form10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2007
o Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the Transition period from _______ to ________
Commission file number 0-24634
TRACK DATA CORPORATION
(Exact name of registrant as specified in its charter)
|
DELAWARE
|
22-3181095
|
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
|
incorporation or organization)
|
|
| |
|
|
95 Rockwell Place
|
|
|
Brooklyn, New York
|
11217
|
|
(Address of principal executive offices)
|
(Zip Code)
|
| |
|
|
(718) 522-7373
|
|
|
(Registrant's telephone number)
|
|
Securities registered pursuant to Section 12(b) of the Exchange
Act: None
Securities registered pursuant to Section 12(g) of the Exchange
Act: Common Stock, $.01 par value
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
oYes x No
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act.
oYes xNo
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 o
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
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “Smaller Reporting Company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer o Accelerated
Filer o Non-Accelerated
Filer o Smaller
Reporting Company x
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
o
Yes x
No
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the Registrant's most recently
completed second fiscal quarter. Based on the average bid and ask
price of the Company's Common Stock on June 30, 2007 of $3.10 per share. $11,269,000
Indicate the number of shares outstanding of each of the
Registrant’s classes of common stock, as of the latest practicable date.
8,392,000 shares of common stock, $.01 par value, as of February
29, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
[SEE INDEX TO EXHIBITS]
|
PART I
|
|
|
|
ITEM 1.
|
BUSINESS
|
I-1
|
|
ITEM 1A.
|
RISK
FACTORS
|
I-8
|
|
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS
|
I-17
|
|
ITEM 2.
|
PROPERTIES
|
I-17
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
I-18
|
|
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
I-18
|
|
PART II
|
|
|
|
ITEM 5.
|
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
II-1
|
|
ITEM 6.
|
SELECTED FINANCIAL
DATA
|
II-2
|
|
ITEM 7.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
II-3
|
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
II-11
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS
|
II-12
|
|
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
|
II-34
|
|
ITEM 9A(T).
|
CONTROLS AND
PROCEDURES
|
II-34
|
|
PART III
|
|
|
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
III-1
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
III-3
|
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
III-7
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
III-8
|
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND
SERVICES
|
III-9
|
|
PART IV
|
|
|
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT
CHEDULES
|
IV-1
|
PART
I
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. 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. The Company makes no
commitment to revise or update any forward looking statements in order to
reflect events or circumstances after the date any such statement is
made.
ITEM
1. BUSINESS
Track Data Corporation (the
“Company”) is a Delaware corporation that was formed in 1981. The Company
maintains offices in the U.S. and Europe, with executive offices located at 95
Rockwell Place, Brooklyn, New York 11217. Its telephone number is 212-943-4555
or 718-522-7373.
The Company is a financial services company that provides
real-time financial market data, fundamental research, charting and analytical
services to institutional and individual investors through dedicated
telecommunication lines and the Internet. The Company also
disseminates news and third-party database information from more than 100
sources worldwide. The Company owns Track Data Securities Corp.
("TDSC"), a registered securities broker-dealer and member of the Financial
Industry Regulatory Authority (“FINRA”). The Company provides a
proprietary, fully integrated Internet-based online trading and market data
system, proTrack, for the professional institutional traders, and myTrack and
myTrack Edge, for the individual trader. The Company operates Track
ECN, an electronic communications network (“ECN”) that enables traders to
display and match limit orders for stocks. The Company also engages
in arbitrage trading.
Background
Since its inception in 1981, the Company has been providing
real-time financial market data to institutional customers through the operation
of its own proprietary ticker plant. In 1998, the Company began to
offer financial market data to individuals through the
Internet. Later, through its wholly owned broker-dealer subsidiary,
TDSC, the Company combined an online trading application with its market data in
its myTrack service. In 2002, trading for institutional customers was introduced
with proTrack. Further, the Company commenced operations of its Track ECN. The
Company now offers trading and market data services to all members of the
financial trading community. The offerings include trading in stocks, options
and e-mini futures.
Segments
The Company’s operations are classified in three business
segments: (1) Internet-based online trading, market data services and ECN
services to the institutional professional investment community, (2) online
trading and market data services to the non-professional individual investor
community, and (3) arbitrage trading. See Notes C and E in the
accompanying Notes to Consolidated Financial Statements.
|
A.
|
ONLINE TRADING, MARKET DATA SERVICES AND ECN SERVICES TO THE
INSTITUTIONAL PROFESSIONAL INVESTMENT
COMMUNITY
|
MarkeTrack
MarkeTrack 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. 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. Service charges range between $250
and $600 per month per user. MarkeTrack currently serves approximately 700
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.
proTrack Online Trading
The Company offers proTrack as a direct access state-of-the-art
trading system for the professional market. Among many trading
features offered by proTrack are point and click equities and options trading,
direct access to market makers and Electronic Communications Networks (“ECNs”),
hot keys, smart order routing, reserve book, quick modification of existing
orders, multiple order types and a wide variety of market data and news.
proTrack offers trading through the Company's wholly-owned broker-dealer
subsidiary, TDSC, clearing through Penson Financial Services, Inc., and is also
available for use by other broker dealers under a service bureau
arrangement. Pricing is dependent on trading volume, market data
services required and necessary clearing costs.
Electronic Communications Network
TDSC operates an ECN that enables traders to display and match
limit orders for stocks. The ECN allows trading of Nasdaq Global
Market, Nasdaq Capital Market, NYSE and AMEX listed securities, and
exchange-listed securities on its platform.
Track ECN generally pays subscribers who add liquidity $.0022 per
share on a monthly basis and charges $.0023 per share to market participants who
take liquidity. With a spread between rebate and charge of $.0001 per share, the
Company needs to handle a significant volume to achieve a material financial
result. In addition, Track ECN had been dependent on Nasdaq's trading
platform to display and execute most of its subscriber orders until October 23,
2006, when Nasdaq fully implemented its new trading platform and pricing that
forced Track ECN to operate elsewhere. Track ECN currently displays
orders on the National Stock Exchange (NSX). There has been a
significant decline in volume since the move. In an effort to keep
costs at a minimum, Track ECN became a self-clearing ECN in August
2005. Although TDSC has approval for “clearing” of its Track ECN
business, it is a limited approval for it to submit two sided trade data
respecting trades which were executed by broker-dealers on the Track
ECN. TDSC submits this data to the National Securities Clearing
Corporation so that the actual trading counterparties can compare, clear and
settle their trades and, except in the case of a rare error,
TDSC “drops out” of the clearing process. This effort to
"self-clear" was a step to reduce costs of having a third party handle this
function.
NewsWatch Service
The Company’s NewsWatch 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.
A typical installation is approximately $300/month at the 5-user level and is
scaled down with increased users at a location.
Marketing
The Company markets MarkeTrack to the premium end of the trading
markets. Typical customers are institutional sales people, arbitrageurs, market
makers and traders.
MarkeTrack, proTrack, Track ECN, as well as the NewsWatch service,
are marketed primarily through a dedicated sales force, including 6 full-time
sales persons. All services are sold directly, often as a result of
on-site presentations and service demonstrations.
The Company 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.
Competition
The Company competes with many other providers of electronically
transmitted financial information. The Company competes in its 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. The Company 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, the Company’s competitors
include Bloomberg Financial and Reuters Group. To a lesser degree, these Company
services compete with Thomson One, a Thomson Financial Services company, and
various trading/quotation applications provided by market makers and clearing
firms.
The Company's proTrack service competes primarily with the Redi
System offered by Goldman Sachs, Real-Tick offered by Lehman Brothers, Inc. and
a proprietary system offered by Lava, Inc. There are also many
proprietary systems that offer one-stop trading and limited access to other
destinations, as well as many other direct access trading systems.
The Track ECN competes with other ECNs that have substantially
greater resources and have been operating for a longer period of
time. The Company's competitors, among others, are Archipelago,
Nasdaq, DirectEdge and BATS.
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
competitor is NewsEdge.
|
B.
|
INTERNET-BASED ONLINE TRADING, MARKET DATA SERVICES, AND OTHER
SERVICES TO THE NON-PROFESSIONAL INDIVIDUAL INVESTMENT
COMMUNITY
|
Internet-Based Online Trading and Market Data
Services
The Company offers internet-based online trading and market data
services through its myTrack and myTrack Edge products. myTrack and
myTrack Edge offer trading of U.S.-based stocks, options and mutual funds, as
well as stock index-based futures. The Company has targeted active traders and
believes that myTrack and myTrack Pro are well suited to satisfy their
requirements. For those traders who are the most active and engage in
day trading, the Company's myTrack Pro contains multi windows based features and
enhancements that are designed to satisfy the needs of the hyperactive trader
community. Equity trades on myTrack, the Company’s web-based service,
are currently offered at $5.00 per stock trade; options at $.50 per contract;
and futures at $3.00 per contract. Equity trades on myTrack Edge are
currently offered at prices starting at $12.95 per trade, but volume trading
rebates can result in trade costs as low as $8.20 per trade. Futures
are generally priced at $7.00 per contract.
myTrack Edge provides access to comprehensive information on
stocks, options, indices, and news, including bid and ask prices, charts,
research and other information for any listed or Nasdaq-traded stock and many
OTC-BB stocks, as well as the ability to establish and track securities, cash,
margin and buying power positions on a real-time basis. Real-time quotes, news,
charting and technical analysis are currently available in various pay packages
from $25 per month plus exchange fees to $110 per month (including Nasdaq Level
II) plus exchange fees. Volume trading can result in rebates
equivalent to the service plan charges.
Other Internet-Based Market Data Services
AIQ Systems
AIQ Systems develops and markets 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. Prices for AIQ products vary from $49 to $89 per
month.
Dial/Data Service
Dial/Data is an Internet-based service that provides historical
and end-of-day pricing data for 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. Customers who
subscribe to Dial/Data pay a flat monthly rate that ranges from $15 to $85,
depending on the type of data received.
Marketing
The Company markets myTrack and myTrack Edge by targeting active
traders through advertisements. The Company’s marketing efforts have
included advertisements in financial and various other publications that have a
demographic similar to myTrack’s and myTrack Edge’s target
market. The Company also promotes these services through Internet web
site and banner advertisements, direct mailings and trade shows.
AIQ Systems markets its software products through direct mail, the
Internet, print advertising and seminars.
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 databases,
and to encourage customers to select the Company’s databases in preference to
databases made available by others.
Competition
The Company’s myTrack and myTrack Edge online trading service
competes with services offered by online brokers, many of which have
substantially greater resources. The Company faces direct competition
from other discount brokerage firms, many of which provide touch-tone telephone
and online brokerage services but do not maintain significant branch
networks. The Company also encounters competition from established
full commission brokerage firms. In addition, the Company competes
with financial institutions, mutual fund sponsors and other organizations, some
of which provide (or may in the future provide) electronic and other discount
brokerage services.
The Company believes its competition consists of large and small
brokerage firms, utilizing the Internet to transact retail brokerage
business. Among these competitors are E*Trade Group, Inc., Trade
Station Group, Inc., Charles Schwab & Co., Inc., Options Express and TD
Ameritrade, Inc. The Company also faces competition for customers
from full-commission brokerage firms, including Morgan Stanley Dean Witter &
Co., Merrill Lynch and Salomon Smith Barney, as well as financial institutions
and mutual funds.
MyTrack Edge’s market data service 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 e-Signal, DTN,
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.
Competitors of AIQ include Equis International (MetaStock),
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. AIQ’s TradingExpert Pro competes with Omega’s TradeStation
and MetaStock Professional.
MATTERS RELATED TO SEGMENTS, OTHER THAN ARBITRAGE TRADING
Securities Regulation
TDSC is a broker-dealer registered with the SEC and FINRA and is
licensed as a broker-dealer in 50 states.
The securities industry in the United States is subject to
extensive regulation under federal and state laws. In addition, the SEC, FINRA,
other self regulatory organizations, such as the various stock exchanges, and
other regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of clients
participating in those markets, and not with protecting the interests of the
Company’s stockholders.
Broker-dealers are subject to regulations covering all aspects of
the securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure, record keeping and the conduct of directors, officers and
employees. Because of the number of complaints by online traders, the
SEC, FINRA and other regulatory organizations may adopt more stringent
regulations for online firms and their practices. If the Company fails to comply
with any laws, rules or regulations, the Company could be censured, fined, or
issued a cease-and-desist order, or TDSC and/or its officers and employees could
be suspended or expelled. The operations of TDSC are subject to
reviews by regulators within its industry, which include the SEC and
FINRA. In the past, certain reviews have resulted in the Company
incurring fines and required the Company to change certain of its internal
control and operating procedures. Ongoing and future reviews may
result in the Company incurring additional fines and changes in its internal
control and operating procedures. Management does not expect any
ongoing reviews to have a material affect on the Company's financial position or
statement of operations.
Operations
Clearing and Order Processing
The Company does not hold any funds or securities owned by its
clients nor execute securities transactions. The Company clears all
transactions for its clients, on a fully disclosed basis, with Penson Financial
Services, Inc. ("Penson").
The Company’s agreement with Penson provides that the clearing
broker process all securities transactions for the Company’s clients for a fee.
Services of the clearing broker include billing and credit control and receipt,
custody and delivery of securities. The Company has agreed to
indemnify and hold the clearing broker harmless from certain liabilities or
claims, including claims arising from the transactions of its clients, which
could be material in amount. The Company’s clearing agreement may be
terminated by either party, upon 45 days’ written notice. The Company
relies on the operational capacity and the ability of the clearing broker for
the orderly processing of transactions.
Clients’ securities transactions are effected on either a cash or
margin basis. In connection with margin transactions, credit is extended to a
client, collateralized by securities and cash in the client’s account, for a
portion of the purchase price. The client is charged for margin financing at
interest rates based on the broker call rate plus an additional amount of up to
2.50%. The broker call rate, also known as the “Call Money Rate,” is the
prevailing interest rate charged by banks on secured loans to
broker-dealers.
Margin lending is subject to the margin rules of the Board of
Governors of the Federal Reserve System. Margin lending subjects the Company to
the risk of a market decline that would reduce the value of collateral below the
client’s indebtedness before the collateral could be sold. Under applicable
rules, in the event of a decline in the market value of the securities in a
margin account, the client is required to deposit additional securities or cash
in the account. The margin agreement allows the Company or Penson to
sell securities owned by the client under certain circumstances.
Although TDSC has approval for “clearing” of its Track ECN
business, it is a unique and limited approval for it to submit two sided trade
data respecting trades which were executed by broker-dealers on the Track ECN.
TDSC submits this data to the National Securities Clearing Corporation so that
the actual trading counterparties can and do compare, clear and settle their
trades and, except in the case of a rare error, TDSC “drops out” of the clearing
process. This effort to “self-clear” was a step to reduce costs of having a
third party handle this function.
Network Infrastructure
The Company’s external network consists of a series of routers and
other Internet-networking equipment, mail, web and File Transfer Protocol (ftp)
servers; these servers are connected to the Company's internal (i.e. protected)
network. This permits a moderated connection to the Company’s
intranet, so that any computer that can connect to the Internet can access
authorized services.
The Company’s technology is supported by an internal staff of
programmers, developers, and operators 24 hours a day, seven days a week. The
programming staff is supplemented by a team of quality control analysts, web
page developers, technical writers, and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new
services. Software is designed to be versatile and easily adaptable
to new and emerging technologies.
Net Capital Requirements
The SEC, FINRA, and various other regulatory agencies have
stringent rules requiring the maintenance of specific levels of net capital by
securities brokers. These include 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 December 31, 2007, TDSC was required to maintain minimum net
capital, in accordance with SEC rules, of approximately $1 million and had total
net capital of $4,413,000 or approximately $3,413,000 in excess of minimum net
capital requirements.
If TDSC fails to maintain the required net capital, TDSC may be
subject to suspension or revocation of registration by the SEC and suspension or
expulsion by FINRA 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.
Limited Proprietary Information
The Company relies on a combination of copyright, trademark and
trade secret laws and non-disclosure agreements to protect its proprietary
technologies, ideas, know-how and other proprietary information. The
Company holds a United States trademark registration for the myTrack
name. The Company has no patents or registered copyrights. Third
parties may copy or otherwise obtain and use the Company’s proprietary
technologies, ideas, know-how and other proprietary information without
authorization or independently develop technologies similar or superior to its
technologies. Policing unauthorized use of its technologies and other
intellectual property is difficult, particularly because the global nature of
the Internet makes it difficult to control the ultimate destination or security
of software or other data transmitted.
The financial information provided by the Company for its
MarkeTrack, myTrack, proTrack, myTrack Edge, 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, myTrack, proTrack and Dial/Data are
registered service marks owned by the Company. AIQ has registered trademarks for
StockExpert, MarketExpert, OptionExpert and TradingExpert, as well as Opening
Bell for its newsletter.
Research, Development and Maintenance
The Company charges all costs incurred to establish the
technological feasibility of a product or product enhancement, as well as
correction of software bugs and minor enhancements to existing software
applications, to research, development and maintenance expense. Research,
development and maintenance expenses, included in direct operating costs, were
approximately $162,000, $159,000 and $210,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
Employees
The Company employed approximately 130 persons on a full-time
basis as of December 31, 2007. The Company believes that its relationship with
its employees is satisfactory.
The Company engages in arbitrage trading activity. The Company's
trading strategy consists principally of establishing hedged positions
consisting of stocks and options. The Company is subject to market
risk in attempting to establish a hedged position, as the market prices could
change, precluding a profitable hedge. In these instances, any
positions that were established for this hedge would be immediately sold,
usually resulting in small losses. If the hedged positions are
successfully established at the prices sought, the positions generally stay
until the next option expiration date, resulting in small gains, regardless of
market value changes in these securities. While virtually all
positions are liquidated at option expiration date, certain stock positions
remain. The liquidation of these positions generally results in
small profits or losses. From time to time, losses may result from
certain dividends that may have to be delivered on positions held, as well as
from certain corporate restructurings and mergers that may not have been taken
into account when the positions were originally established.
In connection with the arbitrage trading activity, the Company
incurs margin loans. The Company is exposed to interest rate change
market risk with respect to these margin loans. The level of trading
in the arbitrage trading account is partially dependent on the margin value of
Track Data common stock pledged by its Principal Stockholder, and the Company’s
investment in Innodata common stock, an available-for-sale security which is
used as collateral. The market value of such securities is dependent
on future market conditions for these companies over which the Company has
little or no control.
ITEM 1A. RISK FACTORS
Risks Relating to Owning Our Stock
Market volatility may cause our stock price and the value of your
investment to decline.
From January 1, 2004 through December 31, 2007, the price per
share of our common stock has ranged from a low of $1.81 to a high of
$9.80. The market price of our common stock has been, and is likely
to continue to be, highly volatile and subject to wide fluctuations. In the
past, volatility in the market price of a company’s securities has often led to
securities class action litigation. Such litigation could result in substantial
costs to us and divert our attention and resources, which could harm our
business. Declines in the market price of our common stock or failure of the
market price to increase could also harm our ability to retain key employees,
reduce our access to capital and otherwise harm our business.
Broad market and industry factors may adversely affect the market
price of our common stock, regardless of our actual operating performance.
Factors that could cause fluctuations in our stock price may include, among
other things:
|
·
|
actual or anticipated variations in quarterly operating
results;
|
|
·
|
conditions or trends in our industry, including trading
volumes, regulatory changes or changes in the securities
marketplace;
|
|
·
|
changes in the market valuations of other companies
operating in our industry;
|
|
·
|
announcements by us or our competitors of significant
acquisitions, strategic partnerships or
divestitures;
|
|
·
|
announcements of investigations or regulatory scrutiny of
our operations or lawsuits filed against
us;
|
|
·
|
additions or departures of key personnel;
and
|
|
·
|
sales of our common stock, including sales of our common
stock by our directors and officers.
|
We cannot assure you that we will be profitable.
Our Professional Market segment revenues from market data services
experienced significant declines since 2001 from a combination of staffing
reductions in the securities industry, the use by customers of internally
developed services, or lower priced services offered by us or other vendors.
This trend has continued in 2008. Track ECN had been dependent on
Nasdaq's trading platform to display and execute most of its subscriber orders
until October 23, 2006, when Nasdaq fully implemented its new trading platform
and pricing that forced Track ECN to operate elsewhere. Track ECN
currently displays orders on the NSX. There has been a significant decline in
volume since the move.
Our Non-Professional Market segment revenues have been
inconsistent month to month. The Company is attempting to grow revenues in this
segment, principally through marketing alliances and limited advertising to
attract new customers, and by offering additional services to existing
customers. The Company presently offers trading of U.S. based stocks, options
and e-mini futures.
We also engage in arbitrage trading activity. Our
trading strategy consists principally of establishing hedged positions
consisting of stocks and options. We are subject to market risk in
attempting to establish a hedged position, as the market prices could change,
precluding a profitable hedge. In these instances, any positions that were
established for this hedge would be immediately sold, usually resulting in small
losses. If the hedged positions are successfully established at the prices
sought, the positions generally stay until the next option expiration date,
resulting in small gains, regardless of market value changes in these
securities. While virtually all positions are liquidated at option expiration
date, certain stock positions remain. The liquidation of these positions
generally results in small profits or losses. From time to time, losses may
result from certain dividends that may have to be delivered on positions held,
as well as from certain corporate restructurings and mergers that may not have
been taken into account when the positions were originally established.
Our officers, directors and largest stockholder have the ability to
control all matters submitted to stockholders for approval and control the
issuance of preferred stock.
Our Principal Stockholder may be able to control matters requiring
a stockholder vote, such as unsolicited takeovers which may prevent investors
from receiving a premium on their shares. As of February 29, 2008,
Barry Hertz, who served as the Company’s Chairman and CEO until his resignation
on March 16, 2007, directly or indirectly controlled approximately 56% of our
shares. He is in a position to control the outcome of matters requiring a
stockholder vote, including the election of directors. Such control
could have the effect of discouraging, or making more difficult, an unsolicited
acquisition of us by means of a tender offer, a proxy contest or otherwise, even
though an unsolicited acquisition could have resulted in our stockholders
receiving a premium for their shares or be otherwise economically beneficial to
them.
Our right to issue preferred stock could dilute or diminish the
value of existing investors' common stock. Our governing documents authorize the
issuance of up to five million shares of preferred stock without stockholder
approval, with dividend, liquidation, conversion, voting or other rights which
could adversely affect the voting power or other rights of the holders of our
common stock. Depending on the designations, rights and preferences
of a particular issuance of preferred stock, such issuance could adversely
affect the market value of our common stock.
Our right to issue preferred stock could also make a third-party
acquisition of us difficult. In the event of issuance, the preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control. Although we
have no present intention to issue any shares of preferred stock, there can be
no assurance that we will not do so in the future.
Success of stockholder actions against directors is less likely as
our directors' liability for their actions is limited and we may indemnify them
if they are sued. Our governing documents limit the liability of our directors
for breach of their fiduciary duty of care. The effect is to
eliminate liability of directors for monetary damages arising out of negligent
or grossly negligent conduct. Stockholder actions against our directors for
monetary damages can only be maintained upon a showing of certain factors and
not for director's negligence or gross negligence in satisfying their duty of
care. The factors required to obtain monetary damages are a breach of
the individual director's duty of loyalty, a failure to act in good faith,
intentional misconduct, a knowing violation of the law, an improper personal
benefit, or an illegal dividend or stock purchase. These documents
also provide for indemnification as permitted by Delaware
law. However, insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to our directors, officers or
controlling persons pursuant to the foregoing provisions, we have been informed
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
We may not pay dividends on our common stock.
We have paid dividends in the past but have not done so since
March, 2004. There is currently no plan to pay dividends in the near
future. Dividends in the future, if any, will be based on factors,
among others, relating to future earnings and capital requirements and to the
discretion of our board of directors.
Risks Relating to the Nature of the Financial Services
Business
Many of our competitors have greater financial, technical, marketing and
other resources.
Many of our competitors have greater resources than we do and
offer a wider range of financial products and services. Many also have greater
name recognition, greater market acceptance and larger customer bases. These
competitors may conduct extensive promotional activities and offer better terms,
lower prices and/or different products and services than we do. Moreover, some
of our competitors have established relationships among themselves or with third
parties to enhance their products and services. This means that our competitors
may be able to respond more quickly to new or changing opportunities and demands
and withstand changing market conditions better than we can.
This intense competition has resulted in several trends that may
adversely affect our financial condition and results of operations, including
the implementation of new pricing strategies, consolidation in the industry and
increased emphasis on advertising and promotional efforts.
We face direct competition from numerous online and software-based
brokerage firms, including Charles Schwab & Co., Inc., E*TRADE Group, Inc.,
Options Express, TD Ameritrade, Inc. and TradeStation Group, Inc. We also
encounter competition from the broker-dealer affiliates of established full
commission brokerage firms, as well as from financial institutions, mutual fund
sponsors and other organizations, some of which provide online brokerage
services.
We believe that the general financial success of companies within
the online securities industry will continue to attract new competitors to the
industry, such as banks, software development companies, insurance companies,
providers of online financial information and others. These companies may
provide a more comprehensive suite of services than we do. We may not be able to
compete effectively with our current or future competitors.
A decline in activity levels in the securities markets could lower demand
for our services.
Our business is dependent upon the health of the financial markets
as well as the financial health of the participants in those markets. Some of
the demand for financial data and information is dependent upon activity levels
in the securities markets while other demand is static and is not dependent on
activity levels. In the event that the U.S. or international financial markets
suffer a prolonged downturn that results in a significant decline in investor
activity, our revenue levels could be materially adversely affected. We have
experienced higher than normal cancellations or downgrades as a result of the
cost cutting pressures evident in the financial services sector in recent years
and such cancellations or downgrades may continue.
Consolidation of financial services within and across industries could
lower demand for our services.
As consolidation occurs and synergies are achieved, the number of
potential customers for our services decreases. This consolidation has two
forms: consolidations within an industry, such as banking, and across
industries, such as consolidations of insurance, banking and brokerage
companies. When two companies that separately subscribe to or use our services
combine, they may terminate or reduce duplicative subscriptions for our services
or if they are billed on a usage basis, usage may decline due to synergies
created by the business combination. We experienced higher than normal
cancellations in recent years as a result of this trend and these consolidations
and cancellations may continue. A large number of cancellations, or lower
utilization resulting from consolidations, could have a material adverse effect
on our revenue.
The continuing impact of cost-cutting pressures across the financial
services industry could cause lower demand for our services.
Many customers within the financial services industry are striving
to reduce their operating costs. To achieve this goal, customers may seek to
reduce their spending on market data services. If customers elect to reduce
their spending with us, our results of operations could be materially adversely
affected. Alternatively, customers may use other strategies to reduce their
overall spending on market data services, either by consolidating their spending
with a fewer number of vendors or by selecting vendors with lower-cost
offerings. If customers elect to consolidate their spending on market data
services with other vendors and not us, or if we cannot price our services as
aggressively as the competition, our results of operations could be materially
adversely affected.
Servicing customers outside the United States involves special challenges
that we may not be able to meet, which could negatively impact our financial
results.
To date, our operations are principally located in the United
States, with Internet access to our products from outside the United States.
Since our services are available over the Internet in foreign countries and we
have customers residing in foreign countries, foreign jurisdictions may claim
that we are required to qualify to do business in their country. We believe that
the number of our customers residing outside of the United States will increase
over time. We are required to comply with the laws and regulations of each
country in which we conduct business, including laws and regulations currently
in place or which may be enacted related to Internet services available to their
citizens from service providers located elsewhere. Any failure to develop
effective compliance and reporting systems could result in regulatory penalties
in the applicable jurisdiction, which could have a material adverse effect on
our business, financial condition and operating results.
In addition, in the future we may choose to offer foreign
securities brokerage services. There are certain risks inherent in doing so.
Among other risks, we may face less developed technological infrastructures,
less developed automation in exchanges, depositories and national clearing
systems, exchange rate fluctuations, increased credit risk and unexpected
changes in regulatory requirements, tariffs and other trade barriers. If we
choose to do business through an international entity, we may also face barriers
to repatriation of foreign earnings. Any of these factors could have a material
adverse effect on our future international operations and consequently on our
business, financial condition and operating results.
If we fail to attract customers in a cost-effective manner, our
profitability and growth may be impaired.
Our profitability and growth depends on increasing our customer
base in a cost-effective manner. We expect to increase our
advertising and related expenses. There are no assurances that these
efforts will be cost-effective at attracting new customers. In particular, we
believe that rates for desirable advertising and marketing placements are likely
to increase in the foreseeable future, and we may be disadvantaged relative to
our larger competitors in our ability to expand or maintain our advertising and
marketing commitments. Also, our sales and marketing methods are
subject to regulation by FINRA. Their rules and regulations impose specific
limitations on our sales methods, including our advertising and payments to
non-broker-dealers. If we do not achieve our advertising objectives, our
profitability and growth may be impaired.
We are subject to various forms of credit risk, and those risks could
have a material adverse effect on our financial situation.
Through an arrangement with our clearing firm, we extend margin
credit and leverage to our customers, which is subject to various regulatory and
clearing firm margin requirements. Margin credit is collateralized by cash and
securities in the customers’ accounts. Leverage involves securing a large
potential future obligation with a proportional amount of cash or securities.
The risks associated with margin credit and leverage increase during periods of
fast market movements or in cases where leverage or collateral is concentrated
and market movements occur. During such times, customers who utilize margin
credit or leverage and who have collateralized their obligations with securities
may find that the securities have a rapidly depreciating value and may not be
sufficient to cover their obligations in the event of a liquidation. We are also
exposed to credit risk when our customers execute transactions, such as short
sales of options and equities that can expose them to risk beyond their invested
capital.
We expect this kind of exposure to increase with growth in our
overall business. Because we indemnify and hold harmless our clearing firms from
certain liabilities or claims, the use of margin credit, leverage and short
sales may expose us to significant off-balance-sheet risk in the event that
collateral requirements are not sufficient to fully cover losses that customers
may incur and those customers fail to satisfy their obligations. As of
December 31, 2007, we had $15.5 million in margin credit extended to our
customers through our clearing firms. The amount of risk to which we are exposed
from the leverage we extend to our customers and from short sale transactions by
our customers is unlimited and not quantifiable as the risk is dependent upon
analysis of a potential significant and undeterminable rise or fall in stock
prices.
Our risk management policies and procedures may not be effective and may
leave us exposed to unidentified or unexpected risks.
Our policies, procedures and practices used to identify, monitor
and control a variety of risks may fail to be effective. As a result, we face
the risk of losses, including losses resulting from firm errors, customer
defaults, market movements, fraud and money-laundering. Our risk management
methods rely on a combination of technical and human controls and supervision
that are subject to error and failure. Some of our methods of managing risk are
based on internally developed controls and observed historical market behavior,
and also involve reliance on industry standard practices. These methods may not
adequately prevent future losses, particularly as they relate to extreme market
movements, which may be significantly greater than the historical measures
indicate. These methods also may not adequately prevent losses due to technical
errors if our testing and quality control practices are not effective in
preventing technical software or hardware failures.
We may suffer losses if our reputation is harmed.
Our ability to attract and retain customers and employees may be
adversely affected to the extent our reputation is damaged. If we fail, or
appear to fail, to deal with various issues that may give rise to reputational
risk, we could harm our business prospects. These issues include, but are not
limited to, appropriately dealing with potential conflicts of interest, legal
and regulatory requirements, ethical issues, money-laundering, privacy,
record-keeping, sales and trading practices, and the proper identification of
the legal, reputational, credit, liquidity, and market risks inherent in our
business. Failure to appropriately address these issues could also give rise to
additional legal risk to us, which could, in turn, increase the size and number
of claims and damages asserted against us or subject us to regulatory
enforcement actions, fines, and penalties.
Systems failures and delays could harm our business.
We receive and process trade orders through a variety of
electronic channels. Our online trading services are heavily dependent on the
integrity of the systems supporting them. Our systems and operations, including
our Web servers, and those of our third-party service providers are vulnerable
to damage or interruption from human error, sabotage, encryption failures,
break-ins, intentional acts of vandalism, earthquakes, terrorist attacks,
floods, fires, power loss, telecommunications failures, computer viruses,
computer denial of service, attacks or other attempts to harm our systems and
operations, and similar events. Our disaster recovery planning cannot account
for all eventualities. In addition, extraordinary trading volumes could cause
our computer systems to operate at an unacceptably low speed or even fail. While
we have invested significant amounts to upgrade the reliability and scalability
of our systems, there can be no assurance that our systems will be sufficient to
handle such extraordinary trading volumes.
Systems failures or delays may occur in the future and could
cause, among other things, unanticipated disruptions in service to our
customers, slower system response time resulting in transactions not being
processed as quickly as our customers desire, decreased levels of customer
service and customer satisfaction and harm to our reputation. If any of these
events were to occur, we could suffer: a loss of customers or a reduction in the
growth of our customer base; increased operating expenses; financial losses;
litigation or other customer claims; and regulatory sanctions or additional
regulatory burdens.
Our business also depends on the continued reliability of the
Internet infrastructure. This includes maintenance of a reliable network
backbone with the necessary speed, data capacity and security for providing
reliable Internet services. Internet infrastructure may be unable to support the
demands placed on it if the number of Internet users continues to increase, or
if existing or future Internet users access the Internet more often or increase
their bandwidth requirements. In addition, viruses, worms and similar programs
may harm the performance of the Internet. The Internet has experienced a variety
of outages and other delays as a result of damage to portions of its
infrastructure, and it could face outages and delays in the future. These
outages and delays could reduce the level of Internet usage and our business
could be materially adversely affected.
Our networks and those of our third-party service providers may be
vulnerable to security risks.
The secure transmission of confidential information over public
networks is a critical element of our operations. Our networks and those of our
third-party service providers may be vulnerable to unauthorized access, computer
viruses and other security problems. Persons who circumvent security measures
could wrongfully use our confidential information or our customers’ confidential
information or cause interruptions or malfunctions in our operations. We or our
service providers may be required to expend significant additional resources to
protect against the threat of security breaches or to alleviate problems caused
by any breaches. We or our service providers may not be able to implement
security measures that will protect against all security risks.
During the third quarter of 2007, the security of the Company's
computer system was compromised. As a result, certain information may
have been illegally accessed, including certain customer personal
information. The Company has made certain changes in its security
systems to reduce the likelihood of future intrusions. The Company
does not anticipate any costs in connection with the security breach will have a
material affect on the Company's financial position.
Our inability to protect our intellectual property rights or our
infringement of the intellectual property rights of others could adversely
affect our business.
Our success and ability to compete in the online securities
industry depends in part upon our technology. Laws and our contractual terms may
not be sufficient to protect our technology from use or theft by third parties.
For instance, a third party might try to reverse engineer or otherwise obtain
and use our technology without our permission and without our knowledge,
allowing competitors to duplicate our products. We may have legal or contractual
rights that we could assert against such illegal use, but lawsuits claiming
infringement or misappropriation are complex and expensive, and the outcome
would not be certain. We may choose not to enforce or protect our intellectual
property rights, depending on our strategic evaluation and judgment regarding
the best use of our intellectual property portfolio and the recourse available
to us.
Patents of third parties may have an important bearing on our
ability to offer certain of our products and services. Our major competitors as
well as other companies and individuals may obtain and may have obtained patents
related to the technologies for trading the types of products and providing the
services we offer or plan to offer. We cannot assure you that we are or will be
aware of all patents containing claims that may pose a risk of infringement by
our products and services. In addition, some patent applications in the United
States are confidential until a patent is issued and, therefore, we cannot
evaluate the extent to which technology concerning our products and services may
be covered or asserted to be covered by claims contained in pending patent
applications. In general, if one or more of our products or services were found
by a court to infringe on patents held by others, we may be required to stop
developing or marketing the products or services, to obtain licenses to develop
and market the services from the holders of the patents or to redesign the
products or services in such a way as to avoid infringing those patents. An
adverse ruling arising out of any intellectual property dispute could also
subject us to significant liability for damages.
We cannot assess the extent to which we may be required in the
future to obtain licenses with respect to patents held by others, whether such
licenses would be available or, if available, whether we would be able to obtain
such licenses on commercially reasonable terms. If we are unable to obtain
licenses with respect to patents held by others, and are unable to redesign our
products or services to avoid infringement of any such patents, this could
materially adversely affect our business, financial condition and operating
results.
Also, protection may not be available for our other intellectual
property. Although we have registered trademarks in the United States, there can
be no assurance that we will be able to secure significant protection for these
marks. It is possible that our competitors will adopt product or service names
similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion. Our inability to adequately protect our
trademarks could have a material adverse effect on our business, financial
condition and operating results.
We will need to introduce new products and services to remain
competitive.
Our future success depends in part on our ability to develop and
enhance our products and services. The financial services industry is
characterized by rapid technological change and the emergence of new industry
standards and practices that could render our existing technology and systems
obsolete. There are significant technical and financial risks in the development
of new or enhanced products and services, including the risk that we will be
unable to effectively use new technologies or adapt our services to emerging
industry standards, or develop, introduce and market enhanced or new products
and services. In addition, the adoption of new Internet, networking or
telecommunications technologies or other technological changes could require us
to incur substantial expenditures to modify or adapt our services or
infrastructure.
We may make acquisitions, and we may be unable to successfully integrate
those acquisitions with our business, impairing our financial
performance.
If appropriate opportunities present themselves, we may acquire
businesses, products or technologies that we believe are strategic. If we do
succeed in acquiring a business, product or technology, we have limited
experience in integrating an acquisition into our business. The process of
integration may produce unforeseen operating difficulties and expenditures and
may absorb significant attention of our management that would otherwise be
available for the ongoing development of our business, which may harm our
business, financial condition or results of operations.
We are dependent on our clearing agent, Penson Financial Services, Inc.,
and any failure by them or difficulties in our relationship could materially
harm our business.
We are dependent on Penson Financial Services, Inc. for the
orderly processing of transactions.
Our clearing agreement with Penson may be terminated by either
party upon 45 days prior written notice. A breach or termination of this
agreement or the clearing firm’s agreement with their third-party suppliers
could harm our business. Termination of our relationship with Penson could
expose us to certain capital reserve requirements and other complex regulatory
requirements imposed by federal and state securities laws, which could have a
material adverse effect on our business. Moreover, we have agreed to indemnify
and hold harmless our clearing firm from certain liabilities or claims,
including claims arising from the transactions of our customers, and may incur
significant costs as a result.
The loss of or change in our third-party vendors may adversely affect our
business.
We rely on a number of third parties for various services. These
include the services of market makers and exchanges to execute customer orders
and other third parties for back-office services and other information necessary
to run our business, including transaction summaries, data feeds for compliance
and risk management, execution reports and trade confirmations. The
stock and option exchange and other third-party content providers provide us
with all of the financial information, market news, charts, option and stock
quotes, research reports and other fundamental data that we offer to
customers. In addition, Track ECN had been dependent on Nasdaq's
trading platform to display and execute most of its subscriber orders until
October 23, 2006, when Nasdaq fully implemented its new trading platform and
pricing that forced Track ECN to operate elsewhere. Track ECN
currently displays orders on the NSX. There has been a significant decline in
volume since the move.
We cannot assure you that any of these providers will be able to
continue to provide these services in an efficient, cost-effective manner or
that they will be able to adequately expand their services to meet our needs. An
interruption in or the cessation of service by any third-party service provider
as a result of systems failures, capacity constraints, unanticipated trading
market closures or for any other reason, and our inability to make alternative
arrangements in a smooth and timely manner, if at all, may have a material
adverse effect on our business, financial condition and operating results.
Our exposure to possible litigation could adversely affect our
business.
Because of the extent and complexity of our regulatory environment
and the products we offer, many aspects of our business involve substantial
risks of liability. In recent years, there has been an increasing incidence of
litigation involving the securities brokerage industry, including class action
and other suits that generally seek substantial damages, including in some cases
punitive damages. Any such litigation brought in the future could have a
material adverse effect on our business, financial condition and operating
results.
We also face potential indirect liability for claims of
defamation, negligence, copyright, patent or trademark infringement, violation
of the securities laws and other claims based upon the third-party content that
we distribute online. Computer failures may also result in our widely publishing
and distributing incorrect data. Our insurance may not necessarily cover any of
these claims or may not be adequate to protect us against all liability that may
be imposed. Any such litigation brought in the future could have a material
adverse effect on our business, financial condition and operating results.
Losses due to employee or customer fraud could have an adverse effect on
our business.
We are exposed to potential losses resulting from fraud and other
misconduct by employees and customers. Employees may bind us to transactions
that exceed authorized limits or present unacceptable risks, hide from us
unauthorized or unsuccessful activities or improperly use confidential
information. Customers may engage in fraudulent activities, including fraudulent
access to legitimate customer accounts or the use of a false identity to open an
account, or the use of forged or counterfeit checks for payment. Such
types of fraud may be difficult to prevent or detect, and we may not be able to
recover the losses caused by such activities. Any such losses could have a
material adverse effect on our business, financial condition and operating
results.
Risks Relating to Regulation of Our Business
We operate in a highly regulated industry and compliance failures could
adversely affect our business.
We operate under extensive regulation, which increases our cost of
doing business and is a limiting factor on the operations and development of our
business. The SEC, FINRA, the NFA and other self-regulatory organizations,
commonly called SROs, and state securities commissions regulate us. Outside the
United States, we also may be subject to regulation by securities regulatory
authorities in the countries where our customers are located. The securities
industry in the United States is subject to extensive regulation covering all
aspects of the securities business, including: sales methods; trade practices;
use and safekeeping of customer funds and securities; capital structure;
record-keeping; financing of customers’ purchases; and conduct of directors,
officers and employees.
Failure to comply with any of the laws, rules or regulations
applicable to us, even inadvertently, could lead to adverse consequences
including censure, fine, the issuance of cease-and-desist orders or the
suspension or disqualification of directors, officers or
employees. In the past, certain reviews have resulted in the Company
incurring fines and required the Company to change certain of its internal
control and operating procedures. Any of these adverse consequences
could affect our business. It is also possible that any noncompliance could
subject us to criminal penalties and civil lawsuits. An adverse ruling against
us or our officers or other employees could cause our subsidiaries or our
officers and other employees to pay a substantial fine or settlement, and could
result in their suspension or expulsion. Any of these events could have a
material adverse effect on our business.
Compliance with the Sarbanes-Oxley Act of 2002 will require substantial
financial and management resources and may increase the time and
costs.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we
evaluate and report on our system of internal controls for the year ended
December 31, 2007 and requires that we have such system of internal controls
audited beginning with our Annual Report on Form 10-K for the year ending
December 31, 2008, however, there is a proposal to delay implementation of the
audit requirement for an additional year. If we fail to maintain the
adequacy of our internal controls, we could be subject to regulatory scrutiny,
civil or criminal penalties and/or stockholder litigation. Any inability to
provide reliable financial reports could harm our business. Furthermore, any
failure to implement required new or improved controls, or difficulties
encountered in the implementation of adequate controls over our financial
processes and reporting in the future, could harm our operating results or cause
us to fail to meet our reporting obligations. Inferior internal controls could
also cause investors to lose confidence in our reported financial information,
which could have a negative effect on the trading price of our stock.
Changes in legislation or regulations may affect our ability to conduct
our business or reduce our profitability.
The regulatory environment in which we operate may change. These
changes may affect our ability to conduct our business or reduce our
profitability. Our activities may be affected not only by legislation or
regulations of general applicability, but also by industry-specific legislation
or regulations. The SEC, other U.S. or foreign governmental authorities, FINRA
or other SROs may adopt new or revised regulations which affect our business.
Changes in the interpretation or enforcement of existing laws and rules by those
entities may also affect our business.
Until October, 2006, Track ECN displayed orders submitted by its
subscribers on Nasdaq's trading platform. Broker-dealers could access
this liquidity through Nasdaq. Nasdaq was authorized to operate as an
exchange and Track ECN was no longer able to operate its business on Nasdaq’s
platform. Track ECN currently operates on NSXs Blade platform. This
change has resulted in significantly lower revenues.
In addition, we use the Internet as the distribution channel to
provide services to our customers. A number of regulatory agencies have recently
adopted regulations regarding customer privacy and the use of customer
information by service providers. Additional laws and regulations relating to
the Internet may be adopted in the future, including regulations regarding the
pricing, taxation, content and quality of products and services delivered over
the Internet. Complying with these laws and regulations is expensive and time
consuming and could limit our ability to use the Internet as a distribution
channel.
Failure to comply with net capital requirements could adversely affect
our business.
The SEC, FINRA and other SROs have stringent rules with respect to
the maintenance of specific levels of net capital by securities broker-dealers.
Our broker-dealer subsidiary is required to comply with the net capital
requirements. If we fail to maintain the required net capital, the SEC could
fine us or even suspend or revoke our registration, or FINRA could sanction us,
including by limiting our growth or expelling us from membership. Any of these
actions could have a material adverse effect on our business.
The net capital requirements also provide that the SEC may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to stockholders, employees or affiliates, commonly
called capital withdrawal, if the capital withdrawal, together with all other
net capital withdrawals during a 30-day period, exceeds 30% of excess net
capital and the SEC concludes that the capital withdrawal may be detrimental to
the financial integrity of the broker-dealer.
Procedures and requirements of the Patriot Act may expose us to
significant costs or penalties.
As participants in the financial services industry, our subsidiary
is subject to laws and regulations, including the Patriot Act of 2001, that
require that it know its customers and monitor transactions for suspicious
financial activities. The cost of complying with the Patriot Act and related
laws and regulations is significant. We face the risk that our policies,
procedures, technology and personnel directed toward complying with the Patriot
Act are insufficient and that we could be subject to significant criminal and
civil penalties due to noncompliance. Such penalties could have a material
adverse effect on our business, financial condition and operating results. As an
online broker with customers worldwide, we may face particular difficulties in
identifying our customers and monitoring their activities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The Company’s executive offices are located at 95 Rockwell Place,
Brooklyn, NY. These offices are leased from a family partnership
controlled by the Company’s Principal Stockholder. The Company
entered into a new two-year lease in the fourth quarter of 2007, expiring
September 30, 2009. The annual rental of approximately 36,000 square feet is
approximately $657,000 plus real estate taxes. The original lease expired in
April, 2006 with an annual rental of $630,000. Rent has since been
paid on a month to month basis at the same rate. 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 maintained sales and/or service offices in Brooklyn,
NY, Chicago, IL, Los Angeles, CA, San Francisco, CA, Boston, MA, Incline
Village, NV, Philadelphia, PA, Boca Raton, FL, Dallas, TX and London, England
with aggregate annual rentals of $994,000 in 2007. These leases expire at
various dates through 2009. The leases in Chicago, Los Angeles, San Francisco,
Incline Village, Boca Raton and London were terminated as of December 31, 2007,
resulting in a cost of $68,000 relating to the terminations.
The Company's facilities are fully utilized and are suitable and
adequate for their purpose.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise
in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not
materially affect the Company's financial position.
On June 14, 2005, the SEC
filed a civil complaint against Barry Hertz, the Company’s Chairman and CEO at
that time, in the U.S. District Court for the Eastern District of New York in
Brooklyn alleging violations of various provisions of the federal securities
laws in connection with certain transactions in Track Data stock owned by
others. On March 16, 2007, Mr. Hertz reached a settlement with the SEC regarding
these charges. Mr. Hertz consented, without admitting or
denying the allegations in the SECs complaint, to a permanent injunction from
violations of Section 10(b) and 10b-5 of the Exchange Act and Section 17(a) of
the Securities Act of 1933, a two-year bar from serving as an officer or
director of a publicly traded company, a two-year bar from association with a
broker or dealer, and also agreed to pay approximately $136,000 in disgorgement,
interest and civil penalties. On March 16, 2007, Mr. Hertz resigned
as Chairman and CEO of the Company. In May, 2007, the Board of
Directors agreed to reimburse Mr. Hertz under the indemnification provisions of
Delaware law, $75,000 for the disgorgement and interest portion of the amounts
paid to the SEC by him. The Company from time to time is subject to
informal inquiries and document requests from the SEC to review compliance with
Mr. Hertz's two-year association bar imposed from serving as an officer or
director of a publicly traded company and from association with a broker or
dealer. On October 24, 2007, the Company was notified by the
SEC that they would be conducting such an inquiry and requested certain
documents. The Company provided all requested documents.
In July,
2007, a subscriber of the Track ECN services filed an arbitration claim with
FINRA alleging that the Company's website confused the subscriber with respect
to its fee schedule for ECN transactions, and that, as a result, a customer of
the subscriber was billed a greater amount for ECN transactions than was
expected. The subscriber is seeking a return of its fees paid and for
loss of its customer for a total claim of $500,000. The Company has
answered the claim, denying all of the relevant facts and any liability in
connection with this claim. An arbitration hearing is scheduled for
May, 2008. The Company is unable to predict the outcome of these claims and
accordingly, no adjustments have been made in the consolidated financial
statements in response to these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The Company held its Annual Meeting on December 6, 2007. The
results of matters voted at that Meeting are presented below:
|
Election of Directors:
|
|
|
|
|
| |
|
|
|
|
|
Nominee
|
For
|
Against
|
Withheld
|
Abstain
|
|
Abraham Biderman
|
6,421,093
|
|
281,533
|
|
|
Albert Drillick
|
6,135,247
|
|
567,379
|
|
|
E. Bruce Fredrikson
|
6,421,772
|
|
280,845
|
|
|
Martin Kaye
|
6,135,206
|
|
567,420
|
|
|
Philip Ort
|
6,421,593
|
|
281,033
|
|
|
Shaya Sofer
|
6,421,424
|
|
281,172
|
|
|
Stanley Stern
|
6,130,866
|
|
571,760
|
|
| |
|
|
|
|
|
Appointment of Auditors:
|
6,508,708
|
38,873
|
|
155,043
|
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is quoted on the Nasdaq Global Market
under the symbol "TRAC." On February 29, 2008, there were 260 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 6,500.
The following table sets forth the high and low sales prices for
the Company's Common Stock as reported on Nasdaq:
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Common Stock
|
|
| |
|
|
|
|
Sale Price
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
High
|
|
|
Low
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006
|
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$
|
3.48
|
|
|
$
|
2.78
|
|
| |
Second Quarter
|
|
|
3.18
|
|
|
|
2.81
|
|
| |
Third Quarter
|
|
|
5.00
|
|
|
|
2.96
|
|
| |
Fourth Quarter
|
|
|
4.12
|
|
|
|
3.44
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007
|
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$
|
4.00
|
|
|
$
|
3.10
|
|
| |
Second Quarter
|
|
|
3.49
|
|
|
|
3.08
|
|
| |
Third Quarter
|
|
|
3.15
|
|
|
|
2.30
|
|
| |
Fourth Quarter
|
|
|
2.84
|
|
|
|
1.81
|
|
Dividends
The Company has not paid a dividend since 2004. 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, financial condition, and other relevant factors.
Issuer Purchases of Equity Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Number of
|
|
|
|
Total Number of
|
|
Maximum Number
|
|
| |
|
|
Shares of
|
|
Average
|
|
Shares Purchased as
|
|
of Shares That May
|
|
| |
Period
|
|
Common Stock
|
|
Price Paid
|
|
Part of Publicly
|
|
Yet be Purchased
|
|
| |
Purchased
|
|
Purchased
|
|
Per Share
|
|
Announced Plans
|
|
Under the Plans
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
October, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
November, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
None
|
|
|
|
|
|
|
|
None
|
|
|
|
993,501
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 1, 2005, the Board of Directors approved a buy back of up
to 1,000,000 shares of the Company’s Common Stock in market or private
negotiated transactions from time to time.
ITEM
6. SELECTED FINANCIAL DATA
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
| |
|
(in thousands, except earnings and dividends per
share)
|
|
|
SERVICE FEES AND REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Data Services
|
|
$
|
18,648
|
|
|
$
|
21,474
|
|
|
$
|
23,175
|
|
|
$
|
26,308
|
|
|
$
|
29,988
|
|
|
|
ECN Services
|
|
|
6,764
|
|
|
|
13,375
|
|
|
|
6,911
|
|
|
|
5,050
|
|
|
|
2,003
|
|
|
|
Broker-Dealer Commissions (includes $125 in
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and $89 in 2006 from related
party)
|
|
|
8,668
|
|
|
|
7,137
|
|
|
|
6,008
|
|
|
|
8,735
|
|
|
|
8,890
|
|
|
|
Total
|
|
|
34,080
|
|
|
|
41,986
|
|
|
|
36,094
|
|
|
|
40,093
|
|
|
|
40,881
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS, EXPENSES AND OTHER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
24,963
|
|
|
|
30,465
|
|
|
|
25,002
|
|
|
|
23,544
|
|
|
|
23,201
|
|
|
|
Selling and administrative expenses
|
|
|
10,575
|
|
|
|
10,986
|
|
|
|
12,485
|
|
|
|
13,815
|
|
|
|
14,515
|
|
|
|
Rent expense – related party
|
|
|
637
|
|
|
|
630
|
|
|
|
623
|
|
|
|
600
|
|
|
|
583
|
|
|
|
Marketing and advertising
|
|
|
247
|
|
|
|
200
|
|
|
|
274
|
|
|
|
414
|
|
|
|
394
|
|
|
|
Net gain on sale of investments in private companies
|
|
|
-
|
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Gain on arbitrage trading
|
|
|
(2,114
|
)
|
|
|
(1,013
|
)
|
|
|
(819
|
)
|
|
|
(1,512
|
)
|
|
|
(1,891
|
)
|
|
|
Gain on marketable securities-Innodata and Edgar
Online
|
|
|
(344
|
)
|
|
|
(1,777
|
)
|
|
|
(1,067
|
)
|
|
|
(5,887
|
)
|
|
|
(624
|
)
|
|
|
Interest expense (income)– net
|
|
|
291
|
|
|
|
(84
|
)
|
|
|
223
|
|
|
|
305
|
|
|
|
107
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34,255
|
|
|
|
39,407
|
|
|
|
36,309
|
|
|
|
31,279
|
|
|
|
36,285
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(175
|
)
|
|
|
2,579
|
|
|
|
(215
|
)
|
|
|
8,814
|
|
|
|
4,596
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX (BENEFIT) EXPENSE
|
|
|
(43
|
)
|
|
|
1,030
|
|
|
|
(178
|
)
|
|
|
3,614
|
|
|
|
1,750
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(132
|
)
|
|
$
|
1,549
|
|
|
$
|
(37
|
)
|
|
$
|
5,200
|
|
|
$
|
2,846
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
|
|
|
|
$(.02
|
)
|
|
|
|
$.18
|
|
|
|
|
$(.00
|
)
|
|
|
|
$.53
|
|
|
|
|
$.29
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER SHARE
|
|
|
|
$.00
|
|
|
|
|
$.00
|
|
|
|
|
$.00
|
|
|
|
|
$.05
|
|
|
|
|
$.05
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
8,392
|
|
|
|
8,382
|
|
|
|
9,221
|
|
|
|
9,732
|
|
|
|
9,942
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED DILUTIVE SHARES OUTSTANDING
|
|
|
8,392
|
|
|
|
8,401
|
|
|
|
9,221
|
|
|
|
9,740
|
|
|
|
9,960
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
| |
|
(in thousands)
|
|
|
TOTAL ASSETS
|
|
$
|
32,953
|
|
|
$
|
34,848
|
|
|
$
|
36,207
|
|
|
$
|
69,438
|
|
|
$
|
73,498
|
|
|
|
TOTAL LIABILITIES
|
|
|
10,219
|
|
|
|
12,415
|
|
|
|
14,658
|
|
|
|
42,570
|
|
|
|
49,693
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
22,734
|
|
|
|
22,433
|
|
|
|
21,549
|
|
|
|
26,868
|
|
|
|
23,805
|
|
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Business
Track Data Corporation (the "Company") is a financial services
company that provides real-time financial market data, fundamental research,
charting and analytical services to institutional and individual investors
through dedicated telecommunication lines and the Internet. The
Company also disseminates news and third-party database information from more
than 100 sources worldwide. The Company owns TDSC, a registered
securities broker-dealer and member of FINRA. The Company provides a
proprietary, fully integrated Internet-based online trading and market data
system, proTrack, for the professional institutional traders, and myTrack and
myTrack Edge, for the individual trader. The Company also operates
Track ECN, an electronic communications network that enables traders to display
and match limit orders for stocks. The Company's operations are
classified in three business segments: (1) Professional Market -- Market data
services and trading, including ECN services, to the institutional professional
investment community, (2) Non-Professional Market -- Internet-based online
trading and market data services to the non-professional individual investor
community, and (3) Arbitrage trading.
Relevant Factors
The Company's Professional Market segment revenues experienced
significant declines since 2001 from a combination of staffing reductions in the
securities industry, the use by customers of internally developed services, or
lower priced services offered by the Company or other vendors. This
trend has continued into 2008. Until October, 2006, Track ECN
displayed orders submitted by its subscribers on Nasdaq's trading
platform. Broker-dealers could access this liquidity through
Nasdaq. Nasdaq was authorized to operate as an exchange and Track ECN
was no longer able to operate its business on Nasdaq’s
platform. Track ECN currently displays its orders on the National
Stock Exchange. This change has resulted in significantly lower
revenues. In addition, revenues were reduced in the second quarter of
2007 by a new regulation that limited ECN charges for trading of stocks under
$1.00. The Company commenced self-clearing of its ECN business at the
end of the third quarter of 2005 in an effort to decrease costs associated with
ECN revenues. Although TDSC has approval for “clearing” of its Track
ECN business, it is a limited approval for it to submit two sided trade data
respecting trades which were executed by broker-dealers on the Track
ECN. TDSC submits this data to the National Securities Clearing
Corporation so that the actual trading counterparties can compare, clear and
settle their trades and, except in the case of a rare error, TDSC “drops out” of
the clearing process. This effort to "self-clear" was a step to
reduce costs of having a third party handle this function.
The Non-Professional Market segment revenues have been
inconsistent month to month. The Company is attempting to grow revenues in this
segment, principally through marketing alliances and limited advertising to
attract new customers, and by offering additional services to existing
customers. The Company presently offers trading of U.S. based stocks,
options and e-mini futures.
The trading and market data services for both segments require the
Company to maintain a market data ticker plant on a 24/7 basis, as well as all
back office trading functions. The Company's focus is to increase
revenues in both segments, as the underlying costs of maintaining the operations
and back office will not increase commensurate with any revenue increase,
allowing greater operating margins on incremental revenues.
The Company engages in arbitrage trading activity. The Company's
trading strategy consists principally of establishing hedged positions
consisting of stocks and options. The Company is subject to market
risk in attempting to establish a hedged position, as the market prices could
change, precluding a profitable hedge. In these instances, any
positions that were established for this hedge would be immediately sold,
usually resulting in small losses. If the hedged positions are
successfully established at the prices sought, the positions generally stay
until the next option expiration date, resulting in small gains, regardless of
market value changes in these securities. While virtually all
positions are liquidated at option expiration date, certain stock positions
remain. The liquidation of these positions generally results in
small profits or losses. From time to time, losses may result from
certain dividends that may have to be delivered on positions held, as well as
from certain corporate restructurings and mergers that may not have been taken
into account when the positions were originally established.
In connection with the arbitrage trading activity, the Company
incurs margin loans. The Company is exposed to interest rate change
market risk with respect to these margin loans. The level of trading
in the arbitrage trading account is partially dependent on the margin value of
Track Data common stock pledged by its Principal Stockholder and Innodata common
stock, which is used as collateral. The market value of such
securities is dependent on future market conditions for these companies over
which the Company has little or no control.
Results of Operations
Years ended December 31, 2007 and 2006
Revenues for the years ended December 31, 2007 and 2006 were
$34,080,000 and $41,986,000, respectively, a decrease of 19%. The
Company’s Professional Market segment had revenues for the years ended December
31, 2007 and 2006 of $20,803,000 and $29,642,000, respectively, a decrease of
30% for this segment. The Company’s Non-Professional Market segment
had revenues of $13,277,000 and $12,344,000, respectively, for the years ended
December 31, 2007 and 2006, an increase of 8% for this segment. The
decrease in revenues was principally attributable to the Company’s Track ECN
which revenues decreased approximately $6.6 million. Until October,
2006, Track ECN displayed orders submitted by its subscribers on Nasdaq's
trading platform. Broker-dealers could access this liquidity through
Nasdaq. Nasdaq was authorized to operate as an exchange and Track ECN
was no longer able to operate its business on Nasdaq’s
platform. Track ECN currently displays its quotes on the National
Stock Exchange. This change has resulted in significantly lower ECN revenues
since November, 2006. Market data revenues decreased approximately $2.8 million
in 2007 compared to 2006. Since 2001, the Company has experienced a decline in
revenues from its market data services to the Professional Market segment due
principally to staffing reductions in the securities industry, the use by
customers of internally developed services, or lower priced services that are
offered by the Company or other vendors. This trend has continued in
2008, negatively impacting revenues and profits. The declines in ECN and market
data revenues were partially offset by in increase of $1.5 million in
broker-dealer commissions, principally from the Non-Professional Market
Segment.
Direct operating costs were $24,963,000 for the year ended
December 31, 2007 and $30,465,000 for the similar period in 2006, a decrease of
18%. Direct operating costs as a percentage of revenues were 73% in
2007 and 2006. Without giving effect to unallocated depreciation,
amortization expense and costs directly allocated to the Arbitrage segment, the
Company’s Professional Market segment had $16,568,000 and $23,153,000 of direct
costs for the years ended December 31, 2007 and 2006, respectively, a decrease
of 28%. Direct operating costs as a percentage of revenues for
the Professional segment were 80% in 2007 and 78% in 2006. The dollar
decrease in direct costs is due principally to the decrease in ECN rebates due
to reduced ECN revenues. The Company’s Non-Professional Market segment had
$7,598,000 and $6,542,000 in direct costs for the years ended December 31, 2007
and 2006, respectively, an increase of 16%. The dollar increase in
direct costs is due principally to the increased broker-dealer commissions in
2007. Direct operating costs as a percentage of revenues for the
Non-Professional segment were 57% in 2007 and 53% in 2006. Certain
direct operating costs are allocated to each segment based on revenues. Direct
operating costs include direct payroll, direct telecommunication costs, computer
supplies, depreciation, equipment lease expense and the amortization of software
development costs, costs of clearing, back office payroll and other direct
broker-dealer expenses and ECN customer commissions and clearing.
Selling and administrative expenses were $10,575,000 and
$10,986,000 in the 2007 and 2006 periods, respectively, a decrease of
4%. Selling and administrative expenses as a percentage of revenues
were 31% in 2007 and 26% in 2006. Without giving effect to unallocated
depreciation, amortization expense and costs directly allocated to the Arbitrage
segment, selling and administrative expenses for the Professional Market segment
were $7,064,000 and $7,788,000 in the 2007 and 2006 periods, respectively, a
decrease of 9%. For the Professional Market segment selling and
administrative expenses as a percentage of revenues were 34% in 2007 and 26% in
2006. Selling and administrative expenses for the Non-Professional segment were
$3,418,000 and $3,098,000 in the 2007 and 2006 periods, respectively, an
increase of 10%. For the Non-Professional segment selling and
administrative expense as a percentage of revenue was 26% in 2007 and 25% in
2006. The increase in selling and administrative expenses was due
principally to increased expenses due to increased revenues. Certain selling and
administrative expenses are allocated to each segment based on revenues.
Rent costs to related parties was $637,000 in 2007 and $630,000 in
2006. The Professional Market segment incurred rent costs of $389,000
in 2007 and $454,000 in 2006. The Non-Professional segment incurred
rent costs of $248,000 in 2007 and $176,000 in 2006.
Marketing and advertising costs were $247,000 in 2007 and $200,000
in 2006. The Professional Market segment incurred costs of $102,000
in 2007 and $86,000 in 2006. The Non-Professional segment incurred
marketing costs of $145,000 in 2007 and $114,000 in 2006.
The Professional Market segment realized a loss of $3,320,000 in
2007 compared to a loss of $1,829,000 before unallocated amounts and income
taxes in 2006. The Non-Professional Market segment realized income of
$1,870,000 in 2007 and $2,404,000 in 2006 before unallocated amounts and income
taxes. The Arbitrage segment realized income of $1,584,000 in 2007 compared to
$843,000 in 2006 before unallocated amounts and income taxes.
In 2007 and 2006, the Company recognized gains of $344,000 and
$1,777,000, respectively, from the sale of available-for-sale securities of
Innodata and Edgar Online common stock.
Net interest expense in 2007 was $291,000 compared to net interest
income of $84,000 in 2006. The increase in interest expense in 2007 is due
principally to increased levels of margin debt in connection with the Company's
arbitrage trading program.
As a result of the above-mentioned factors, the Company realized a
loss before income taxes of $175,000 in the 2007 period compared to income
before income taxes of $2,579,000 in the 2006 period.
The Company's effective tax rate was 25% in 2007 and 40% in 2006.
The lower rate in 2007 is due principally to non-taxable items and permanent
differences.
The Company realized a net loss of $132,000 in 2007 compared to
net income of $1,549,000 in 2006.
Years ended December 31, 2006 and 2005
Revenues for the years ended December 31, 2006 and 2005 were
$41,986,000 and $36,094,000, respectively, an increase of 16%. The
Company’s Professional Market segment had revenues for the years ended December
31, 2006 and 2005 of $29,642,000 and $24,419,000, respectively, an increase of
21% for this segment. The Company’s Non-Professional Market segment
had revenues of $12,344,000 and $11,675,000, respectively, for the years ended
December 31, 2006 and 2005, an increase of 6% for this segment. The
increase in revenues was attributable to the Company’s Track ECN which increased
from $6,911,000 to $13,375,000; however, ECN revenues have low margins compared
to higher margins lost from reduced market data services. Until
October, 2006, Track ECN displayed orders submitted by its subscribers on
Nasdaq's trading platform. Broker-dealers could access this liquidity
through Nasdaq. Nasdaq was authorized to operate as an exchange and
Track ECN was no longer able to operate its business on Nasdaq’s
platform. Track ECN currently operates on the NSXs Blade platform.
This change has resulted in significantly lower ECN revenues since November,
2006. Since 2001, the Company has experienced a decline in revenues from its
market data services to the Professional Market segment due principally to
staffing reductions in the securities industry, the use by customers of
internally developed services, or lower priced services that are offered by the
Company or other vendors. This trend has continued in 2007,
negatively impacting revenues and profits. One customer, with monthly
revenues of approximately $90,000, cancelled a customized market data service in
March, 2007.
Direct operating costs were $30,465,000 for the year ended
December 31, 2006 and $25,002,000 for the similar period in 2005, an increase of
22%. Direct operating costs as a percentage of revenues were 73% in
2006 and 69% in 2005. Without giving effect to unallocated
depreciation, amortization expense and costs directly allocated to the Arbitrage
segment, the Company’s Professional Market segment had $23,153,000 and
$18,161,000 of direct costs for the years ended December 31, 2006 and 2005,
respectively, an increase of 27%. Direct operating costs as a
percentage of revenues for the Professional segment were 78% in 2006 and 74% in
2005. The significant dollar and percentage increase was principally
due to costs from ECN customer commissions associated with the increased ECN
revenues, which have minimal gross margins replacing the higher gross margins,
lost to the reduced market data revenues. The Company commenced
self-clearing of its ECN operations at the end of the third quarter of 2005
which has since reduced clearing costs. The Professional Market segment includes
a credit in 2005 of $370,000 for telecommunication costs recognized in prior
periods. The Company’s Non-Professional Market segment had $6,542,000
and $6,026,000 in direct costs for the years ended December 31, 2006 and 2005,
respectively, an increase of 9%. Direct operating costs as a
percentage of revenues for the Non-Professional segment were 53% in 2006 and 52%
in 2005. Certain direct operating costs are allocated to each segment
based on revenues.
Selling and administrative expenses were $10,986,000 and
$12,485,000 in the 2006 and 2005 periods, respectively, a decrease of
12%. Selling and administrative expenses as a percentage of revenues
were 26% in 2006 and 35% in 2005. The decrease in dollars and
percentages is due to reduced payroll and professional fees. Without
giving effect to unallocated depreciation, amortization expense and costs
directly allocated to the Arbitrage segment, selling and administrative expenses
for the Professional Market segment were $7,788,000 and $8,353,000 in the 2006
and 2005 periods, respectively, a decrease of 7%. For the
Professional Market segment selling and administrative expenses as a percentage
of revenues were 26% in 2006 and 34% in 2005. The decline in dollars
and percentage includes a reversal of a judgment on sales taxes assessed of
$245,000. Selling and administrative expenses for the Non-Professional segment
were $3,098,000 and $3,991,000 in the 2006 and 2005 periods, respectively, a
decrease of 22%. For the Non-Professional segment selling and
administrative expense as a percentage of revenue was 25% in 2006 and 34% in
2005. The decrease in selling and administrative expenses was due
principally to reduced allocations of shared expenses due to reduced revenues.
Certain selling and administrative expenses are allocated to each segment based
on revenues.
Rent costs to related parties was $630,000 in 2006 and $623,000 in
2005. The Professional Market segment incurred rent costs
of $454,000 in 2006 and $421,000 in 2005. The
Non-Professional segment incurred rent costs of $176,000 in 2006 and $202,000 in
2005.
Marketing and advertising costs were $200,000 in 2006 and $274,000
in 2005. The Professional Market segment incurred costs of $86,000 in
2006 and $226,000 in 2005. The Non-Professional segment incurred
marketing costs of $114,000 in 2006 and $48,000 in 2005.
The Professional Market segment realized a loss of $1,829,000 in
2006 compared to a loss of $2,742,000 before unallocated amounts and income
taxes in 2005. The Non-Professional Market segment realized income of
$2,404,000 in 2006 and $1,409,000 in 2005 before unallocated amounts and income
taxes. The Arbitrage segment realized income of $843,000 in 2006 compared to
$406,000 in 2005 before unallocated amounts and income taxes.
In 2006 and 2005, the Company recognized gains of $1,777,000 and
$1,067,000, respectively, from the sale of shares of Innodata and Edgar Online
common stock.
In 2005, the Company realized a gain of $512,000 from the sale of
an investment in a private company, offset by a $100,000 impairment charge on an
investment in another private company.
Net interest
income in 2006 was $84,000 compared to net interest expense of $223,000 in 2005.
The decrease in interest expense in 2006 is due principally to reduced levels of
margin debt in connection with the Company's arbitrage trading program.
As a result of the above-mentioned factors, the Company realized
income before income taxes of $2,579,000 in the 2006 period compared
to a loss before income taxes of $215,000 in the 2005 period.
The Company's effective tax rate was 40% in 2006 and (83)% in
2005. The unusually high rate in 2005 was due to a reversal of an over estimate
of state income taxes in 2004 related to state apportionments.
The Company realized net income of $1,549,000 in 2006 compared to
a net loss of $37,000 in 2005.
Liquidity and Capital Resources
During the year ended December 31, 2007, cash provided by
operating activities was $181,000 compared to $1,308,000 in 2006. The
decrease in 2007 was principally due to decreased receivables and amounts due
from broker, offset by the decrease in trading securities sold, but not yet
purchased, and the net loss for 2007. Cash flows used in investing activities in
2007 were $449,000 compared to cash flows provided by investing activities of
$606,000 in 2006. The decrease was due principally to reduced sales
of Innodata and Edgar Online common stock in 2007. Cash flows used in financing
activities were $962,000 in 2007 compared to cash flows provided by financing
activities of $130,000 in 2006. The increase was due to repayment of bank
obligations in 2007.
The Company has a line of credit with a bank up to a maximum of $3
million. 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 line
expires in October, 2008, subject to automatic renewal. The Company may borrow
up to 80% of eligible market data service receivables as defined, and is
required to maintain a compensating balance of 10% of the outstanding
loans. At December 31, 2007, the Company had no borrowings under the
line. Borrowings available on the line of credit at December 31, 2007
were $869,000 based on these formulas.
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 C in the
accompanying Notes to Consolidated Financial Statements. The Company
expects that its December 31, 2007 positions will be closed during the first
quarter of 2008 and that other positions with the same strategy will be
established. The level of trading activity is partially dependent on
the value of the shares of Track Data pledged by its Principal Stockholder, and
Innodata common stock that is held as collateral.
The Company purchased 1,247,000 shares of its common stock in 2005
at a cost of $3,676,000. The purchases were paid with cash that was part of the
total capital used in Arbitrage trading. In November, 2005, the Board
authorized the purchase of up to 1 million shares from time to time in market
purchases or in negotiated transactions. Since that authorization,
the Company purchased approximately 6,000 shares of its common stock for
$20,000. No major capital expenditures are anticipated beyond the normal
replacement of equipment and additional equipment to meet customer
requirements. The Company believes that borrowings available under
the Company’s line of credit, its present cash position, including cash
available in its Arbitrage trading, and any cash that may be generated from
operations are sufficient for the Company’s cash requirements for the next 12
months.
The Company’s broker-dealer subsidiary, TDSC, is subject to a
minimum net capital requirement of $1 million by FINRA. TDSC
operations are subject to reviews by regulators within its industry, which
include the SEC and FINRA. In the past, certain reviews have resulted
in the Company incurring fines and required the Company to change certain of its
internal control and operating procedures. Ongoing and future reviews
may result in the Company incurring additional fines and changes in its internal
control and operating procedures. Management does not expect any
ongoing reviews to have a material affect on the Company's financial position or
statement of operations.
The Company's New York City tax return is presently under audit.
The audit has recently commenced, therefore the outcome cannot be reasonably
estimated at this time.
From time to time the Company is subject to legal proceedings and
claims that arise in the ordinary course of its business. In the
opinion of management, the amount of ultimate liability with respect to these
actions will not materially affect the Company's financial position.
Off Balance Sheet Risk
In connection with the Company's broker-dealer operations, certain
customer securities activities are transacted on a margin basis. The
Company's clearing broker extends credit to the Company's customers, subject to
various regulatory margin requirements, collateralized by cash and securities in
the customers' accounts. In the event of a decline in the market
value of the securities in a margin account, the Company is required to either
obtain additional collateral from the customer or to sell the customer's
position if such collateral is not forthcoming. The Company is
responsible for any losses on such margin loans, and has agreed to indemnify its
clearing broker for losses that the clearing broker may sustain from the
customer accounts introduced by the Company. The Company and its
clearing broker seek to control the risks associated with customer activities by
monitoring required margin levels daily and, pursuant to such guidelines,
requiring the customer to deposit additional collateral or to reduce positions
when necessary. At December 31, 2007, the Company had $15.5 million
in margin credit extended to its customers. The Company’s margin
loans in connection with Arbitrage trading were immaterial at December 31,
2007. The Company believes it is unlikely it will have to make
material payments under the indemnification agreement and has not recorded any
related liability in the Consolidated Financial Statements.
During the third quarter of 2007, the security of the Company's
computer system was compromised. As a result, certain information may
have been illegally accessed, including certain customer personal
information. The Company has made certain changes in its security
systems to reduce the likelihood of future intrusions. The Company
does not anticipate any costs in connection with the security breach will have a
material affect on the Company's financial position.
Contractual Obligations and Commitments
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Payment due by
Period
|
|
| |
|
|
|
|
|
Less than
|
|
|
|
|
|
|
Contractual
Obligations
|
|
|
Total
|
|
|
|
1 year
|
|
|
1-3 Years
|
|
|
Operating Lease Obligations
|
|
$
|
1,229,000
|
|
|
$
|
736,000
|
|
|
$
|
493,000
|
|
|
In connection with the Company's broker-dealer operations, certain
customer securities activities are transacted on a margin basis. 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.
Critical Accounting Policies
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and potentially result in
materially different results when different assumptions are
utilized. We believe that our principal critical accounting policies
are described below. For a detailed discussion on the
application of these and other accounting policies, see Note A in the
accompanying Notes to Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenue from market data and ECN services 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. The Company earns commissions
as an introducing broker and for licensing its trading system for the
transactions of its customers. Commissions and related clearing
expenses are recorded on a trade-date basis as securities transactions
occur.
For ECN services, transaction fees are earned on a per trade
basis, based on shares transacted, and are recognized as transactions occur. For
each transaction executed, there is an associated liquidity payment or routing
charge paid. Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”),
the Company records such expenses as liquidity payments or routing charges in
the consolidated statements of operations.
Marketable Securities
Arbitrage marketable securities transactions are recorded on trade
date. Gains and losses are recognized based on closed transactions and the
difference between market value and cost at balance sheet date.
The Company classifies its investments in Innodata and Edgar
Online as available for sale securities. The Company carries these
investments at fair value, based on quoted market prices, and unrealized gains
and losses, net of taxes, are included in accumulated other comprehensive
income, which is reflected as a separate component of stockholders'
equity. Realized gains and losses are recognized in the consolidated
statement of operations when realized. The Company reviews these
holdings on a regular basis to evaluate whether or not each security has
experienced an other-than-temporary decline in fair value. If the
Company believes that an other-than-temporary decline exists in the marketable
securities, the equity investments are written down to market value and an
investment loss is recorded in the consolidated statement of operations.
Long-lived Assets
In assessing the recoverability of the Company's goodwill and
other intangibles, the Company must make assumptions regarding estimated
undiscounted expected future cash flows to be generated by the assets to
determine the fair value of the respective assets. If these estimated
cash flows and related assumptions change in the future, the Company may be
required to record an impairment charge in the consolidated statement of
operations.
New Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. It codifies the definitions
of fair value included in other authoritative literature; clarifies and, in some
cases, expands on the guidance for implementing fair value measurements; and
increases the level of disclosure required for fair value measurements. Although
SFAS 157 applies to (and amends) the provisions of existing authoritative
literature, it does not, of itself, require any new fair value measurements, nor
does it establish valuation standards. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. This statement will be effective for
the Company's fiscal year beginning January 2008. We will evaluate the impact of
adopting SFAS 157 but do not expect that it will have a material impact on the
Company's consolidated financial position, results of operations or cash
flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities - Including an Amendment
of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value at specified election dates. Most of the provisions of SFAS No. 159 apply
only to entities that elect the fair value option. However, the amendment to
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. The fair value option established by SFAS No. 159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option may be applied instrument by instrument,
with a few exceptions, such as investments otherwise accounted for by the equity
method, is irrevocable (unless a new election date occurs), and is applied only
to entire instruments and not to portions of instruments. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of SFAS No.
157. The Company has not completed its review of the new guidance.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51”
(“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary (previously referred to as minority
interests). SFAS 160 also requires that a retained noncontrolling interest upon
the deconsolidation of a subsidiary be initially measured at its fair value.
Upon adoption of SFAS 160, the Company would be required to report any
noncontrolling interests as a separate component of stockholders’ equity. The
Company would also be required to present any net income allocable to
noncontrolling interests and net income attributable to the stockholders of the
Company separately in its consolidated statements of income. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption
of the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS 160 shall be applied prospectively. SFAS 160
would have an impact on the presentation and disclosure of the noncontrolling
interests of any non wholly-owned businesses acquired in the future.
In December 2007, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 141R, “Business Combinations”
(“SFAS 141R”), which replaces SFAS No. 141, “Business Combinations.” SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS
141R also requires acquisition-related transaction expenses and restructuring
costs be expensed as incurred rather than capitalized as a component of the
business combination. SFAS 141R will be applicable prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. SFAS 141R
would have an impact on accounting for any businesses acquired after the
effective date of this pronouncement.
In December 2007, the SEC staff issued Staff Accounting Bulletin
110 (“SAB 110”), “Share-Based Payment,” which amends SAB 107, “Share-Based
Payment,” to permit public companies, under certain circumstances, to use the
simplified method in SAB 107 for employee option grants after December 31, 2007.
Use of the simplified method after December 2007 is permitted only for companies
whose historical data about their employees’ exercise behavior does not provide
a reasonable basis for estimating the expected term of the options. The adoption
of this pronouncement is not expected to have a material effect on the Company’s
consolidated financial position, results of operations or cash flows.
Inflation and Seasonality
To date, inflation has not had a significant impact on the
Company’s operations. The Company’s revenues are not affected by
seasonality.
ITEM 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, 2007, there were no
borrowings outstanding under the credit facility. Changes in the prime interest
rate during fiscal 2008 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 2008.
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 C of Notes
to the accompanying Consolidated Financial Statements. In connection
with the arbitrage trading activity, 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. The level of trading in
the arbitrage trading account is partially dependent on the value of the
Company’s common stock pledged by its Principal Stockholder and Innodata common
stock, which is used as collateral. The market value of such
securities is dependent on future market conditions for these companies over
which the Company has little or no control. If the stock collateral
is not available, the Company will decrease its trading or seek additional
collateral. The Company’s margin loans as of December 31, 2007 were
immaterial.
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 obligation at a loss. At December
31, 2007, the Company had $15.5 million in margin credit extended to its
customers.
ITEM 8. FINANCIAL
STATEMENTS
| |
|
|
|
|
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
|
II-13
|
|
| |
|
|
|
|
| |
CONSOLIDATED BALANCE SHEETS
|
|
II-14
|
|
| |
|
|
|
|
| |
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
II-15
|
|
| |
|
|
|
|
| |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY AND COMPREHENSIVE INCOME
(LOSS)
|
|
II-16
|
|
| |
|
|
|
|
| |
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
II-17
|
|
| |
|
|
|
|
| |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
II-18
|
|
| |
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors
and Stockholders of Track Data Corporation
We have audited the accompanying consolidated balance sheets of
Track Data Corporation and Subsidiaries (the “Company”) as of December 31, 2007
and 2006, and the related consolidated statements of operations, stockholders’
equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended December 31, 2007. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, 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 consolidated 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, 2007 and
2006, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2007 in conformity with United States
generally accepted accounting principles.
| |
|
|
|
|
| |
/S/ Marcum & Kliegman LLP
|
|
|
| |
|
|
|
|
| |
|
Melville, New York
|
|
|
| |
|
March 26, 2008
|
|
|
Track Data Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2007 and 2006
(in thousands, except share data)
| |
|
|
2007
|
|
|
|
|
2006
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS
|
|
$
|
5,275
|
|
|
|
$
|
6,508
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS RECEIVABLE – net of allowance for doubtful
|
|
|
|
|
|
|
|
|
|
|
|
accounts of $227 in 2007 and $326 in 2006
|
|
|
1,382
|
|
|
|
|
1,277
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
DUE FROM CLEARING BROKER
|
|
|
635
|
|
|
|
|
495
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
DUE FROM BROKER
|
|
|
12,258
|
|
|
|
|
12,962
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
MARKETABLE SECURITIES
|
|
|
8,581
|
|
|
|
|
8,757
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
FIXED ASSETS - at cost (net of accumulated
depreciation)
|
|
|
2,093
|
|
|
|
|
1,998
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
EXCESS OF COST OVER NET ASSETS ACQUIRED – net
|
|
|
1,900
|
|
|
|
|
1,900
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
829
|
|
|
|
|
951
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
32,953
|
|
|
|
$
|
34,848
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,540
|
|
|
|
$
|
3,928
|
|
|
|
Note payable - bank
|
|
|
-
|
|
|
|
|
987
|
|
|
|
Trading securities sold, but not yet purchased
|
|
|
5,060
|
|
|
|
|
6,102
|
|
|
|
Net deferred income tax liabilities
|
|
|
755
|
|
|
|
|
528
|
|
|
|
Other liabilities
|
|
|
864
|
|
|
|
|
870
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,219
|
|
|
|
|
12,415
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock - $.01 par value; 60,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
authorized; issued and outstanding –8,392,000
shares
|
|
|
84
|
|
|
|
|
84
|
|
|
|
Additional paid-in capital
|
|
|
10,183
|
|
|
|
|
10,183
|
|
|
|
Retained earnings
|
|
|
11,791
|
|
|
|
|
11,923
|
|
|
|
Accumulated other comprehensive income
|
|
|
676
|
|
|
|
|
243
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
22,734
|
|
|
|
|
22,433
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
32,953
|
|
|
|
$
|
34,848
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Track Data Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2007, 2006 and 2005
(in thousands, except earnings per share)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
SERVICE FEES AND REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Data Services
|
|
$
|
18,648
|
|
|
$
|
21,474
|
|
|
$
|
23,175
|
|
|
|
ECN Services
|
|
|
6,764
|
|
|
|
13,375
|
|
|
|
6,911
|
|
|
|
Broker Dealer Commissions
(includes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$125 in 2007 and $89 in 2006 from related party)
|
|
|
8,668
|
|
|
|
7,137
|
|
|
|
6,008
|
|
|
|
Total
|
|
|
34,080
|
|
|
|
41,986
|
|
|
|
36,094
|
|
|
|
COSTS, EXPENSES AND OTHER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs (includes
depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $628, $559 and $614 in
2007, 2006 and 2005, respectively)
|
|
|
24,963
|
|
|
|
30,465
|
|
|
|
25,002
|
|
|
|
Selling and administrative expenses
(includes depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization of $94, $100
and $141 in 2007, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and 2005,
respectively)
|
|
|
10,575
|
|
|
|
10,986
|
|
|
|
12,485
|
|
|
|
Rent expense – related
party
|
|
|
637
|
|
|
|
630
|
|
|
|
623
|
|
|
|
Marketing and advertising
|
|
|
247
|
|
|
|
200
|
|
|
|
274
|
|
|
|
Gain on arbitrage trading
|
|
|
(2,114
|
)
|
|
|
(1,013
|
)
|
|
|
(819
|
)
|
|
|
Gain on sale of marketable securities –
Innodata and Edgar Online
|
|
|
(344
|
)
|
|
|
(1,777
|
)
|
|
|
(1,067
|
)
|
|
|
Net gain on sale of investment in private
companies
|
|
|
-
|
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
Interest income
|
|
|
(445
|
)
|
|
|
(430
|
)
|
|
|
(241
|
)
|
|
|
Interest expense
|
|
|
736
|
|
|
|
346
|
|
|
|
464
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34,255
|
|
|
|
39,407
|
|
|
|
36,309
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(175
|
)
|
|
|
2,579
|
|
|
|
(215
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX (BENEFIT) EXPENSE
|
|
|
(43
|
)
|
|
|
1,030
|
|
|
|
(178
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(132
|
)
|
|
$
|
1,549
|
|
|
$
|
(37
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
|
|
|
|
$(.02
|
)
|
|
|
|
$.18
|
|
|
|
|
$(.00
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
|
|
|
8,392 |
|
|
|
8,382 |
|
|
|
9,221 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED DILUTIVE SHARES OUTSTANDING
|
|
|
8,392 |
|
|
|
8,401 |
|
|
|
9,221 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Track Data Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
(Loss)
Years Ended December 31, 2007, 2006 and 2005
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Compre-
|
|
| |
|
Number
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Other
|
|
Stock-
|
|
hensive
|
|
| |
|
of
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
holders’
|
|
Income
|
|
| |
|
Shares
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Income
|
|
Equity
|
|
(Loss)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, JANUARY 1, 2005
|
|
|
9,627
|
|
|
|
$
|
96
|
|
|
|
|
$
|
13,786
|
|
|
|
|
$
|
10,411
|
|
|
|
|
$
|
2,575
|
|
|
|
|
$
|
26,868
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
$
|
(37
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and retirement of treasury stock
|
|
|
(1,247
|
)
|
|
|
|
(12
|
)
|
|
|
|
|
(3,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,676
|
)
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect on distribution of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
phantom shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on marketable securities - net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(472
|
)
|
|
|
|
|
(472
|
)
|
|
|
|
|
(472
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,148
|
)
|
|
|
|
|
(1,148
|
)
|
|
|
|
|
(1,148
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,657
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2005
|
|
|
8,380
|
|
|
|
|
84
|
|
|
|
|
|
10,136
|
|
|
|
|
|
10,374
|
|
|
|
|
|
955
|
|
|
|
|
|
21,549
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
1,549
|
|
|
|
|
$
|
1,549
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and retirement of treasury stock
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on marketable securities - net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(946
|
)
|
|
|
|
|
(946
|
)
|
|
|
|
|
(946
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
234
|
|
|
|
|
|
234
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
837
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2006
|
|
|
8,392
|
|
|
|
|
84
|
|
|
|
|
|
10,183
|
|
|
|
|
|
11,923
|
|
|
|
|
|
243
|
|
|
|
|
|
22,433
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
|
$
|
(132
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable securities - net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142
|
)
|
|
|
|
|
(142
|
)
|
|
|
|
|
(142
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575
|
|
|
|
|
|
575
|
|
|
|
|
|
575
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
301
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2007
|
|
|
8,392
|
|
|
|
$
|
84
|
|
|
|
|
$
|
10,183
|
|
|
|
|
$
|
11,791
|
|
|
|
|
$
|
676
|
|
|
|
|
$
|
22,734
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Track Data Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
(in thousands)
| |
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(132
|
)
|
|
$
|
1,549
|
|
|
$
|
(37
|
)
|
|
|
Adjustments to reconcile net (loss) income to net
cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
722
|
|
|
|
659
|
|
|
|
755
|
|
|
|
Deferred taxes
|
|
|
(62
|
)
|
|
|
43
|
|
|
|
(13
|
)
|
|
|
Provision for doubtful
accounts
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
Tax effect of stock options exercised
and phantom shares
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
14
|
|
|
|
Net gain on sale of investment in
private companies
|
|
|
-
|
|
|
|
-
|
|
|
|
(412
|
)
|
|
|
Loss on surrender of leases
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Loss on sale of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
|
|
Gain on sale of Innodata and Edgar
Online common stock
|
|
|
(344
|
)
|
|
|
(1,777
|
)
|
|
|
(1,067
|
)
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and due from clearing broker
|
|
|
(245
|
)
|
|
|
299
|
|
|
|
325
|
|
|
|
Due from
broker
|
|
|
704
|
|
|
|
2,629
|
|
|
|
20,160
|
|
|
|
Marketable
securities
|
|
|
818
|
|
|
|
(462
|
)
|
|
|
7,916
|
|
|
|
Other
assets
|
|
|
140
|
|
|
|
306
|
|
|
|
137
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(388
|
)
|
|
|
221
|
|
|
|
(1,006
|
)
|
|
|
Trading
securities sold, but not yet purchased
|
|
|
(1,042
|
)
|
|
|
(2,121
|
)
|
|
|
(25,392
|
)
|
|
|
Other
liabilities
|
|
|
(26
|
)
|
|
|
(60
|
)
|
|
|
(2,087
|
)
|
|
|
Net cash provided by (used in) operating activities
|
|
|
181
|
|
|
|
1,308
|
|
|
|
(656
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(869
|
)
|
|
|
(1,031
|
)
|
|
|
(726
|
)
|
|
|
Investment in private companies
|
|
|
-
|
|
|
|
(150
|
)
|
|
|
(100
|
)
|
|
|
Proceeds from sale of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
Proceeds from sale of investment in private
company
|
|
|
-
|
|
|
|
-
|
|
|
|
522
|
|
|
|
Proceeds from sale of Innodata and Edgar Online
common stock
|
|
|
420
|
|
|
|
1,787
|
|
|
|
1,085
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(449
|
)
|
|
|
606
|
|
|
|
789
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (payments) proceeds on note payable –
bank
|
|
|
(987
|
)
|
|
|
(150
|
)
|
|
|
1,137
|
|
|
|
Net proceeds from contributions to employee
savings program
|
|
|
25
|
|
|
|
233
|
|
|
|
66
|
|
|
|
Proceeds from exercise of stock options
|
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
Excess tax benefit from exercise of stock
options
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
Purchase of treasury stock
|
|
|
-
|
|
|
|
(20
|
)
|
|
|
(3,676
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(962
|
)
|
|
|
130
|
|
|
|
(2,473
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS
|
|
|
(1,233
|
)
|
|
|
2,039
|
|
|
|
(2,349
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS, BEGINNING OF YEAR
|
|
|
6,508
|
|
|
|
4,469
|
|
|
|
6,818
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS, END OF YEAR
|
|
$
|
5,275
|
|
|
$
|
6,508
|
|
|
$
|
4,469
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
for: Interest
|
|
$
|
737
|
|
|
$
|
346
|
|
|
$
|
465
|
|
|
|
Income taxes
|
|
|
50
|
|
|
|
708
|
|
|
|
1,943
|
|
|
|
NON-CASH INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury stock
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
3,676
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
Track Data Corporation and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
A. The Company and Summary of Significant Accounting
Policies
Description of Business and Basis of Presentation--Track Data
Corporation (the "Company") is a financial services company that provides
real-time financial market data, fundamental research, charting and analytical
services to institutional and individual investors through dedicated
telecommunication lines and the Internet. The Company also
disseminates news and third-party database information from more than 100
sources worldwide. The Company’s wholly-owned subsidiary, Track Data
Securities Corp. ("TDSC"), is a registered securities broker-dealer and member
of Financial Industry Regulatory Authority (“FINRA”). The Company
provides a proprietary, fully integrated Internet-based online trading and
market data system, proTrack, for the professional institutional traders, and
myTrack and myTrack Edge, for the individual trader. The Company also
operates Track ECN, an electronic communications network (“ECN”) that enables
traders to display and match limit orders for stocks. The Company's
operations are classified in three business segments: (1) Professional Market --
Market data services and trading, including ECN services, to the institutional
professional investment community, (2) Non-Professional Market -- Internet-based
online trading and market data services to the non-professional individual
investor community, and (3) Arbitrage trading.
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.
Cash and Cash Equivalents--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 and money market
funds to be cash equivalents. The Company’s cash and cash equivalents includes
$500,000 of restricted cash on deposit with the Company’s clearing broker. The
Company has cash balances in banks in excess of the maximum amount insured by
the FDIC as of December 31, 2007.
Accounts Receivable--Accounts receivable, principally trade, are
generally due within 30 days and are stated at amounts due from customers net of
an allowance for doubtful accounts. The Company continuously monitors
agings, collections and payments from customers and a provision for estimated
credit losses is maintained based upon its historical experience and any
specific customer collection issues that have been identified. While
such credit losses have historically been within the Company’s expectation and
the provisions established, the Company cannot guarantee that the same credit
loss rates will be experienced in the future. The Company writes off accounts
receivable when they become uncollectible. The Company’s allowance
for doubtful accounts was $227,000 and $326,000 at December 31, 2007 and 2006,
respectively. There have been no significant write offs during the
years ended December 31, 2007, 2006 and 2005.
Marketable Securities--The Company accounts for securities owned
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." SFAS 115 requires investments in debt and equity
securities to be classified as either "held to maturity," "trading," or
"available for sale." The accounting treatment for unrealized gains
and losses on those securities is then determined by the classification
chosen. Arbitrage trading securities transactions, consisting of
stocks and options, are recorded on a trade-date basis, as if they had been
settled. Securities are valued at quoted market value. The
resulting difference between cost and market (or fair value) is included in
“gain (loss) on arbitrage trading.” Securities sold, but not yet
purchased, consist of trading securities at market values. The
difference between the proceeds received from securities sold short and the
current market value is included in gain on arbitrage
trading. Securities available for sale are carried at fair value,
with unrealized gains and losses, net of deferred taxes, reported as
comprehensive income (loss), a separate component of stockholders' equity, and
realized gains and losses, determined on a specific identification basis, are
included in earnings. The Company reviews these holdings on a regular
basis to evaluate whether or not each security has experienced an
other-than-temporary decline in fair value. If the Company believes
that an other-than-temporary decline exists in the marketable securities, the
equity investments are written down to market value and an investment loss is
recorded in the consolidated statement of operations.
Due From Broker--Due from broker includes cash, securities owned
and securities sold, but not yet purchased carried by the Company’s
broker.
Fixed Assets--Fixed assets are depreciated on a straight-line
basis over their estimated useful lives which are as follows: equipment – 3-10
years; furniture and fixtures – 10 years; and transportation equipment – 4
years. 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--Certain costs of internally developed
software are capitalized 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. Costs incurred for internal use software in the
preliminary project stage and for application maintenance are
expensed. Costs incurred for application development are
capitalized. Most costs are incurred for upgrades and enhancements
that are constantly upgraded and changed with useful lives of less than one
year. Accordingly, these costs are expensed as
incurred. No development costs have been capitalized during the three
years ended December 31, 2007. Software and database costs, net of
accumulated amortization, at December 31, 2007 and 2006 of $30,000 and $15,000,
respectively, were included in other assets. Database costs are
amortized on a straight-line basis over their estimated useful lives of ten
years. Amortization expense for the years ended December 31, 2007, 2006 and 2005
was approximately $7,000, $4,000 and $4,000, respectively. At each
balance sheet date, the unamortized capitalized costs of a computer software
product is compared to the net realizable value of that product. The amount by
which the unamortized capitalized costs of a computer software product exceed
the net realizable value of that asset is written off. The net realizable value
is the estimated future revenues from that product reduced by the estimated
future costs of completing and disposing of that product, including the costs of
performing maintenance and customer support required to satisfy the Company’s
responsibility set forth at the time of sale. The reduced amount of capitalized
computer software costs that have been written down to net realizable value at
the close of an annual fiscal period is considered to be the costs for
subsequent accounting purposes, and the amount of the write-down shall not be
subsequently restored.
Long-lived Assets--In accordance with SFAS 142, "Goodwill and
Other Intangible Assets," all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged are recognized as an asset apart from
goodwill. Goodwill and intangibles with indefinite lives are not
subject to amortization, but are subject to at least an annual assessment for
impairment by applying a fair value based test. The excess of the
purchase price of acquired businesses over the fair value of net assets
("goodwill") on the dates of acquisition amounts to $1,900,000, net of
accumulated amortization of $2,494,000 as of December 31, 2007 and 2006.
In accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," management assesses the recoverability of the
remaining unamortized costs of long-lived assets other than goodwill 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. To date, the Company has not provided an impairment
charge.
Foreign Currency Translation--The Company has a division which
operates in a foreign country for which the functional currency is the British
pound. Balance sheet accounts are translated at the exchange rates in effect at
December 31, 2007 and 2006, and the income statement accounts are translated at
the weighted average rates prevailing during the years ended December 31, 2007,
2006 and 2005. Unrealized foreign exchange gains and losses resulting from this
translation are insignificant.
Revenue Recognition--The Company recognizes revenue from market
data and ECN services 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. The
Company earns commissions as an introducing broker and for licensing its trading
system for the transactions of its customers. Commissions and related
clearing expenses are recorded on a trade-date basis as securities transactions
occur.
For ECN services, transaction fees are earned on a per trade
basis, based on shares transacted, and are recognized as transactions occur. For
each transaction executed, there is an associated liquidity payment or routing
charge paid. Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent,” the Company
records such expenses as liquidity payments or routing charges in the
consolidated statements of operations.
Income Taxes--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
and are adjusted when conditions indicate that deferred assets will 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.
The Company has adopted the provisions of Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes (as amended) - an interpretation of FASB Statement No. 109" ("FIN
48"), on January 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS Statement 109, "Accounting for Income Taxes," and
prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 states that a tax benefit from an uncertain tax
position may be recognized only if it is "more likely than not" that the
position is sustainable, based on its technical merits. The tax benefit of a
qualifying position is the largest amount of tax benefit that is greater than
50% likely of being realized upon settlement with a taxing authority having full
knowledge of all relevant information. A tax benefit from an uncertain tax
position was previously recognized if it was "probable" of being sustained.
Under FIN 48, the liability for unrecognized tax benefits is classified as
noncurrent unless the liability is expected to be settled in cash within 12
months of the reporting date. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48 did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
The Company did not record a cumulative effect adjustment related
to the adoption of FIN 48 at January 1, 2007 and no liability for unrecognized
tax benefits was required to be reported at December 31, 2007. The
Company has identified its federal tax return and its state and city tax returns
in New York as "major" tax jurisdictions, as defined. The Company is
also subject to filings in multiple other state and city
jurisdictions. Based on the Company's evaluation, it has been
concluded that there are no significant uncertain tax positions requiring
recognition in the Company's financial statements. The Company's
evaluation was performed for tax years ended 2003 through 2007, the only periods
subject to examination. The Company believes that its income tax
positions and deductions will be sustained on audit and does not anticipate any
adjustments that will result in a material change to its financial position. The
Company's New York City tax returns for 2003 through 2005 are presently under
audit. The audit has recently commenced, therefore the outcome cannot be
reasonably estimated at this time.
The Company's policy for recording interest and penalties
associated with uncertain tax positions is to record such items as a component
of income before income taxes. Penalties are recorded in other
expense and interest paid or received is recorded in interest expense or
interest income, respectively, in the statement of operations. For
the year ended December 31, 2007, penalties and interest related to the
settlements of audits was insignificant.
Research, Development and Maintenance--The Company charges all
costs incurred to establish the technological feasibility of a product or
product enhancement, as well as correction of software bugs and minor
enhancements to existing software applications, to research, development and
maintenance expense. Research, development and maintenance expenses, included in
direct operating costs, were approximately $162,000, $159,000 and $210,000 for
the years ended December 31, 2007, 2006 and 2005, respectively.
Marketing and Advertising--Marketing and advertising costs are
charged to expense when incurred. Marketing and advertising costs
were approximately $247,000, $200,000 and $274,000 for the years ended December
31, 2007, 2006 and 2005, respectively.
Segment Reporting--The Company uses the "management approach" as
defined by SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information" for its segment reporting. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the basis for disclosures about
products and services, geographic areas, and major customers.
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 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 and note payable, approximate carrying value due to the short
payment terms associated with its accounts receivable and payable and the
floating interest rate associated with its note payable.
Use of Estimates--In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America,
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. Significant estimates relate to: useful lives and recoverability of
long-lived assets, including goodwill; fair values of marketable securities;
income tax calculations; and allowances for doubtful accounts.
Comprehensive Income (Loss)--The Company reports comprehensive income (loss) in accordance
with SFAS 130, "Reporting Comprehensive Income." SFAS 130 requires
foreign currency translation adjustments and unrealized gains and losses on
available for sale securities to be included in accumulated other comprehensive
income.
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 are 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 (Note J), reduced by the
shares that may be repurchased with the funds received from the exercise, based
on the average price during the year.
Accounting for Stock Options--At December 31, 2007, the Company
has seven stock-based employee compensation plans, which are described more
fully in Note J. Until December 31, 2005, the Company accounted for
those plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and
related Interpretations. No stock-based employee compensation cost is
reflected in the statement of operations, as all options granted under those
plans had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
The Company adopted SFAS 123(R), “Share-Based Payment,” using the
modified prospective transition method on January 1, 2006. The
adoption of the new requirements result in compensation charges to the Company’s
statement of operations for the fair value of options granted to employees after
December 31, 2005, as well as the compensation cost for the portion of
outstanding awards for which the requisite service had not yet been rendered as
of December 31, 2005. At December 31, 2005, all of the Company’s outstanding
stock options were fully vested and the Company made no option grants during the
years ended December 31, 2007 and 2006. As such, the adoption of SFAS 123(R) had
no impact on net (loss) income for the years ended December 31, 2007 and
2006. The Company expects that the adoption of this statement may
have a material impact on net income (loss) and earnings (loss) per share in
future periods upon issuance of new awards.
The following table illustrates the effect on net (loss) income
and net (loss) income per share as if the Company had applied the fair value
recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,”
to stock-based employee compensation prior to January 1, 2006:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended
|
| |
|
December 31, 2005
|
| |
|
(in thousands, except earnings per share)
|
| |
|
|
|
|
|
|
|
|
| |
Net loss, as reported
|
|
|
$
|
(37
|
)
|
|
|
| |
Deduct: Total stock-based employee
compensation
|
|
|
|
|
|
|
|
| |
expense determined under fair value based method for
|
|
|
|
|
|
|
|
| |
all awards, net of related tax effects
|
|
|
|
(476
|
)
|
|
|
| |
Net loss, as adjusted
|
|
|
$
|
(513
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
| |
Net loss per share:
|
|
|
|
|
|
|
|
| |
Basic and diluted --as reported
|
|
|
|
$(.00
|
)
|
|
|
| |
|
|
|
|
|
|
|
|
| |
Basic and diluted --as adjusted
|
|
|
|
$(.05
|
)
|
|
|
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: an expected life of four years; risk free interest rate of 4.4%;
expected volatility of 86%; and a zero dividend yield. The effects of applying
SFAS 123 in this proforma disclosure are not indicative of future results.
New Pronouncements--In September 2006, the FASB issued SFAS No.
157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. It
codifies the definitions of fair value included in other authoritative
literature; clarifies and, in some cases, expands on the guidance for
implementing fair value measurements; and increases the level of disclosure
required for fair value measurements. Although SFAS 157 applies to (and amends)
the provisions of existing authoritative literature, it does not, of itself,
require any new fair value measurements, nor does it establish valuation
standards. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. This statement will be effective for the Company's fiscal year beginning
January 2008. We will evaluate the impact of adopting SFAS 157 but do not expect
that it will have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities - Including an Amendment
of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value at specified election dates. Most of the provisions of SFAS No. 159 apply
only to entities that elect the fair value option. However, the amendment to
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities,” applies to all entities with available-for-sale and trading
securities. The fair value option established by SFAS No. 159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option may be applied instrument by instrument,
with a few exceptions, such as investments otherwise accounted for by the equity
method, is irrevocable (unless a new election date occurs), and is applied only
to entire instruments and not to portions of instruments. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of SFAS No.
157. The Company has not completed its review of the new guidance.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51”
(“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary (previously referred to as minority
interests). SFAS 160 also requires that a retained noncontrolling interest upon
the deconsolidation of a subsidiary be initially measured at its fair value.
Upon adoption of SFAS 160, the Company would be required to report any
noncontrolling interests as a separate component of stockholders’ equity. The
Company would also be required to present any net income allocable to
noncontrolling interests and net income attributable to the stockholders of the
Company separately in its consolidated statements of income. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption
of the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS 160 shall be applied prospectively. SFAS 160
would have an impact on the presentation and disclosure of the noncontrolling
interests of any non wholly-owned businesses acquired in the future.
In December 2007, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 141R, “Business Combinations”
(“SFAS 141R”), which replaces SFAS No. 141, “Business Combinations.” SFAS 141R
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including noncontrolling interests,
contingent consideration, and certain acquired contingencies. SFAS
141R also requires acquisition-related transaction expenses and restructuring
costs be expensed as incurred rather than capitalized as a component of the
business combination. SFAS 141R will be applicable prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. SFAS 141R
would have an impact on accounting for any businesses acquired after the
effective date of this pronouncement.
In December 2007, the SEC staff issued Staff Accounting Bulletin
110 (“SAB 110”), “Share-Based Payment,” which amends SAB 107, “Share-Based
Payment,” to permit public companies, under certain circumstances, to use the
simplified method in SAB 107 for employee option grants after December 31, 2007.
Use of the simplified method after December 2007 is permitted only for companies
whose historical data about their employees’ exercise behavior does not provide
a reasonable basis for estimating the expected term of the options. The adoption
of this pronouncement is not expected to have a material effect on the Company’s
consolidated financial position, results of operations or cash flows.
B. Fixed Assets
Fixed assets consist of the following at December 31, 2007 and 2006
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
2007 |
|
2006 |
|
| |
Equipment
|
|
|
$
|
6,231
|
|
|
$
|
5,385
|
|
|
| |
Telephone systems
|
|
|
|
804
|
|
|
|
922
|
|
|
| |
Furniture and fixtures
|
|
|
|
368
|
|
|
|
411
|
|
|
| |
Transportation equipment
|
|
|
|
70
|
|
|
|
70
|
|
|
| |
Leasehold improvements
|
|
|
|
189
|
|
|
|
380
|
|
|
| |
|
|
|
|
7,662
|
|
|
|
7,168
|
|
|
| |
Less accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
| |
and amortization
|
|
|
|
5,569
|
|
|
|
5,170
|
|
|
| |
Fixed assets - net
|
|
|
$
|
2,093
|
|
|
$
|
1,998
|
|
|
Depreciation and amortization expense for the years ended December
31, 2007, 2006 and 2005 was $715,000, $655,000 and $751,000, respectively.
C. Marketable Securities
Marketable securities consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31,
|
|
|
| |
|
|
2007 |
|
|
2006
|
|
|
| |
Innodata - Available for sale securities - at market
|
|
$
|
1,372
|
|
|
$
|
730
|
|
|
| |
Arbitrage trading securities - at market
|
|
|
7,209
|
|
|
|
8,027
|
|
|
| |
Marketable securities
|
|
$
|
8,581
|
|
|
$
|
8,757
|
|
|
| |
Arbitrage trading securities sold but not yet purchased – at
market
|
|
$
|
5,060
|
|
|
$
|
6,102
|
|
|
During the year ended December 31, 2006, the Company sold its
remaining 403,498 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. As a result, the Company
received proceeds of $1,771,000 and recorded a gain of $1,766,000 during the
year ended December 31, 2006. The Company sold 285,302 shares,
received proceeds of $994,000 and recorded a gain of $990,000 during the year
ended December 31, 2005. At December 31, 2005, the difference between
the cost of $5,000 and fair market value of $734,000, net of $292,000 in
deferred taxes, or $437,000 was classified as a component of accumulated other
comprehensive income included in stockholders’ equity.
The Company owns 256,502 shares of Innodata, a provider of digital
content outsourcing services. The Company carries the investment at
$1,372,000, the market value at December 31, 2007. The difference between the
cost of $246,000 and fair market value of these securities, net of $450,000 in
deferred taxes, or $676,000 is classified as a component of accumulated other
comprehensive income included in stockholders' equity as of December 31, 2007.
The Company sold 81,795 shares, received proceeds of $420,000 and recorded a
gain of $344,000 during the year ended December 31, 2007. In addition, the
Company purchased 399 shares during the year ended December 31, 2007. At
December 31, 2006, the Company owned 337,898 shares of Innodata. The
Company sold 6,750 shares, received proceeds of $16,000 and recorded a gain of
$11,000 during the year ended December 31, 2006. In addition, the Company
purchased 100 shares during the year ended December 31, 2006. The Company
carried the investment at $730,000, the market value at December 31, 2006. The
difference between the cost of $324,000 and fair market value of these
securities, net of $163,000 in deferred taxes, or $243,000 is classified as a
component of accumulated other comprehensive income included in stockholders’
equity at December 31, 2006. The Company sold 21,055 shares, received proceeds
of $91,000 and recorded a gain of $77,000 during the year ended December 31,
2005. At December 31, 2005, the difference between the cost of
$329,000 and fair market value of $1,193,000, net of $346,000 in deferred taxes,
or $518,000 is classified as a component of accumulated other comprehensive
income included in stockholders’ equity.
The Company engages in arbitrage trading activity. The Company's
trading strategy consists principally of establishing hedged positions
consisting of stocks and options. The Company is subject to market
risk in attempting to establish a hedged position, as the market prices could
change, precluding a profitable hedge. In these instances, any
positions that were established for this hedge would be immediately sold,
usually resulting in small losses. If the hedged positions are
successfully established at the prices sought, the positions generally stay
until the next option expiration date, resulting in small gains, regardless of
market value changes in these securities. While virtually all
positions are liquidated at option expiration date, certain stock positions
remain. The liquidation of these positions generally results in small
profits or losses. From time to time, losses may result from certain
dividends that may have to be delivered on positions held, as well as from
certain corporate restructurings and mergers that may not have been taken into
account when the positions were originally established.
As of December 31, 2007, trading securities had a long market
value of $7,209,000 with a cost of $7,209,000. Securities sold but
not yet purchased, had a short market value of $5,060,000 with a cost/short
proceeds of $5,069,000, or a net unrealized gain of $9,000. The
Company expects that its December 31, 2007 positions will be closed during the
first quarter of 2008 and that other positions with the same strategy will be
established. The Company pledged its holdings in Innodata as
collateral for its trading accounts. In addition, the Company's
Principal Stockholder, who served as its Chairman and CEO until his resignation
on March 16, 2007 (referred to hereafter as “Principal Stockholder”), pledged
approximately 3 million shares of his holdings in the Company's common stock as
collateral for these accounts. The Company is paying its Principal
Stockholder at the rate of 2% per annum on the value of the collateral
pledged. Such payments aggregated $39,000, $42,000 and $44,000,
respectively, for the years ended December 31, 2007, 2006 and 2005,
respectively.
The Company recognized gains from arbitrage trading of $2,114,000,
$1,013,000 and $819,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
At December 31, 2006, trading securities had a long market value
of $8,027,000 with a cost of $8,013,000, or a net unrealized gain of
$14,000. Securities sold but not yet purchased, had a short market
value of $6,102,000 with a cost/short proceeds of $6,102,000.
In connection with the arbitrage trading activity, the Company
incurs margin loans. The Company is exposed to interest rate change
market risk with respect to these margin loans. The level of trading
in the arbitrage trading account is partially dependent on the margin value of
the Company’s common stock pledged by its Principal Stockholder, and Innodata
common stock, which is used as collateral. The market value of such securities
is dependent on future market conditions for these companies over which the
Company has little or no control.
D. Note Payable - Bank
The note payable - bank is a revolving line of credit up to a
maximum of $3 million which bears interest at a per annum rate of 1.75% above
the bank’s prime rate (10% at December 31, 2007) and is due on demand. The line
expires in October, 2008, subject to automatic renewal. The note is
collateralized by substantially all of the assets of Track Data Corporation 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 and is required
to comply with certain covenants. There were no borrowings
outstanding at December 31, 2007. Borrowings available under the line of credit
at December 31, 2007 were $869,000 based on these formulas.
E. Segment Information
The Company is a financial services company that provides
real-time financial market data, fundamental research, charting and analytical
services to institutional and individual investors through dedicated
telecommunication lines and the Internet. The Company also
disseminates news and third-party database information from more than 100
sources worldwide. The Company owns Track Data Securities Corp., a
registered securities broker-dealer and member of FINRA. The Company
provides a proprietary, fully integrated Internet-based online trading and
market data system, proTrack, for the professional institutional traders, and
myTrack and myTrack Edge, for the individual trader. The Company also
operates Track ECN, an electronic communications network that enables traders to
display and match limit orders for stocks. The Company's operations
are classified in three business segments: (1) market data services
and trading, including ECN services, to the institutional professional
investment community, (2) Internet-based online trading and market data services
to the non-professional individual investor community, and (3) arbitrage
trading. See Note C.
The accounting policies of the segments are the same as those
described in Note A, Summary of Significant Accounting
Policies. 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 excess of the
purchase price of acquired businesses over the fair value of net assets
(“goodwill”) on the dates of acquisition amounts to $1,900,000, net of
accumulated amoritization of $2,494,000 as of December 31, 2007 and
2006. Goodwill is an asset of the non-professional market segment.
The Company's business is predominantly in the U.S. Revenues and net
income (loss) from international operations are not material.
Information concerning operations in its business segments is as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
Professional Market
|
|
$
|
20,803
|
|
|
$
|
29,642
|
|
|
$
|
24,419
|
|
|
|
Non-Professional Market
|
|
|
13,277
|
|
|
|
12,344
|
|
|
|
11,675
|
|
|
|
Total Revenues
|
|
$
|
34,080
|
|
|
$
|
41,986
|
|
|
$
|
36,094
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbitrage Trading – Gain on sale of marketable
securities
|
|
$
|
2,114
|
|
|
$
|
1,013
|
|
|
$
|
819
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before unallocated amounts and income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Market
|
|
$
|
(3,320
|
)
|
|
$
|
(1,829
|
)
|
|
$
|
(2,742
|
)
|
|
|
Non-Professional
Market
|
|
|
1,870
|
|
|
|
2,404
|
|
|
|
1,409
|
|
|
|
Arbitrage Trading (including interest)
|
|
|
1,584
|
|
|
|
843
|
|
|
|
406
|
|
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(722
|
)
|
|
|
(659
|
)
|
|
|
(755
|
)
|
|
|
Gain on sale of Innodata common stock
|
|
|
344
|
|
|
|
1,777
|
|
|
|
1,067
|
|
|
|
Net gain on sale of investment in private companies
|
|
|
-
|
|
|
|
-
|
|
|
|
412
|
|
|
|
Interest income (expense)-net
|
|
|
69
|
|
|
|
43
|
|
|
|
(12
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(175
|
)
|
|
$
|
2,579
|
|
|
$
|
(215
|
)
|
|
F. Income Taxes
The components of the (benefit from) provision for income taxes
are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007
|
|
2006
|
|
2005 |
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
10
|
|
|
$
|
712
|
|
|
$
|
28
|
|
|
|
Deferred
|
|
|
(56
|
)
|
|
|
36
|
|
|
|
(12
|
)
|
|
|
Total federal
|
|
|
(46
|
)
|
|
|
748
|
|
|
|
16
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
9
|
|
|
|
275
|
|
|
|
(193
|
)
|
|
|
Deferred
|
|
|
(6
|
)
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
Total state and local
|
|
|
3
|
|
|
|
282
|
|
|
|
(194
|
)
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
(43
|
)
|
|
$
|
1,030
|
|
|
$
|
(178
|
)
|
|
Reconciliation of the U.S. statutory rate with the Company's
effective tax rate is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007
|
|
2006
|
|
2005
|
|
|
Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
|
|
State and local income taxes
|
|
|
3.4
|
|
|
|
7.0
|
|
|
|
(60.0
|
)
|
|
|
Non-deductible penalties
|
|
|
10.0
|
|
|
|
-
|
|
|
|
14.0
|
|
|
|
Non taxable dividends
|
|
|
(12.7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
Other permanent differences
|
|
|
8.7
|
|
|
|
(1.1
|
)
|
|
|
(3.0
|
)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
(24.6
|
)%
|
|
|
39.9
|
%
|
|
|
(83.0
|
)%
|
|
The components of the Company’s net deferred taxes are as follows
(in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
2007
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
Charitable contributions
|
|
$
|
249
|
|
|
$
|
153
|
|
|
|
Allowance for doubtful accounts
|
|
|
91
|
|
|
|
62
|
|
|
|
Other
|
|
|
117
|
|
|
|
86
|
|
|
| |
|
|
457
|
|
|
|
301
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable
securities
|
|
|
(509
|
)
|
|
|
(240
|
)
|
|
|
Accelerated depreciation
|
|
|
(703
|
)
|
|
|
(589
|
)
|
|
| |
|
|
(1,212
|
)
|
|
|
(829
|
)
|
|
|
Net deferred tax liability
|
|
$
|
(755
|
)
|
|
$
|
(528
|
)
|
|
At December 31, 2007, the Company had state net operating loss
carryforwards of $158,000 available to offset future taxable income expiring
through December 31, 2027.
G. Commitments and Contingencies
Leases--The Company is obligated under various lease agreements
covering office space and computer equipment which expire at various dates
through 2009. 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, 2007 follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Operating Leases
|
|
|
|
|
Year Ending
|
|
Office
|
|
Computer
|
|
|
|
|
December 31,
|
|
Space
|
|
Equipment
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
712,000
|
|
|
|
$
|
24,000
|
|
|
|
$
|
736,000
|
|
|
|
2009
|
|
|
493,000
|
|
|
|
|
-
|
|
|
|
|
493,000
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,205,000
|
|
|
|
$
|
24,000
|
|
|
|
$
|
1,229,000
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2007, 2006 and 2005
amounted to $994,000, $1,058,000 and $1,072,000 for office space and $78,000,
$77,000 and $66,000 for computer equipment, respectively.
Included in the Company’s rent expense is a lease for its
executive office facilities in Brooklyn which is leased from a limited
partnership owned by the Company’s Principal Stockholder and members of his
family. The Company paid the partnership rent of $637,000 in 2007,
$630,000 in 2006 and $623,000 in 2005. A new lease effective October
1, 2007 provides for the Company to pay $657,000 per annum plus real estate
taxes through September 30, 2009.
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 contractual obligations and the Company has to purchase or sell the
financial instrument underlying the obligation at a loss.
The Company's customer securities activities are transacted on
either a cash or margin basis. In margin transactions, the clearing
broker extends credit to the Company's customers, subject to various regulatory
margin requirements, collateralized by cash and securities in the customers'
accounts. However, the Company is required to either obtain
additional collateral or to sell the customer's position if such collateral is
not forthcoming. The Company is responsible for any losses on such
margin loans, and has agreed to indemnify its clearing broker for losses that
the clearing broker may sustain from the customer accounts introduced by the
Company. At December 31, 2007, the Company had $15.5 million in
margin credit extended to its customers. The Company believes it is
unlikely it will have to make material payments under the indemnification
agreement and has not recorded any related liability in the consolidated
financial statements. There were no indemnifications paid by the Company under
this agreement.
The Company and its clearing broker seek to control the risks
associated with customer activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal guidelines. The
Company and its clearing broker monitor required margin levels daily and,
pursuant to such guidelines, require the customer to deposit additional
collateral or to reduce positions when necessary.
Net Capital Requirements--The SEC, FINRA, 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 December 31, 2007, TDSC was required to maintain minimum net
capital, in accordance with SEC rules, of approximately $1 million and had total
net capital of $4,413,000, or approximately $3,413,000 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 FINRA 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.
The operations of TDSC are subject to reviews by regulators within
its industry, which include the SEC and FINRA. In the past, certain
reviews have resulted in the Company incurring fines and required the Company to
change certain of its internal control and operating procedures. In
April 2007, the Company settled one such review by paying FINRA $185,000, which
was accrued at December 31, 2006. The Company was also fined $50,000, which was
accrued at December 31, 2007. Ongoing and future reviews may result in the
Company incurring additional fines and changes in its internal control and
operating procedures. Management does not expect any ongoing reviews
to have a material affect on the Company's financial position or results of
operations.
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 position or results of
operations.
On June 14, 2005, the SEC filed a civil complaint against Barry
Hertz, the Company’s Chairman and CEO at that time, in the U.S. District Court
for the Eastern District of New York in Brooklyn alleging violations of various
provisions of the federal securities laws in connection with certain
transactions in the Company’s stock owned by others. Mr. Hertz reached a
settlement with the SEC regarding these charges. Mr. Hertz
consented, without admitting or denying the allegations in the SECs complaint,
to a permanent injunction from violations of Section 10(b) and 10b-5 of the
Exchange Act and Section 17(a) of the Securities Act of 1933, a two-year bar
from serving as an officer or director of a publicly traded company, a two-year
bar from association with a broker or dealer, and also agreed to pay
approximately $136,000 in disgorgement, interest and civil
penalties. On March 16, 2007, Mr. Hertz resigned as Chairman and CEO
of the Company. In May, 2007, the Board of Directors agreed to
reimburse Mr. Hertz under the indemnification provisions of Delaware law,
$75,000 for the disgorgement and interest portion of the amounts paid to the SEC
by him. The Company from time to time is subject to informal
inquiries and document requests from the SEC to review compliance with Mr.
Hertz's two-year association bar imposed from serving as an officer or director
of a publicly traded company and from association with a broker or
dealer. On October 24, 2007, the Company was notified by the
SEC that they would be conducting such an inquiry and requested certain
documents. The Company provided all requested documents.
In July,
2007, a subscriber of the Track ECN services filed an arbitration claim with
FINRA alleging that the Company's website confused the subscriber with respect
to its fee schedule for ECN transactions, and that, as a result, a customer of
the subscriber was billed a greater amount for ECN transactions than was
expected. The subscriber is seeking a return of its fees paid and for
loss of its customer for a total claim of $500,000. The Company has
answered the claim, denying all of the relevant facts and any liability in
connection with this claim. An arbitration hearing is scheduled for
May, 2008. The Company is unable to predict the outcome of these claims and
accordingly, no adjustments have been made in the consolidated financial
statements in response to these claims.
H. Savings Program
The Company has an employee savings program under which employees
may make deposits and receive interest at the prime rate. As of December 31,
2007 and 2006, the Company’s Chief Executive Officer/Chief Financial Officer had
deposits in the program of $583,000 and $479,000, respectively, and received
interest of $44,000, $32,000 and $16,000 during the years ended December 31,
2007, 2006 and 2005, respectively. Amounts due to employees under the
program aggregated $770,000 which is included in other liabilities at December
31, 2007. This program was terminated as of February 29, 2008 and all
savings at that date were returned to the employees.
I. Capital Stock and Dividends
Common Stock--On January 18, 2005, The Board of Directors
authorized a one-for-five reverse stock split, which was consented to by the
Company’s Principal Stockholder. The stock split became effective on February
28, 2005.
During the year ended December 31, 2006, the Company purchased
6,000 shares of its common stock at a cost of $20,000. During the year ended
December 31, 2005, the Company purchased 1,247,000 shares of its common stock at
a cost of $3,676,000. The purchases include 300,000 shares purchased from the
Company’s Principal Stockholder for $837,000, including 200,000 shares purchased
in the Company's tender offer. The purchases include 1,042,000 shares (200,000
shares tendered by the Company's Principal Stockholder) pursuant to a tender
offer made on August 17, 2005 to purchase shares at $3.00 per share. The total
costs relating to the tender offer were $3,179,000, including transaction
costs.
In November 2005, the Board of Directors authorized the buy-back
of up to 1 million additional shares from time to time in open market or
privately negotiated transactions. As of December 31, 2007, 6,000 shares had
been repurchased under this program.
Dividends--No dividends were declared during the three years ended
December 31, 2007, 2006 and 2005. The Board expects to consider future
dividends, if any, based on such factors as the Company's earnings, financial
condition, cash requirements, future prospects and other factors.
Preferred Stock--The Company is authorized to issue up to
5,000,000 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, 2007, the Company reserved
for issuance 1,982,000 shares of its common stock pursuant to the Company's
Stock Option Plans.
J. Stock Options
The Company adopted, with stockholder approval, the 1994, 1995,
1995 Disinterested Director, 1996, 1998, 2001 and 2002 Stock Option Plans (the
“1994 Plan,” “1995 Plan,” “1995 DD Plan,” “1996 Plan,” “1998 Plan,
” “2001 Plan” and the “2002 Plan”) which provided for the granting of
options to purchase not more than an aggregate of 240,000, 400,000, 40,000,
640,000, 640,000, 560,000 and 500,000 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"). 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, under the 1998 Plan after July 9, 2008, under the
2001 Plan after May 3, 2011 and under the 2002 Plan after May 2,
2012. At December 31, 2007, the total options available for issuance
under the plans were options to purchase 1,982,000 shares.
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.
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.
In December 2005, the Company granted five-year options to
purchase 202,650 shares (102,500 shares to officers and directors) of its common
stock at exercise prices of $3.00 – 3.05 per share, the market value at date of
grant. The options were exercisable immediately. The intrinsic value of options
exercised in 2006 was $28,000. No options were exercised in 2007 or
2005. No options vested in 2007 or 2006. The fair value of shares
vested in 2005 was $793,000.
A summary of the Company's Stock Option Plans is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
| |
|
Per Share
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Fair
|
|
| |
|
Range of
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
|
Average
|
|
Value
|
|
| |
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
Date of
|
|
| |
|
Prices
|
|
Outstanding
|
|
Life (Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
|
Grant
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance 01/01/05
|
|
$
|
5.00
|
-
|
6.25
|
|
|
|
247,660
|
|
|
3
|
|
$
|
5.65
|
|
|
|
247,660
|
|
|
$
|
5.65
|
|
|
|
|
|
|
| |
|
$
|
7.50
|
|
|
|
|
|
1,076,770
|
|
|
4
|
|
$
|
7.50
|
|
|
|
881,253
|
|
|
$
|
7.50
|
|
|
|
|
|
|
| |
|
$
|
33.75
|
|
|
|
|
|
16,000
|
|
|
1
|
|
$
|
33.75
|
|
|
|
16,000
|
|
|
$
|
33.75
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
1,340,430
|
|
|
|
|
|
|
|
|
|
1,144,913
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
$
|
5.00
|
-
|
33.75
|
|
|
|
(283,170
|
)
|
|
1
|
|
$
|
8.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
$
|
3.00
|
-
|
3.05
|
|
|
|
202,650
|
|
|
5
|
|
$
|
3.01
|
|
|
|
|
|
|
|
|
|
|
$
|
2.95
|
|
|
|
Balance 12/31/05
|
|
$
|
3.00
|
-
|
3.05
|
|
|
|
202,650
|
|
|
5
|
|
$
|
3.01
|
|
|
|
202,650
|
|
|
$
|
3.01
|
|
|
|
|
|
|
| |
|
$
|
5.00
|
-
|
6.25
|
|
|
|
240,300
|
|
|
2
|
|
$
|
5.63
|
|
|
|
240,300
|
|
|
$
|
5.63
|
|
|
|
|
|
|
| |
|
$
|
7.50
|
|
|
|
|
|
816,960
|
|
|
3
|
|
$
|
7.50
|
|
|
|
816,960
|
|
|
$
|
7.50
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
1,259,910
|