)
----------
Comprehensive loss $(697,161)
------------- ------------ -------------- ------------ ==========
BALANCE, DECEMBER 31, 1996 147,826 14,125,989 44,085 (8,381,511)
Net income 427,530 $ 427,530
Contribution of loan payable to stockholder 1,025,313
Purchase and retirement of treasury stock (4,736) (733,977)
Foreign currency translation adjustment (21,086) (21,086)
----------
Comprehensive income $ 406,444
------------- ------------ -------------- ------------ ==========
BALANCE, DECEMBER 31, 1997 143,090 14,417,325 22,999 (7,953,981)
Net income 218,172 $ 218,172
Stock options exercised 9,030 2,373,099
Purchase and retirement of treasury stock (4,156) (909,616)
Tax effect of stock options exercised 319,000
Foreign currency translation adjustment (22,999) (22,999)
----------
Comprehensive income $ 195,173
------------- ------------ -------------- ------------ ==========
BALANCE, DECEMBER 31, 1998 $ 147,964 $16,199,808 $ - $(7,735,809)
============= ============ ============== ============
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 218,172 $ 427,530 $ (506,928)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,743,908 3,656,987 3,580,610
Equity in net (income) loss of affiliate (326,000) 1,146,000 184,355
Deferred compensation - - 294,893
Profit sharing and charitable contributions paid in stock - 397,800 -
Loss on contribution of stock of affiliate - 292,577 -
Gain on sale of marketable securities - - (335,340)
Deferred taxes 135,000 (265,000) 727,419
Other 153,381 33,137 52,185
Changes in operating assets and liabilities:
Accounts receivable 39,106 (312,511) 553,906
Other assets (111,365) 227,967 (147,380)
Accounts payable and accrued expenses (900,641) 33,598 70,818
Other liabilities (664,341) 469,998 (368,688)
------------ ------------ ------------
Net cash provided by operating activities 2,287,220 6,108,083 4,105,850
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (703,258) (591,531) (1,003,600)
Proceeds from sales of fixed assets 154,684 - -
Payments from related parties 201,462 14,909 748,661
Payments to related parties (7,476) (949,895) (777,073)
Payments (to) from others (5,263) 48,167 (25,450)
Purchase of marketable securities - (10,000) (76,931)
Purchase of shares of affiliate - - (30,650)
------------ ------------ ------------
Net cash used in investing activities (359,851) (1,488,350) (1,165,043)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (1,959,052) (2,782,015) (2,756,554)
Net payments on note payable - bank (234,767) (413,883) (1,657,369)
Net proceeds (payments) on notes payable - other 32,144 (18,231) (27,045)
Net proceeds (payments) on loans from employee savings program 32,482 66,991 (49,932)
Payments of acquisition notes - (208,333) (250,000)
Proceeds from exercise of stock options 1,443,706 - -
Purchase of treasury stock (913,772) (738,713) (113,658)
------------ ------------ ------------
Net cash used in financing activities (1,599,259) (4,094,184) (4,854,558)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH (23,744) (11,924) (39,156)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 304,366 513,625 (1,952,907)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 579,214 65,589 2,018,496
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF YEAR $ 883,580 $ 579,214 $ 65,589
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 546,042 $ 698,093 $ 910,113
Income taxes 786,447 18,094 31,629
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquisitions financed by capital leases $ 1,783,198 $ 1,717,311 $ 2,401,000
Payment of dividend by distribution of related party receivables - - 2,088,698
Exercise of stock options 938,423 - -
See notes to consolidated financial statements.
TRACK DATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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") operate in one business segment
providing sophisticated market information and news services to the investment
community and to corporate environments under continuing contracts, and lease
dedicated communication lines to customers which link such customers to
databases on a real-time basis. The Company, 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 its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and accounts have been eliminated in consolidation.
FIXED ASSETS--Fixed assets are depreciated on a straight-line basis over their
estimated useful lives which are as follows:
ESTIMATED
USEFUL
LIVES
CATEGORY (in years)
Equipment 3-10
Furniture and fixtures 10
Transportation equipment 4
Leasehold improvements are amortized on a straight-line basis over the
respective lease term or estimated useful life, whichever is less.
SOFTWARE AND DATABASE COSTS--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 excess of the purchase price of
acquired businesses over the fair value of net assets on the dates of
acquisition amounts to $3,030,068 and $3,312,613, net of accumulated
amortization of $1,363,838 and $1,081,292 as of December 31, 1998 and 1997,
respectively. The excess is being amortized on the straight-line basis over ten
to fifteen years. Management assesses the recoverability of the remaining
unamortized costs based principally upon a comparison of the carrying value of
the asset to the undiscounted expected future cash flows to be generated by the
asset. If management concludes that the asset is impaired, its carrying value is
adjusted to its 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,
1998 and 1997, and the income statement accounts are translated at the weighted
average rates prevailing during the years ended December 31, 1998, 1997 and
1996. Unrealized foreign exchange gains and losses resulting from this
translation are included in accumulated other comprehensive income.
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.
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.
RESEARCH AND DEVELOPMENT--The Company charges all costs incurred to establish
the technological feasibility of a product or product enhancement to research
and development expense. Research and development expenses were $2,475,000,
$2,322,000 and $2,383,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
ADVERTISING--Advertising costs, charged to operations when incurred, were
approximately $1,302,000, $734,000 and $863,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
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 values
of financial instruments, consisting of accounts receivable and payable, notes
payable and capital lease obligations, approximate carrying value due to the
short payment terms associated with its accounts receivable and payable and the
interest rates associated with its notes payable and capital lease obligations.
SEGMENT REPORTING--The Company adopted Statement of Financial Accounting
Standards SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" for the year ended December 31, 1998. SFAS No. 131 requires that
the Company disclose certain information about its operating segments defined as
"components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.
COMPREHENSIVE INCOME (LOSS)--In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS No. 130 had no impact on the Company's net earnings or
stockholders' equity. SFAS No. 130 requires foreign currency translation
adjustments and unrealized gains and losses on available for sale securities,
which prior to adoption were reported separately in stockholders' equity, to be
included in accumulated other comprehensive income (loss). Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130. The balance as of January 1, 1996 consists of $59,517 of unrealized gains
on foreign currency translation adjustments and $174,801 of gains on available
for sale securities.
EARNINGS PER SHARE--Basic earnings per share is based on the weighted average
number of common shares outstanding without consideration of potential common
stock. Diluted earnings per share is based on the weighted average number of
common and potential common shares outstanding. There was no affect on earnings
per share in 1998 as a result of potential dilution. The calculation takes into
account the shares that may be issued upon exercise of stock options, reduced by
the shares that may be repurchased with the funds received from the exercise,
based on the average price during the year.
B. FIXED ASSETS
Fixed assets consist of the following at December 31, 1998 and 1997:
1998 1997
Equipment $32,013,293 $30,981,623
Telephone system 679,142 642,103
Furniture and fixtures 946,894 941,206
Transportation equipment 95,196 92,241
Leasehold improvements 1,948,073 1,956,391
----------- -----------
35,682,598 34,613,564
Less accumulated depreciation
and amortization 27,774,904 25,736,846
----------- -----------
Fixed assets - net $ 7,907,694 $ 8,876,718
=========== ===========
Equipment financed by capital leases has a net carrying value of $5,305,644 and
$5,910,644 at December 31, 1998 and 1997, respectively. Depreciation and
amortization expense (including assets held under capital leases) for the years
ended December 31, 1998, 1997 and 1996 was $3,112,806, $3,023,594 and
$2,908,573, respectively.
C. INVESTMENT IN AFFILIATE
As discussed in Note A, the Company has an equity interest in Innodata of 14%,
14% and 28% at December 31, 1998, 1997 and 1996, 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:
1998 1997 1996
Total assets $10,596,000 $10,029,000 $12,416,000
Total liabilities 3,110,000 4,775,000 2,939,000
Revenues 19,593,000 20,117,000 20,536,000
Net income (loss) 2,250,000 (4,200,000) (602,000)
The Company's equity in the net income (loss) of Innodata for the years ended
December 31, 1998, 1997 and 1996 was $326,000, $(1,146,000) and $(184,000),
respectively.
D. DUE FROM RELATED PARTIES
The amounts due from related parties consisted of loans made to the Company's
Chairman and entities controlled by him. Interest income recognized on amounts
due from related parties was $5,583, $23,063 and $18,750 for the years ended
December 31, 1998, 1997 and 1996, respectively.
E. NOTE PAYABLE - BANK
The note payable - bank bears interest at 1.75% above the bank's prime rate
(9.75% at December 31, 1998) 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, 1998 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, 1998.
F. NOTES PAYABLE - OTHER
Notes payable - other (i) are due on demand, (ii) bear interest at rates ranging
from 9 to 10 percent per annum, and (iii) approximately $140,000 is guaranteed
by the Company's Chairman.
G. SEGMENT INFORMATION
The Company operates in one business segment providing real-time financial
market data, fundamental research, charting, and analytical services to
institutional and individual investors through dedicated telecommunication lines
and the Internet. It also disseminates news and third party database
information from more than 100 sources worldwide.
The Company's revenues are derived from the following sources:
1998 1997 1996
Institutional and corporate $29,647,000 $29,494,000 $30,507,000
Individual 16,826,000 18,137,000 17,524,000
----------- ----------- -----------
$46,473,000 $47,631,000 $48,031,000
=========== =========== ===========
The decline in revenues from the individual market is due principally to a
transition of this customer base from higher paying customers using direct
telephone connections to the Company's lower paying services over the Internet.
In mid 1998, the Company commenced offering its myTrack Internet-based service
and many customers have moved to this lower paying service. Due to the late
introduction of myTrack pay services in 1998, myTrack had little impact on
revenues in that year. Revenues from foreign sources are not significant. No
customer accounted for 10% of revenues in either market served by the Company.
H. INCOME TAXES
The components of the provision for income taxes are as follows:
1998 1997 1996
Federal:
Current $ - $ 355,000 $162,000
Deferred 115,000 (225,000) 285,000
-------- ---------- --------
Total federal 115,000 130,000 447,000
-------- ---------- --------
State and local:
Current 22,958 209,433 29,000
Deferred 20,000 (40,000) 49,969
-------- ---------- --------
Total state and local 42,958 169,433 78,969
-------- ---------- --------
Provision for income taxes $157,958 $ 299,433 $525,969
======== ========== ========
Reconciliation of the U.S. statutory rate with the Company's effective tax rate
is summarized as follows:
1998 1997 1996
Federal statutory rate 34.0% 34.0% 34.0%
State and local income taxes 7.5 15.4 -
Subchapter S losses not available to the Company - 14.2 376.5
Utilization of net operating loss carryforward/back - (23.6) (469.7)
Increase in valuation allowance - - 2,735.0
Other 0.5 1.2 86.5
----- ------ --------
Effective rate 42.0% 41.2% 2,762.3%
===== ====== ========
The components of the Company's net deferred taxes are as follows:
1998 1997
Deferred tax assets:
Net operating loss carryforwards $1,669,000 $ 669,000
Deferred compensation 1,354,000 1,491,500
Excess tax basis over book basis of investment 11,000 157,000
Other (principally reserves for uncollectible accounts) 206,000 327,500
----------- ------------
3,240,000 2,645,000
Less valuation allowance 2,057,000 1,000,000
----------- ------------
1,183,000 1,645,000
----------- ------------
Deferred tax liabilities:
Accelerated depreciation for tax (515,000) (745,000)
Amortization of software and database costs
deducted for tax, not for financial reporting (218,000) (315,000)
----------- ------------
(733,000) (1,060,000)
----------- ------------
Net deferred tax asset $ 450,000 $ 585,000
=========== ============
The valuation allowance reduces total deferred tax assets to an amount
management believes will likely be realized. At December 31, 1998, $426,000 of
refundable income taxes is included in other assets. As of December 31, 1998,
the Company has net operating loss carryforwards for Federal income tax purposes
totaling approximately $4,171,000 which expire $785,000 in 2010; $590,000 in
2011; and $2,796,000 in 2012. Certain of these net operating losses may be
limited to annual use based on IRS regulations.
I. COMMITMENTS AND CONTINGENCIES
LEASES--The Company is obligated under various lease agreements covering office
space and computer equipment. The lease agreements for office space contain
escalation clauses based principally on increases in real estate taxes, building
maintenance and utility costs. A summary of such commitments as of December 31,
1998 follows:
YEAR ENDING OFFICE COMPUTER CAPITAL
DECEMBER 31, SPACE EQUIPMENT TOTAL LEASES
1999 $ 928,776 $ 708,237 $1,637,013 $1,861,325
2000 702,473 335,240 1,037,713 1,078,721
2001 700,163 76,068 776,231 333,957
2002 579,623 16,039 595,662 -
2003 459,257 3,716 462,973 -
Thereafter 381,748 - 381,748 -
---------- ---------- ---------- ----------
Total $3,752,040 $1,139,300 $4,891,340 3,274,003
========== ========== ==========
Less amounts representing interest 321,826
----------
Capital lease obligations $2,952,177
==========
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted to
$1,620,855, $1,609,920 and $1,613,846 for office space and $983,829, $1,570,977
and $1,943,633 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 $1,610,028 at
December 31, 1998. 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 $530,646,
$988,500 and $979,857 for the years ended December 31, 1998, 1997 and 1996,
respectively. The Brooklyn lease provides for the Company to pay $480,000 per
annum.
SOFTWARE DEVELOPMENT AGREEMENT--In July 1998 the Company entered into a software
development agreement with Third Millennium Technology, Inc. ("TMT"), a
corporation controlled by a director of the Company. The agreement is for an
initial period of two years and is renewable annually thereafter unless
cancelled. The Company may terminate this agreement after two years by paying
$40,000 plus continuation of fees provided in the contract for a third year. The
monthly fees paid to TMT consist of a declining fee per user of the Company's
myTrack service. Such fees amounted to $21,357 in 1998. Additional fees are
payable in connection with revenues from on-line trading. The Company granted
TMT a five year option to purchase 30,000 shares of its common stock at $4.00
per share exercisable 15,000 at the end of each of the first two anniversaries.
LITIGATION--The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the Company's financial statements.
J. 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 June 1998, the Board of Directors authorized the
distribution of 74,338 shares to participants and a further 127,500 shares in
February 1999.
In addition, the Company has an employee savings plan under which employees may
make deposits to the savings plan and receive interest at the prime rate.
Amounts due to employees under the plan aggregated $332,837 at December 31,
1998.
K. CAPITAL STOCK
COMMON STOCK--In August 1994, the Company sold, pursuant to a public offering,
1,380,000 shares of its common stock and certain warrants which have expired and
realized net proceeds from the offering of approximately $5,544,000.
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. These warrants are presently
registered.
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, 1998, the Company reserved for issuance
1,981,979 shares of its common stock as follows: (a) 1,861,979 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.
L. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS--The Company adopted, with stockholder approval, the 1994, 1995,
1996 and 1998 Stock Option Plans (the "1994 Plan," "1995 Plan," "1995 DD Plan,"
"1996 Plan" and the "1998 Plan") which provide for the granting of options to
purchase not more than an aggregate of 300,000, 500,000, 50,000, 800,000 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, under the 1996 Plan
after July 8, 2006 and under the 1998 Plan after July 9, 2008.
The Stock Option Plans may be amended from time to time by the Board of
Directors of the Company. However, the Board of Directors may not, without
stockholder approval, amend the Stock Option Plans to increase the number of
shares of common stock which may be issued under the Stock Option Plans (except
upon changes in capitalization as specified in the Stock Option Plans), decrease
the minimum exercise price provided in the Plans or change the class of persons
eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of 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
1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net income (loss) and income (loss) per share, both basic and diluted,
would have been changed to the pro forma amounts as follows: net income would
have been $115,000, or $.01 per share in 1998, net income would have been
$277,000, or $.02 per share, in 1997, and net loss would have been $(777,000),
or $(.05) per share, in 1996. The fair value of options at date of grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: an expected life of three years in 1998 and four
years in 1997 and 1996; risk free interest rate of 5.6% in 1998 and 6.4% in 1997
and 1996; expected volatility of 80% in 1998 and 25% in 1997 and 1996; and a
zero dividend yield. The effects of applying SFAS No. 123 in this proforma
disclosure are not indicative of future disclosures.
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 1/1/96 $ 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
============
Canceled $ 2.00 - 3.00 (14,075) 2 $ 2.32
Exercised $ 1.50 - 5.06 (902,274) 2 $ 2.64
Granted $ 3.00 - 5.00 399,750 4 $ 3.07 $ .73
------------
Balance 12/31/98 $ 1.50 - 3.00 597,772 4 $ 2.67 202,854 $ 2.18
$ 4.00 - 6.00 59,679 2 $ 4.98 33,179 $ 5.35
------------ ------------
657,451 236,033
================ ============
The options have a term of five years. The above table includes options to
purchase 45,847 shares which were not granted pursuant to any plan, but contain
the same conditions as those provided in the Plans. On January 4, 1999, the
Company granted employee stock options to purchase 390,000 shares of its common
stock at $6.00 per share. Options exercised in December 1998 in the amount of
$938,423, included in other assets, was paid in January 1999.
M. RETIREMENT PLAN
The Company has a profit sharing plan which qualifies under Section 401(k) of
the Internal Revenue Code. The plan covers substantially all employees who have
completed six months of service. Company contributions to the plan are
discretionary and vest at a rate of 20% after three years of service, and 20%
each year thereafter until employees are fully vested after 7 years.
Contributions to the plan for the years ended December 31, 1998, 1997 and 1996
were $35,945, $54,468 and $72,000, respectively.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Hackensack, New Jersey
We have audited the accompanying consolidated balance sheets of Innodata
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years 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 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Parsippany, New Jersey
February 25, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Innodata Corporation
Brooklyn, New York
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Innodata Corporation and subsidiaries for
the year 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 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 results of operations and cash flows of
Innodata Corporation and subsidiaries for the year 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, 1998 AND 1997
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,535,533 $ 1,969,852
Accounts receivable-net of allowance for doubtful accounts of
$425,000 in 1998 and $450,000 in 1997 2,943,422 3,188,920
Prepaid expenses and other current assets 555,127 825,586
Deferred income taxes 376,000 136,000
------------ ------------
TOTAL CURRENT ASSETS 7,410,082 6,120,358
FIXED ASSETS-NET 2,669,892 2,909,619
GOODWILL - 410,076
OTHER ASSETS 515,534 589,194
------------ ------------
TOTAL $10,595,508 $10,029,247
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 56,718 $ 122,450
Accounts payable and accrued expenses 1,295,347 1,507,866
Accrued salaries and wages 849,608 641,186
Estimated loss on foreign currency contracts - 1,400,000
Income and other taxes 459,308 357,008
------------ ------------
TOTAL CURRENT LIABILITIES 2,660,981 4,028,510
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 24,089 79,604
------------ ------------
DEFERRED INCOME TAXES 425,000 667,000
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-authorized 20,000,000 shares;
issued - 1,528,402 shares in 1998 and 1,521,736 shares in 1997 15,284 15,217
Additional paid-in capital 8,890,661 8,870,731
Deficit (1,199,538) (3,449,218)
------------ ------------
7,706,407 5,436,730
Less: treasury stock - at cost; 48,083 shares in 1998 and 26,400 shares in 1997 (220,969) (182,597)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,485,438 5,254,133
------------ ------------
TOTAL $10,595,508 $10,029,247
============ ============
See notes to consolidated financial statements.
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
REVENUES $19,593,353 $20,116,935 $20,536,448
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Direct operating costs 13,068,660 16,007,051 16,783,595
Selling and administrative expenses 4,982,127 5,283,891 4,799,739
Restructuring costs, impairment of assets and other 133,141 1,500,000 -
(Gain) loss on foreign currency contracts (487,458) 1,400,000 -
Interest expense 77,594 85,595 36,383
Interest income (98,391) (59,384) (123,771)
------------ ------------ ------------
TOTAL 17,675,673 24,217,153 21,495,946
------------ ------------ ------------
INCOME (LOSS) BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES 1,917,680 (4,100,218) (959,498)
(BENEFIT) PROVISION FOR INCOME TAXES (332,000) 100,000 (357,000)
------------ ------------ ------------
NET INCOME (LOSS) $ 2,249,680 $(4,200,218) $ (602,498)
============ ============ ============
BASIC INCOME (LOSS) PER SHARE $ 1.52 $ (2.80) $ (.40)
============ ============ ============
DILUTED INCOME (LOSS) PER SHARE $ 1.49 $ (2.80) $ (.40)
============ ============ ============
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COMMON STOCK ADDITIONAL UNREALIZED (DEFICIT)
------------ PAID-IN LOSS ON RETAINED TREASURY
SHARES AMOUNT CAPITAL SECURITIES EARNINGS STOCK TOTAL
------------ ----------- ----------- ------------ ------------ ---------- ------------
JANUARY 1, 1996 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
Net income - - - - 2,249,680 - 2,249,680
Issuance of common stock
upon exercise of stock
options 6,666 67 19,930 - - - 19,997
Purchase of treasury stock - - - - - (38,372) (38,372)
------------ ----------- ----------- ------------ ------------ ---------- ------------
DECEMBER 31, 1998 1,528,402 $ 15,284 $ 8,890,661 $ - $(1,199,538) $(220,969) $ 7,485,438
============ =========== =========== ============ ============ ========== ============
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,249,680 $(4,200,218) $ (602,498)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,322,721 1,321,555 1,372,731
Restructuring costs, impairment of assets and other 133,141 1,500,000 -
Gain on disposal of fixed assets (74,399) - -
(Gain) loss on foreign currency contracts (487,458) 1,400,000 -
Deferred income taxes (482,000) 400,000 (150,000)
Changes in operating assets and liabilities:
Accounts receivable 419,834 529,363 1,380,498
Prepaid expenses and other current assets 120,459 304,924 (479,251)
Other assets 23,660 (116,769) (271,413)
Accounts payable and accrued expenses (76,805) (104,330) 187,764
Liability for foreign currency contracts (912,542) - -
Accrued salaries and wages 208,422 15,707 100,991
Income and other taxes payable 102,300 78,439 (641,737)
------------ ------------ ------------
Net cash provided by operating activities 2,547,013 1,128,671 897,085
------------ ------------ ------------
INVESTING ACTIVITIES:
Expenditures for fixed assets (1,024,622) (1,015,088) (1,231,273)
Proceeds from disposal of fixed assets 182,912 - -
Payments in connection with acquisition - - (410,646)
Short-term investments - - 1,240,000
------------ ------------ ------------
Net cash used in investing activities (841,710) (1,015,088) (401,919)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings - 577,000 626,014
Payments of borrowings (121,247) (779,204) (656,409)
Proceeds from exercise of stock options 19,997 - 65,768
Purchase of treasury stock (38,372) (38,720) -
------------ ------------ ------------
Net cash (used in) provided by financing activities (139,622) (240,924) 35,373
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,565,681 (127,341) 530,539
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,969,852 2,097,193 1,566,654
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF YEAR $ 3,535,533 $ 1,969,852 $ 2,097,193
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 32,524 $ 85,595 $ 35,238
Income taxes - - 922,789
See notes to consolidated financial statements
INNODATA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ---------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION - Innodata Corporation and subsidiaries (the
"Company") performs data conversion and content management services and document
imaging services tailored to customer requirements. The Company's services are
performed in production facilities located in the Philippines, Sri Lanka, India
and the United States. The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned.
All intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION - Revenue is recognized in the period in which 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
services.
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, 1998 and 1997 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
1998 and 1996 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.
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."
SEGMENT REPORTING - The Company adopted Statement of Financial Accounting
Standards SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" for the year ended December 31, 1998. SFAS No. 131 requires that
the Company disclose certain information about its operating segments defined as
"components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has estimated the fair value
of financial instruments using available market information and other valuation
methodologies in accordance with SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments." Management of the Company believes that the fair value
of financial instruments for which estimated fair value has not been
specifically presented is not materially different than the related carrying
value. Determinations of fair value are based on subjective data and
significant judgment relating to timing of payments and collections and the
amounts to be realized. Different assumptions and/or estimation methodologies
might have a material effect on the fair value estimates. Accordingly, the
estimates of fair value are not necessarily indicative of the amounts the
Company would realize in a current market exchange.
INCOME (LOSS) PER SHARE - Basic earnings 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.
2. FIXED ASSETS
Fixed assets, stated at cost less accumulated depreciation and amortization,
consist of the following:
DECEMBER 31, 1998 1997
Equipment $6,647,870 $6,095,004
Furniture and fixtures 427,807 372,566
Leasehold improvements 678,557 472,574
---------- ----------
Total 7,754,234 6,940,144
Less accumulated depreciation
and amortization 5,084,342 4,030,525
---------- ----------
$2,669,892 $2,909,619
========== ==========
As of December 31, 1998 and 1997, the net book value of fixed assets located at
the Company's production facilities in the Philippines, India and Sri Lanka was
approximately $1,553,000 and $1,600,000, respectively. In addition, equipment
financed by capital leases has a net book value of $153,000 at December 31,
1998.
3. INCOME TAXES
The significant components of the provision for (benefit from) income taxes are
as follows:
1998 1997 1996
Current income tax expense (benefit):
Foreign $ 50,000 $ - $ -
Federal 55,000 (300,000) (159,000)
State and local 45,000 - (48,000)
---------- ---------- ----------
150,000 (300,000) (207,000)
Deferred income tax (benefit) expense (482,000) 400,000 (150,000)
---------- ---------- ----------
(Benefit from) provision for income taxes $(332,000) $ 100,000 $(357,000)
========== ========== ==========
During 1998 the Company utilized approximately $1,100,000 of net operating loss
carryforwards, resulting in a tax benefit of $375,000.
Reconciliation of the U.S. statutory rate with the Company's effective tax rate
is summarized as follows:
1998 1997 1996
Federal statutory rate 34.0% (34.0)% (34.0)%
Effect of:
Valuation allowance (35.0) 34.0 -
Utilization of net operating loss carryforwards
not previously recognized (19.5) - -
State income taxes (net of federal tax benefit) 1.6 - (5.4)
Foreign taxes 2.6 - -
Other (1.0) 2.4 2.2
----- ----- -----
Effective rate (17.3)% 2.4% (37.2)%
===== ===== =====
As of December 31, 1998 and 1997, the composition of the Company's net deferred
taxes is as follows:
1998 1997
Deferred income tax assets:
Allowances not currently deductible $ 266,000 $ 247,000
Expenses not deductible until paid 60,000 161,000
Net operating loss carryforwards 150,000 500,000
---------- ----------
476,000 908,000
Less: valuation allowance (100,000) (772,000)
---------- ----------
Deferred income tax assets 376,000 136,000
---------- ----------
Deferred income tax liabilities:
Foreign source income, not taxable
unless repatriated (415,000) (415,000)
Depreciation and amortization (10,000) (252,000)
---------- ----------
(425,000) (667,000)
---------- ----------
Net deferred income tax liability $ (49,000) $(531,000)
========== ==========
The valuation allowance reduces total deferred tax assets to an amount
management believes will likely be realized. At December 31, 1998, the Company's
net operating loss carryforward for federal income tax purposes of approximately
$400,000 expires in 2012. These net operating losses may be limited to annual
use based on IRS regulations.
4. LONG-TERM DEBT
Long-term debt is as follows:
1998 1997
Equipment leases, at 9.6% to 13.5% $88,581 $226,335
Less: deferred interest 7,774 24,281
------- --------
Total 80,807 202,054
Less: current portion of long-term debt 56,718 122,450
------- --------
Long-term debt $24,089 $ 79,604
======= ========
Long term debt matures as follows: 1999 - $62,494; 2000 - $19,299; and 2001 -
$6,788.
5. COMMITMENTS AND CONTINGENT LIABILITIES
LINE OF CREDIT - The Company has a line of credit with a bank in the amount of
$1 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
2003, 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 $350,000. For the years ended December 31, 1998, 1997 and 1996,
rent expense totaled approximately $700,000, $940,000 and $825,000,
respectively.
At December 31, 1998, future minimum annual rental commitments on
non-cancellable leases are as follows:
1999 $382,000
2000 191,000
2001 193,000
2002 165,000
--------
931,000
========
EMPLOYMENT AGREEMENTS - The Company has a three-year employment agreement
through August 2000 with its President and CEO. He is currently paid at the
rate of $240,000 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 (after repricing in
June 1998): 10,000 options at $3.00 per share; 16,666 at $5.00; 23,333 at $6.00;
30,000 at $7.00; and 33,333 at $15.50. The options are exercisable upon the
earliest to occur of (i) various dates during 1999; or (ii) in the event of a
sale of the Company where a third party acquires more than 50% of the Company.
The Company has an employment agreement with its former President and CEO
expiring September 30, 2000 that provides for a salary of $75,000 per annum. He
will serve as Vice Chairman of the Board and in executive capacities as
designated by the CEO or the Board of Directors.
LITIGATION - The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the Company's financial statements.
FOREIGN CURRENCY - The Company's production facilities are located in the
Philippines, India and Sri Lanka. To the extent that the currencies of these
countries fluctuate, the Company is subject to risks of changing costs of
production after pricing is established for certain customer projects, although
most arrangements are at will and can be terminated or renegotiated.
OTHER COMMITMENTS - 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, 1998. Under the legislation, the Company is not required to
fund future costs, if any.
6. CAPITAL STOCK
COMMON STOCK - In 1993 the Company sold pursuant to a public offering 563,500
shares of its common stock and certain warrants that expired in 1997 and
realized net proceeds after all expenses of the offering of $6,752,585.
The Company's 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.
PREFERRED STOCK - The Board of Directors is authorized to fix the terms, rights,
preferences and limitations of the preferred stock and to issue the preferred
stock in series which differ as to their relative terms, rights, preferences and
limitations.
COMMON STOCK RESERVED - At December 31, 1998, the Company reserved for issuance
999,356 shares of its common stock as follows: (a) 982,690 shares pursuant to
the Company's Stock Option Plans (including 120,332 options issued to the
Company's Chairman and its President which were not granted under the plans);
and (b) 16,666 shares issuable upon exercise of warrants issued to a consultant.
7. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company adopted, with stockholder approval, 1993, 1994, 1995, 1996 and 1998
Stock Option Plans (the "1993 Plan," "1994 Plan," "1994 DD Plan," "1995 Plan,"
"1996 Plan" and the "1998 Plan") which provide for the granting of options to
purchase not more than an aggregate of 87,500, 105,000, 17,500, 200,000, 166,666
and 300,000 shares of common stock, respectively, subject to adjustment under
certain circumstances. Such options may be incentive stock options ("ISOs")
within the meaning of the Internal Revenue Code of 1986, as amended, or options
that do not qualify as ISOs ("Non-Qualified Options").
The option exercise price per share may not be less than the fair market value
per share of common stock on the date of grant (110% of such fair market value
for an ISO, if the grantee owns stock possessing more than 10% of the combined
voting power of all classes of the Company's stock). Options may be granted
under the Stock Option Plan to all officers, directors and employees of the
Company and, in addition, Non-Qualified Options may be granted to other parties
who perform services for the Company. No options may be granted under the 1993
Plan after April 30, 2003, under the 1994 Plan and 1994 DD Plan, after May 19,
2004, under the 1995 Plan, after May 16, 2005, under the 1996 Plan, after July
8, 2006 and under the 1998 Plan, after July 8, 2008.
The Plans may be amended from time to time by the Board of Directors of the
Company. However, the Board of Directors may not, without stockholder approval,
amend the Plans to increase the number of shares of common stock which may be
issued under the Plans (except upon changes in capitalization as specified in
the Plans), decrease the minimum exercise price provided in the Plans or change
the class of persons eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of 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
1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net income would have been $1,463,259, or $1.00 per share, basic, and
$.97 per share, diluted, in 1998, net loss would have been $(4,359,807), or
$(2.90) per share, in 1997 and $(738,987), or $(.49) per share, in 1996. The
fair value of options at date of grant was estimated using the Black-Scholes
pricing model with the following weighted average assumptions: expected life of
four years; risk free interest rate of 5% in 1998 and 6.4% in 1997 and 1996;
expected volatility of 107% in 1998 and 40% in 1997 and 1996; and a zero
dividend yield. The effects of applying SFAS No. 123 in this disclosure are not
indicative of future disclosures.
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 1/1/96 $ 7.89 - 9.75 132,696 3 $ 8.25
$ 10.14 - 17.85 135,050 3 $ 12.93
------------
267,746 120,098 $ 10.38
============
Canceled $ 9.03 (166)
Granted $ 6.93 - 11.79 29,666 5 $ 9.18 $ 3.66
Exercised $ 7.89 - 9.03 (7,646)
------------
Balance 12/31/96 $ 6.93 - 9.75 138,717 3 $ 8.13 111,513 $ 8.88
$ 10.14 - 17.85 150,883 3 $ 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
============
Canceled $ 3.75 - 10.50 (161,366)
Canceled $ 11.44 - 21.00 (162,543)
Granted $ 3.00 - 6.38 176,299 5 $ 5.49 $ 4.00
Granted and
Repriced $ 5.00 - 8.63 267,260 2 $ 6.34 $ 2.67
Granted and
Repriced $ 15.50 33,333 3 $ 15.50 $ 1.98
Exercised $ 3.00 (6,666)
------------
BALANCE 12/31/98 $ 3.00 - 9.03 537,217 3 $ 5.67 97,496 $ 4.13
$ 14.28 - 17.85 36,483 2 $ 15.69 3,150 $ 17.65
------------ ------------
573,700 100,646
============ ============
WARRANTS
In connection with a consulting agreement on December 18, 1995, the Company
issued a five-year warrant to purchase 16,666 shares at a price of $11.44 per
share.
8. SEGMENT REPORTING
The Company's operations are classified in two business segments; Internet and
on-line data conversion and content management services and document imaging
services.
Internet and on-line data conversion and content management services provide all
the necessary steps for product development and data conversion to enable its
customers to disseminate vast amounts of information both on-line and via the
Internet. Its customers represent an array of major electronic publishers of
legal, scientific, educational, and medical information, as well as
document-intensive companies repurposing their proprietary information into
electronic resources that can be referenced via web-centric applications.
During 1998, 1997 and 1996, one customer that is comprised of twelve affiliated
companies, accounted for 21%, 16% and 28% of the Company's Internet and on-line
data conversion and content management service revenues, respectively. One other
customer accounted for 13%, 10% and 10% of such revenues in 1998, 1997 and 1996,
respectively. No other customer accounted for 10% or more of such revenues.
Further, in 1998, 1997 and 1996, export revenues, all of which were derived from
European customers, accounted for 22%, 24% and 22%, respectively, of such
revenues. A significant amount of the Company's revenues are derived from
customers in the publishing industry. Accordingly, the Company's accounts
receivable generally include significant amounts due from such customers.
The document imaging services segment provides high volume backfile and
day-forward conversion of business documents, technical manuals, engineering
drawings, aperture cards, roll film, and microfiche, providing high quality
computer accessible images and indexing.
During 1998, 1997 and 1996 one customer accounted for 53%, 11% and 12% of the
Company's document imaging service revenues, respectively. The Company has no
present arrangements with this customer for 1999. Another customer accounted for
10% and 12% of such revenues in 1997 and 1996. No other customer accounted for
10% or more of such revenues.
1998 1997 1996
Revenues
- --------
Internet and on-line services $17,401,346 $18,032,232* $17,852,384
Document imaging services 2,192,007 2,084,703 2,684,064
----------- ----------- -----------
Total consolidated $19,593,353 $20,116,935 $20,536,448
=========== =========== ===========
* Includes $2,612,000 from journal and book pagination and medical transcription
businesses that were discontinued in 1997.
Income (loss) before income taxes
- ---------------------------------
Internet and on-line services $ 3,151,928(a) $(2,894,158)(c) $(475,744)
Document imaging services (1,234,248)(b) (1,206,060)(d) (483,754)
------------ ------------ ----------
Total consolidated $ 1,917,680 $(4,100,218) $(959,498)
============ ============ ==========
(a) Includes gain on foreign currency contracts and reversal of previously estimated
liabilities of $736,000.
(b) Includes write off of goodwill of $382,000.
(c) Includes loss on foreign currency contracts and restructuring costs of $2,107,000.
(d) Includes restructuring costs of $793,000.
1998 1997 1996
Total assets
- -----------------------------
Internet and on-line services $ 9,520,116 $ 8,703,927 $ 9,501,943
Document imaging services 1,075,392 1,325,320 2,914,353
----------- ----------- -----------
Total consolidated $10,595,508 $10,029,247 $12,416,296
=========== =========== ===========
Capital expenditures
- --------------------
Internet and on-line services $ 980,218 $ 907,535 $ 1,071,190
Document imaging services 44,404 107,553 160,083
----------- ----------- -----------
Total consolidated $ 1,024,622 $ 1,015,088 $ 1,231,273
=========== =========== ===========
Depreciation and amortization
- -----------------------------
Internet and on-line services $ 1,116,445 $ 1,048,875 $ 1,115,674
Document imaging services 206,276 272,680 257,057
----------- ----------- -----------
Total consolidated $ 1,322,721 $ 1,321,555 $ 1,372,731
=========== =========== ===========
9. INCOME (LOSS) PER SHARE
1998 1997 1996
Net income (loss) $2,249,680 $(4,200,218) $ (602,498)
========== ============ ===========
Weighted average common shares outstanding 1,478,408 1,501,043 1,503,196
Dilutive effect of outstanding warrants and options 31,391 - -
---------- ------------ -----------
Adjusted for dilutive computation 1,509,799 1,501,043 1,503,196
========== ============ ===========
Basic income (loss) per share $ 1.52 $ (2.80) $ (.40)
========== ============ ===========
Diluted income (loss) per share $ 1.49 $ (2.80) $ (.40)
========== ============ ===========
Reference is made to Note 7 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. RESTRUCTURING COSTS AND IMPAIRMENT OF ASSETS
During the second quarter of 1997 management implemented a plan to reduce the
Company's U.S. based overhead. The principal actions were to eliminate U.S.
production for the publishing services division and merge the east and west
coast document imaging operations into one facility on the west coast. The
restructuring costs consisted of estimated losses on leases and severance pay
totaling approximately $325,000, while the impairment costs consisted of a
write-off of goodwill in connection with the document imaging business totaling
approximately $700,000 and fixed assets related to both the imaging and
publishing services businesses totaling approximately $475,000.
In the fourth quarter of 1998, management determined that its plans to
significantly increase the revenues of the document imaging services segment
were not realized. While management continues to evaluate this business, it was
determined that the goodwill associated with the business could not be
recovered. Accordingly, the remaining unamortized amount of $382,000 was written
off at December 31, 1998. Further, certain estimated liabilities for
restructuring and other items totaling $249,000 were deemed in excess of actual
amounts payable and were recognized as income in the fourth quarter of 1998.
11. FOREIGN CURRENCY CONTRACTS
The Company recognized an unrealized loss of $1,400,000 in 1997 in connection
with foreign currency contracts that were in dispute. The loss represented the
difference between the contract rate for Philippine pesos and the estimated fair
value at December 31, 1997. In the second quarter of 1998, the Company reached
an agreement regarding the disputed currency contracts. This resulted in a
reduction of the estimated liability previously provided by $487,000 that was
recognized as a gain.
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 49 Chairman of the Board, Chief Executive Officer
Alan Schnelwar 59 Senior Vice President and Director
Martin Kaye 51 Vice President - Finance, Chief Financial Officer,
Secretary and Director
E. Bruce Fredrikson 61 Director
Morton Mackof 51 Director
Jack Spiegelman 60 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 Global in August 1994. He
served as President until March 1996 and became the Company's Senior Vice
President upon the Merger. He holds a B.S. degree in Civil Engineering from the
City University of New York (1967).
MARTIN KAYE has been Vice President-Finance, Chief Financial Officer and
Director of the Company since April 1994. He was elected Secretary of the
Company in August 1994. Mr. Kaye is a certified public accountant and has served
as Chief Financial Officer of Innodata since October 1993 and was appointed as a
Director in March 1995. He had been an audit partner with Deloitte & Touche LLP
for more than five years until his resignation in 1993. Mr. Kaye holds a B.B.A.
in accounting from Baruch College (1970).
DR. E. BRUCE FREDRIKSON has been a Director of the Company since June 1994. He
is currently a professor of finance at Syracuse University School of Management
where he has taught since 1966 and has previously served as chairman of the
finance department. Dr. Fredrikson has a B.A. in economics from Princeton
University and a M.B.A. and a Ph.D. in finance from Columbia University. He
serves as director of Eagle Finance Corp., a company which acquires and services
non-prime automobile installment sales contracts. He is also an independent
general partner of Fiduciary Capital Partners, L.P. and Fiduciary Capital
Pension Partners, L.P. He is also a director of Innodata.
MORTON MACKOF has been a Director of the Company since April 1994. He 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, 1998 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 1998 $375,000 - $375,000 40,000
Chairman, CEO 1997 350,000 - 350,000 -
1996 350,000 - 350,000 40,000
Alan Schnelwar 1998 $190,000 - $190,000 25,000
Senior Vice President 1997 180,000 - 180,000 25,000
1996 165,000 - 165,000 25,500
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
POTENTIAL
PERCENT REALIZED
OF TOTAL VALUE AT
OPTIONS ASSUMED ANNUAL
GRANTED TO RATES OF STOCK
NUMBER OF EMPLOYEES APPRECIATION FOR
OPTIONS IN FISCAL EXERCISE EXPIRATION OPTION TERM
NAME GRANTED YEAR PRICE DATE 5% 10%
- -------------- ---------- ------------ ---------- ---------- ------- -------
Barry Hertz 40,000 10% $3.00 4/2003 $33,200 $73,200
Alan Schnelwar 25,000 6% $3.00 4/2003 $20,750 $45,750
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR;
FISCAL YEAR END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS IN-THE-MONEY
AT FISCAL OPTIONS AT
SHARES YEAR END FISCAL YEAR END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- -------------- ----------- ------------- --------------- ------------------
Barry Hertz 75,366 $ 487,365 64,634/40,000 $549,316 /$315,200
Alan Schnelwar 65,500 $ 385,953 25,000/25,000 $ 222,000/$197,000
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the Company's fiscal year ended December 31, 1998, Messrs. Hertz, Schnelwar
and Kaye were officers of the Company and were members of the Board of Directors
(there is no compensation committee). Mr. Hertz is Chairman of Innodata and Mr.
Kaye is chief financial officer and a director of Innodata. Messrs. Fredrikson
and Mackof are also directors of Innodata.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company believes that during the period from January 1, 1998 through
December 31, 1998 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, 1999, 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)
NO. OF % OF
NAME SHARES CLASS
- -------------------------------------- ---------- ------
Barry Hertz (2) 11,549,645 77.4%
Morton Mackof (3) 232,500 1.6%
Alan Schnelwar (4) 37,500 *
Martin Kaye (4) 32,500 *
Jack Spiegelman (5) 11,000 *
E. Bruce Fredrikson (4)
Syracuse University
School of Management
Syracuse, NY 13244 12,000 *
All Officers and Directors as a Group
(six persons)(2)(3)(4)(5) 11,875,145 79.2%
* = less than 1%
(1) Except as noted otherwise, all shares are owned beneficially and of
record. Based on 14,898,716 shares outstanding.
(2) Consists of 11,086,745 shares owned by Mr. Hertz and 442,900 shares
owned by Trusts established in the names of Mr. Hertz's children. Also includes
20,000 options which are presently exercisable under the Company's Stock Option
Plans.
(3) Consists of 20,500 shares owned of record and 212,000 shares held in the
Track Data Phantom Unit Trust to be released upon his termination of association
with the Company, or earlier with approval of the Board of Directors.
(4) Consists of shares issuable upon the exercise of presently exercisable
options granted under the Company's Stock Option Plans.
(5) Consists of 1,000 shares owned by his wife as to which Mr. Spiegelman
disclaims beneficial interest and 10,000 shares issuable upon the exercise of
presently exercisable options granted under the Company's Stock Option Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company guarantees a mortgage on real estate owned by a partnership
controlled by Mr. Hertz and members of his family. At December 31, 1998, such
mortgage provided for interest at 10% per annum and had a balance of $1,610,000
due May 2000. See Item 2. "Properties" for information on leases from
partnerships affiliated with Mr. Hertz.
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 further 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.
In July 1998 the Company entered into a software development agreement with
Third Millennium Technology, Inc. ("TMT"), a corporation controlled by Morton
Mackof, a director of the Company. The agreement is for an initial period of two
years and is renewable annually thereafter unless cancelled. The Company may
terminate this agreement after two years by paying $40,000 plus continuation of
fees provided in the contract for a third year. The monthly fees paid to TMT
consist of a declining fee per user of the Company's myTrack service. Additional
fees are payable in connection with revenues from on-line trading. The Company
granted TMT a five year option to purchase 30,000 shares of its common stock at
$4.00 per share exercisable 15,000 at the end of each of the first two
anniversaries. Fees paid to TMT under this agreement and for other consulting
services totaled $98,132 in 1998.
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 Global (4)
10.9 1996 Stock Option Plan (5)
10.10 1998 Stock Option Plan (6)
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
(6) Previously filed as Appendix A to Definitive Proxy for November 5, 1998,
Annual Meeting of Stockholders
(b) Reports on Form 8-K during fourth quarter
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRACK DATA CORPORATION
By /s/
-----------------------
Barry Hertz, Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------- ----------------------------------------- --------------
/s/ Chairman of the Board and March 25, 1999
- -------------------
Barry Hertz Chief Executive Officer
/s/ Senior Vice President and Director March 25, 1999
- -------------------
Alan Schnelwar
/s/ Vice President, Chief March 25, 1999
- -------------------
Martin Kaye Financial Officer, Secretary and Director
/s/ Director March 25, 1999
- -------------------
E. Bruce Fredrikson
/s/ Director March 25, 1999
- -------------------
Morton Mackof
/s/ Director March 25, 1999
- -------------------
Jack Speigelman