UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004

Commission File Number: 0-24634
TRACK DATA CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization)	22-3181095 (I.R.S. Employer Identification No.)
95 Rockwell Place, Brooklyn, New York  (Address of principal executive offices)	11217 (Zip Code)
(718)-522-7373 (Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  o  No x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of July 31, 2004 there were 48,619,000 shares of common stock outstanding.

 

PART I.      FINANCIAL INFORMATION

Item 1.      Financial Statements

  See pages 2-11

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations

  See pages 12-18

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

  See page 19

Item 4.       Controls and Procedures

 

              See page 19

PART ll      OTHER INFORMATION

  See page 20

Track Data Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except number of shares)

		June 30,					December 31,
			2004					2003
	Unaudited						Derived from
							audited
							financial
							statements
ASSETS
CASH AND EQUIVALENTS		$	6,417					$	8,315
ACCOUNTS RECEIVABLE – net			1,411						1,099
DUE FROM CLEARING BROKER			450						547
DUE FROM BROKER			48,483						37,141
MARKETABLE SECURITIES			21,896						21,427
FIXED ASSETS - at cost (net of accumulated depreciation)			1,923						2,140
EXCESS OF COST OVER NET ASSETS ACQUIRED – net			1,900						1,900
OTHER ASSETS			782						929
TOTAL		$	83,262					$	73,498
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Accounts payable and accrued expenses		$	4,235					$	4,112
Notes payable - other			-						494
Trading securities sold but not yet purchased			52,624						40,996
Net deferred income tax liabilities			1,924						2,475
Other liabilities, including income taxes			491						1,616
Total liabilities			59,274						49,693
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock - $.01 par value; 300,000,000 shares authorized; issued and
outstanding – 48,681,000 shares in 2004 and 49,001,000 shares in 2003			487						490
Additional paid-in capital			13,837						14,152
Retained earnings			7,028						5,701
Accumulated other comprehensive income			2,636						3,462
Total stockholders’ equity			23,988						23,805
TOTAL		$	83,262					$	73,498

 

(in thousands, except earnings and dividends per share)

(Unaudited)

			2004				2003
SERVICE FEES AND REVENUE		$	20,595			$	21,019
COSTS, EXPENSES AND OTHER:
Direct operating costs			11,423				12,383
Selling and administrative expenses			7,407				8,128
Marketing and advertising			268				134
Gain on marketable securities (including $542,000
from sale of Innodata common stock in 2004)			(1,653	)			(766	)
Interest expense – net			122				33
Total			17,567				19,912
INCOME BEFORE INCOME TAXES			3,028				1,107
INCOME TAXES			1,211				443
NET INCOME		$	1,817			$	664
BASIC AND DILUTED NET INCOME PER SHARE			$.04				$.01
DIVIDENDS PER SHARE			$.01
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			48,929				50,376
ADJUSTED DILUTIVE SHARES OUTSTANDING			49,012				50,376

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED JUNE 30, 2004 AND 2003

(in thousands, except earnings per share)

(Unaudited)

			2004				2003
SERVICE FEES AND REVENUE		$	9,822			$	10,324
COSTS, EXPENSES AND OTHER :
Direct operating costs			5,688				6,029
Selling and administrative expenses			3,648				3,837
Marketing and advertising			153				56
Gain on marketable securities (including $98,000
from sale of Innodata common stock in 2004)			(867	)			(397	)
Interest expense – net			45				8
Total			8,667				9,533
INCOME BEFORE INCOME TAXES			1,155				791
INCOME TAXES			462				317
NET INCOME		$	693			$	474
BASIC AND DILUTED NET INCOME PER SHARE			$.01				$.01
WEIGHTED AVERAGE SHARES OUTSTANDING			48,882				50,088
ADJUSTED DILUTIVE SHARES OUTSTANDING			48,891				50,088

Track Data Corporation and Subsidiaries

SIX MONTHS ENDED JUNE 30, 2004

(in thousands)

(Unaudited)

																			Accumulated						Total
							Additional												Other						Stock-						Compre-
	Common						Paid-in						Retained						Comprehensive						holders’						hensive
	Stock						Capital						Earnings						Income						Equity						Income
BALANCE, JANUARY 1, 2004		$	490					$	14,152					$	5,701					$	3,462					$	23,805
Net income															1,817												1,817					$	1,817
Stock options and warrants exercised									11																		11
Dividends paid															(490	)											(490	)
Purchase and retirement of treasury stock			(3	)					(326	)																	(329	)
Reclassification adjustment for gain on
marketable securities-net of taxes																					(319	)					(319	)					(319	)
Unrealized loss on marketable securities -
net of taxes																					(507	)					(507	)					(507	)
Comprehensive income																																$	991
BALANCE, JUNE 30, 2004		$	487					$	13,837					$	7,028					$	2,636					$	23,988

 

Track Data Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(in thousands)

(Unaudited)

			2004				2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,817			$	664
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization			564				723
Gain on sale of Innodata common stock			(542	)			(17	)
Changes in operating assets and liabilities:
Accounts receivable and due from clearing broker			(215	)			2,102
Due from broker			(11,376	)			(13,405	)
Marketable securities			(2,015	)			(4,369	)
Other assets			140				(158	)
Accounts payable and accrued expenses			123				(221	)
Securities sold, but not yet purchased			11,628				17,732
Other liabilities			(1,189	)			8
Net cash (used in) provided by operating activities			(1,065	)			3,059
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets			(337	)			(125	)
Proceeds from sale of Innodata common stock			711				182
Net cash provided by investing activities			374				57
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations			-				(54	)
Net payments on note payable - bank			-				(1,030	)
Net payments from notes payable - other			(494	)			(388	)
Dividends paid			(490	)			-
Net proceeds on loans from employee savings program			62				74
Purchase of treasury stock			(296	)			(1,227	)
Proceeds from exercise of stock options			11				-
Net cash used in financing activities			(1,207	)			(2,625	)
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH			-				(9	)
NET (DECREASE) INCREASE IN CASH			(1,898	)			482
CASH, BEGINNING OF PERIOD			8,315				5,491
CASH, END OF PERIOD		$	6,417			$	5,973
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	389			$	105
Income taxes			2,389				441

Track Data Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.   In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2004, and the results of operations for the three and six month periods ended June 30, 2004 and 2003 and of cash flows for the six months ended June 30, 2004 and 2003. The results of operations for the six months ended June 30, 2004 are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K. The accounting policies used in preparing these financial statements are the same as those described in the December 31, 2003 financial statements.

2.   During the six months ended June 30, 2004, the Company purchased 305,935 shares of its common stock at a cost of $329,000.

3.   The Company charges all costs incurred to establish the technological feasibility of a product or product enhancement to research and development expense. Research and development expenses were $133,000 and $161,000 for the six months ended June 30, 2004 and 2003, respectively.

4.   Advertising costs, charged to operations when incurred, were $268,000 and $134,000 for the six months ended June 30, 2004 and 2003, respectively.

5.   Marketable securities consists of the following (in thousands):

	June 30,						December 31,
	2004						2003
Edgar Online – Available for sale securities – at market		$	744					$	1,150
Innodata – Available for sale securities – at market			4,948						6,088
Trading securities – at market			16,204						14,189
Marketable securities		$	21,896					$	21,427
Trading securities sold but not yet purchased – at market		$	52,624					$	40,996

The Company owns 688,800 shares of Edgar Online, Inc. ("EOL"), an Internet-based supplier of business, financial and competitive intelligence derived from U.S. Securities and Exchange Commission data. The Company carries the investment at $744,000, the market value at June 30, 2004. The difference between the cost of $9,000 and market value of these securities, net of $294,000 in deferred taxes, or $441,000 is classified as a component of accumulated other comprehensive income included in stockholders’ equity.

	7

 

The Company owns 1,344,218 shares of Innodata, a provider of digital content outsourcing services. The Company carries the investment at $4,948,000, the market value at June 30, 2004. The difference between the cost of $1,290,000 and market value of these securities, net of $1,463,000 in deferred taxes, or $2,195,000 is classified as a component of accumulated other comprehensive income included in stockholders’ equity.

 

The Company engages in arbitrage trading activity in which it seeks to fully cover open equity and option positions in its trading accounts during each month with covering equity and option positions that expire in succeeding months. As of June 30, 2004, trading securities had a long market value of $16,204,000 with a cost of $16,414,000, or a net unrealized loss of $210,000. Securities sold but not yet purchased, had a short market value of $52,624,000 with a cost/short proceeds of $52,600,000, or a net unrealized loss of $24,000. The Company expects that its June 30, 2004 positions will be closed during the third quarter of 2004 and that other positions with the same strategy will be established. The Company pledged its holdings in EOL and Innodata as collateral for its trading accounts. In addition, the Company’s Chairman pledged approximately 12 million shares of his holdings in the Company’s common stock as collateral for these accounts. The Company is paying its Chairman at the rate of 2% per annum on the value of the collateral pledged. Such payments aggregated $52,000 and $25,000 for the six months ended June 30, 2004 and 2003, respectively.

At December 31, 2003, trading securities had a long market value of $14,189,000 with a cost of $14,371,000, or a net unrealized loss of $182,000. Securities sold but not yet purchased, had a short market value of $40,996,000 with a cost/short proceeds of $41,076,000, or a net unrealized gain of $80,000.

 

6.

Earnings Per Share--Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of potential common stock issuance. Diluted earnings per share is based on the weighted average number of common and potential dilutive common shares outstanding. There was no effect on earnings per share as a result of potential dilution. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the period. The calculation did not take into account options to purchase 6,660,000 and 7,714,000 shares for the three months ended June 30, 2004 and 2003, respectively, and 7,115,000 and 7,716,000 shares for the six months ended June 30, 2004 and 2003, respectively, as they were anti-dilutive.

Earnings per share (in thousands, except per share)

		Three Months Ended								Six Months Ended
			June 30								June 30
			2004				2003				2004				2003
Net income		$	693			$	474			$	1,817			$	664
Weighted average common shares outstanding			48,882				50,088				48,929				50,376
Dilutive effect of outstanding warrants and options			9				-				83				-
Adjusted for dilutive computation			48,891				50,088				49,012				50,376
Basic income per share			$.01				$.01				$.04				$.01
Diluted income per share			$.01				$.01				$.04				$.01

	8

 

7.   Accounting for Stock Options--On December 31, 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial Reporting," to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The adoption of SFAS 148 disclosure requirements did not have an effect on the Company's consolidated financial statements. At June 30, 2004, the Company has seven stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans were issued to employees and directors and had exercise prices equal to or greater than the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2004				2003				2004				2003
		(in thousands, except earnings per share)
Net income, as reported		$	693			$	474			$	1,817			$	664
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects			(248	)			(227	)			(448	)			(464	)
Net income as adjusted		$	445			$	247			$	1,369			$	200
Earnings per share:
Basic and diluted --as reported			$.01				$.01				$.04				$.01
Basic and diluted --as adjusted			$.01				$.00				$.03				$.00

In January, March and June, 2004, the Company granted five-year options to officers, directors and employees to purchase an aggregate of 1,449,650 shares at an exercise price of $1.50 per share vesting over two years. The weighted average fair value of the options was $.86 per share. The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: an expected life of four years; risk free interest rate of 2.7%; expected volatility of 112%; and a zero dividend yield. The effects of applying SFAS 123 in this proforma disclosure are not indicative of future results.

8.   Segment Information--The Company is a financial services company that provides real-time financial market data, fundamental research, charting and analytical services to institutional and individual investors through dedicated telecommunication lines and the Internet. The Company also disseminates news and third-party database information from more than 100 sources worldwide. The Company owns Track Data Securities Corp., a registered securities broker-dealer and member of the National Association of Securities Dealers, Inc. The Company provides a proprietary, fully integrated Internet-based online trading and market data system, proTrack, for the professional institutional traders, and myTrack and TrackTrade, for the individual trader. The Company also operates Track ECN, an electronic communications network that enables traders to display and match limit orders for stocks. The Company's operations are classified in two business segments: (1) market data services and trading, including ECN services, to the institutional professional investment community, and (2) Internet-based online trading and market data services to the non-professional individual investor community. The Company also engages in arbitrage trading. See Note 5.

	9

 

Segment data includes charges allocating corporate overhead to each segment. The Company has not disclosed asset information by segment as the information is not produced internally. Substantially all long-lived assets are located in the U.S. The Company's business is predominantly in the U.S. Revenues and net income from international operations are not material. Information concerning operations in its business segments is as follows (in thousands):

			Three Months								Six Months
		Ended June 30,									Ended June 30,
		2004				2003					2004				2003
Revenues
Professional Market		$	6,092			$	6,015			$	12,493			$	12,841
Non-Professional Market			3,730				4,309				8,102				8,178
Total		$	9,822			$	10,324			$	20,595			$	21,019
Income before unallocated
amounts and income taxes:
Professional Market		$	160			$	72			$	552			$	356
Non-Professional Market			470				677				1,509				741
Unallocated amounts:
Depreciation and amortization			(297	)			(347	)			(564	)			(723	)
Gain on marketable securities			867				397				1,653				766
Interest expense, net			(45	)			(8	)			(122	)			(33	)
Income before income taxes		$	1,155			$	791			$	3,028			$	1,107

9.   Transactions with Clearing Broker and Customers--The Company conducts business through a clearing broker which settles all trades for the Company, on a fully disclosed basis, on behalf of its customers. The Company earns commissions as an introducing broker for the transactions of its customers. In the normal course of business, the Company's customer activities involve the execution of various customer securities transactions. These activities may expose the Company to off-balance-sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the 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. The Company's Chairman and CEO has a margin loan of approximately $3 million as a customer of the Company's broker-dealer which is collateralized by 12.5 million of the Company's shares owned by him with a market value of $13.4 million as of June 30, 2004, and which is also subject to such indemnity by the Company in the event the clearing broker were to sustain losses.

	10

 

The Company and its clearing broker seek to control the risks associated with customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company and its clearing broker monitor required margin levels daily and, pursuant to such guidelines, require the customer to deposit additional collateral or to reduce positions when necessary.

10. Net Capital Requirements--The SEC, NASD, and various other regulatory agencies have stringent rules requiring the maintenance of specific levels of net capital by securities brokers, including the SEC’s uniform net capital rule, which governs Track Data Securities Corp. ("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 June 30, 2004, TDSC was required to maintain minimum net capital, in accordance with SEC rules, of $1 million and had total net capital of $3,073,000, or approximately $2,073,000 in excess of minimum net capital requirements.

If TDSC fails to maintain the required net capital it may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by the NASD and other regulatory bodies, which ultimately could require TDSC's liquidation. In addition, a change in the net capital rules, the imposition of new rules, a specific operating loss, or any unusually large charge against net capital could limit those operations of TDSC that require the intensive use of capital and could limit its ability to expand its business.

11. Comprehensive income is as follows (in thousands):

	Three Months Ended										Six Months Ended
		June 30,										June 30,
		2004				2003						2004				2003
Net income		$	693			$	474					$	1,817			$	664
Reclassification adjustment for
gain on marketable securities
- net of taxes			(55	)			(2	)					(319	)			(2	)
Unrealized (loss) gain on marketable
securities-net of taxes			(164	)			461						(507	)			116
Comprehensive income		$	474			$	933					$	991			$	778