U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File Number 0-24634
TRACK DATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
22-3181095
(I.R.S. Employer Identification No.)
56 Pine Street
New York, NY 10005
(Address of principal executive offices)
(212) 422-4300
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of October 31, 2002 there
were 51,500,488 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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See pages 2-11
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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See pages 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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See page 17
Item 4. Controls and procedures
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See pages 17-18
PART II. OTHER INFORMATION
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See page 19
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)
September 30, December 31,
2002 2001
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Unaudited Derived from
Audited
Financial
Statements
ASSETS
CASH AND EQUIVALENTS $ 5,022 $ 5,687
ACCOUNTS RECEIVABLE - net 3,413 1,813
DUE FROM CLEARING BROKER - 735
DUE FROM BROKER 38,856 14,813
MARKETABLE SECURITIES 15,629 45,623
FIXED ASSETS - at cost (net of accumulated depreciation) 3,504 4,583
EXCESS OF COST OVER NET ASSETS ACQUIRED 1,900 1,920
NET DEFERRED INCOME TAX ASSETS 1,219 -
OTHER ASSETS 1,153 1,746
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TOTAL $70,696 $76,920
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 4,446 $ 3,099
Note payable - bank 2,042 1,865
Notes payable - other 967 918
Due to clearing broker 215 -
Trading securities sold but not yet purchased 43,743 46,409
Capital lease obligations 159 480
Net deferred income tax liabilities - 805
Other liabilities, including income taxes 905 183
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Total liabilities 52,477 53,759
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 300,000,000
shares authorized; issued and outstanding -
51,884,798 shares in 2002 and
54,739,695 shares in 2001 519 547
Additional paid-in capital 15,386 18,585
Accumulated other comprehensive income 736 3,676
Retained earnings 1,578 353
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Total stockholders' equity 18,219 23,161
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TOTAL $70,696 $76,920
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See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except earnings per share)
(Unaudited)
2002 2001
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REVENUES $41,140 $48,244
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OPERATING COSTS AND EXPENSES:
Direct operating costs 23,482 22,795
Selling and administrative expenses 13,917 14,573
Marketing and advertising 531 1,125
Writedown of investments in private companies 516 -
Gain on sale of investments in affiliate - (949)
Loss (gain) on marketable securities 44 (1,719)
Gain on sale of Internet domain name - (1,000)
Interest expense (income) - net 608 (174)
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Total 39,098 34,651
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INCOME BEFORE EQUITY IN NET INCOME
OF AFFILIATE AND INCOME TAXES 2,042 13,593
EQUITY IN NET INCOME OF AFFILIATE - 276
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INCOME BEFORE INCOME TAXES 2,042 13,869
INCOME TAXES 817 3,884
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NET INCOME $ 1,225 $ 9,985
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BASIC AND DILUTED NET INCOME PER SHARE $.02 $.16
==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 53,054 60,835
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ADJUSTED DILUTIVE SHARES OUTSTANDING 53,419 61,099
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See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except earnings per share)
(Unaudited)
2002 2001
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REVENUES $14,765 $14,530
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OPERATING COSTS AND EXPENSES:
Direct operating costs 9,313 7,022
Selling and administrative expenses 4,446 4,674
Marketing and advertising 74 316
Gain on marketable securities (262) (730)
Gain on sale of Internet domain name - (1,000)
Interest expense (income) - net 15 (52)
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Total 13,586 10,230
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INCOME BEFORE INCOME TAXES 1,179 4,300
INCOME TAXES 471 1,205
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NET INCOME $ 708 $ 3,095
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BASIC AND DILUTED NET INCOME PER SHARE $.01 $.05
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WEIGHTED AVERAGE SHARES OUTSTANDING 52,314 57,814
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ADJUSTED DILUTIVE SHARES OUTSTANDING 52,326 58,092
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See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(in thousands)
(Unaudited)
Accumulated
Additional Other Compre-
Common Paid-in Comprehensive Retained hensive
Stock Capital Income Earnings Loss
BALANCE,
JANUARY 1, 2002 $547 $18,585 $ 3,676 $ 353
Net income 1,225 $ 1,225
Stock options and warrants
exercised 2 203
Purchase and retirement of
treasury stock (23) (3,471)
Contribution of stock by
Chairman (7) 7
Tax effect of stock options 62
exercised
Reclassification adjustment
For gain on marketable
securities - net of taxes (87) (87)
Unrealized loss on
marketable securities -
net of taxes (2,853) (2,853)
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Comprehensive loss $(1,715)
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BALANCE,
SEPTEMBER 30, 2002 $519 $15,386 $ 736 $1,578
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See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)
(Unaudited)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,225 $ 9,985
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,489 2,124
Deferred taxes - 3,537
Equity in net income of affiliate - (276)
Writedown of investments in private companies 516 -
Gain on sale of Internet domain name - (1,000)
Gain on sale of Innodata and Edgar Online common stock (124) (1,410)
Changes in operating assets and liabilities:
Accounts receivable and due from clearing broker (650) (905)
Due from broker (24,108) -
Marketable securities 25,046 (6,194)
Other assets 36 437
Accounts payable and accrued expenses 1,347 (87)
Securities sold, but not yet purchased (2,666) 18,366
Other liabilities 800 57
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Net cash provided by operating activities 2,911 24,634
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (374) (746)
Loans from others - 30
Proceeds from sale of Internet domain name - 1,000
Proceeds from sale of Innodata and Edgar Online common stock 170 1,688
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Net cash (used in) provided by investing activities (204) 1,972
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (321) (701)
Net proceeds from note payable - bank 177 532
Net proceeds from notes payable - other 50 60
Net payments on loans from employee savings program (49) (26)
Purchase of treasury stock (3,431) (10,150)
Proceeds from exercise of stock options 215 61
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Net cash used in financing activities (3,359) (10,224)
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EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH (13) (1)
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NET (DECREASE) INCREASE IN CASH (665) 16,381
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 5,687 6,506
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CASH AND EQUIVALENTS, END OF PERIOD $ 5,022 $22,887
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,045 $ 319
Income taxes $ 45 $ 371
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquisitions financed by capital leases $ - $ 123
See notes to condensed consolidated financial statements
Track Data Corporation and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position as of September 30, 2002, and the results of operations for the
three and nine month periods ended September 30, 2002 and 2001, and of cash
flows for the nine months ended September 30, 2002 and 2001. The results of
operations for the nine months ended September 30, 2002 are not necessarily
indicative of results that may be expected for any other interim period or
for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 2001 included
in the Company's Annual Report on Form 10-K. The accounting policies used
in preparing these financial statements are the same as those described in
the December 31, 2001 financial statements. See Note 12 with respect to new
business commenced in 2002.
2. During the nine months ended September 30, 2002, options to purchase
232,150 shares were exercised at prices of $0.50 to $1.50, aggregating net
proceeds to the Company of $205,000.
3. During the nine months ended September 30, 2002, 2,437,047 shares of the
Company's common stock were purchased at a cost of $3,494,000.
4. The Company charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and development
expense. Research and development expenses were $237,000 and $230,000 for
the nine months ended September 30, 2002 and 2001, respectively.
5. Advertising costs, charged to operations when incurred, were $531,000 and
$1,125,000 for the nine months ended September 30, 2002 and 2001,
respectively.
6. Until May 7, 2001, when the Company's Chairman and CFO resigned as officers
and directors of Innodata Corporation, the Company accounted for its
investment in Innodata using the equity method under which the Company's
share of the affiliate's earnings was included in its results of
operations. The Company's investment in Innodata has been accounted for as
available for sale securities after such date. As of September 30, 2002,
the Company owned 1,904,656 shares of Innodata common stock, or
approximately 9% of its outstanding common stock. See Note 7.
7. Marketable securities consists of the following (in thousands):
September 30, December 31,
2002 2001
Edgar Online - Available for sale securities - at market $ 1,157 $ 2,209
Innodata - Available for sale securities - at market 1,905 5,800
Trading securities - at market 12,567 37,614
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$15,629 $45,623
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Trading securities sold but not yet purchased - at market $43,743 $46,409
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The Company owns 696,800 shares of Edgar Online, Inc. ("EOL"), an
Internet-based supplier of business, financial and competitive intelligence
derived from U.S. Securities and Exchange Commission data. The Company
carries the investment at $1,157,000, the market value at September 30,
2002. The difference between the cost of $9,000 and fair market value of
these securities, net of $459,000 in deferred taxes, or $689,000 is
classified as a component of accumulated other comprehensive income
included in stockholders' equity.
The Company owns 1,904,656 shares of Innodata, a provider of digital
content outsourcing services. The Company carries the investment at
$1,905,000, the market value at September 30, 2002. The difference between
the cost of $1,826,000 and fair market value of these securities, net of
$32,000 in deferred taxes, or $47,000 is classified as a component of
accumulated other comprehensive income included in stockholders' equity.
The Company engages in arbitrage trading activity in which it seeks to
fully cover open positions in its trading accounts during each month with
covering positions that expire in succeeding months. As part of this
activity, the Company has significant positions in stocks and options and
receives significant proceeds from the sale of trading securities sold but
not yet purchased. As of September 30, 2002, trading securities had a long
market value of $12,567,000 with a cost of $14,149,000, or a net unrealized
loss of $1,582,000. Securities sold but not yet purchased, had a short
market value of $43,743,000 with a cost/short proceeds of $44,877,000, or a
net unrealized gain of $1,134,000. The Company expects that its September
30, 2002 positions will be closed during the fourth quarter of 2002 and
that other positions with the same strategy will be established. The
Company has pledged its holdings in Edgar Online and Innodata as collateral
for its trading accounts. In addition, the Company's Chairman has pledged
approximately 10 million shares of his holdings in the Company's common
stock as collateral for these accounts. The Company is paying its Chairman
at the rate of 2% per annum on the value of the collateral pledged. Such
payments aggregated $120,000 for the nine months ended September 30, 2002.
During the nine months ended September 30, 2002, the Company's
broker-dealer subsidiary paid to the Company's Chairman $41,000 in net
commissions for trades in his personal trading account that added liquidity
to the Track ECN (See Note 12).
In the fourth quarter of 2001, the Company expanded its arbitrage trading
program to include a greater risk profile trading program. The greater risk
portion of the trading program incurred a pre-tax loss of $1,400,000 in the
first quarter of 2002. The Company has continued its arbitrage trading
program but has discontinued the greater risk trading program. The
Company's Chairman contributed 650,000 shares of Company stock owned by him
to the capital of the Company upon discontinuance of this program.
At December 31, 2001, trading securities had a long market value of
$37,614,000 with a cost of $38,325,000, or a net unrealized loss of
$711,000. Securities sold but not yet purchased, had a short market value
of $46,409,000 with a cost/short proceeds of $47,129,000, or a net
unrealized gain of $720,000.
8. Earnings Per Share--Basic earnings per share is based on the weighted
average number of common shares outstanding without consideration of
potential common stock. Diluted earnings per share is based on the weighted
average number of common and potential dilutive common shares outstanding.
There was no effect on earnings per share as a result of potential
dilution. The calculation takes into account the shares that may be issued
upon exercise of stock options and warrants, reduced by the shares that may
be repurchased with the funds received from the exercise, based on the
average price during the period.
9. Segment Information--The Company is a financial services company that owns
Track Data Securities Corp., a registered securities broker-dealer and
member of the National Association of Securities Dealers, Inc. The Company
provides a proprietary, fully integrated Internet-based online trading and
market data system, myTrack, for the individual trader and proTrack, for
the professional institutional traders. The Company provides real-time
financial market data, fundamental research, charting and analytical
services to institutional and individual investors through dedicated
telecommunication lines and the Internet. The Company also disseminates
news and third-party database information from more than 100 sources
worldwide. The Company's operations are classified in two business
segments: Internet-based online trading and market data services to the
non-professional individual investor community, and online trading and
market data services to the institutional professional investment
community. The Company commenced operations of its Track ECN (Electronic
Communications Network) in the second quarter of 2002. The operations of
the ECN are included in the Professional Market segment. The Company also
engages in arbitrage trading. See Note 7.
Segment data includes charges allocating corporate overhead to each
segment. The Company has not disclosed asset information by segment as the
information is not produced internally. Substantially all long-lived assets
are located in the U.S. The Company's business is predominantly in the U.S.
Revenues and net income from international operations are not material.
Information concerning operations in its business segments is as follows
(in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Revenues
Professional Market $10,388 $ 9,246 $26,268 $26,925
Non-Professional Market 4,377 5,284 14,872 21,319
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Total $14,765 $14,530 $41,140 $48,244
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Income before unallocated
amounts, equity in net income
of affiliate and income taxes:
Professional Market $ 1,282 $ 2,494 $ 4,008 $ 7,613
Non-Professional Market 149 584 691 3,815
Unallocated amounts:
Depreciation and amortization (499) (560) (1,489) (1,677)
Writedown of investments - - (516) -
Gain (loss) on marketable securities
and sale of investment in affiliate 262 730 (44) 2,668
Gain on sale of Internet domain name - 1,000 - 1,000
Interest (expense) income, net (15) 52 (608) 174
------- ------- ------- -------
Income before equity in net
income of affiliate and income taxes 1,179 4,300 2,042 13,593
Equity in net income of affiliate - - - 276
------- ------- ------- -------
Income before taxes $ 1,179 $ 4,300 $ 2,042 $13,869
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10. Transactions with Clearing Broker and Customers--The Company conducts
business through a clearing broker which settles all trades for the
Company, on a fully disclosed basis, on behalf of its customers. The
Company earns commissions as an introducing broker for the transactions of
its customers. In the normal course of business, the Company's customer
activities involve the execution of various customer securities
transactions. These activities may expose the Company to off-balance-sheet
risk in the event the customer or other broker is unable to fulfill its
contracted obligations and the Company has to purchase or sell the
financial instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the clearing broker extends
credit to the Company's customers, subject to various regulatory margin
requirements, collateralized by cash and securities in the customers'
accounts. In the event of a decline in the market value of the securities
in a margin account, the Company is required to either obtain additional
collateral from the customer or to sell the customer's position if such
collateral is not forthcoming. The Company is responsible for any losses on
such margin loans, and has agreed to indemnify its clearing broker for
losses that the clearing broker may sustain from the customer accounts
introduced by the Company. The Company's Chairman and CEO has a margin loan
of approximately $3.5 million as a customer of the Company's broker-dealer
which is collateralized by 14 million of the Company's shares owned by him
and which is also subject to such indemnity in the event the clearing
broker were to sustain losses.
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. The Company
monitors required margin levels daily and, pursuant to such guidelines,
requires the customer to deposit additional collateral or to reduce
positions when necessary.
11. Net Capital Requirements--The SEC, NASD, and various other regulatory
agencies have stringent rules requiring the maintenance of specific levels
of net capital by securities brokers, including the SEC's uniform net
capital rule, which governs TDSC. Net capital is defined as assets minus
liabilities, plus other allowable credits and qualifying subordinated
borrowings less mandatory deductions that result from excluding assets that
are not readily convertible into cash and from valuing other assets, such
as a firm's positions in securities, conservatively. Among these deductions
are adjustments in the market value of securities to reflect the
possibility of a market decline prior to disposition.
As of September 30, 2002, TDSC was required to maintain minimum net
capital, in accordance with SEC rules, of $1 million and had total net
capital of $1,276,000, or approximately $276,000 in excess of minimum net
capital requirements.
If TDSC fails to maintain the required net capital it may be subject to
suspension or revocation of registration by the SEC and suspension or
expulsion by the NASD and other regulatory bodies, which ultimately could
require TDSC's liquidation. In addition, a change in the net capital rules,
the imposition of new rules, a specific operating loss, or any unusually
large charge against net capital could limit those operations of TDSC that
require the intensive use of capital and could limit its ability to expand
its business.
12. During the second quarter of 2002, the Company commenced operations of its
Track ECN that enables traders to display and match limit orders for
stocks. The Company encourages broker-dealers and market makers to become
subscribers to its ECN by paying a commission of up to $.005 per share for
adding liquidity (limit orders added to the ECN order book) and charges
$.007 per share for taking liquidity (those who execute against an existing
bid or offer on the ECN). The Company pays $.002 (increased to $.00225 as
of November 1, 2002) of the $.005 per share each month and pays the
remainder only out of the Company's collections of charges to subscribers
and non-subscribers who took liquidity that month. The Company has met
certain resistance in the payment of its fees by non-subscribers who access
the Track ECN through Nasdaq's SuperSoes automated execution system. All
methods of collecting its charges are being pursued, including the filing
of arbitration cases against those parties who continue to access liquidity
and refuse to pay the bills. The Company has recognized as revenues only
that portion of its billing that has not been contested by users. The
Company believes that it will prevail in these arbitration cases, but
revenue recognition will be deferred until such cases are settled. It is
anticipated that these parties will attempt to delay the arbitration
process for as long as possible.
13. Comprehensive income (loss) is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Net income $ 708 $ 3,095 $ 1,225 $ 9,985
Unrealized (loss) gain on marketable
securities-net of taxes (511) (2,419) (2,853) 1,030
Reclassification adjustment for
gain on marketable securities
- net of taxes - - (87) -
----- ------- ------- -------
Comprehensive income (loss) $ 197 $ 676 $(1,715) $11,015
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14. NASDAQ has advised the Company that its shares may no longer be eligible
for listing on the NASDAQ National Market if the bid price of its common
stock does not close at $1.00 per share for a minimum of 10 consecutive
trading days before December 11, 2002. NASDAQ may exempt the Company from
the $1 closing bid price requirement until September 8, 2003 if the Company
transfers to the NASDAQ SmallCap Market and meets certain conditions. In
September 2002, the Board of Directors and stockholders representing a
majority of the voting stock approved a one for six reverse stock split.
The Company has not yet determined whether and when to effectuate this
split.
Track Data Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months ended September 30, 2002 and 2001
Revenues for the three months ended September 30, 2002 and 2001 were
$14,765,000 and $14,530,000, respectively, an increase of 2%. The Company's
Professional Market segment had revenues for the three months ended September
30, 2002 and 2001 of $10,388,000 and $9,246,000, respectively, an increase of
12% for this segment. The Company's Non-Professional Market segment had
revenues of $4,377,000 and $5,284,000 for the three months ended September 30,
2002 and 2001, respectively, a decrease of 17% for this segment. Professional
Market segment revenues in 2002 includes revenue of $3,019,000 from the
Company's new Track ECN. This increase was offset by a decline in revenues from
its Professional Market segment market data business due principally to a
reduction in customers' staffing that began in 2001 and has continued during
2002. This downtrend is expected to continue, at least for the remainder of
2002. In addition, the Non-Professional Market segment has experienced a
significant decline in revenues from its retail trading business. The rate of
decline increased in the fourth quarter of 2001 as a result of new day trader
rules instituted by the NASD. These rules qualified a large number of customers
as day traders and required that greater equity balances be maintained by such
customers.
Direct operating costs were $9,313,000 for the three months ended September
30, 2002 and $7,022,000 for the similar period in 2001, an increase of 33%.
Direct operating costs as a percentage of revenues were 63% in 2002 and 48% in
2001. Without giving effect to unallocated depreciation and amortization
expense, the Company's Professional Market segment had $6,595,000 and $3,740,000
of direct costs for the three months ended September 30, 2002 and 2001,
respectively. Direct operating costs as a percentage of revenues for the
Professional segment were 63% in 2002 and 40% in 2001. The increased dollars
and percentage in 2002 in the Professional segment is due to costs associated
with the Company's new Track ECN, including commissions to its subscribers and
clearing costs, as well as certain fixed costs that could not be reduced
commensurate with the reduced revenues from its market data business. The
Company's Non-Professional Market segment had $2,323,000 and $3,058,000 in
direct costs for the three months ended September 30, 2002 and 2001,
respectively. Direct operating costs as a percentage of revenues for the
Non-Professional segment were 53% in 2002 and 58% in 2001. The decline in
Non-Professional segment costs was due principally to the decline in revenues.
The decline in percentage is due to Track ECN absorbing certain of the fixed
costs. Direct operating costs include direct payroll, direct telecommunication
costs, computer supplies, depreciation, equipment lease expense and the
amortization of software development costs, costs of clearing, back office
payroll, other direct broker-dealer expenses and ECN customer commissions.
Selling and administrative expenses were $4,446,000 and $4,674,000 for the
three months ended September 30, 2002 and 2001, respectively, a decrease of 5%.
Selling and administrative expenses as a percentage of revenues was 30% in 2002
and 32% in 2001. Without giving effect to unallocated depreciation and
amortization expense, selling and administrative expenses for the Professional
Market segment were $2,442,000 and $2,891,000 in the 2002 and 2001 periods,
respectively. For the Professional Market segment selling and administrative
expenses as a percentage of revenues was 24% in 2002 and 31% in 2001. The
decline in percentage is due principally to lower selling and administrative
expenses associated with the increased revenues from the New Track ECN. Selling
and administrative expenses for the Non-Professional segment were $1,899,000 and
$1,446,000 in the 2002 and 2001 periods, respectively. For the Non-Professional
segment selling and administrative expense as a percentage of revenue was 43% in
2002 and 27% in 2001. The percentage increase in 2002 compared to 2001 was
principally due to certain fixed costs that could not be reduced commensurate
with the reduced revenues.
Marketing and advertising costs were $74,000 in 2002 and $316,000 in 2001.
The Non-Professional segment of the Company incurred $5,000 of costs in 2002 and
$194,000 in 2001. The Professional Market segment spent $69,000 in 2002 and
$122,000 in 2001. The Company has continued to reduce its costs for all
business lines.
The Professional Market segment realized $1,282,000 in income before
unallocated amounts, equity in net income of affiliate and income taxes in 2002
compared to $2,494,000 in 2001. The Non-Professional Market segment realized
income before unallocated amounts, equity in net income of affiliate and income
taxes of $149,000 in 2002 compared to income of $584,000 in 2001.
The Company realized a gain of $262,000 in 2002 and a gain of $730,000 in
2001 on the sale of certain shares of Edgar Online, Inc., Innodata Corporation
and other marketable securities. The reduced income in 2002 is due principally
to significantly reduced value of the common stock used as collateral for the
trading account, resulting in less trading during the period.
In July 2001, the Company sold an Internet domain name to a European entity
for $1 million.
Interest expense in 2002 was $15,000 compared to interest income of $52,000
in 2001. The increase in interest expense in 2002 is due principally to reduced
interest received in connection with the Company's arbitrage trading program.
As a result of the above mentioned factors, the Company realized income
before income taxes of $1,179,000 in the 2002 period compared to $4,300,000 in
2001.
Taxes have been provided at an anticipated annualized rate of 40% for 2002
and 28% in 2001. The lower rate in 2001 was due principally to the utilization
of tax loss carryforwards.
The Company realized net income of $708,000 in 2002 compared to $3,095,000
in 2001.
Nine Months ended September 30, 2002 and 2001
Revenues for the nine months ended September 30, 2002 and 2001 were
$41,140,000 and $48,244,000, respectively, a decrease of 15%. The Company's
Professional Market segment had revenues for the nine months ended September 30,
2002 and 2001 of $26,268,000 and $26,925,000, respectively, a decrease of 2% for
this segment. The Company's Non-Professional Market segment had revenues of
$14,872,000 and $21,319,000, respectively, for the nine months ended September
30, 2002 and 2001, a decrease of 30% for this segment. Since August 2001, the
Company has experienced a decline in revenues and profits from its Professional
Market segment due principally to a reduction in customers' staffing. This
downtrend is expected to continue, at least for the remainder of 2002. The
decline in revenues was partially offset by an increase in revenue of $4,089,000
from the Company's new Track ECN. In addition, the Non-Professional Market
segment has experienced a significant decline in revenues from its retail
trading business. The rate of decline increased in the fourth quarter of 2001 as
a result of new day trader rules instituted by the NASD. These rules qualified a
large number of customers as day traders and required that greater equity
balances be maintained by such customers.
Direct operating costs were $23,482,000 for the nine months ended September
30, 2002 and $22,795,000 for the similar period in 2001, an increase of 3%.
Direct operating costs as a percentage of revenues were 57% in 2002 and 47% in
2001. Without giving effect to unallocated depreciation and amortization
expense, the Company's Professional Market segment had $14,339,000 and
$10,607,000 of direct operating costs for the nine months ended September 30,
2002 and 2001, respectively. Direct operating costs as a percentage of revenues
for the Professional segment were 55% in 2002 and 39% in 2001. The increased
dollars and percentage in 2002 in the Professional segment is due to costs
associated with the Company's new Track ECN, including commissions to its
subscribers and clearing costs, as well as certain fixed costs that could not be
reduced commensurate with the reduced revenues from its market data business.
The Company's Non-Professional Market segment had $7,961,000 and $11,030,000 in
direct costs for the nine months ended September 30, 2002 and 2001,
respectively. Direct operating costs as a percentage of revenues for the
Non-Professional segment were 54% in 2002 and 52% in 2001. The increased
percentage in 2002 is due to certain fixed costs that could not be reduced
commensurate with the reduced revenues.
Selling and administrative expenses were $13,917,000 and $14,573,000 for
the nine months ended September 30, 2002 and 2001, respectively, a decrease of
5%. Selling and administrative expenses as a percentage of revenues was 34% in
2002 and 30% in 2001. Without giving effect to unallocated depreciation and
amortization expense, selling and administrative expenses for the Professional
Market segment were $7,553,000 and $8,502,000 in the 2002 and 2001 periods,
respectively. For the Professional Market segment selling and administrative
expenses as a percentage of revenues was 29% in 2002 and 32% in 2001. The
decline in percentage is due principally to lower selling and administrative
expenses associated with the increased revenues from the new Track ECN. Selling
and administrative expenses for the Non-Professional segment were $6,056,000 and
$5,552,000 in the 2002 and 2001 periods, respectively. For the Non-Professional
segment selling and administrative expense as a percentage of revenue was 41% in
2002 and 26% in 2001. The percentage increase in 2002 compared to 2001 was
principally due to certain fixed costs that could not be reduced commensurate
with the reduced revenues.
Marketing and advertising costs were $531,000 in 2002 and $1,125,000 in
2001. The Non-Professional segment of the Company incurred $163,000 in 2002 and
$921,000 in 2001. The Company has continued to reduce advertising for its
retail brokerage business. The Professional Market segment spent $368,000 in
2002 and $204,000 in 2001. The increase in 2002 was attributable to marketing
related to the Company's new proTrack online trading for professionals.
The Company in 2002 wrote down its investments in two privately held
companies in the aggregate amount of $516,000.
The Professional Market segment realized $4,008,000 in income before
unallocated amounts, equity in net income of affiliate and income taxes in 2002
compared to $7,613,000 in 2001. The Non-Professional Market segment realized
income of $691,000 before unallocated amounts, equity in net income of affiliate
and income taxes in 2002 compared to $3,815,000 in 2001.
The Company realized a loss of $44,000 in 2002 and a gain of $2,668,000 in
2001 on the sale of certain shares of Edgar Online, Inc., Innodata Corporation
and other marketable securities. In the fourth quarter of 2001, the Company
expanded its arbitrage trading program to include a greater risk profile trading
program. The greater risk portion of the trading program incurred a pre-tax
loss of $1,400,000 in the first quarter of 2002. The Company has continued its
arbitrage trading program but has discontinued the greater risk trading program.
In July 2001, the Company sold an Internet domain name to a European entity
for $1 million.
Interest expense in 2002 was $608,000 compared to interest income of
$174,000 in 2001. The increase in interest expense in 2002 is due principally to
interest on margin debt in connection with the Company's arbitrage trading
program.
As a result of the above mentioned factors, the Company realized income
before equity in net income from an affiliate and income taxes of $2,042,000 in
the 2002 period compared to income of $13,593,000 in 2001.
The equity in net income of an affiliate, Innodata, was $276,000 in 2001.
The Company no longer accounts for its investment in Innodata under the equity
method.
Taxes have been provided at an anticipated annualized rate of 40% for 2002
and 28% in 2001. The lower rate in 2001 was due principally to the utilization
of tax loss carryforwards.
The Company realized net income of $1,225,000 in 2002 compared to
$9,985,000 in 2001.
Liquidity and Capital Resources
During the nine months ended September 30, 2002, cash provided by operating
activities was $2,911,000 compared to $24,634,000 in 2001. The decrease in 2002
was due to reduced operating income and also to net purchases of trading
securities compared to the 2001 period that included net proceeds from
marketable securities of approximately $18,000,000. Cash flows used in
investing activities in 2002 was $204,000 compared to $1,972,000 provided by
investing activities in 2001 due to proceeds from sales of Innodata and Edgar
Online common stock and the sale of an Internet domain name. Cash flows used in
financing activities, principally for the purchase of treasury stock, was
$3,359,000 in 2002 compared to $10,224,000 in 2001.
The Company has a line of credit with a bank. The line is collateralized
by the assets of the Company and is guaranteed by its Chairman. Interest is
charged at 1.75% above the bank's prime rate and is due on demand. The Company
may borrow up to 80% of eligible market data service receivables and is required
to maintain a compensating balance of 10% of the outstanding loans. At
September 30, 2002, the Company had outstanding borrowings under the line of
$2,042,000. The Company believes that its line of credit is sufficient for the
Company's present cash requirements.
The Company has significant positions in stocks and options and receives
significant proceeds from the sale of trading securities sold but not yet
purchased under the arbitrage trading strategy described in Note 7 of Notes to
Condensed Consolidated Financial Statements. The Company expects that its
September 30, 2002 positions will be closed during the fourth quarter of 2002
and that other positions with the same strategy will be established. The level
of trading activity is substantially dependent on the value of the shares of
Track Data, Innodata and Edgar Online common stock that is held as collateral.
During the third quarter of 2002, trading was limited due to a reduction in the
market price of each of the securities held as collateral. See Note 7 of Notes
to Condensed Consolidated Financial Statements. In the fourth quarter of 2001,
the Company expanded its arbitrage trading program to include a greater risk
profile trading program. The greater risk portion of the trading program
incurred a pre-tax loss of $1,400,000 in the first quarter of 2002. The Company
has continued its arbitrage trading program but has discontinued the greater
risk trading program.
Since August 2001, the Company has experienced a decline in revenues and
profits from its Professional Market segment due principally to a reduction in
customers' staffing that has continued during 2002. This downtrend is
continuing at least through the remainder of 2002. In addition, the Company
experienced a decline in revenues from its retail trading business in the fourth
quarter of 2001 after new day trader rules were instituted by the NASD. These
revenues have not been replaced. The Company reduced its advertising costs in
2002 and does not expect to increase advertising for the remainder of 2002.
During the nine months ended September 30, 2002, the Company repurchased under
its buy back program approximately 2.4 million shares of its common stock for
$3.5 million. No major capital expenditures are anticipated beyond the normal
replacement of equipment and additional equipment to meet customer requirements.
During the second quarter of 2002, the Company commenced operations of its
Track ECN that enables traders to display and match limit orders for stocks.
The Company encourages broker-dealers and market makers to become subscribers to
its ECN by paying a commission of up to $.005 per share for adding liquidity
(limit orders added to the ECN order book) and charges $.007 per share for
taking liquidity (those who execute against an existing bid or offer on the
ECN). The Company pays $.002 (increased to $.00225 as of November 1, 2002) of
the $.005 per share each month and pays the remainder only out of the Company's
collections of charges to subscribers and non-subscribers who took liquidity
that month. The Company has met certain resistance in the payment of its fees
by non-subscribers who access the Track ECN through Nasdaq's SuperSoes automated
execution system. All methods of collecting its charges are being pursued,
including the filing of arbitration cases against those parties who continue to
access liquidity and refuse to pay the bills. The Company has recognized as
revenues only that portion of its billing that has not been contested by users.
The Company believes that it will prevail in these arbitration cases, but
revenue recognition will be deferred until such cases are settled. It is
anticipated that debtors will attempt to delay the arbitration process for as
long as possible.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
Company's financial position.
The Company conducts business through a clearing broker which settles all
trades for the Company, on a fully disclosed basis, on behalf of its customers.
The Company earns commissions as an introducing broker for the transactions of
its customers. In the normal course of business, the Company's customer
activities involve the execution of various customer securities transactions.
These activities may expose the Company to off-balance-sheet risk in the event
the customer or other broker is unable to fulfill its contracted obligations and
the Company has to purchase or sell the financial instrument underlying the
contract at a loss.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the clearing broker extends
credit to the Company's customers, subject to various regulatory margin
requirements, collateralized by cash and securities in the customers' accounts.
In the event of a decline in the market value of the securities in a margin
account, the Company is required to either obtain additional collateral from the
customer or to sell the customer's position if such collateral is not
forthcoming. The Company is responsible for any losses on such margin loans,
and has agreed to indemnify its clearing broker for losses that the clearing
broker may sustain from the customer accounts introduced by the Company.
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company monitors required
margin levels daily and, pursuant to such guidelines, requires the customer to
deposit additional collateral or to reduce positions when necessary.
Inflation and Seasonally
To date, inflation has not had a significant impact on the Company's
operations. The Company's revenues are not affected by seasonally .
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 September 30, 2002, $2,042,000 was outstanding under
the credit facility. Changes in the prime interest rate during fiscal 2002 will
have a positive or negative effect on the Company's interest expense. Such
exposure will increase should the Company maintain higher levels of borrowing
during the balance of 2002.
The Company has significant positions in stocks and options and
receives significant proceeds from the sale of trading securities sold but not
yet purchased under the arbitrage trading strategy described in Note 7 of Notes
to Condensed Consolidated Financial Statements. The Company's arbitrage trading
strategy is to fully cover its open positions during each month with covering
option positions that expire in succeeding months. The Company expects that its
September 30, 2002 positions will be closed during the fourth quarter of 2002
and that other positions with the same strategy will be established. In the
fourth quarter of 2001, the Company expanded its arbitrage trading program to
include a greater risk profile trading program. The greater risk portion of the
trading program incurred a pre-tax loss of $1,400,000 in the first quarter of
2002. The Company is continuing its arbitrage trading program but has
discontinued the greater risk trading program. In connection with the arbitrage
trading program, the Company incurs margin loans. The Company is exposed to
interest rate change market risk with respect to these margin loans. Such
exposure will increase should the Company maintain higher levels of borrowing
during 2002. The level of trading in the arbitrage trading account is dependent
on the value of Track Data, Innodata and Edgar Online common stock which is used
as collateral. The price of these stocks declined during 2002.
The Company has investments in Innodata and Edgar Online, both publicly
traded companies listed on Nasdaq. The market value of such securities is
dependent on future market conditions for these companies over which the Company
has little or no control.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and the
operation of our "disclosure controls and procedures" (as such term is
defined in Rules 13a-14(c) under the Securities Exchange Act of 1934). This
evaluation took place as of a date within 90 days prior to the filing date
of this quarterly report ("Evaluation Date"). Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as
of the Evaluation Date, the disclosure controls and procedures are
reasonably designed and effective to ensure that (i) information required
to be disclosed by us in the reports we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and (ii) such
information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in
our internal controls or in other factors that could significantly affect
such controls.
Disclosures in this Form 10-Q contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words "believe," "expect," "anticipate" and
other similar expressions generally identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. These forward-looking statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties, including without limitation, changes in external
market factors, changes in the Company's business or growth strategy or an
inability to execute its strategy due to changes in its industry or the economy
generally, the emergence of new or growing competitors, various other
competitive factors and other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
Actual results could differ materially from the results referred to in the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the results referred to in the forward-looking statements
contained in this Form 10-Q will in fact occur.
PART II. OTHER INFORMATION
------- ------------------
Item 1. Legal Proceedings. Not Applicable
-----------------
Item 2. Changes in Securities. Not Applicable
---------------------
Item 3. Defaults upon Senior Securities. Not Applicable
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The following matters were voted on at the August 13, 2002 Annual
Meeting of Stockholders. The total shares voted were 48,830,825.
For Against Abstain
--- ------- -------
Election of Directors:
Abraham Biderman 48,465,710 365,115
E. Bruce Fredrikson 48,465,710 365,115
Jay Gelman 47,013,410 1,817,415
Barry Hertz 47,013,410 1,817,415
Martin Kaye 47,013,410 1,817,415
Jack Spiegelman 48,465,710 365,115
Stanley Stern 46,948,310 1,882,515
Charles Zabatta 48,465,710 365,115
Approval of Stock Option Plan: 47,497,960 1,242,662 90,203
Appointment of Auditors: 48,606,427 127,803 96,595
Item 5. Other Information. None
-----------------
Item 6. (a) Exhibits.
--------
99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) There were no reports on Form 8-K filed during the third quarter
of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRACK DATA CORPORATION
Date: 11/12/02 /s/
-------- --------------------------------
Barry Hertz
Chairman of the Board
Chief Executive Officer
Date: 11/12/02 /s/
-------- --------------------------------
Martin Kaye
Chief Operating Officer
Principal Financial Officer
CERTIFICATION
I, Barry Hertz, CEO of Track Data Corporation, certify that:
1. I have reviewed this report on Form 10-Q of Track Data Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and internal controls and procedures for financial
reporting as of the end of the period covered by this report (the
"Evaluation Date");
d. Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and
procedures for financial reporting based on our evaluation as of the
Evaluation Date;
e. Disclosed to the registrant's auditors and the audit committee of the
board of directors (or persons performing the equivalent functions):
i. All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for
financial reporting which could adversely affect the registrant's
ability to record, process, summarize and report financial
information required to be disclosed by the registrant in the
reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S.
Securities and Exchange Commission's rules and forms; and
ii. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
f. Indicated in this report any significant changes in the registrant's
internal controls and procedures for financial reporting or in other
factors that could significantly affect internal controls and
procedures for financial reporting made during the period covered by
this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date: November 12, 2002 /s/
---------------------------
Barry Hertz, CEO
(principal executive officer)
CERTIFICATION
I, Martin Kaye, CFO of Track Data Corporation, certify that:
1. I have reviewed this report on Form 10-Q of Track Data Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and internal controls and procedures for financial
reporting as of the end of the period covered by this report (the
"Evaluation Date");
d. Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and
procedures for financial reporting based on our evaluation as of the
Evaluation Date;
e. Disclosed to the registrant's auditors and the audit committee of the
board of directors (or persons performing the equivalent functions):
i. All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for
financial reporting which could adversely affect the registrant's
ability to record, process, summarize and report financial
information required to be disclosed by the registrant in the
reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S.
Securities and Exchange Commission's rules and forms; and
ii. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
f. Indicated in this report any significant changes in the registrant's
internal controls and procedures for financial reporting or in other
factors that could significantly affect internal controls and
procedures for financial reporting made during the period covered by
this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date: November 12, 2002 /s/
------------------------------
Martin Kaye, CFO
(principal financial officer)
EXHIBIT 99
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Track Data Corporation on Form
10-Q for the quarter ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, Barry Hertz, Chief
Executive Officer of the Company and Martin Kaye, Chief Financial Officer of the
Company, certify, to the best of our knowledge, pursuant to 18 U.S.C Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1. the Report fully complies with the requirements of Section 13(a) or
15(d)of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/
-------------------------------
Barry Hertz
Chief Executive Officer
November 12, 2002
/s/
-------------------------------
Martin Kaye
Chief Financial Officer
November 12, 2002