SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ Annual report under section 13 or 15(d) of the securities exchange act of
1934
For the fiscal year ended December 31, 2001
/ / Transition report under section 13 or 15(d) of the securities exchange act
of 1934
Commission file number 0-24634
TRACK DATA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-3181095
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
56 Pine Street
New York, New York 10005
(Address of principal executive offices) (Zip Code)
(212) 943-4555
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price of the Company's Common Stock on
February 28, 2002 of $1.94 per share. $51,225,000
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date. 53,824,010 shares of common stock,
$.01 par value, as of February 28, 2002
DOCUMENTS INCORPORATED BY REFERENCE
[SEE INDEX TO EXHIBITS]
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 financial services company that
owns Track Data Securities Corp. ("TDSC"), a registered securities broker-dealer
and member of the National Association of Securities Dealers, Inc. The Company
provides a proprietary, fully integrated Internet-based online trading and
market data system, myTrack, for the individual trader, and proTrack for the
institutional trader. The proTrack system is also licensed as a trading
platform for other broker-dealers. The Company provides real-time financial
market data, fundamental research, charting, and analytical services to
institutional and individual investors through dedicated telecommunication lines
and the Internet. The Company also disseminates news and third-party database
information from more than 100 sources worldwide. In February 2002, TDSC
received authorization to operate Track ECN, an electronic communications
network that enables traders to display and match limit orders for stocks.
The Company has delivered mission-critical information to the most
demanding customers in the investment community since 1981. Market data is
delivered direct from the original sources (such as the exchanges) to the
Company's facilities, where the data is simultaneously redistributed to its
customers. myTrack and proTrack operate through the use of proprietary
application software. Once the user is attached to the Company's host server,
the connection link is constant, like an open telephone connection. This allows
the system to provide dynamically updating stock quotes and news and to
immediately respond to all queries. Utilizing the built-in trading platform
allows the user to enter a trade that is received by the Company's server
instantaneously, as the connection is the same one that is already connected for
market data. The Company believes this is a competitive advantage over other
trading systems that require a new connection to a server every time information
is requested or sent. The Company also offers proTrack through a direct
point-to-point T1 connection.
The Company maintains offices in the U.S. and Europe, with executive
offices located at 56 Pine Street, New York, New York 10005 and at 95 Rockwell
Place, Brooklyn, New York 11217. Its telephone number is 212-943-4555 or
718-522-7373.
The Company's operations are classified in two business segments:
Internet-based online trading and market data services to the non-professional
individual investor community, and online trading and market data services to
the institutional professional investment community. The Company also engages in
arbitrage trading. See Notes C and H of Notes to Consolidated Financial
Statements.
A. INTERNET-BASED ONLINE TRADING, MARKET DATA SERVICES, AND OTHER SERVICES TO
THE NON-PROFESSIONAL INDIVIDUAL INVESTMENT COMMUNITY
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Internet-Based Online Trading and Market Data Services to the
Non-Professional Individual Investment Community
General
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The evolution of the Internet has fundamentally changed the way in
which many investors manage their financial affairs. The speed,
convenience, choice, cost savings, and information that the Internet offers
as an investment tool has driven investor assets online.
The Company combined its strength from 20 years of delivering market
data and third-party market information to the professional trading
community with a unique order entry system to create a proprietary trading
system, myTrack. The Company has offered its myTrack software-based online
trading system since June 1999. Since myTrack is a client-server
application, it is not restricted by the limitations of HTML, the primary
programming language of the worldwide web. With trading systems that use
HTML, displayed data remains static until a query is repeated. In contrast,
myTrack delivers and automatically updates a continuous, dynamic stream of
live market data to the client's screen. The Company believes this
difference gives myTrack a substantial edge over the web site-based trading
offered by the vast majority of online brokerage firms.
Another advantage of myTrack is that it is a direct access broker.
Direct access means that myTrack clients can have their trades routed
directly to the exchange, market maker, or electronic communication network
("ECN") of their choice. Our smart order routing system will select routing
for those traders who do not wish to select on their own. As a result, the
Company believes trades can be executed more quickly than if the trade is
routed through a third market firm or an online brokerage firm's trading
desk, as is the case with a number of other trading systems. The order
entry section can be preset for size and type of order. The client can use
a mouse to click the bid or ask price of a security and either close out an
open position or add to an existing one. If the user clicks the bid or ask
price of the security, the order screen will appear pre-configured to buy
or sell.
myTrack clients may place bids or offers onto an ECN which will also
appear in the Nasdaq Market Maker Level 2 screen with the corresponding
price and size of the order. We believe that this gives myTrack clients an
advantage in attempting to execute orders between the bid and asked prices
of Nasdaq securities.
myTrack offers trading of U.S. based stocks, options and mutual funds,
as well as stock index-based futures.
The Company has targeted active traders and other active investors and
believes that myTrack is well-suited to satisfy their requirements. For
those traders who are the most active and engage in daytrading, the Company
offers trading software, "dayTrader by myTrack." dayTrader contains
features and enhancements designed to satisfy the needs of the hyperactive
trader community.
The Company markets myTrack by targeting active traders through
advertisements, including direct mail and telemarketing. The Company's
marketing efforts have included advertisements on financial TV networks, in
financial publications, and in various other regional and national
publications that have demographics similar to myTrack's target market. The
Company also advertises and promotes myTrack through Internet web site
banner advertisements.
myTrack Services
----------------
Trading Access: In addition to the myTrack software, users can access
myTrack trading through the myTrack web site, a Palm or other PDA, a
web-enabled cellular phone, or two-way pager. myTrack delivers to customers
with trading account free streaming delayed quotes and unlimited free
real-time extended quotes, as well as breaking company news, a trade by
trade log, charting for technical analysis and a proprietary library of
intra-day market statistics.
Commission Rates: Trading is currently offered at prices starting at
$12.95 per trade. Volume trading rebates can result in trade costs as low
as $8.20 per trade. The Company also offers software for day traders,
dayTrader by myTrack, which offers commissions from $.015 to $.02 per share
based on volume. Futures are generally priced at $7.00 per contract.
myTrack Market Data: myTrack 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. myTrack's clients can arrange the display and
configuration of data on their computer screens using a menu and tool bar,
which are generally utilized in the Windows operating system.
Market Data Pricing: Real-time quotes, news, charting and technical
analysis are currently available in various pay packages from $19.95 per
month plus exchange fees to $95.00 per month (including Nasdaq Level II)
plus exchange fees. Volume trading can result in rebates equivalent to the
service plan charges.
Customer Service: Client services for all levels of online service,
including trading, administrative, and technical support, are among the
Company's highest priorities. Based on the Company's experience in the
financial services industry and client feedback, it believes that providing
an effective client service team to handle client needs is critical to its
success. The Company's Client Service department helps clients get online,
handles product and service inquiries and addresses all brokerage and
technical questions. The Client Service department also conducts various
surveys to verify the satisfaction of our clients and to learn more about
client preferences and requirements. Live client support is available 13
hours a day, from 7:00 AM to 8:00 PM Eastern Time, Monday through Friday.
Operations
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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, for which the
Company pays a per-ticket charge. 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 can
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.
Network Infrastructure
The Company's external network consists of a series of routers
and other Internet-networking equipment, myTrack, 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.
Any individual with a personal computer who has a connection to
the Internet and has Windows compatible software can subscribe to
myTrack. Once an account is opened, the client downloads myTrack
software and is given a unique user name and password. The client then
logs onto the Company's myTrack servers. The myTrack servers connect
to market data and order servers.
myTrack employs a proprietary protocol to communicate between the
client and the server. Conventional mail, web and ftp servers are used
to download software, provide a public access to a chat function and
to exchange mail with internal mail servers and prevents
virus-infected files or messages from reaching the internal network.
Logins to myTrack servers are validated by a permission server. Once
the permission server allows the client to establish a connection to a
myTrack server, the connection between the client and server is
maintained until the client requests it be terminated or until the
system determines that the connection is no longer efficient or is
inoperable.
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.
The order servers accept buy/sell or sell short/buy to cover
messages from the client application and qualify orders according to a
number of business rules. Once an order is qualified, it is sent to
the exchange of choice and messages are sent to update the database.
This update offers the client real-time account positions, buying
power and profit and loss calculations. All transactions for the day
are processed for delivery to the clearing firm.
Account Security
The Company uses a combination of proprietary and industry
standard security measures to protect clients' assets. Clients are
assigned unique account numbers, user identifications and passwords.
In accordance with standard industry practices, telephone orders
require authentication via personal identification number/password
and/or other personal information. In addition, the Company's trade
processing system is designed to compare the accounts database with
the clearing firm's account information on a daily basis to detect any
discrepancies.
Firewalls and other software limit not only system access to the
authorized users, but also limit the authorized users to specifically
approved applications. This filter-software prevents unauthorized
access to critical areas of the system such as account information.
Furthermore, public access servers, such as e-mail, chat services and
the file transfer protocol, are in a network entirely separate from
the rest of the Company's systems.
The Company has implemented special policies relating to the
transfer or withdrawal of funds by clients to prevent unauthorized
withdrawals. Checks will only be made out in the account holder's name
and wire transfers will only be sent to a bank account in the account
holder's name.
Other Internet-Based Market Data Services To The Individual
Non-Professional Market
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AIQ Systems
-----------
AIQ Systems is an industry leader in developing artificial
intelligence (AI) based stock market analysis and charting software for
personal computers. By simulating the reasoning of top market technicians,
AIQ's "Expert Systems" delivers trading signals and valuable market
insight, as well as state-of-the-art technical charting and screening
capabilities. AIQ's customer list consists of thousands of individual and
professional investors worldwide who rely on AIQ's accurate and unique
timing information for their daily trading decisions.
AIQ currently publishes three primary expert systems for market
trading. AIQ MarketExpert or Prochart is an introductory level charting and
analysis package used in conjunction with a professional data feed used by
individual investors, brokers, and institutions worldwide.
AIQ's most popular product is AIQ TradingExpert for Windows. This
advanced analysis package includes market timing, stock timing, and
industry group analysis capabilities. TradingExpert retails for $995. AIQ
and myTrack joined forces to give investors the design and testing tools
required to uncover profitable trading systems with myTrack's delayed and
real-time quotes and news and Dial/Data's historical and end of day data.
In addition, the 32-bit TradingExpert Pro contains state-of-the-art
charting, industry group analysis, market timing, reports and screening,
and portfolio management. AIQ offers this package for monthly fees starting
at $59 for delayed quotes and $79 plus exchange fees for real-time quotes.
AIQ waives the purchase price for users that sign up for one of these
monthly packages.
AIQ's OptionExpert is an option data and evaluation system that uses
the Internet to deliver real-time option chains, data and analysis.
OptionExpert is offered in conjunction with myTrack's Internet-based online
trading and market data system. OptionExpert delivers the tools necessary
to identify, analyze, and track potentially profitable options strategies.
OptionExpert can be used as a stand-alone program, or combined with AIQ's
award winning TradingExpert. AIQ is offering OptionExpert bundled with
myTrack for monthly fees starting at $59 plus exchange fees for real-time
data. Separately, OptionExpert is $39 per month. All packages include
unlimited historical data and news.
AIQ also develops a full line of add-on modules for fundamental
analysis, news retrieval, and data correlation. In addition, AIQ offers
educational services including: the Opening Bell Monthly educational
newsletter, bi-annual educational seminars and workshops, and a full line
of educational videotapes.
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. In
addition, fundamental data is provided for equity issues such as splits,
dividends, and earnings per share. News headlines and full text stories
from some of the Company's news vendors can also be delivered to Dial/Data
customers. Dial/Data is primarily marketed through independent software
vendors who provide analytical and charting programs for analyzing
financial information. The Company's AIQ division, Equis International, and
other independent software vendors include Dial/Data access as an integral
part of the software that they market. The Company encourages these vendors
of charting software, through the payment of royalties, to make their
software compatible with the Company's Dial/Data market information, and to
advise customers by inserts and other means that they may select Dial/Data
as their source of market information by contacting Dial/Data and entering
into a month to month subscription agreement. A customer that has
subscribed to Dial/Data accesses the service directly using the vendor's
software program through modems on their PC's and is billed for the
Dial/Data service directly by the Company. Access to the Company's database
is provided by using the Internet. Although the software can operate on
real-time information, customers primarily apply their charting techniques
to historical information and there is substantially less emphasis on
up-to-the-minute information for this service than there is for other
services provided by the Company.
Pricing: Customers who subscribe to Dial/Data pay a flat monthly rate
that ranges from $15 to $85, depending on the type of data received.
Customers pay for their services primarily by permitting the Company to
charge their credit cards. Customers may terminate Dial/Data services at
any time.
Marketing
---------
The Company markets myTrack by targeting active traders through
advertisements, including direct mail and telemarketing. The Company's
marketing efforts have included advertisements on financial TV networks, in
financial publications, and various other regional and national
publications that have a demographic similar to myTrack's target market.
The Company also advertises and promotes myTrack through Internet web site
and banner advertisements.
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 online trading service competes with services
offered by online brokers, many of which have substantially greater
resources. The market for brokerage services is rapidly evolving and
intensively competitive. The Company expects competition to continue and
intensify in the future. 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., Charles Schwab &
Co., Inc., Quick & Reilly, Inc., TD Waterhouse, Inc., Fidelity Brokerage
Services, Inc. and Datek Securities Corp. 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'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 Signal, DTN, PC Quote, AT Financial, as well as many other Internet
providers of financial information.
Competitors to the Dial/Data service include Interactive Data Corp.,
The Dow Jones Retrieval Service, Compuserve, Telescan and Commodity
Systems, Inc. The Company competes in this market based on price, the
quality and reliability of its data, the extent and breadth of historical
information, ease of access and the negotiation of agreements with vendors
that provide royalty arrangements they find attractive. Some of the
Company's competitors provide both software and data services. The Company
competes with such full service providers by attempting to enter into
agreements with vendors of superior software.
Competitors of AIQ include Equis International (MetaStock), Omega
Research (SuperCharts), Windows on Wall Street, and many others. Generally,
these competitors' products can be classified as "charting" packages. They
concentrate their resources on general charting (graphical) and stock
market back-testing capabilities, rather than the pre-programmed market
analysis offered by the AIQ products. Due to this approach, which tends to
be less support intensive, they compete at a lower price range of between
$250 and $450 per unit, as compared to AIQ Systems which sells its most
popular software product, "TradingExpert," for $695. AIQ's TradingExpert
Pro competes with Omega's TradeStation and MetaStock Professional.
B. ONLINE TRADING AND MARKET DATA SERVICES TO THE INSTITUTIONAL PROFESSIONAL
INVESTMENT COMMUNITY
MarkeTrack
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MarkeTrack offers significant real-time quote processing and
analytical features, and has become distinguished over time for its ability
to consistently deliver real-time, market sensitive information. The
service provides domestic and international market information, dynamically
updating quotelines, options and futures displays, real-time spreadsheets,
tick-by-tick updating graphics, news services and third-party databases,
user-defined screen layouts, access to back-office order and execution
services, and over 20 years of graphical price history. It allows users to
calculate theoretical values of options and determine the most beneficial
investment strategy through calculating returns on alternative investments,
including options and futures. In addition, users are able to download
real-time data to both Microsoft Excel and Lotus 1-2-3 spreadsheet
applications, which allows the users to create individually tailored
financial applications to meet specific needs without additional
programming. MarkeTrack Web provides essentially the same service through
the Internet.
The service provides investment professionals the ability to easily
and rapidly analyze, on a single service terminal, large volumes of
real-time prices, third-party databases, historical information and news
services to support split second trading decisions. It runs under Windows
NT, DOS and UNIX operating systems on a wide variety of personal computer
and workstation platforms.
Pricing and Customers: Customers are charged a monthly service fee and
a communications or location charge that typically varies with the location
and size of the customer's installation. Service charges vary with the
number and types of functions to which an individual subscribes, and are
typically between $250 and $600 per month per user. Typically subscribers
who execute a subscriber agreement contract that specifies both term and
quantity of users receive pricing discounts for multi-year contracts. Such
agreements allow subscribers to receive services at a known cost and ensure
the Company of a recurring revenue stream into the future.
MarkeTrack currently serves over 3,000 customers in trading and
institutional investment management positions. Customers include floor
traders, block traders, market makers, OTC traders, options specialists,
head traders, arbitrageurs and hedge fund managers.
proTrack Online Trading
-----------------------
The Company has taken its 20 years of experience delivering
mission-critical market data to the world's top traders and integrated that
system with a direct access trading system to provide a state-of-the-art
system for the professional market, proTrack, which has been available
since January, 2002. Many competing systems are connected with a particular
market maker or ECN that require all trades to first pass through that
platform, even when the execution will not be done there. proTrack enables
the trader to access the market directly. There is also smart order routing
built into the system for times when a routing destination is not selected
by the trader. proTrack is a Windows-based fully customizable system with
flexibility to see the information the trader wants to see with dynamically
updating linked windows.
Among many trading features offered by proTrack are: point and click
equities and options trading, direct access to market makers (not just
through SelectNet as many other systems offer) and ECN's, hot keys, smart
order routing, reserve book, quick modification of existing orders,
multiple order types and a wide variety of market data and news which the
Company has provided to the professional market for over 20 years.
proTrack offers trading through the Company's wholly-owned
broker-dealer subsidiary, TDSC, clearing through Penson Financial Services,
Inc. and DVP accounts through Penson. proTrack also offers its trading
platform with direct access to market makers and ECNs to broker-dealers who
wish to route orders utilizing the advanced features of proTrack.
proTrack is available on a private label basis and is customized,
where required, to particular trading requirements. Pricing of the services
is dependent on trading volume, market data services required and necessary
clearing costs.
NewsWatch Service
-----------------
The market focus of NewsWatch is the business professional who "must
know first." This group includes traders, bankers, research analysts,
investment relations professionals, corporate executives, or any "knowledge
worker" who needs real-time information for making day-to-day business
decisions. The service provides enterprise wide solutions to corporations
needing to deliver external/internal real-time information to their
"knowledge workers," leveraging internal networks and/or intranets. The
service includes a high-speed consolidated news ticker, an NT-resident
database with full-text indexing, access to a variety of third-party
databases, and multiple domestic/international exchanges, all via a state
of the art user-friendly presentation environment.
NewsWatch also provides a browser-based interface, bringing all the
advantages of the Company's news collection and delivery service to the web
environment. It is appropriate for corporations which are comfortable with
browser technology and need access to real-time business news for their
end-user population via an internal intranet or the World Wide Web.
Pricing and Customers: Customers are charged a monthly service fee and
a communications or location charge, which typically varies with the
location and size of the customer installation. Service charges vary with
the number and types of functions/news sources to which the user
subscribes. A typical installation is approximately $300/month at the
5-user level and is scaled down with increased users at a location.
Marketing
---------
MarkeTrack competes in several highly competitive segments of the
on-line real-time financial information marketplace: equity, options and
futures trading; and the investment management segments of the professional
investment community. The equities, options, and futures trading segment of
this market is comprised of approximately 30,000 professionals who spend an
estimated $150 million per year on financial information, and the
investment management segment is comprised of approximately 60,000
professionals who spend an estimated $320 million per year on financial
information. The Company's focus is on the premium end of these trading
markets, appealing to institutional sales people, arbitrageurs, market
makers and traders. The Company estimates that the premium segment of the
trading market consists of approximately 16,000 terminals, of which its
share is approximately 18%.
MarkeTrack, proTrack, as well as the NewsWatch service, are marketed
primarily through a dedicated sales force, including 12 full-time regional
sales persons in the U.S. and an international sales staff of 2 full-time
sales persons. All services are sold directly, often as a result of on-site
presentations and service demonstrations. In March 2002, the Company
commenced a cable TV ad campaign for its new proTrack online trading
service.
In addition to its dedicated sales force, the Company maintains
relationships with a number of brokerage firms that actively sell the
Company's services to the money management side of the industry for "soft
dollars." In a soft dollar arrangement, the brokerage firm pays the Company
in cash for services delivered to the money managers. These brokerage firms
are typically also customers of the Company.
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 Bridge Information Systems. To a lesser
degree, these Company services compete with ILX, a Thomson Financial
Services company, and Quotron, a Reuters company, who dominate the retail
brokerage market segment. There can be no assurance that the Company will
not encounter increased competition in the future, which could limit the
Company's ability to maintain or increase its market share or maintain its
margins, and which could have a material adverse effect on the Company's
business, financial condition or operating results.
The Company's newly introduced proTrack service competes primarily
with the Redi System offered by Spear Leeds and Real-Tick offered by AT
Financial. 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 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.
C. MATTERS RELATED TO BOTH SEGMENTS
Securities Regulation
---------------------
Track Data Securities Corp. ("TDSC") is a broker-dealer registered
with the SEC and NASD 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, NASD, 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 recent increase in the number of complaints
by online traders, the SEC, NASD 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.
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. 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, 2001, TDSC was required to maintain minimum net
capital, in accordance with SEC rules, of approximately $79,000 and had
total net capital of $543,000, or approximately $464,000 in excess of
minimum net capital requirements. In February 2002, TDSC received
permission to operate an ECN. Its minimum capital requirement after that
date was increased to $1 million. The additional capital was provided by
Track Data Corporation pursuant to a subordinated loan of $600,000.
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 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.
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 our 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 Pro, Dial/Data and NewsWatch services can be
purchased from third-party sources and is not proprietary. The Company
maintains proprietary economic and historical financial databases. The
Company protects its proprietary information with standard secrecy
agreements.
MarkeTrack, NewsWatch, MarkeTrack Web, myTrack, myTrack Pro, 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 and Development
------------------------
Expenditures for research and development incurred primarily to
establish technological feasibility of a product or for product enhancement
were $307,000, $324,000 and $364,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
Employees
---------
The Company employed approximately 250 persons on a full time basis as
of December 31, 2001. The Company believes that its relationship with its
employees is satisfactory.
D. ELECTRONIC COMMUNICATIONS NETWORK
In February 2002, TDSC received authorization from the NASD and the
Securities and Exchange Commission to operate an Electronic Communications
Network ("ECN") that enables traders to display and match limit orders for
stocks. This authorization will allow trading of Nasdaq National Market,
Small Cap, and exchange-listed securities on its ECN trading platform. In
order to set the Track ECN apart from other ECNs, the Company has
incorporated state-of-the-art trading functionality into the ECN. This
functionality is normally available only on sophisticated front-end trading
platforms. The Track ECN has the market maker symbol TRAC. The Company
commenced operations of its ECN trading platform in March 2002. The Company
does not anticipate the ECN will have any measurable impact on its results
of operations during 2002.
ITEM 2. PROPERTIES
The Company's executive offices are located at 56 Pine Street, New York, NY
and 95 Rockwell Place, Brooklyn, NY. The Company maintains office space and
data centers at locations in New York, NY, Brooklyn, NY and Chicago, IL. The
Brooklyn, NY location is leased from a family partnership controlled by the
Company's Chairman. The annual rental of approximately 36,000 square feet is
approximately $540,000. The lease expires in April 2002. 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 leases its New York, NY property comprising 16,800 square feet
from an unaffiliated third party through February 2005 with base rent of
$260,000 per annum, subject to annual increases of 2.5% plus payment for
electric and a share of increases in taxes.
The Company maintains sales and/or service offices for its institutional
customers in Chicago, IL, Los Angeles, CA, San Francisco, CA, Boston, MA,
Incline Village, NV, Philadelphia, PA, Dallas, TX, Boca Raton, FL and Toronto
and Montreal, Canada with aggregate annual rentals of $521,000. These leases
expire at various dates through 2004. The Company also maintains a full service
office in London, England under a lease for annual rentals of $149,000 expiring
in 2004.
The Company's facilities are fully utilized and are suitable and adequate
for their purpose.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending to which the Company is a party or
of which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting on November 1, 2001. The results of
matters voted at that Meeting were reported in Part II, Item 4 of the Company's
Form 10-Q for the period ended September 30, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market System
under the symbol "TRAC." On February 28, 2002, there were 229 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 18,000.
The following table sets forth the high and low sales prices for the
Company's Common Stock as reported on Nasdaq NMS.
Common Stock
------------
Sale Price
------------
High Low
---- ---
2000
----
First Quarter 12--1/4 6
Second Quarter 8--7/32 1--7/64
Third Quarter 2--1/4 15/16
Fourth Quarter 1--15/32 5/8
2001
----
First Quarter 1--1/4 11/16
Second Quarter 1--31/32 3/4
Third Quarter 1--15/16 1--1/64
Fourth Quarter 1--19/32 1--1/16
Dividends
The Company has never paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payment of
dividends, if any, on the Common Stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements,
financial condition, and other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, 2001 2000 1999 1998 1997
(in thousands, except per share data)
SERVICE FEES AND REVENUE $62,217 $58,767 $46,620 $46,473 $47,631
-------- ------- ------- ------- -------
COSTS AND EXPENSES:
Direct operating costs 29,539 31,484 26,989 26,466 25,629
Selling and administrative expenses 19,560 21,564 19,290 18,147 18,676
Marketing and advertising 1,243 5,472 5,684 1,302 734
Gain on sale of Internet domain name (1,000) - - - -
Other income - net (2,749) (1,429) (350) - -
Interest (income) expense-net (58) 288 270 508 719
------- ------- ------- ------- -------
Total 46,535 57,379 51,883 46,423 45,758
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME
(LOSS) OF AFFILIATE AND INCOME TAXES 15,682 1,388 (5,263) 50 1,873
EQUITY IN NET INCOME (LOSS) OF AFFILIATE 276 718 275 326 (1,146)
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 15,958 2,106 (4,988) 376 727
INCOME TAXES 4,880 47 60 158 299
------- ------- ------- ------- -------
NET INCOME (LOSS) $11,078 $ 2,059 $(5,048) $ 218 $ 428
======= ======= ======= ======= =======
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $.19 $.03 $(.08) $.00 $.01
==== ==== ===== ==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 59,593 63,660 61,229 58,224 58,220
======= ======= ======= ======= =======
ADJUSTED DILUTIVE SHARES OUTSTANDING 59,874 64,056 61,229 58,224 58,220
======= ======= ======= ======= =======
December 31, 2001 2000 1999 1998 1997
(In thousands)
TOTAL ASSETS $76,920 $24,479 $25,056 $18,591 $18,312
TOTAL LIABILITIES 53,759 7,747 10,060 9,979 11,683
STOCKHOLDERS' EQUITY 23,161 16,732 14,996 8,612 6,629
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Years ended December 31, 2001 and 2000
Revenues for the years ended December 31, 2001 and 2000 were $62,217,000
and $58,767,000, respectively, an increase of 6%. The Company's Professional
Market segment had revenues for the years ended December 31, 2001 and 2000 of
$35,074,000 and $32,261,000, respectively, an increase of 9% for this segment.
The increase was due to additional desktop market data services, increased
Newsware news services and a price increase. The Company's Non-Professional
Market segment had revenues of $27,143,000 and $26,506,000, respectively, for
the years ended December 31, 2001 and 2000, an increase of 2% for this segment.
The revenue increase in 2001 is due principally to myTrack's online trading and
market data services. The Company obtained its own broker-dealer license and
its registration in all of the states by August 2000. Prior thereto, trading
revenues include only revenues from the licensing of its trading system, rather
than a full amount of commissions paid by customers. Since August 2001, the
Company has experienced a decline in revenues from its Professional Market
segment due principally to customers' staffing reductions which have continued
during the first quarter of 2002. Management expects this trend to continue
through the first half of 2002 negatively impacting revenues and profits. In
addition, the Company has also experienced a decline in revenues from its retail
trading business in the fourth quarter after the new day trader rules were
instituted by the NASD.
Direct operating costs were $29,539,000 for the year ended December 31,
2001 and $31,484,000 for the similar period in 2000, a decrease of 6%. Direct
operating costs as a percentage of revenues were 47% in 2001 and 54% in 2000.
Without giving effect to unallocated depreciation and amortization expense, the
Company's Professional Market segment had $14,102,000 and $14,863,000 of direct
costs for the years ended December 31, 2001 and 2000, respectively. Direct
operating costs as a percentage of revenues for the Professional segment were
40% in 2001 and 46% in 2000. The decline in dollars and percent in 2001 is due
to reduced costs of telecommunications and greater sharing of the overhead by
the Non-Professional segment. The Company's Non-Professional Market segment had
$13,666,000 and $14,475,000 in direct costs for the years ended December 31,
2001 and 2000, respectively. Direct operating costs as a percentage of revenues
for the Non-Professional segment were 50% in 2001 and 55% in 2000. Direct
operating costs include direct payroll, direct telecommunication costs, computer
supplies, depreciation, equipment lease expense and the amortization of software
development costs. Since August 2000, when the Company commenced recording the
full commissions from customers, direct costs include costs of clearing, back
office payroll and other direct broker-dealer expenses.
Selling and administrative expenses were $19,560,000 and $21,564,000 in the
2001 and 2000 periods, respectively, a decrease of 9%. Selling and
administrative expenses as a percentage of revenues was 31% in 2001 and 37% in
2000. Without giving effect to unallocated depreciation and amortization
expense, selling and administrative expenses for the Professional Market segment
were $11,204,000 and $12,893,000 in the 2001 and 2000 periods, respectively, a
decrease of 13%. For the Professional Market segment selling and administrative
expenses as a percentage of revenues was 32% in 2001 and 40% in 2000. The
dollar and percentage decrease was due to a reduction in payroll and
telecommunications costs combined with increased revenues. In addition, prior
to August 2000, when the Company received its broker-dealer license, certain
costs were included in selling and administrative expenses and such costs
allocated to each segment were accordingly greater. Certain of these costs are
presently classified as direct operating costs. Selling and administrative
expenses for the Non-Professional segment were $7,995,000 and $8,311,000 in the
2001 and 2000 periods, respectively, a decrease of 4%. For the Non-Professional
segment selling and administrative expense as a percentage of revenue was 29% in
2001 and 31% in 2000. The dollar and percentage decrease in 2001 compared to
2000 was principally due to decreased payroll and related expenses for myTrack's
online trading and market data services combined with increased revenues.
Marketing and advertising costs were $1,243,000 in 2001 and $5,472,000 in
2000. The substantial majority of these costs were incurred by the
Non-Professional segment of the Company which incurred $1,091,000 in 2001 and
$5,361,000 in 2000. Marketing costs in 2000 are net of $666,000 received from
Track Securities under a licensing agreement. These costs were principally
incurred in connection with the Company's myTrack online trading and market data
systems. Due to a downturn in the market and lower levels of trading activity
by the retail trading sector, the Company decided to spend significantly less on
marketing in 2001 and continues to spend at these significantly reduced levels
in 2002. The Professional Market segment spent $152,000 in 2001 and $111,000 in
2000.
As a result of the above-mentioned factors, the Professional Market segment
realized $9,616,000 in income before unallocated amounts, equity in net income
of affiliate and income taxes in 2001 compared to income of $4,395,000 in 2000.
The Non-Professional Market segment realized $4,390,000 in income in 2001 and
incurred losses of $1,642,000 in 2000 before unallocated amounts, equity in net
income of affiliate and income taxes.
In July, 2001, the Company sold an Internet domain name to a European
entity for $1 million.
In 2001 and 2000, the Company recognized gains of approximately $2,749,000
and $1,683,000, respectively, on the sale of certain shares of Edgar Online,
Inc. and Innodata Corporation, and from other marketable securities due to its
arbitrage trading strategy. In the fourth quarter of 2001, the Company
expanded its arbitrage trading program to include a greater risk profile trading
program. The greater risk trading program resulted in pre-tax losses of
$400,000 in the fourth quarter of 2001 and $1,400,000 in the first quarter of
2002. The Company is continuing its arbitrage trading program but has
discontinued the greater risk trading program.
As a result of the above-mentioned factors, the Company realized income
before equity in net income from an affiliate of $15,682,000 in the 2001 period
compared to $1,388,000 in 2000.
The equity in net income from an affiliate, Innodata Corporation, was
$276,000 and $718,000 in 2001 and 2000, respectively. The Company had accounted
for its investment in Innodata using the equity method until May 7, 2001 when
the Company's Chairman and its CFO resigned as officers and directors of
Innodata. The Company's investment in Innodata has been accounted for as
available for sale securities since that date.
The Company's effective tax rate in 2001 was approximately 31% due to the
utilization of tax loss carryforwards in that year and the effect of the
reversal of a valuation allowance. The Company expects the rate for 2002 to
approximate 40%.
The Company realized net income of $11,078,000 in 2001 principally from
increased revenues from online trading and market data services, arbitrage
trading activities, gains on sale of marketable securities and an Internet
domain name, and a significant reduction in expenses, including marketing and
advertising, compared to $2,059,000 in 2000, which was substantially less than
2001, principally due to significant expenditures for marketing and advertising
of the Company's myTrack service.
Years ended December 31, 2000 and 1999
Revenues for the years ended December 31, 2000 and 1999 were $58,767,000
and $46,620,000, respectively, an increase of 26%. The Company's Professional
Market segment had revenues for the years ended December 31, 2000 and 1999 of
$32,261,000 and $30,482,000, respectively, an increase of 6% for this segment.
The Company's Non-Professional Market segment had revenues of $26,506,000 and
$16,138,000, respectively, for the years ended December 31, 2000 and 1999, an
increase of 64% for this segment. The revenue increase in 2000 is due
principally to myTrack's online trading and market data services. The Company
obtained its own broker-dealer license and its registration in all of the states
by August 2000. Prior thereto, trading revenues include only revenues from the
licensing of its trading system, rather than a full amount of commissions paid
by customers.
Direct operating costs were $31,484,000 for the year ended December 31,
2000 and $26,989,000 for the similar period in 1999, an increase of 17%. Direct
operating costs as a percentage of revenues were 54% in 2000 and 58% in 1999.
The decrease in 2000 is due principally to the greater revenues recognized after
obtaining the broker-dealer license. Without giving effect to unallocated
depreciation and amortization expense, the Company's Professional Market segment
had $14,863,000 and $15,445,000 of direct costs for the years ended December 31,
2000 and 1999, respectively. Direct operating costs as a percentage of revenues
for the Professional segment were 46% in 2000 and 51% in 1999. The Company's
Non-Professional Market segment had $14,475,000 and $9,007,000 in direct costs
for the years ended December 31, 2000 and 1999, respectively. Direct operating
costs as a percentage of revenues for the Non-Professional segment were 55% in
2000 and 56% in 1999. Direct operating costs include direct payroll, direct
telecommunication costs, computer supplies, depreciation, equipment lease
expense and the amortization of software development costs. Since August 2000,
when the Company commenced recording the full commissions from customers, direct
costs include costs of clearing, back office payroll and other direct
broker-dealer expenses.
Selling and administrative expenses were $21,564,000 and $19,290,000 in the
2000 and 1999 periods, respectively, an increase of 12%. Selling and
administrative expenses as a percentage of revenues was 37% in 2000 and 41% in
1999. Without giving effect to unallocated depreciation and amortization
expense, selling and administrative expenses for the Professional Market segment
were $12,893,000 and $12,235,000 in the 2000 and 1999 periods, respectively, an
increase of 5%. For the Professional Market segment selling and administrative
expenses as a percentage of revenues was 40% in 2000 and 41% in 1999. Selling
and administrative expenses for the Non-Professional segment were $8,311,000 and
$6,643,000 in the 2000 and 1999 periods, respectively, an increase of 25%. For
the Non-Professional segment selling and administrative expense as a percentage
of revenue was 31% in 2000 and 41% in 1999. The dollar increase in 2000
compared to 1999 was principally due to increased payroll and related expenses
for myTrack's online trading and market data services. Online trading was first
introduced in the second quarter of 1999.
Marketing and advertising costs were $5,472,000 in 2000 and $5,684,000 in
1999. The substantial majority of these costs were incurred by the
Non-Professional segment of the Company, which incurred $5,361,000 in 2000, and
$5,451,000 in 1999. Marketing costs in 2000 and 1999 are net of $666,000 and
$571,000, respectively, received from Track Securities under a licensing
agreement. These costs were principally incurred in connection with the
Company's myTrack online trading and market data systems. The level of
expenditures in the second half of 2000 was substantially below the expenditures
in the first half of 2000. The Professional Market segment spent $111,000 in
2000 and $233,000 in 1999.
As a result of the above-mentioned factors, the Professional Market segment
realized $4,395,000 in income before unallocated amounts, equity in net income
of affiliate and income taxes in 2000 compared to income of $2,570,000 in 1999.
The Non-Professional Market segment incurred losses of $1,642,000 in 2000 and
$4,964,000 in 1999 before unallocated amounts, equity in net income of affiliate
and income taxes.
In 1999, the Company relocated certain of its personnel to other office
space and realized a gain on the landlord buy-out of the lease of approximately
$350,000.
In 2000, the Company realized a gain of approximately $1,683,000 on the
sale of certain shares of Edgar Online, Inc., Innodata Corporation and other
marketable securities.
In 2000, the Company wrote off its investment in iAnalyst of $254,000.
As a result of the above mentioned factors, the Company realized income
before equity in net income from an affiliate of $1,388,000 in the 2000 period
compared to a loss of $5,263,000 in 1999. The income realized in 2000 was due
principally to gains realized from the sale of marketable securities and the
increased revenues in the Company's myTrack online trading and market data
systems.
The equity in net income from an affiliate, Innodata Corporation, was
$718,000 and $275,000 in 2000 and 1999, respectively.
The Company had a valuation allowance of $5,727,000 at December 31, 2000 as
management believed it may not be able to realize all of its net operating loss
carryforwards in the future. The establishment of a valuation allowance results
in not recognizing tax benefits currently. However, in the event such benefits
are realized or determined at a later date to be realizable, such future periods
will benefit, net of amounts credited to paid-in capital, from such change and
reflect greater income or a decreased loss.
The Company realized net income of $2,059,000 in 2000 principally from
gains on marketable securities and increased revenues from myTrack's online
trading and market data services compared to a net loss of $5,048,000 in 1999
principally due to marketing and advertising of the Company's myTrack service.
Liquidity and Capital Resources
During the year ended December 31, 2001, cash provided by operating
activities was $9,778,000 compared to $1,637,000 in 2000. The increase in 2001
was primarily due to significantly increased operating income in 2001. Cash
flows provided by investing activities in 2001 was $1,865,000 compared to
$812,000 in 2000 principally from the sale of an Internet domain name for
$1,000,000. Cash flows used in financing activities in 2001 were $12,461,000
principally from the purchase of treasury stock, compared to $1,608,000 used in
the 2000 period. In 2000, the Company realized $2,586,000 from the exercise of
stock options and warrants and the sale of common stock.
The Company has a line of credit with a bank. The line is collateralized
by the assets of the Company and is guaranteed by its Chairman. Interest is
charged at 1.75% above the bank's prime rate and is due on demand. The Company
may borrow up to 80% of eligible accounts receivable and is required to maintain
a compensating balance of 10% of the outstanding loans. At December 31, 2001,
the Company had outstanding borrowings under the line of $1,865,000. The
Company believes that its line of credit is sufficient for the Company's present
cash requirements.
The Company has significant positions in stocks and options and receives
significant proceeds from the sale of trading securities sold but not yet
purchased under the trading strategy described in Note C. The December 31, 2001
positions were closed during the first quarter of 2002 and other positions with
the same strategy have been established. In the fourth quarter of 2001, the
Company expanded its arbitrage trading program to include a greater risk profile
trading program. The greater risk trading program resulted in pre-tax losses of
$400,000 in the fourth quarter of 2001 and $1,400,000 in the first quarter of
2002. The Company is continuing its arbitrage trading program but has
discontinued the greater risk trading program.
Since August 2001, the Company has experienced a decline in revenues from
its Professional Market segment due principally to customers' staffing
reductions which have continued during the first quarter of 2002. Management
expects this decline to continue at a minimum through the first half of 2002
negatively impacting revenues and profits. In addition, the Company also
experienced a decline in revenues from its retail trading business in the fourth
quarter after the new day trader rules were instituted by the NASD. The Company
substantially reduced its advertising costs in 2001 and does not expect to
significantly increase advertising for 2002. During the first quarter of 2002,
the Company repurchased under its buy back program approximately 1 million
shares of its common stock for approximately $2 million. The Company may seek
additional financing and/or dispose of certain of its marketable securities to
support increased advertising costs, if deemed appropriate, in the future or to
support its working capital or other opportunity requirements. No major capital
expenditures are anticipated beyond the normal replacement of equipment and
additional equipment to meet customer requirements.
The Company conducts business through a clearing broker which settles all
trades for the Company, on a fully disclosed basis, on behalf of its customers.
The Company earns commissions as an introducing broker for the transactions of
its customers. In the normal course of business, the Company's customer
activities involve the execution of various customer securities transactions.
These activities may expose the Company to off-balance-sheet risk in the event
the customer or other broker is unable to fulfill its contracted obligations and
the Company has to purchase or sell the financial instrument underlying the
contract at a loss.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the clearing broker extends credit
to the Company's customers, subject to various regulatory margin requirements,
collateralized by cash and securities in the customers' accounts. 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 seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company monitors required
margin levels daily and, pursuant to such guidelines, requires the customer to
deposit additional collateral or to reduce positions when necessary.
Inflation and 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, 2001, $1,865,000 was outstanding under
the credit facility. Changes in the prime interest rate during fiscal 2002 will
have a positive or negative effect on the Company's interest expense. Such
exposure will increase should the Company maintain higher levels of borrowing
during 2002.
The Company has significant positions in stocks and options and
receives significant proceeds from the sale of trading securities sold but not
yet purchased under the trading strategy described in Note C. The Company's
arbitrage trading strategy is to fully cover its open positions during each
month with covering option positions that expire in the succeeding month. The
December 31, 2001 positions were closed during the first quarter of 2002 and
other positions with the same strategy have been established. In the fourth
quarter of 2001, the Company expanded its arbitrage trading program to include a
greater risk profile trading program. The greater risk trading program resulted
in pre-tax losses of $400,000 in the fourth quarter of 2001 and $1,400,000 in
the first quarter of 2002. The Company is continuing its arbitrage trading
program but has discontinued the greater risk trading program.
The Company has investments in marketable securities consisting principally
of its investments in Innodata Corporation and Edgar Online, Inc., both publicly
traded companies listed on Nasdaq. The market value of such securities is
dependent on future market conditions for these companies over which the Company
has little or no control.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Track Data Corporation and Subsidiaries
Report of Independent Certified Public Accountants II-8
Consolidated Balance Sheets as of December 31, 2001 and 2000 II-9
Consolidated Statements of Operations for the three years ended II-10
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity and Comprehensive II-11
Income (Loss) for the three years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the three years ended II-12
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements II-13-26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Track Data Corporation
We have audited the accompanying consolidated balance sheets of Track Data
Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000,
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, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Track Data
Corporation and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/S/
-----------------------------
Grant Thornton LLP
Melville, New York
March 1, 2002
Track Data Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2001 and 2000
(in thousands, except number of shares)
2001 2000
------- ---------
ASSETS
CASH AND EQUIVALENTS $ 5,687 $ 6,506
ACCOUNTS RECEIVABLE - net of allowance for
doubtful accounts of $159 in 2001 and 2000 1,813 1,744
DUE FROM CLEARING BROKER 735 775
DUE FROM BROKER 14,813 -
MARKETABLE SECURITIES 45,623 2,646
FIXED ASSETS - at cost (net of accumulated depreciation) 4,583 5,743
SOFTWARE AND DATABASE COSTS - at
cost (net of accumulated amortization
of $7,594 in 2001 and $7,444 in 2000) 107 288
INVESTMENT IN AFFILIATE - 1,874
EXCESS OF COST OVER NET ASSETS ACQUIRED 1,920 2,334
NET DEFERRED INCOME TAX ASSETS - 450
OTHER ASSETS 1,639 2,119
------- --------
TOTAL $76,920 $24,479
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 3,099 $ 3,338
Note payable - bank 1,865 569
Notes payable - other 918 836
Trading securities sold but not yet purchased 46,409 1,492
Capital lease obligations 480 1,216
Net deferred income tax liabilities 805 -
Other liabilities, including income taxes 183 296
------- -------
Total liabilities 53,759 7,747
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 300,000,000
shares authorized; issued and outstanding - 54,739,695
shares in 2001 and 64,453,556 shares in 2000 547 645
Additional paid-in capital 18,585 26,136
Accumulated other comprehensive income 3,676 676
Retained earnings (deficit) 353 (10,725)
------- -------
Total stockholders' equity 23,161 16,732
------- -------
TOTAL $76,920 $24,479
======= =======
See notes to consolidated financial statements.
Track Data Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2001, 2000 and 1999
(in thousands, except number of shares and earnings per share)
2001 2000 1999
------- ------- -------
SERVICE FEES AND REVENUE $62,217 $58,767 $46,620
------- ------- -------
COSTS AND EXPENSES:
Direct operating costs 29,539 31,484 26,989
Selling and administrative expenses 19,560 21,564 19,290
Marketing and advertising 1,243 5,472 5,684
Gain on marketable securities (1,800) (783) -
Gain on sales of investment in affiliate (949) (900) -
Write off of investment - 254 -
Gain on real property lease buyout - - (350)
Gain on sale of Internet domain name (1,000) - -
Interest income (680) (247) (181)
Interest expense 622 535 451
------- ------- -------
Total 46,535 57,379 51,883
------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF
AFFILIATE AND INCOME TAXES 15,682 1,388 (5,263)
EQUITY IN NET INCOME OF AFFILIATE 276 718 275
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 15,958 2,106 (4,988)
INCOME TAXES 4,880 47 60
------- ------- -------
NET INCOME (LOSS) $11,078 $ 2,059 $(5,048)
======= ======= =======
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $.19 $.03 $(.08)
==== ==== =====
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 59,593 63,660 61,229
======= ======= =======
ADJUSTED DILUTIVE SHARES OUTSTANDING 59,874 64,056 61,229
======= ======= =======
See notes to consolidated financial statements.
Track Data Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
Accumulated Compre-
Additional Other Retained hensive
Common Paid-in Comprehensive Earnings income
Stock Capital Income (Deficit) (loss)
------- --------- -------------- ---------- -------
BALANCE,
JANUARY 1, 1999 $593 $15,756 $ - $ (7,736)
Net loss (5,048) $ (5,048)
Issuance of common
stock in exchange for
investment in
private company 1 499
Sale of common stock 19 5,182
Issuance of common stock
for services 93
Issuance of options for
services 106
Stock options and
warrants exercised 18 1,862
Purchase and
retirement of
treasury stock (23)
Tax effect of stock
options exercised 1,470
Unrealized gain on
marketable
securities -
net of taxes 2,205 2,205
-------
Comprehensive loss $(2,843)
---- ------- ------ -------- =======
BALANCE,
DECEMBER 31, 1999 631 24,945 2,205 (12,784)
Net income 2,059 $ 2,059
Issuance of common
stock in exchange
for investment in
private companies 3 466
Sale of common stock 10 1,240
Stock options and
warrants exercised 6 1,209
Purchase and retirement
of treasury stock (5) (704)
Reversal of tax effect
of stock options
exercised (1,020)
Reclassification
adjustment for gain
on marketable
securities -
net of taxes (434)
Unrealized loss
on marketable
securities -
net of taxes (1,529) (1,529)
-------
Comprehensive income $ 96
---- ------- ------ ------- =======
BALANCE,
DECEMBER 31, 2000 645 26,136 676 (10,725)
Net income 11,078 $11,078
Stock options and
warrants exercised 1 124
Purchase and
retirement of
treasury stock (99) (12,993)
Tax effect of stock
options exercised 5,318
Unrealized gain on
marketable securities -
net of taxes 3,000 3,000
-------
Comprehensive income $14,078
---- ------- ------ ------- =======
BALANCE,
DECEMBER 31, 2001 $547 $ 18,585 $3,676 $ 353
==== ======== ====== =======
See notes to consolidated financial statements.
Track Data Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,078 $ 2,059 $(5,048)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,726 3,099 3,650
Services performed in exchange for common
stock and options - - 200
Equity in net income of affiliate (276) (718) (275)
Deferred taxes 1,056 - -
Tax effect of stock options exercised 3,464 - -
Gain on sale of Internet domain name (1,000) - -
Write off of investment - 254 -
Gain on sale of Innodata and Edgar
Online common stock (949) (1,650) -
Net gain on other marketable securities - (33) -
Net proceeds from other marketable securities - 30 -
Other - (43) (1)
Changes in operating assets and liabilities:
Accounts receivable and due from
clearing broker (29) (322) 375
Due from broker (8,285) - -
Marketable securities (33,488) - -
Other assets 458 (102) (116)
Accounts payable and accrued expenses (240) (1,015) 481
Securities sold, but not yet purchased 35,311 - -
Other liabilities (48) 78 (13)
-------- -------- -------
Net cash provided by (used in)
operating activities 9,778 1,637 (747)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (853) (1,024) (1,062)
Proceeds from sales of fixed assets - 64 52
Payments to related parties - - (27)
Proceeds from (payments to) others 30 (12) (53)
Proceeds from sale of Internet domain name 1,000 - -
Proceeds from sale of Innodata and Edgar
Online common stock 1,688 1,837 -
Other investments - (53) (26)
-------- ------- -------
Net cash provided by (used in)
investing activities 1,865 812 (1,116)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease obligations (859) (1,427) (1,799)
Net proceeds (payments) on note payable - bank 1,296 (1,966) 397
Net proceeds from notes payable - other 81 74 65
Net (payments) proceeds on loans from employee
savings program (4) (165) 110
Proceeds from issuance of common stock - 1,250 5,201
Proceeds from exercise of stock options and warrants 117 1,336 2,696
Purchase of treasury stock (13,092) (710) (23)
-------- ------- -------
Net cash (used in) provided by
financing activities (12,461) (1,608) 6,647
-------- ------- -------
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH (1) (1) (2)
-------- ------- -------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (819) 840 4,782
CASH AND EQUIVALENTS, BEGINNING OF YEAR 6,506 5,666 884
-------- ------- -------
CASH AND EQUIVALENTS, END OF YEAR $ 5,687 $ 6,506 $ 5,666
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for: Interest $ 539 $ 456 $ 347
Income taxes 386 44 20
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquisitions financed by
capital leases $ 123 $ 635 $ 853
Exercise of stock options 10 2 122
Issuance of common stock for investment in
private companies 470 500
See notes to consolidated financial statements.
Track Data Corporation and Subsidiaries
Notes To Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
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 owns Track Data Securities Corp.
("TDSC"), a registered securities broker-dealer and member of the National
Association of Securities Dealers, Inc. The Company provides a proprietary,
fully integrated Internet-based online trading and market data system, myTrack,
for the individual trader and proTrack, for the professional institutional
traders. The Company provides real-time financial market data, fundamental
research, charting and analytical services to institutional and individual
investors through dedicated telecommunication lines and the Internet. The
Company also disseminates news and third-party database information from more
than 100 sources worldwide. The Company's operations are classified in two
business segments: Internet-based online trading and market data services to the
non-professional individual investor community, and market data services to the
institutional professional investment community. The Company also engages in
arbitrage trading. See Note C. Commencing in 2002, the Company also provides
online trading to the institutional investment community.
Certain reclassifications of prior year amounts were made to conform to the 2001
presentation.
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.
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. Trading securities transactions are recorded on a
trade-date basis. Securities are valued at quoted market value. The resulting
difference between cost and market (or fair value) is included in trading gains
or losses, net. 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 trading gains
or losses, net. Securities available for sale are carried at fair value, with
unrealized gains and losses, net of deferred taxes, reported as a separate
component of stockholders' equity, and realized gains and losses, determined on
a specific identification basis, are included in earnings.
Due From Broker--All cash, securities owned and securities sold, but not yet
purchased reflected in the balance sheet are positions carried by and amounts
due from 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, 2001. Database costs are amortized on a straight-line basis over their
estimated useful lives of ten years. Management assesses the recoverability of
its software development and database costs based principally upon a comparison
of the carrying value of the asset to the undiscounted expected future cash
flows to be generated by the asset, plus estimated salvage value less any
applicable costs. If management concludes that the asset is impaired, its
carrying value is adjusted to its fair value.
Investment in Affiliate--Until May 7, 2001 when the Company's Chairman and CFO
resigned as officers and directors of Innodata Corporation ("Innodata"), a
publicly traded company, the Company accounted for its investment in Innodata
using the equity method under which the Company's share of the affiliate's
earnings was included in its results of operations. Innodata is a global
outsourcing provider of Internet and online digital content services. The
Company accounts for Innodata as available for sale marketable securities.
Excess of Cost Over Net Assets Acquired--In June 2001, the Financial Accounting
Standards Board approved the issuance of SFAS 141, "Business Combinations"
and SFAS 142, "Goodwill and Other Intangible Assets." The new standards require
that all business combinations initiated after June 30, 2001 must be accounted
for under the purchase method. In addition, all intangible assets acquired that
are obtained through contractual or legal right, or are capable of being
separately sold, transferred, licensed, rented or exchanged shall be recognized
as an asset apart from goodwill. Goodwill and intangibles with indefinite lives
will no longer be subject to amortization, but will be 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
on the dates of acquisition amounts to $1,920,000 and $2,334,000, net of
accumulated amortization of $2,474,000 and $2,060,000 as of December 31, 2001
and 2000, respectively. The excess was being amortized on the straight-line
basis over ten to fifteen years until December 31, 2001. Thereafter, annual
amortization expense of $414,000 will no longer be recognized in accordance with
SFAS 142. The Company will perform a transitional fair value based impairment
test at March 31, 2002 and if the fair value is less than the recorded value at
January 1, 2002, the Company will record an impairment loss in the March 31,
2002 quarter as a cumulative effect of a change in accounting principle.
Historically, management has assessed the recoverability of the remaining
unamortized costs based principally upon a comparison of the carrying value of
the asset to the undiscounted expected future cash flows to be generated by the
asset. To date, the Company has not provided an impairment charge.
Foreign Currency Translation--The Company has several divisions which operate in
foreign countries for which the functional currency is not U.S. dollars. Balance
sheet accounts are translated at the exchange rates in effect at December 31,
2001 and 2000, and the income statement accounts are translated at the weighted
average rates prevailing during the years ended December 31, 2001, 2000 and
1999. Unrealized foreign exchange gains and losses resulting from this
translation are insignificant.
Revenue Recognition--The Company recognizes revenue as services are performed.
Billings in advance of services provided are recorded as unearned revenues. All
other revenues collected in advance of services are deferred until services are
rendered. 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.
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.
Research and Development--The Company charges all costs incurred to establish
the technological feasibility of a product or product enhancement to research
and development expense. Research and development expenses were $307,000,
$324,000 and $364,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Marketing and Advertising--Marketing and advertising costs are charged to
expense when incurred. Marketing and advertising costs were $1,243,000,
$5,472,000 and $5,684,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Segment Reporting--The Company uses the "management approach" as defined by SFAS
131, "Disclosures about Segments of 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 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, notes
payable and capital lease obligations, approximate carrying value due to the
short payment terms associated with its accounts receivable and payable and the
interest rates associated with its notes payable and capital lease obligations.
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.
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 (loss).
Earnings (Loss) Per Share--Basic earnings (loss) per share is based on the
weighted average number of common shares outstanding without consideration of
potential common stock. Diluted earnings (loss) per share are based on the
weighted average number of common and potential dilutive common shares
outstanding. In 1999, such result would be anti-dilutive. There was no affect
on earnings per share in 2001 and 2000 as a result of potential dilution. The
calculation takes into account the shares that may be issued upon exercise of
stock options (Note M), reduced by the shares that may be repurchased with the
funds received from the exercise, based on the average price during the year.
Accounting Pronouncements Not Yet Adopted--In August 2001, the Financial
Accounting Standards Board issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS 144 clarifies accounting and reporting for assets
held for sale, scheduled for abandonment or other disposal, and recognition of
impairment loss related to the carrying value of long-lived assets. The Company
has elected to adopt SFAS 144 for the year beginning January 1, 2002. The
impact of adopting SFAS 144 is not expected to be material to the consolidated
financial statements.
B. Fixed Assets
Fixed assets consist of the following at December 31, 2001 and 2000 (in
thousands):
2001 2000
Equipment $34,324 $33,474
Telephone systems 1,194 1,146
Furniture and fixtures 1,083 1,083
Transportation equipment 91 69
Leasehold improvements 2,218 2,176
------- -------
38,910 37,948
Less accumulated depreciation
and amortization 34,327 32,205
------- -------
Fixed assets - net $ 4,583 $ 5,743
======= =======
Equipment financed by capital leases has a net carrying value of $1,780,000 and
$2,927,000 at December 31, 2001 and 2000, respectively. Depreciation and
amortization expense (including assets held under capital leases) for the years
ended December 31, 2001, 2000 and 1999 was $2,131,000, $2,506,000 and
$2,949,000, respectively.
C. Marketable Securities
Marketable securities consists of the following (in thousands):
2001 2000
Edgar Online - Available for sale securities - at market $ 2,209 $1,136
Innodata - Available for sale securities - at market 5,800 -
Trading securities - at market 37,614 1,510
------- ------
Marketable securities $45,623 $2,646
======= ======
Trading securities sold but not yet
purchased - at market $46,409 $1,492
======= ======
The Company owns 712,600 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
$2,209,000, the market value at December 31, 2001. The difference between the
cost of $9,000 and fair market value of these securities, net of $880,000 in
deferred taxes, or $1,320,000 is classified as a component of accumulated other
comprehensive income included in stockholders' equity.
The Company owns 1,952,856 shares of Innodata, a provider of digital content
outsourcing services. The Company carries the investment at $5,800,000, the
market value at December 31, 2001. The difference between the cost of $1,873,000
and fair market value of these securities, net of $1,571,000 in deferred taxes,
or $2,356,000 is classified as a component of accumulated other comprehensive
income included in stockholders' equity.
The Company engages in arbitrage trading activity in which it seeks to fully
cover open positions in its trading accounts during each month with covering
positions that expire in succeeding months. As of December 31, 2001, trading
securities had a long market value of $37,614,000 with a cost of $38,325,000, or
a net unrealized loss of $711,000. Securities sold but not yet purchased, had a
short market value of $46,409,000 with a cost/short proceeds of $47,129,000, or
a net unrealized gain of $720,000. The Company pledged its holdings in EOL and
Innodata as collateral for its trading accounts. In addition, the Company's
Chairman pledged approximately 15 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 $144,000 for the year ended December 31, 2001.
The Company has significant positions in stocks and options and receives
significant proceeds from the sale of trading securities sold but not yet
purchased. The Company's arbitrage trading strategy is to fully cover its open
positions during each month with covering option positions that expire in
succeeding months. The December 31, 2001 positions were closed during the first
quarter of 2002 and other positions with the same strategy have been
established.
In the fourth quarter of 2001, the Company expanded its arbitrage trading
program to include a greater risk profile trading program. The greater risk
trading program resulted in pre-tax losses of $400,000 in the fourth quarter of
2001 and $1,400,000 in the first quarter of 2002. The Company is continuing
its arbitrage trading program but has discontinued the greater risk trading
program. The Company's Chairman and CEO contributed 650,000 shares of Company
stock owned by him to the capital of the Company upon discontinuance of this
program.
At December 31, 2000, trading securities have a long market value of $1,510,000
with a cost of $1,416,000, or a net unrealized gain of $94,000. Securities sold
but not yet purchased, have a short market value of $1,492,000 with a cost/short
proceeds of $1,458,000, or a net unrealized loss of $34,000.
D. Investment in Affiliate
Until May 7, 2001, when the Company's Chairman and CFO resigned as officers and
directors of Innodata, the Company accounted for its investment in Innodata
using the equity method under which the Company's share of the affiliate's
earnings is included in its results of operations. The Company's equity
interest in Innodata was approximately 11% and 13% at December 31, 2000 and
1999, respectively, which was carried at the Company's equity in the underlying
net assets. Since May 7, 2001, the Company carries its investment in Innodata
as available for sale securities (See Note C).
Summarized information for Innodata is as follows (in thousands):
2000 1999
Total assets $27,946 $15,646
Total liabilities 8,630 3,994
Revenues 50,731 27,490
Net income 6,168 2,113
The Company's equity in the net income of Innodata for the years ended December
31, 2001, 2000 and 1999 was $276,000, $718,000 and $275,000, respectively.
E. Due From Related Parties
The amounts due from related parties of approximately $5,000 and $25,000 at
December 31, 2001 and 2000, respectively, included in other assets, consisted of
loans made to the Company's Chairman and entities controlled by him.
F. Note Payable - Bank
The note payable - bank bears interest at 1.75% above the bank's prime rate
(7.75% at December 31, 2001) and is due on demand. The note is collateralized by
substantially all of the Company's assets and is guaranteed by its principal
stockholder. The Company may borrow up to 80% of eligible accounts receivable
and is required to maintain a compensating cash balance of not less than 10% of
the outstanding loan obligation. At December 31, 2001 and at times during the
year, the Company did not meet these requirements. These requirements were
waived by the bank for the year ended December 31, 2001.
G. Notes Payable - Other
Notes payable - other (i) are due on demand, (ii) bear interest at rates ranging
from 9 to 10 percent per annum, and (iii) approximately $140,000 is guaranteed
by the Company's Chairman.
H. Segment Information
The Company is a financial services company that owns Track Data Securities
Corp., a registered securities broker-dealer and member of the National
Association of Securities Dealers, Inc. The Company provides a proprietary,
fully integrated Internet-based online trading and market data system, myTrack,
for the individual trader and proTrack, for the professional institutional
traders. The Company provides real-time financial market data, fundamental
research, charting and analytical services to institutional and individual
investors through dedicated telecommunication lines and the Internet. The
Company also disseminates news and third-party database information from more
than 100 sources worldwide. The Company's operations are classified in two
business segments: Internet-based online trading and market data services to the
non-professional individual investor community, and market data services to the
institutional professional investment community. The Company also engages in
arbitrage trading. See Note C. Commencing in 2002, the Company also provides
online trading to the institutional investment community.
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 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):
Revenues 2001 2000 1999
Professional Market $35,074 $32,261 $30,482
Non-Professional Market 27,143 26,506 16,138
-------- -------- --------
Total $62,217 $58,767 $46,620
======== ======== ========
Income (loss) before unallocated amounts,
equity in net income of
affiliate and income taxes:
Professional Market $ 9,616 $ 4,395 $ 2,570
Non-Professional Market 4,390 (1,642) (4,964)
Unallocated amounts:
Depreciation and amortization (2,131) (2,506) (2,949)
Gain on marketable securities and
sale of investment in affiliate 2,749 1,683 -
Write-off of investment - (254) -
Gain on property lease buyout - - 350
Gain on sale of internet domain name 1,000 - -
Interest income (expense), net 58 (288) (270)
-------- -------- --------
Income (loss) before equity in net income of
affiliate and income taxes 15,682 1,388 (5,263)
Equity in net income of affiliate 276 718 275
-------- -------- --------
Income (loss) before taxes $15,958 $ 2,106 $(4,988)
======== ======== ========
I. Income Taxes
The components of the provision for income taxes are as follows (in thousands):
2001 2000 1999
Federal:
Current $ 293 $ 3 $ 5
Deferred 930 - -
------ ----- -----
Total federal 1,223 3 5
------ ----- -----
State and local:
Current 85 44 55
Deferred 126 - -
------ ----- -----
Total state and local 211 44 55
------ ----- -----
Tax effect of stock options 3,446 - -
------ ----- -----
Provision for income taxes $4,880 $ 47 $ 60
====== ===== =====
Reconciliation of the U.S. statutory rate with the Company's effective tax rate
is summarized as follows:
2001 2000 1999
Federal statutory rate 34.0% 34.0% (34.0)%
State and local income taxes .8 2.2 (1.1)
Change in valuation allowance (4.6) (34.0) 34.0
Other .4 - (.1)
---- ----- ----
Effective rate 30.6% 2.2% (1.2)%
==== ===== =====
The difference in the effective rate from the federal rate in 2001 is
attributable to the Company being subject to Alternative Minimum Taxes,
utilization of net operating losses and a reduction of the valuation allowance.
The components of the Company's net deferred taxes are as follows (in
thousands):
2001 2000
Deferred tax assets:
Net operating loss and other carryforwards $ 770 $ 6,754
Tax credit carryovers 301 -
Software amortization 79 -
Deferred compensation 757 195
Other (principally reserves for uncollectible accounts) 204 176
------- -------
2,111 7,125
Less valuation allowance - (5,727)
------- -------
2,111 1,398
------- -------
Deferred tax liabilities:
Unrealized gain on marketable securities (2,451) (451)
Excess of book basis over tax basis of investment (421) (366)
Accelerated depreciation for tax (44) (127)
Amortization of software and database costs
deducted for tax, not for financial reporting - (4)
------- -------
(2,916) (948)
------- -------
Net deferred tax (liability) asset $ (805) $ 450
======= =======
Deferred tax assets of $681,000 relating to tax benefits resulting from employee
stock plans will be credited to paid in capital when realized. As of December
31, 2001, the Company has net operating loss carryforwards for Federal income
tax purposes totaling approximately $1,700,000, which expire from 2010 to 2020.
J. Commitments and Contingencies
Leases--The Company is obligated under various lease agreements covering office
space and computer equipment. The lease agreements for office space contain
escalation clauses based principally on increases in real estate taxes, building
maintenance and utility costs. A summary of such commitments as of December 31,
2001 follows (in thousands):
Operating Leases
Year Ending Office Computer Capital
December 31, Space Equipment Total Leases
2002 $1,102 $464 $1,566 $426
2003 784 156 940 87
2004 584 73 657 -
2005 218 - 218 -
2006 89 - 89 -
------ ---- ----- ----
Total $2,777 $693 $3,470 513
====== ==== ======
Less amounts representing interest 33
----
Capital lease obligations $480
====
Rent expense for the years ended December 31, 2001, 2000 and 1999 amounted to
$1,600,000, $1,559,000 and $1,559,000 for office space and $764,000, $863,000
and $903,000 for computer equipment, respectively.
The Company leases its office facilities in Brooklyn from a limited partnership
owned by the Company's Chairman and members of his family. The Company paid the
partnership rent of $540,000, $540,000 and $525,000 for the years ended December
31, 2001, 2000 and 1999, respectively. The lease provides for the Company to pay
$540,000 per annum through April 1, 2002.
Broker-Dealer Service Agreement--From April 1999 to August 2000 when the Company
obtained its own broker-dealer license, the Company offered online trading
through its myTrack service utilizing Track Securities Corporation ("TSC") as
its broker-dealer. TSC is a broker-dealer owned and operated by a director of
the Company. The Company licensed its myTrack trading system to a subsidiary of
TSC. The Company received $2.25 per trade pursuant to the agreement, which
aggregated $2,280,000 in 2000 and $590,000 in 1999. In addition, TSC paid a
share of the marketing and advertising costs incurred by the Company, which
aggregated $666,000 in 2000 and $571,000 in 1999. At December 31, 2000, the
amount due from TSC of $116,000 is included in other assets. Further, the
director has a five-year consulting agreement with the Company pursuant to which
he is to be paid an annual fee of the greater of $50,000 or 5% of the after-tax
earnings, if any, from trading activities. In 2001, 2000 and 1999, the fee was
$50,000, $50,000 and $38,000, respectively. In August 2000, the Company
terminated the relationship with TSC, except for the director consulting
agreement, and transferred all the trading accounts from TSC to the Company's
broker-dealer, Track Data Securities Corp.
Transactions with Clearing Broker and Customers--The Company conducts business
through a clearing broker which settles all trades for the Company, on a fully
disclosed basis, on behalf of its customers. The Company earns commissions as
an introducing broker for the transactions of its customers. In the normal
course of business, the Company's customer activities involve the execution of
various customer securities transactions. These activities may expose the
Company to off-balance-sheet risk in the event the customer or other broker is
unable to fulfill its contracted obligations and the Company has to purchase or
sell the financial instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a cash or
margin basis. In margin transactions, the clearing broker extends credit to the
Company's customers, subject to various regulatory margin requirements,
collateralized by cash and securities in the customers' accounts. 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 seeks to control the risks associated with its customer activities
by requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company monitors required margin levels
daily and, pursuant to such guidelines, requires the customer to deposit
additional collateral or to reduce positions when necessary.
Net Capital Requirements--The SEC, NASD, and various other regulatory agencies
have stringent rules requiring the maintenance of specific levels of net capital
by securities brokers, including the SEC's uniform net capital rule, which
governs TDSC. Net capital is defined as assets minus liabilities, plus other
allowable credits and qualifying subordinated borrowings less mandatory
deductions that result from excluding assets that are not readily convertible
into cash and from valuing other assets, such as a firm's positions in
securities, conservatively. Among these deductions are adjustments in the market
value of securities to reflect the possibility of a market decline prior to
disposition.
As of December 31, 2001, TDSC was required to maintain minimum net capital, in
accordance with SEC rules, of approximately $79,000 and had total net capital of
$543,000, or approximately $464,000 in excess of minimum net capital
requirements. In February 2002, TDSC received permission to operate an ECN.
Its minimum capital requirement after that date was increased to $1 million.
The additional capital was provided by Track Data Corporation pursuant to a
subordinated loan of $600,000.
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.
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.
K. Deferred Compensation and Savings Plans
The Company had a deferred compensation plan pursuant to which certain employees
are entitled to payments after termination of their employment. The plan was
based on these employees having phantom stock units prior to its public
offering. In December 1995, the Board of Directors agreed to satisfy all
obligations to participants under the phantom stock plan by committing to pay
upon termination of employment, or sooner upon approval of the Board, 247,284
shares of Innodata common stock and 3,004,400 shares of the Company's common
stock. These shares were placed in a trust as of March 31, 1996. The Board of
Directors authorized distributions of the Company's common stock to participants
as follows: 2001-151,000 shares; 2000-449,900 shares; 1999-776,400 shares; and
1998-297,352 shares. In February 2001, the Board distributed 182,456 shares of
Innodata common stock. In January, 2002 the Board distributed 535,600 shares of
the Company's common stock.
In addition, the Company has an employee savings plan under which employees may
make deposits to the savings plan and receive interest at the prime rate.
Amounts due to employees under the plan aggregated $274,000 at December 31,
2001.
L. Capital Stock
Common Stock--The Company's Board of Directors, with subsequent stockholder
approval, increased the authorized shares of common stock of the Company from 30
million to 60 million in April, 1999; to 75 million in November, 1999; and to
300 million in January 2000. The Company declared two-for-one stock splits in
the form of stock dividends payable on November 17, 1999 and December 29, 1999,
respectively.
In June 1999, the Company issued 137,928 shares of its common stock valued at
$500,000 to Net Earnings Corp., a privately held Internet-based provider to the
individual and professional investment communities of future dates of public
company earnings reports, dividends, conference calls, IPO/secondary offerings
and other timing information, in exchange for a 10% ownership interest in Net
Earnings. The investment is carried at cost and is included in other assets.
The Company registered these shares.
In July 1999, the Company sold pursuant to private placements 1,933,336 shares
of its common stock and realized net proceeds, after expenses, of $5,201,000.
In connection with such sales, the Company also issued three-year warrants to
purchase 603,332 shares of its common stock at $4.22 per share, of which 433,248
are outstanding at December 31, 2001. The Company registered the shares and the
shares underlying the warrants.
In May 2000, the Company acquired approximately 2% of iAnalyst, Inc. ("IA") and
Silicon Summit Technologies Inc. ("SST"), both privately held companies, in
exchange for an aggregate of 326,280 shares of the Company's common stock with a
value of $470,000. The Company registered these shares. IA was to provide the
individual investor Internet-based access to independent equity research
analysts. SST is a leading provider of e-finance solutions and services for B4B
electronic securities trading. As of December 31, 2000, the Company wrote off
its investment in IA totaling $254,000.
In December 2000, the Company sold 1 million shares of its common stock in a
private placement for $1.25 per share and granted a three-year option to
purchase 2 million shares at $1.75 per share, exercisable after the first
anniversary. The Company registered these shares and the shares to be issued on
exercise of warrants.
Preferred Stock--The Company is authorized to issue up to 1,000,000 shares of
$.01 par value preferred stock. The Board of Directors is authorized to fix the
terms, rights, preferences and limitations of the preferred stock and to issue
the preferred stock in series which differ as to their relative terms, rights,
preferences and limitations. No preferred shares have been issued.
Common Stock Reserved--At December 31, 2001, the Company reserved for issuance
10,687,928 shares of its common stock as follows: (a) 8,254,680 shares pursuant
to the Company's Stock Option Plans and options issued which were not granted
under the plans; and (b) 2,433,248 shares issuable upon exercise of investors'
and finders' warrants.
M. Stock Options and Warrants
Stock Options--The Company adopted, with stockholder approval, the 1994, 1995,
1995 Disinterested Director, 1996, 1998 and 2001 Stock Option Plans (the "1994
Plan," "1995 Plan," "1995 DD Plan," "1996 Plan," "1998 Plan" and the "2001
Plan") which provide for the granting of options to purchase not more than an
aggregate of 1,200,000, 2,000,000, 200,000, 3,200,000, 3,200,000 and 2,800,000
shares of common stock, respectively, subject to adjustment under certain
circumstances. Such options may be incentive stock options ("ISOs") within the
meaning of the Internal Revenue Code of 1986, as amended, or options that do not
qualify as ISOs ("Non-Qualified Options").
The option exercise price per share for a Non-Qualified Option may not be less
than 85% of the fair market value per share of common stock on the date of grant
and for an ISO may not be less than the fair market value per share of common
stock on the date of grant (110% of such fair market value for an ISO, if the
grantee owns stock possessing more than 10% of the combined voting power of all
classes of the Company's stock). Options may be granted under the Stock Option
Plan to all officers, directors and employees of the Company and, in addition,
Non-Qualified Options may be granted to other parties who perform services for
the Company. No options may be granted under the 1994 Plan after March 31, 2004,
under the 1995 Plan and 1995 DD Plan after May 15, 2005, under the 1996 Plan
after July 8, 2006, under the 1998 Plan after July 9, 2008 and under the 2001
plan after May 3, 2011.
The Stock Option Plans may be amended from time to time by the Board of
Directors of the Company. However, the Board of Directors may not, without
stockholder approval, amend the Stock Option Plans to increase the number of
shares of common stock which may be issued under the Stock Option Plans (except
upon changes in capitalization as specified in the Stock Option Plans), decrease
the minimum exercise price provided in the Plans or change the class of persons
eligible to participate in the Plans.
The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting
for Stock Based Compensation." Accordingly, no compensation expense has been
recognized for stock options granted to employees. Had compensation cost for the
Company's stock option grants been determined based on the fair value at the
grant date consistent with the provisions of SFAS 123, the Company's net income
(loss) and income (loss) per share, both basic and diluted, would have been
changed to the pro forma amounts as follows: net income (loss) would have been
$9,710,000 or $.16 per share, in 2001, $563,000, or $.01 per share, in 2000 and
$(5,527,000), or $(.09) per share, in 1999. 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 in 2001,
three years in 2000 and two and one-half years in 1999; risk free interest rate
of 4.75% in 2001 and 6% in 2000 and 1999; expected volatility of 136% in 2001,
150% in 2000 and 107% in 1999; and a zero dividend yield. The effects of
applying SFAS 123 in this proforma disclosure are not indicative of future
results.
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 1/1/99 $ .38 - .75 2,391,088 4 $ .67 811,416 $ .55
$1.00 - 1.50 238,716 2 $1.25 132,716 $1.34
--------- ---------
2,629,804 944,132
=========
Canceled $ .50 - 3.50 (32,200) 2 $1.62
Exercised $ .50 - 1.50 (1,262,472) 3 $ .71
Granted $1.50 - 7.00 1,778,700 4 $2.65 $1.48
---------
Balance 12/31/99 $.38 - .75 1,243,332 3 $ .69 827,332 $ .65
$1.00 - 1.75 734,000 2 $1.48 101,000 $1.36
$2.50 - 7.00 1,136,500 4 $3.27 60,000 $3.09
--------- ---------
3,113,832 988,332
=========
Canceled $ .50 - 5.50 (551,500) 2 $2.53
Exercised $ .50 - 6.06 (411,550) 2 $1.23
Granted $1.50 - 6.75 1,974,450 4 $1.79 $1.20
---------
Balance 12/31/00 $.38 - .75 935,282 2 $ .67 935,282 $ .67
$1.00 - 1.75 2,278,050 1 $1.49 244,900 $1.45
$2.50 - 7.00 911,900 3 $3.56 589,650 $3.14
--------- ---------
4,125,232 1,769,832
=========
Canceled $ .38 - 7.00 (218,052) 1 $1.42
Exercised $ .50 - 1.50 (168,530) 1 $ .74
Granted $1.50 3,000,000 5 $1.50 $.94
---------
Balance 12/31/01 $ .50 - .75 681,000 1 $ .71 681,000 $ .71
$1.00 - 1.75 5,196,750 4 $1.50 1,526,400 $1.50
$2.50 - 7.00 860,900 2 $3.57 802,950 $3.54
--------- ---------
6,738,650 3,010,350
========= =========
The options have a term of five years.
N. Retirement Plan
The Company has a profit sharing plan, which qualifies, under Section 401(k) of
the Internal Revenue Code. The plan covers substantially all employees who have
completed six months of service. Company contributions to the plan are
discretionary and vest at a rate of 20% after three years of service, and 20%
each year thereafter until employees are fully vested after 7 years.
Contributions to the plan for the years ended December 31, 2001, 2000, and 1999
were $65,000, $52,000 and $46,000, respectively.
O. Income (Loss) Per Share (in thousands, except per share)
Year Ended December 31
2001 2000 1999
Net income (loss) $11,078 $ 2,059 $(5,048)
======= ======= =======
Weighted average common shares outstanding 59,593 63,660 61,229
Dilutive effect of outstanding warrants and options 281 396 -
------- ------- -------
Adjusted for dilutive computation 59,874 64,056 61,229
======= ======= =======
Basic income (loss) per share $.19 $.03 $(.08)
==== ==== =====
Diluted income (loss) per share $.19 $.03 $(.08)
==== ==== =====
P. Sale of Domain Name
In July 2001, the Company sold its tdc.com domain name to a European entity for
$1 million. The Company's present domain is Trackdata.com, which it already
owned.
Q. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands, except per share)
2001
Revenues $17,391 $16,322 $ 14,530 $ 13,974
Net income 5,355 1,534 3,095 1,094
Basic and diluted income per share $.08 $ .03 $.05 $.02
2000
Revenues $12,890 $13,033 $ 14,871 $ 17,973
Net (loss) income (1,878) (2,743) 1,641 5,039
Basic and diluted net (loss) income per share $(.03) $(.04) $ .03 $.08
1999
Revenues $11,656 $11,662 $ 11,518 $ 11,784
Net loss (35) (686) (2,340) (1,987)
Basic and diluted net loss per share $(.00) $(.01) $(.04) $(.03)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Officers and Directors
The officers and directors of the Company are as follows:
Name Age Position
----- --- --------
Barry Hertz 52 Chairman of the Board, Chief Executive Officer
Martin Kaye 54 Chief Operating Officer, Chief Financial Officer,
Secretary and Director
Jay Gelman 40 Executive Vice President
Stanley Stern 51 Senior Vice President - Customer Relations, Director
E. Bruce Fredrikson 63 Director
Isaac Schlesinger 55 Director
Jack Spiegelman 63 Director
Charles Zabatta 59 Director
Barry Hertz has served as the Company's Chairman and Chief Executive
Officer since its inception. In April 1994 he was elected Secretary of the
Company and served until August 1994. He holds a Masters degree in Computer
Science from New York University (1973) and a B.S. degree in Mathematics from
Brooklyn College (1971). Until his resignation in May 2001, Mr. Hertz also
served as Chairman of Innodata Corporation ("Innodata"), a public company
co-founded by Mr. Hertz, of which the Company was a principal stockholder, and
which is a global outsourcing provider of Internet and on-line digital content
services.
Martin Kaye has been Chief Operating Officer since August 2001, and has
been Chief Financial Officer and Director of the Company since April 1994. He
was elected Secretary of the Company in August 1994. Mr. Kaye is a certified
public accountant. Mr. Kaye served as Chief Financial Officer of Innodata from
October 1993 and Director from March 1995 until his resignation from those
positions in May 2001. He had been an audit partner with Deloitte & Touche LLP
for more than five years until his resignation in 1993. Mr. Kaye holds a B.B.A.
in accounting from Baruch College (1970).
Jay Gelman has been Executive Vice President and a Director since August
2001. Prior thereto he was Vice President of Sales for the Company's
institutional market data business. From August 1998 until December 1999, he
served as President of the Company's Newsware division. In 1989, he co-founded
Alliance Distributors, a leading distributor of products manufactured by
Nintendo, Sony, RCA/GE, Electronic Arts, and many other consumer electronic
companies. In December 1997, Take Two Interactive, a public company, bought
Alliance Distributors. Prior thereto he was a salesman for the Company from
1987 through 1989. Mr. Gelman attended Northeastern University and Bernard
Baruch College.
Stanley Stern has been Senior Vice President - Customer Relations since
June 2000 and a Director of the Company since May 1999. He previously served as
Director from April 1994 until his resignation in September 1997. He served as
Vice President of the Company and in other capacities for more than five years
until his resignation in December 1996. From January 1998 through May 2000, Mr.
Stern had been Chief Operating Officer of Integrated Medical Technologies, Inc.,
an Internet-based provider of medical services information. Mr. Stern holds a
B.B.A. from Baruch College (1973).
Dr. E. Bruce Fredrikson has been a Director of the Company since June 1994.
He is currently a professor of finance at Syracuse University School of
Management where he has taught since 1966 and has previously served as chairman
of the finance department. Dr. Fredrikson has an A.B. in economics from
Princeton University and a M.B.A. and a Ph.D. in finance from Columbia
University. Until his resignation in May 2001, Mr. Fredrikson was a Director of
Innodata.
Isaac Schlesinger has been a Director of the Company since July 2000.
Since 1975, Mr. Schlesinger has been a managing director and senior officer of
Bishop, Rosen & Co., Inc., members of the New York and American Stock Exchanges,
a retail and institutional brokerage firm. He also serves as C.R.O.P.,
S.R.O.P., M.P. and chief financial officer. Mr. Schlesinger received a BA in
Comparative Literature from Brooklyn College (1977).
Jack Spiegelman has been a Director of the Company since April 1996. Mr.
Spiegelman has been President of Briarcliff Securities Corp. (formerly Track
Securities Corp.) since December 1983. From February 1996 to June 1997, he was
a Senior Vice President of J. W. Genesis Securities, Corp. and prior thereto for
more than five years was a Senior Vice President of Fahnestock & Company, Inc.
Mr. Spiegelman holds a B.A. in economics from Brooklyn College (1963).
Charles Zabatta has been a Director of the Company since August 2001. Mr.
Zabatta, who has more than 30 years of brokerage service experience, is Senior
Managing Director of Corporate Development at Knight Capital Markets. He was a
Director on the Board of Knight/Trimark Group from April 1998 to September 1999,
when he resigned to take his current position. Mr. Zabatta joined Knight from
TD Waterhouse, where he also was Senior Managing Director of Corporate
Development. Prior to joining TD Waterhouse in 1995, he was President and Chief
Operating Officer of Wall Street Connect, an automated investment services
company. He also served as Vice President and Director of Marketing at both
Kennedy Cabot & Co. and Securities Settlement, a national clearing organization.
Mr. Zabatta received his BA from Iona College (1964).
In connection with a stock purchase agreement with Knight Trading Group,
Inc. ("Knight") in December 2000, Knight has the right to designate one member
of the Board of Directors for three years. Mr. Zabatta has been designated by
Knight. Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the discretion of the Board. There are no family relationships among
directors or officers.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
The Company believes that during the period from January 1, 2001 through
December 31, 2001 all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten-percent beneficial owners were complied
with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company for services to it during the three fiscal years ended
December 31, 2001 to the Company's Chief Executive Officer and to the executive
officers whose aggregate annual salary and bonus exceeded $100,000.
Summary Compensation Table
Number
of Stock
Fiscal Annual Options
Name and Position Year Salary Bonus Awarded
----------------- -------- -------- ------- ---------
Barry Hertz 2001 $425,000 - 2,000,000
Chairman, CEO 2000 $375,000 - 350,000
1999 $375,000 - 200,000
Martin Kaye 2001 $262,000 - 250,000
Chief Operating Officer,
Chief Financial Officer
Jay Gelman 2001 $283,000 - 100,000
Executive Vice President 2000 $250,000 - 280,000
Stanley Stern 2001 $150,000 - 20,000
Senior Vice President
The above table does not include certain insurance and other personal
benefits, the total value of which does not exceed the lesser of $50,000 or 10%
of such person's cash compensation.
Option Grants In Last Fiscal Year
Individual Grants
Percent of Potential Realized
Total Options Value at Assumed
Granted to Annual Rates of
Number of Employees Stock Appreciation
Options in Fiscal Exercise Expiration for Option Term
Name Granted Year Price Date 5% 10%
------------- ------------- ------------- --------- ----------- ------- --------
Barry Hertz 1,000,000 (A) 33% $1.50 04/03/06 $410,000 $920,000
1,000,000 (A) 33% $1.50 12/18/06 $410,000 $920,000
Martin Kaye 100,000 (B) 3% $1.50 04/03/06 $ 41,000 $ 92,000
150,000 (B) 5% $1.50 12/18/06 $ 62,000 $138,000
Jay Gelman 50,000 (B) 2% $1.50 04/03/06 $ 21,000 $ 46,000
50,000 (B) 2% $1.50 12/18/06 $ 21,000 $ 46,000
Stanley Stern 20,000 (B) 1% $1.50 12/18/06 $ 8,000 $ 19,000
(A) Vesting is over a three-year period
(B) Vesting is over a two-year period.
Aggregate Option Exercises In Last Fiscal Year;
Fiscal Year End Option Values
Number of
Securities
Underlying
Unexercised Value of Unexercised In-
Options at Fiscal the-Money Options at
Shares Year End Fiscal Year End
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
---------- ----------- -------- ----------------- -------------------------
Barry Hertz None - 535,000/2,175,000 $113,600/$-0-
Martin Kaye None - 345,000/335,000 $109,400/$-0-
Jay Gelman None - 235,000/290,000 $11,500/$-0-
Stanley Stern None - 42,500/42,500 $-0-/$-0-
There are no employment agreements, stock appreciation rights or long-term
incentive plans.
Directors Compensation
Dr. Fredrikson is compensated at the rate of $1,250 per month, plus
out-of-pocket expenses for each meeting attended. Mr. Schlesinger is
compensated at the rate of $1,500 per meeting attended. No other director is
paid cash compensation for his services as director.
In 2001, Messrs. Fredrikson, Schlesinger, Spiegelman and Zabatta each
received options to purchase 10,000 shares at an exercise price of $1.50 per
share as compensation for their services.
Compensation Committee Interlocks and Insider Participation
For the Company's fiscal year ended December 31, 2001, Messrs. Hertz, Kaye,
Gelman and Stern were officers of the Company and were members of the Board of
Directors (there is no compensation committee).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 2002, information
regarding the beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's officers and directors and
(iii) all officers and directors of the Company as a group. Unless otherwise
indicated, each stockholder's address is c/o the Company, 56 Pine Street, New
York, New York 10005.
Shares Owned Beneficially (1)
Name No.of Shares % of Class
------------- ------------ ----------
Barry Hertz (2) 28,207,213 51.5%
Martin Kaye (3) 443,400 *
Jay Gelman (4) 300,000 *
Isaac Schlesinger (4) 5,000 *
Jack Spiegelman (5) 89,000 *
E. Bruce Fredrikson (4)
Syracuse University
School of Management
Syracuse, NY 13244 91,000 *
Stanley Stern (6) 108,000 *
All Officers and
Directors as a Group
(eight persons)(7) 29,243,613 52.5%
---------------
* = less than 1%
(1) Unless otherwise indicated, (i) each person has sole investment and voting
power with respect to the shares indicated and (ii) the shares indicated
are currently outstanding shares. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares as
of a given date which such person has the right to acquire within 60 days
after such date. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above on a given date,
any security which such person or persons has the right to acquire within
60 days after such date is deemed to be outstanding for the purpose of
computing the percentage ownership of such person or persons, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. The percentages are calculated based on
53,824,010 shares outstanding.
(2) Consists of 25,030,532 shares owned by Mr. Hertz, 2,138,400 shares owned by
Trusts established in the names of Mr. Hertz's children and 94,948 shares
held by a family LLC managed by Mr. Hertz who owns 8% of such LLC. Mr.
Hertz disclaims beneficial interest in shares owned by the Trust and 92% of
the family LLC not owned by him. Also includes 943,333 shares issuable upon
the exercise of presently exercisable options under the Company's Stock
Option Plans.
(3) Consists of 38,400 shares owned of record and 405,000 shares issuable upon
exercise of presently exercisable options granted under the Company's Stock
Option Plans.
(4) Consists of shares issuable upon the exercise of presently exercisable
options granted under the Company's Stock Option Plans.
(5) Consists of 60,000 shares owned of record, 4,000 shares owned by his wife
as to which Mr. Spiegelman disclaims beneficial interest and 25,000 shares
issuable upon the exercise of presently exercisable options granted under
the Company's Stock Option Plans.
(6) Consists of 28,000 shares owned of record and 25,000 shares held in the
Track Data Phantom Unit Trust to be released upon his termination of
association with the Company, or earlier with approval of the Board of
Directors. Also includes 55,000 shares issuable upon the exercise of
presently exercisable options granted under the Company's Stock Option
Plans.
(7) Consists of 27,419,280 outstanding shares and 1,824,333 shares issuable
upon exercise of options described in footnotes 2 through 6 above.
Potential Change in Control
Mr. Hertz has pledged approximately 20 million shares owned by him as
collateral for the Company's arbitrage trading program and in connection with
certain margin loans. A change in control could occur in the event Mr. Hertz
lost control of these pledged shares. See Note C.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its office facilities in Brooklyn from a limited
partnership owned by the Company's Chairman and members of his family. The
Company paid the partnership rent of $540,000 for the years ended December 31,
2001 and 2000. The lease provides for the Company to pay $540,000 per annum
through April 1, 2002.
In connection with the Company's arbitrage trading program, the Company's
Chairman pledged approximately 15 million shares of his holdings of the
Company's common stock as additional collateral for the arbitrage trading
accounts. The Company is paying its Chairman at the rate of 2% per annum on the
value of the collateral pledged. Such payments aggregated $144,000 for the year
ended December 31, 2001.
In the fourth quarter of 2001, the Company expanded its arbitrage trading
program to include a greater risk profile trading program. The greater risk
trading program resulted in pre-tax losses of $400,000 in the fourth quarter of
2001 and $1,400,000 in the first quarter of 2002. The Company is continuing its
arbitrage trading program but has discontinued the greater risk trading program.
The Company's Chairman contributed 650,000 shares of Company stock owned by him
to the capital of the Company upon discontinuance of this program.
From April 1999 to August 2000, the Company offered online trading through
its myTrack service utilizing Track Securities Corporation ("TSC") as its
broker-dealer. TSC is a broker-dealer owned and operated by Jack Spiegelman, a
director of the Company. The Company licensed its myTrack trading system to a
subsidiary of TSC until August 2000. The Company was receiving $2.25 per trade
pursuant to the agreement, which aggregated $2,280,000 in 2000 and $590,000 in
1999. In addition, TSC paid a share of the marketing and advertising costs
incurred by the Company, which aggregated $666,000 in 2000 and $571,000 in 1999.
Further, the director has a five-year consulting agreement with the Company
pursuant to which he is to be paid an annual fee of the greater of $50,000 or 5%
of the after-tax earnings, if any, from trading activities. In 2001, 2000 and
1999, the fee was $50,000, $50,000 and $37,500, respectively. In August 2000,
the Company obtained its own broker-dealer license and, after registration in
all states, terminated the relationship with TSC, except for the director
consulting agreement, and transferred all the trading accounts from TSC to the
Company's broker-dealer, Track Data Securities Corp.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
-------
Exhibit Description
------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 By-Laws (1)
4.2 Specimen of Common Stock certificate (1)
10.1 1994 Stock Option Plan (1)
10.2 Form of indemnity agreement with directors (1)
10.3 Fully Disclosed Clearing Agreement with Penson Financial Services, Inc.,
dated October 13, 2000 filed herewith
10.4 1995 Stock Option Plan (2)
10.5 1995 Disinterested Directors' Stock Option Plan (3)
10.6 Merger Agreement between the Company and Global (4)
10.7 1996 Stock Option Plan (5)
10.8 1998 Stock Option Plan (6)
10.9 2001 Stock Option Plan (7)
23 Consent of Grant Thornton LLP filed herewith
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
(1) Incorporated by reference to Exhibits 3.1, 3.2, 4.2, 10.3 and 10.4 to
Form S-1 Registration Statement No. 33-78570.
(2) Incorporated by reference to Exhibit A to Definitive Proxy for August 10,
1995, Annual Meeting of Stockholders
(3) Incorporated by reference to Exhibit B to Definitive Proxy for August 10,
1995, Annual Meeting of Stockholder
(4) Incorporated by reference to Appendix A to Definitive Proxy for March 19,
1996, Special Meeting of Stockholders
(5) Incorporated by reference to Appendix A to Definitive Proxy for November
7, 1996, Annual Meeting of Stockholders
(6) Incorporated by reference to Appendix A to Definitive Proxy for November
5, 1998, Annual Meeting of Stockholders
(7) Incorporated by reference to Appendix A to Definitive Proxy for November
1, 2001, Annual Meeting of Stockholders
(b) Reports on Form 8-K during fourth quarter
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRACK DATA CORPORATION
By /s/
-------------------------------
Barry Hertz, Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Chairman of the Board and March 14, 2002
------------------- Chief Executive Officer
Barry Hertz
/s/ Chief Operating Officer, Chief March 14, 2002
------------------- Financial Officer, Secretary and Director
Martin Kaye
/s/ Executive Vice President March 14, 2002
------------------- and Director
Jay Gelman
/s/ Senior Vice President - Customer March 14, 2002
------------------- Relations and Director
Stanley Stern
/s/ Director March 14, 2002
-------------------
E. Bruce Fredrikson
/s/ Director March 14, 2002
-------------------
Isaac Schlesinger
/s/ Director March 14, 2002
-------------------
Jack Spiegelman
/s/ Director March 14, 2002
-------------------
Charles Zabatta
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 1, 2002, accompanying the consolidated
financial statements of Track Data Corporation which is included in the Annual
Report of Track Data Corporation on Form 10-K for the year ended December 31,
2001. We hereby consent to the incorporation by reference of said report in the
Registration Statements of Track Data Corporation on Forms S-3 (File No.
333-4780, effective July 11, 1996, File No. 333-83167, effective August 16,
1999, File No. 333-91645, effective February 9, 2000, File No. 333-34696,
effective June 8, 2000 and File No. 333-54296, effective February 9, 2001) and
on Forms S-8 (File No. 333-4532, effective May 2, 1996, File No. 333-52131,
effective May 8, 1998 and File No. 333-82171, effective July 2, 1999).
/S/ GRANT THORNTON LLP
Melville, New York
March 1, 2002
Exhibit 10.3
FULLY DISCLOSED CLEARING AGREEMENT
This Fully Disclosed Clearing Agreement (the "Agreement") is executed and
entered into by and between Penson Financial Services, Inc. ("Penson"), a
division of Service Asset Management Company, a North Carolina corporation, and
Track Data Securities Corp. ("Correspondent").
WHEREAS, Correspondent is in the process of registering or is registered
with the Securities and Exchange Commission ("SEC") as a broker-dealer of
securities in accordance with Section 15(b) of the Securities and Exchange Act
of 1934 (the "Act") and is applying for membership or is a member of the
National Association of Securities Dealers, Inc. ("NASD"), and desires for
Penson to act as a clearing broker for Correspondent; and
WHEREAS, Penson meets all requirements of the SEC to function as a clearing
broker, and desires to enter into an agreement to clear and maintain cash,
margin, option or other accounts ("Accounts") for Correspondent or customers
("Customers") of Correspondent.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and of the guarantee of this Agreement by any guarantor(s), and for other good
and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. REPRESENTATIONS AND WARRANTIES
Correspondent represents and warrants to Penson that:
(a) Correspondent is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation.
(b) Correspondent has all the requisite authority in conformity with all
applicable laws and regulations to enter into this Agreement and to retain
the services of Penson in accordance with the terms hereof.
(c) Correspondent shall employ as a manager of its brokerage operation only a
person who has all requisite licenses and experience in compliance with
applicable securities laws and regulations.
(d) Correspondent shall duly employ personnel ("Registered Representatives")
who have the requisite licenses and experience in compliance with
applicable securities laws and regulations.
(e) Correspondent has advised Penson of any clearing arrangements that have
been made or are expected to be made with any other clearing broker or
dealer.
Penson represents and warrants to Correspondent that:
(a) Penson is a corporation duly organized, validly existing and in good
standing under the laws of the state of North Carolina.
(b) Penson is registered as a broker-dealer with the SEC and is in compliance
with the rules and regulations thereof.
(c) Penson is a member corporation in good standing of the NASD and is in
compliance with the rules and regulations thereof.
(d) Penson is in compliance with the rules and regulations of each national
securities exchange of which it is a member.
2. CUSTOMER AND CORRESPONDENT ACCOUNTS
Responsibility for compliance with the provisions of the NASD's Conduct
Rules regarding opening, approving and monitoring Customer accounts shall be
allocated between Penson and Correspondent as set forth in this Section 2.
(a) Account Documentation. Correspondent will be responsible for obtaining and
verifying all required information and the identity of each potential
Customer. Correspondent will be responsible for obtaining all documents
related to customer accounts, and for the transmission of all required
documents to Penson on a timely basis. Penson may, in its discretion,
receive documents directly from the Customer. Correspondent acknowledges
the obligation to retain all documents in an easily accessible place in
accordance with SEC rules and agrees to provide the original application by
overnight delivery or a legible copy by facsimile transmission within 24
hours of a request from Penson. Correspondent will be responsible for
complying with the requirement of SEC Rule 15g-9, if applicable.
(b) Knowledge of Customer and Customer's Investment Objectives. Correspondent
will be responsible for learning and documenting all the required
information relating to each and every Customer in order to insure
compliance by Correspondent with applicable rules and regulations. This
required information includes, but is not limited to, all of the
information and instructions submitted to Penson pursuant to Section 2(a),
any additional facts relative to the Customer's investment objectives, and
every person holding power of attorney over any Customer Account. It shall
be the responsibility of Correspondent to ensure that those of its
Customers who open Accounts hereunder shall not be minors. Correspondent
shall be solely responsible for any issues regarding the suitability of any
investments for its Customers.
(c) Acceptance of Accounts. Prior to any Customer Account being opened with
Penson, it must be approved by Correspondent. Penson reserves the right to
withhold acceptance of, or to reject, for any reason, any Customer,
Customer Account, Correspondent Account or any transaction for any Account
and to terminate any Account previously accepted by Penson. Initial
acceptance of each Account shall be conditioned upon Penson's receipt of
completed forms as required by Section 2(a). Correspondent shall not submit
such forms with respect to any Customer Account unless Correspondent has in
its possession the documentation of all information required pursuant to
Section 2(b). Penson shall be under no obligation to accept any Account as
to which any documentation required to be submitted to Penson or maintained
by Correspondent pursuant to Sections 2(a) and 2(b) is incomplete. Prior to
acceptance of any Account, no action taken by Penson or any of its
employees, including, without being limited to, executing or clearing a
trade in any Account, shall be deemed to be or shall constitute acceptance
of such Account.
(d) Supervision of Orders and Accounts. Penson will execute orders for
Correspondent's Customers after Correspondent's appropriate principals have
accepted and approved said Accounts. Correspondent will be responsible for
the review and supervision of, and the suitability of, investments made by
each and every one of its Customers and Penson shall have no
responsibility. Correspondent shall be responsible for insuring that all
transactions in and activities related to all Accounts opened by it with
Penson, including discretionary accounts, will be in compliance with all
applicable laws, rules and regulations of the United States, the several
states, governmental agencies, securities exchanges and the NASD, including
any laws relating to Correspondent's fiduciary, responsibilities to
Customers, either under the Employee Retirement Income Security Act of 1974
or otherwise. Correspondent shall diligently supervise the activities of
its officers, employees and representatives with respect to all Accounts.
Penson will perform the clearing services provided for in this Agreement
for Accounts accepted by it in accordance with the terms of this Agreement,
as it may be amended from time to time, and otherwise in accordance with
its best business judgement. To the extent, if any, that Penson accepts
from Correspondent orders for execution in accordance with Section 7(a),
Correspondent shall be responsible for informing Penson of the location of
the securities that are the subject of the order so that Penson may comply
with the provisions of Rule 3110 of the NASD's Conduct Rules.
(e) Accounts of Associated Persons. Correspondent will not accept Accounts for
any persons that come within the express provisions of Rule 3050 of the
NASD's Conduct Rules unless Correspondent has complied with the provisions
of said Rule and, if applicable, provided evidence of employer approval as
required by the Rule.
(f) Account Responsibility for Certain Purposes. Notwithstanding anything
herein to the contrary, for purposes of the Securities Investment
Protection Act of 1970 and the Financial Responsibility Rules of the SEC,
the Customer Accounts are the responsibility, of Penson. For all other
purposes, the Customer Accounts shall be the full, total and sole
responsibility of Correspondent.
3. EXTENSION OF CREDIT
Responsibility for compliance with the provisions of Regulation T issued by
the Board of Governors of the Federal Reserve System pursuant to the Securities
Exchange Act of 1934 ("Regulation T") and all other applicable rules,
regulations and requirements of any exchange or regulatory agency affecting the
extension of credit shall be allocated between Penson and Correspondent as set
forth in this Section 3.
(a) Margin Agreements. At the time of opening of each margin account,
Correspondent will furnish Penson with a Penson Customer Margin and Short
Account Agreement, executed by the Customer, on the form furnished to
Correspondent by Penson. Correspondent may use a substitute form upon
written approval by Penson.
(b) Margin and Margin Maintenance. Correspondent is responsible for assuring
Customer's payment of Customer's initial margin requirements and of all
amounts necessary to meet subsequent maintenance calls in each Customer
Account, in order to insure compliance with Regulation T and the house
rules of Penson. Such payment may be collected by Correspondent on Penson's
behalf, or made directly to Penson at Correspondent's option. Correspondent
is responsible for the payment of initial margin and of all amounts
necessary to meet subsequent margin calls in each Correspondent Account.
Penson shall have the unlimited right to buy in or sell out positions in
Accounts whenever Penson, in its sole discretion, deems such action
appropriate and despite whether, if the Account is a Margin Account, any
such Account is then in compliance with applicable margin maintenance
requirement or has requested an extension of time to make any payment
required by Regulation T. Correspondent acknowledges that Penson has the
right to demand payment on any debit balance and that Correspondent is
responsible to Penson for any unsecured debit balance resulting from any
failure of a Customer to make any such payments upon demand.
(c) Margin Requirements. Initial margin and margin maintenance requirements
applicable to any margin account shall be in accordance with the house
rules of Penson, rather than in accordance with any lower requirement of
any law, any exchange or any regulatory agency. Penson may change the
margin requirements applicable to any Account or class of accounts, as
described in its house rules; Correspondent shall be responsible for
advising its Customer of the changed requirements and for the payment by
the Customer of any additional margin necessary to insure compliance with
such increased requirements.
(d) Losses. In addition to, and not in limitation of, Correspondent's agreement
to indemnify Penson pursuant to the provisions of Section 10, Correspondent
indemnifies and holds harmless Penson from and against any and all loss,
cost, expense and liability (including legal and accounting fees and
expenses) sustained by Penson arising out of any of the following:
(i) any failure by any Customer to comply with the terms of its Customer
Margin and Short Account Agreement with Penson;
(ii) The failure of Correspondent or any Customer to comply with Regulation
T;
(iii) the failure of Correspondent to satisfy its obligations under this
Section 3; or
(iv) The failure of delivery of securities sold or failure of payment for
securities purchased in accordance with the provisions of Regulation
T; the return to Penson unpaid of any check given to Penson by
Correspondent or any Customer; or the payment for and/or delivery of
all "when issued" transactions which Penson may accept or execute for
the Accounts.
4. MAINTENANCE OF BOOKS AND RECORDS
Penson will maintain stock records and other records on a basis consistent
with generally accepted practices in the securities industry and will maintain
copies of such records in accordance with the NASD and SEC guidelines for record
retention in effect from time to time. At the time this Agreement is executed
and annually thereafter, Penson will provide Correspondent with a list or
description of all exception or other reports that it offers to Correspondent.
Annually, Penson will provide Correspondent with a list of those reports
requested by or supplied to Correspondent and will provide a copy of such notice
to Correspondent's DEA. Penson and Correspondent shall each be responsible for
preparing and filing the reports required by the governmental and regulatory
agencies that have jurisdiction over each and Penson and Correspondent will
provide the other with such information, if any, which is in the control of one
party but is required by the other to prepare any such report.
5. RECEIPT, DELIVERY AND SAFEGUARDING OF FUNDS AND SECURITIES
(a) Receipt and Delivery in the Ordinary Course of Business. Penson,
acting on behalf of Correspondent, will receive and deliver all funds
and securities in connection with transactions for Customer Accounts
in accordance with the Customer's instructions to Correspondent.
Correspondent shall be responsible for advising Customers of their
obligations to deliver funds or securities in connection with each
such transaction. Correspondent shall be responsible for any failure
of any Customer to fulfill such obligation. Penson shall be
responsible for the safeguarding of all funds and securities delivered
to and accepted by it, subject to count and verification by Penson.
However, Penson will not be responsible for any funds or securities
delivered by a Customer or Correspondent, its agents or employees,
until such funds or securities are physically delivered to Penson's
premises and accepted by Penson or deposited in bank accounts
maintained in Penson's name. It is expressly understood and agreed,
however, that Correspondent is responsible for compliance with the
Currency and Foreign Transactions Reporting Act (31 U.S.C. Section
5311 et seq.) and the rules and regulations promulgated thereunder (31
C.F.R. Section 103.11, as amended, et seq.).
(b) Custody Services. Whenever Penson has been instructed to act as
custodian of the securities in any Correspondent or Customer Account,
or to hold such securities in "safekeeping," Penson may hold the
securities in the Customer's name or may cause such securities to be
registered in the name of Penson or its nominee or in the names of
nominees of any depository used by Penson. Penson will perform the
services required in connection with acting as custodian for
securities in Correspondent and Customer Accounts, such as (i)
collection and payment of dividends; (ii) transmittal and handling
(through Correspondent) of tenders or exchanges pursuant to tender
offers and exchange offers; (iii) transmittal of all proxy materials
and other shareholder communications; and (iv) handling of exercises
or expirations of rights and warrants, and of redemptions of
securities.
(c) Receipt and Delivery Pursuant to Special Instruction. Upon instruction
from Correspondent or a Customer, Penson will make such transfers of
securities or Accounts as may be requested. Correspondent shall be
responsible for determining if any securities held in Correspondent or
Customer Accounts are "restricted securities" or "control stock" as
defined by the rules of the SEC and that orders executed for such
securities are in compliance with applicable laws, rules and
regulations.
(d) Draft-Issuing Authority. At its discretion Penson may authorize
certain of Correspondent's employees to sign drafts as drawer payable
to Correspondent's Customers in amounts and pursuant to conditions as
may be determined by Penson from time to time. Correspondent agrees
that it will not request Penson to authorize someone to sign drafts
who is not an employee of Correspondent. Correspondent further agrees
that this authority shall not be granted by Penson until Correspondent
has notified Penson in writing that it has established and will
maintain and enforce supervisory procedures with respect to the
issuance of such instruments. Correspondent agrees to fully indemnify
Penson from the negligence, fraud, or mistakes of Correspondent or
Correspondent's employees in connection with any draft issuing
authority granted to them and Correspondent authorizes Penson to
charge any Correspondent Account or any other assets of Correspondent
held by Penson with the amount of any such losses. Notwithstanding
Section 5(a), Penson will not be repsonsible for the safeguarding of
funds withdrawn by Correpsondent or Correspondent's employees pursuant
to such draft issuing authority. Penson may withdraw this draft
issuing privilege without notice at any time during the term of this
Agreement. Notwithstanding anything herein to the contrary, Penson may
at any time, at its sole discretion, despite any prior authorization,
refuse payment on any draft for which Correspondent is drawer and
Penson is payee.
6. CONFIRMATIONS AND STATEMENTS
(a) Preparation and Transmission. Penson will prepare and send to
Customers monthly statements of account (or quarterly statements if no
activity occurs in an account during any quarter covered by such
statement), which statements shall meet Penson's requirements as to
format and quality and will indicate that Correspondent is the
introducing broker for the Account. Penson will be responsible for
preparing and transmitting confirmations. Upon prior written approval
from Penson, Correspondent may assume the responsibility of preparing
and transmitting confirmations, including the responsibility for
compliance with the provisions of Rule 2230 of the NASD's Conduct
Rules. Copies of all monthly or quarterly statements sent by Penson to
Customers will be sent to Correspondent. Penson will also provide to
Correspondent monthly statements of clearing services performed by
Penson for Correspondent and Customer Accounts showing the fees
charged for such services during the month, as provided in Section 8.
(b) Examination and Notification of Errors. Correspondent shall examine
promptly all monthly statements of account, monthly statements of
clearing services and other reports provided to Correspondent by
Penson. Correspondent shall notify Penson of any error claimed by
Correspondent in any Account in connection with (i) any transaction
prior to the settlement date of such transaction, (ii) information
appearing on daily reports within seven days of such report, and (iii)
information appearing on monthly statements or reports within 30 days
of Correspondent's receipt of any monthly statement or report. Any
notice of error shall be accompanied by such documentation as may be
necessary to substantiate Correspondent's claim. Correspondent shall
provide promptly upon Penson's request any additional documentation
which Penson reasonably believes is necessary or desirable to
determine and correct any such error.
7. ACCEPTANCE OF ORDERS, EXECUTION OF TRANSACTIONS, OTHER SERVICES
(a) Customers' Orders. Orders received by Correspondent can be executed by
Correspondent or forwarded to Penson for execution. The party
executing the order shall be responsible for errors in execution.
Acceptance of orders from Customers shall be the responsibility of
Correspondent, and Correspondent shall be responsible for the
authenticity of all orders. Correspondent shall advise each of its
Customers that its relationship with Penson is solely that of an
introducing broker to a clearing broker and that, except as set forth
in Section 2(f) above, Correspondent bears all responsibility for the
Customer's Account. Penson is not obligated to accept for execution
any orders placed directly with Penson by a Customer. In addition,
Penson is not obligated to accept any orders from Correspondent if
Penson determines in good faith that it should not. Correspondent
assumes the risk of failure by an over-the--counter dealer with which
Correspondent executes an order in the event such dealer fails to
perform and will reimburse Penson for any, loss incurred by it in the
transaction.
(b) Transactions Clearing. During the term of this Agreement, Penson will
clear transactions on a fully disclosed basis for Accounts of
Correspondent and the Customers that Correspondent introduces and
Penson accepts as provided in Section 2(b); provided, however, that
Penson is not obligated to clear any transactions for Correspondent or
Correspondent's Customers if Penson determines in good faith that it
should not.
(c) Other Services. Penson will perform such other services, upon such
terms and at such prices, as Penson and Correspondent may from time to
time agree.
8. FEES AND SETTLEMENTS FOR SECURITIES TRANSACTIONS
(a) Commissions: Fees for Clearing Services.
(i) Correspondent has provided to Penson its basic commission
schedule and Penson will charge each Customer the commission
shown on such schedule or which Correspondent otherwise directs
Penson to charge on each transaction. Correspondent's basic
commission schedule may be amended from time to time by written
instructions to Penson from Correspondent. Penson shall be
required to implement such changes only to the extent that they
are within the usual capabilities of Penson's data processing and
operations systems and only over such reasonable time as Penson
may deem necessary or desirable to avoid disruption of Penson's
normal operational capabilities. Penson may charge Correspondent
for changes in the basic commission schedule. Correspondent's
basic commission schedule shall be within the format of Penson's
computer system.
(ii) Penson will charge Correspondent for clearing services according
to the fee schedule set forth in Schedule A attached hereto and
incorporated herein for all purposes. Clearing charges may be
modified from time to time by Penson without re-execution of this
Agreement. To implement new charges, Penson will mail or telecopy
a new Schedule A to Correspondent. If Correspondent does not
object to the new charges within ten (10) days of such mailing or
telecopying, as provided below, the new charges shall become
effective and the new Schedule A shall become a part of and
modify this Agreement without any further action by the parties.
Upon such event, Penson and Correspondent shall replace the
previous Schedule A with the new Schedule A. Correspondent may
object to new charges by giving notice canceling this Agreement
as provided under Sections 12 and 19(m). During the pendency of
such notice period, the previous charges shall continue to be
effective until termination.
(b) Settlements. Penson will collect commissions from Customers on behalf
of Correspondent and through Correspondent. Penson may make payments
to Correspondent against such commissions in advance of the monthly
settlement contemplated by this Section 8(b), the amount of such
payments to be determined in Penson's sole discretion based upon
Penson's experience with Correspondent.
As soon as practicable after the end of each month, Penson will
forward to the Correspondent a statement showing the amount of commissions
and other amounts collected by Penson on Correspondent's behalf, and all
amounts due to Penson from Correspondent (including, without being limited
to, clearing charges, other charges, other fees and Customer's unsecured
debit items, however arising), together with the amount by which the total
owed Correspondent exceeds the total owed Penson. If such statement
indicates that Correspondent owes monies to Penson, Correspondent shall
promptly pay Penson the amount by which the total owed Penson exceeds the
total owed Correspondent. If Correspondent fails to make such payment on a
timely basis, Penson shall have the right to charge any other Account
maintained by Penson for Correspondent or any other assets of Correspondent
held by Penson (including the deposit required pursuant to Section 9 and
positions and balances in Correspondent Accounts) for the net amount due
Penson. Any failure by Penson to charge any Account or assets of
Correspondent held by Penson shall not act as a waiver of Penson's right to
demand payment of, or to charge Correspondent's Accounts for, the full
amount due at any time.
9. DEPOSIT
Contemporaneously with the signing of this Agreement, Correspondent will
deliver cash or securities to Penson, as specified in Schedule A attached,
for deposit in an account maintained by Penson (the "Deposit Account"). If
at any subsequent time Penson, in its sole discretion, requires an
additional deposit, Correspondent will deposit additional cash or
securities in an amount specified by Penson. Instead of making such
additional deposit, Correspondent may reduce Correspondent's business
volume or modify the nature of the securities involved in the
Correspondent's transactions ("business mix") as specified by Penson. Any
failure by Penson to demand compliance with the requirement that
Correspondent either deposit additional amounts or modify Correspondent's
business mix shall not act as a waiver of Penson's right to demand
compliance with such requirements at any time. If the deposit is not
adequately funded as required by Penson, Penson may, in addition to all
other rights under this Agreement, transfer cash or securities of
Correspondent held by Penson to the Deposit Account. Correspondent agrees
that if Penson, at its sole discretion, determines it to be necessary,
Penson shall accept only liquidating transactions for Customer Accounts and
that Correspondent will give notice of such fact to Customers. If such
notice is not given to Customers by Correspondent, Correspondent agrees
that Penson may give such notice to Customers. Penson shall be entitled to
set-off against any deposit in addition to any and all other rights or
remedies Penson may have under this Agreement or otherwise. The deposit
will be refunded to the Correspondent within thirty (30) days after
cancellation of the Agreement provided there has been no claim that does or
could give rise to a claim for indemnification under Section 10 of this
Agreement, thereby invoking the rights set forth under Section 10(c) of
this Agreement. Correspondent agrees that if this Agreement is terminated
for any reason, Penson may liquidate securities deposited and deduct from
such deposit any amounts Correspondent owes Penson because of failure to
meet any of Correspondent's obligations under this Agreement.
10. INDEMNIFICATION
(a) Indemnity.
(i) Correspondent agrees to indemnify and hold harmless Penson, each
person who controls Penson within the meaning of the Securities
Exchange Act of 1934 and any directors, officers, employees,
agents and attorneys of Penson ("Penson Indemnified Persons")
from and against all claims, demands, proceedings, suits and
actions and all liabilities, losses, expenses and costs
(including any legal and accounting fees and expenses) relating
to Penson's defense of any failure, for any reason, fraudulent or
otherwise, by Correspondent, Correspondent's employees,
independent agents or contractors, or Customers to comply with
any obligation under this Agreement or any other agreement
executed and delivered to Penson in connection with Penson's
performance of services hereunder and any act or failure to act
by Penson Indemnified Persons, except any act or failure to act
which is the result of gross negligence or willful misconduct on
the part of any such Penson Indemnified Person. Without limiting
the generality of the foregoing, such failure is explicitly
intended by the parties to include failure resulting from (i)
suspension of trading or bankruptcy or insolvency of any company,
securities of which are held in a Customer's Accounts; (ii)
failure by any Customer to maintain adequate margin; or (iii)
breach of any obligation existing between Correspondent and a
Customer of Correspondent or any law, rule or regulation of the
United States, a state or territory thereof, the SEC, the Federal
Reserve Board or other authority, applicable to any transaction
contemplated by this Agreement.
(ii) Penson shall indemnify and hold Correspondent harmless against
any losses, claims, damages, liabilities or expenses including
without limitation those asserted by Customers (which shall
include, but not be limited to, all costs of defense and
investigation and all attorney's fees) to which Correspondent may
become subject, insofar as such losses, claims, damages,
liabilities or expenses arise out of, or are based upon the gross
negligence or willful misconduct of Penson or its employees in
providing the services contemplated hereunder.
(iii) Upon receipt by any indemnified party under this Section of
notice of the commencement of any action, and if a claim is to be
made against the indemnifying party under this Section, the
indemnified party will promptly notify the indemnifying party.
The omission to notify the indemnifying party will not relieve it
from any liability that it may have to any indemnified party
otherwise than under this Section 10(a)(iii). In any such action
brought against any indemnified party, the indemnifying party
will be entitled to participate in and, to the extent that it may
wish, to assume the defense thereof, subject to the provisions
herein stated, with counsel satisfactory to such indemnified
party. After notice from the indemnifying party to such
indemnified party of its election to assume the defense thereof,
the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expense
subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of
investigation. The indemnified party shall have the right to
employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with
counsel satisfactory to the indemnified party.
(b) Security Interest and Authorization to Charge. Correspondent
grants to Penson a first lien and security interest in any
Correspondent Account maintained by Penson and any other assets
of Correspondent now or hereafter held by Penson and authorizes
Penson to discharge such lien by charging such Account and assets
with all amounts owing to Penson including, but not limited to,
(i) any cost or expense resulting from failures to deliver or
failures to receive, (ii) any losses resulting from unsecured
debit balances in any Customer or Correspondent Account and (iii)
any amounts to which Penson is otherwise entitled pursuant to the
provisions of Section 10(a). Penson shall have discretion to
liquidate or sell any securities without notice to Correspondent,
and to determine which securities to sell. Such charge may be
made against Correspondent Account or assets at any time and in
such amount as Penson deems appropriate. No delay in charging any
Correspondent Account or asset shall operate as a waiver of
Penson's right to do so at any future time as and when Penson
deems appropriate. Penson shall have the unlimited right to
set-off any indebtedness or other obligations of Correspondent
under this Agreement or otherwise (absolute or contingent,
matured or unmatured) against any obligations of Penson to
Correspondent, including from the Deposit Account (as described
in Section 9 and/or any other money, securities, or other
property of Correspondent in Penson's possession).
(c) Reserves. In connection with any claim that does or could give
rise to a claim for indemnification under this Section 10 for
Penson or an Penson Indemnified Person, Penson may, in its
discretion, in addition to any and all other rights and remedies
under this Agreement, reserve and retain any money, securities or
other property of Correspondent pending a determination of such
claim. The money, securities or other property of Correspondent
set aside in such a reserve shall be subject to Penson's standard
lien and security interest described in Section 10(b) above.
Penson will exercise its rights under this Section on a
reasonable basis and Penson will provide Correspondent with at
least concurrent notice of any action taken under this Section.
11. UNDERTAKINGS OF CORRESPONDENT
(a) Financial Statements and Other Reports. Correspondent will furnish to
Penson as soon as possible a copy of Correspondent's balance sheet and
statement of earnings for the current fiscal year and for each of
Correspondent's subsequent fiscal years. Each such balance sheet and
statement of earnings shall be certified by independent public
accountants. Correspondent also shall furnish Penson with copies of
its monthly and quarterly Focus filings promptly after filing.
(b) Other Clearing Services. During the term of this Agreement,
Correspondent will not sign a clearing agreement with another clearing
broker or dealer without prior written approval by Penson.
(c) Suspension or Restriction. In the event that Correspondent or any
employee of Correspondent shall become subject to suspension or
restriction by any regulatory body having jurisdiction over
Correspondent and Correspondent's securities business, Correspondent
will notify Penson immediately and Correspondent authorizes Penson to
take such steps as may be necessary for Penson to maintain compliance
with the rules and regulations to which Penson is subject.
Correspondent further authorizes Penson, in any event, to comply with
directives or demands made upon Penson by any exchange or regulatory
body relative to Correspondent and Customers. In connection with such
directives or demands, Penson may seek advice or legal counsel and
Correspondent will reimburse Penson for reasonable fees and expenses
of such counsel.
(d) Fixed Price Offerings. Correspondent agrees that in making sales of
Securities, as a part of a fixed price offering, it will comply with
all applicable rules of the NASD, including, without limitation, the
NASD's Interpretations with respect to Free-Riding and Withholding
under Rules 2110 and 2740 of the NASD's Conduct Rules.
(e) Customer Orders Correspondent represents that all orders received by
Penson will be in accordance with its Customers' instructions. The
parties hereto expressly agree that Penson shall not be responsible
for investigation into the facts surrounding any transaction that it
may have with Correspondent, or that Correspondent may have with its
Customers or other persons, nor shall Penson be under any
responsibility for compliance by Correspondent with any laws or
regulations which may be applicable to Correspondent.
(f) Inquiries on Certificates. Penson agrees to act as Correspondent's
direct inquirer under the Lost and Stolen Securities Program under
Rule 17f-1 (17CFR 240.17f-1).
12. TERMINATION OF AGREEMENT: TRANSFER OF ACCOUNTS
(a) Effectiveness. This Agreement shall remain in force from the date of
its execution, and may be terminated by either party upon forty-five
(45) days prior written notice to the other party.
(b) Termination by Penson. Notwithstanding Section 12(a), Penson may
terminate this Agreement at any time on five (5) days written notice
to Correspondent in the event that Correspondent:
(i) fails to comply with the terms of this Agreement and upon
notification by Penson fails to begin compliance within 10 days
from said notification; or
(ii) is enjoined, prohibited or suspended, as a result of an
administrative or judicial proceeding, from engaging in
securities business activities constituting all or portions of
Correspondent's securities business, which injunction,
prohibition or suspension in Penson's judgment makes
impracticable the fully disclosed clearing relationship
established in this Agreement.
(c) Automatic Termination. In addition to any other provisions for
termination herein, this Agreement shall terminate immediately in the
event that either Correspondent or Penson ceases to conduct its
business or that Penson:
(i) is no longer registered as a broker/dealer with the SEC; or
(ii) is no longer a member in good standing of the NASD; or
(iii) is suspended by any national securities exchange of which Penson
is a member for failure to comply with the rules and regulations
thereof.
(d) Conversion of Accounts. In the event that this Agreement is terminated
for any reason, it shall be Correspondent's responsibility to arrange
for the conversion of Correspondent and Customer Accounts to another
clearing broker. Correspondent will give Penson notice (the
"Conversion Notice") of:
(i) the name of the broker that will assume responsibility for
clearing services for Customers and Correspondent;
(ii) the date on which such broker will commence providing such
services;
(iii) Correspondent's undertaking, in form and substance satisfactory
to Penson, that Correspondent's agreement with such broker
provides that such broker will accept on conversion all
Correspondent and Customer Accounts, then maintained by Penson;
and
(iv) the name of an individual within that organization who Penson can
contact to coordinate the conversion. The Conversion Notice shall
accompany Correspondent's notice of termination given pursuant to
Section 12(a) or within thirty (30) days of the occurrence of an
event specified in Section 12(c).
If Correspondent fails to give the Conversion Notice to Penson,
Penson may give to Customers such notice as Penson deems appropriate
of the termination of this Agreement and may make such arrangements as
Penson deems appropriate for transfer or delivery of Customer and
Correspondent Accounts. Correspondent will pay to Penson $3,000 in
programming charges to process the conversion. In addition,
Correspondent shall pay any costs incurred by Penson as billed by any
third party vendors such as transfer agents, etc.
(e) Survival. Termination of this Agreement shall not affect Penson's
rights or liabilities relating to business transacted prior to the
effective date of such termination. From the date of termination until
transfer or delivery of all Customer and Correspondent Accounts,
Penson's rights and liabilities relating to business transacted after
such termination shall be governed by the same terms as those set
forth in this Agreement.
(f) No Obligation to Release. Penson shall not be required to release to
Correspondent any securities or cash held by Penson for Correspondent
in one or more Correspondent Accounts until any amounts owing to
Penson pursuant to the provisions of this Agreement are paid; and
Correspondent's outstanding obligations hereunder to Penson are
determined, including determination of any disputed amounts, and
satisfied; and any property of Penson in the possession of
Correspondent is returned to Penson.
13. CONFIDENTIAL NATURE OF DOCUMENTS
All agreements, documents, papers, and data in any form, supplied by
Correspondent concerning Correspondent's business or Customers shall be treated
by Penson as confidential. To the extent such documents or data are retained by
Penson, they shall be kept in a safe place and shall be made available to third
parties only as authorized by Correspondent in writing or pursuant to any order
or request of a court or regulatory body having appropriate jurisdiction.
Penson shall give Correspondent prompt notice of the receipt by Penson of any
such order or subpoena, unless prohibited from doing so by the issuing
authority which notice shall be given prior to Penson's compliance therewith.
Such documents shall be made available by Penson for inspection and examination
by Correspondent's auditors, by properly authorized agents or employees of any
regulatory bodies or commissions or by such other persons as Correspondent may
authorize in writing. Notwithstanding anything herein to the contrary,
Correspondent expressly authorizes Penson to supply any information requested
relating to Correspondent, its business, or its Customers to any regulatory body
having appropriate authority.
14. NOTICE TO CUSTOMERS
Subject to the requirements of the NASD's Conduct Rules, Correspondent
shall provide, or cause to be provided to every Customer upon the opening of a
Customer Account, notice of the existence and general terms of this Agreement.
15. CUSTOMER COMPLAINT PROCEDURES
Correspondent will be responsible for the initial handling of all Customer
complaints. Any customer who initiates a complaint with Penson will be referred
by Penson to Correspondent. Penson will forward any complaints received to
Correspondent's Designated Examining Authority ("DEA"). Penson will also notify
the Customer in writing that the complaint was received and was forwarded to
Correspondent and to Correspondent's DEA. If any such complaint is based upon
an alleged act or failure to act by Penson, Correspondent will notify Penson
promptly of such complaint and the basis therefor; and will consult with Penson;
and the parties will cooperate in determining the validity of such complaint and
the appropriate action to be taken.
16. REMEDIES CUMULATIVE
The enumeration herein of specific remedies shall not be exclusive of any
other remedies. Any delay or failure by any party to this Agreement to exercise
any right, power, remedy or privilege herein contained, or now or hereafter
existing under any applicable statute or law, shall not be construed to be a
waiver of such right, power, remedy or privilege, nor to limit the exercise of
such right, power, remedy or privilege, nor shall it preclude the further
exercise thereof or the exercise of any other right, power, remedy or privilege.
17. RESPONSIBILITY FOR ERRORS; LIMIT ON LIABILITY; NO CONSEQUENTIAL DAMAGES
In the general course of business, Penson and Correspondent shall each be
responsible for correcting their own errors. In any action by Correspondent
against Penson for any claim arising out of the relationship created by this
Agreement, Penson shall only be liable to Correspondent in cases of gross
negligence or willful misconduct, and in such cases Penson shall only be liable
for the amount or actual monetary losses suffered by Correspondent.
Correspondent shall not, in any such action or proceeding, or otherwise, assert
any claim against Penson for consequential damages on account of any loss, cost,
damage or expense which Correspondent may suffer or incur related to
transactions in connection with this Agreement or otherwise, including, but not
limited to, any lost opportunity claims.
18. PAIB PROVISION
(a) PAIB Reserve Calculation. As the clearing broker for Correspondent,
Penson agrees to perform the calculation for PAIB assets ("PAIB
reserve computation") in accordance with the customer reserve
computation ("customer reserve formula") set forth in SEC Rule 15c3-3
with the following modifications:
(i) Any credit (including a credit applied to reduce a debit) that is
included in the customer reserve formula will not be included as
a credit in the PAIB reserve computation.
(ii) Note E(3) to Rule 15c3-3a which reduces debit balances by 1%
under the basic method and subparagraph (a)(1)(ii)(A) of the net
capital rule which reduces debit balances by 3% under the
alternative method will not apply to the PAIB reserve computation
(iii) Neither Note E(1) to Rule 15c3-3a nor NYSE interpretation/04 to
Item 10 of Rule 15c3-3a regarding securities concentration
charges will be applied to the PAIB reserve computation
(b) Reserve Computation Time Frames. The PAIB reserve computation will be
prepared within the same time frames as those prescribed by Rule
15c3-3 for the customer reserve formula.
(c) PAIB Assets. The PAIB reserve computation will include all of the
proprietary accounts of Correspondent covered by this Agreement. All
PAIB assets will be kept separate and distinct from customer assets
under the customer reserve formula in the Customer Protection Rule.
(d) PAIB Reserve Account. Penson will maintain a separate "Special Reserve
Account for the Exclusive Benefit of Customers" with a bank in
conformity with the standards of paragraph (f) of Rule 15c3-3 ("PAIB
Reserve Account"). Cash and/or qualified securities as defined in the
customer reserve formula will be maintained in the PAIB Reserve
Account in an amount equal to the PAIB reserve requirement.
(e) PAIB Credits
(i) Credits included in the PAIB reserve computation that result from
the use of PAIB securities pledged to meet intra-day margin calls
in a cross margin account established between The Options
Clearing Corporation and any regulated commodity exchange can be
reduced to the extent that the excess margin held by the other
clearing corporation in the cross margin relationship is used the
following business day to replace the PAIB securities that were
previously pledged. In addition, balances resulting from a cross
margin account which are segregated pursuant to the Commodities
Future Trading Commission regulations need not be included in the
PAIB reserve computation.
(ii) Deposits received prior to a transaction pending settlement which
are $5 million or greater for any single transaction or $10
million in aggregate can be excluded as credits from the PAIB
reserve computation if such balances are placed and maintained in
a separate PAIB Reserve Account by 12 noon eastern time (ET) on
the following business day. Thereafter, the money representing
any such deposits may be withdrawn to complete the related
transactions without performing a new PAIB reserve computation.
(f) Deposit Requirements. In the event the PAIB reserve computation
results in a deposit requirement, the requirement can be satisfied to
the extent of any excess debit in the customer reserve formula of the
same date. However, a deposit requirement resulting from the customer
reserve formula will not be satisfied with excess debits from the PAIB
reserve computation.
(g) Credit Balances. A credit balance resulting from a PAIB reserve
computation can be reduced by the amount that items representing such
credits are swept into money market funds or mutual funds of an
investment company registered under the Investment Company Act of 1940
prior to 10 a.m. ET on the deposit date provided that the credits
swept into any such fund are not subject to an right, charge, security
interest, lien, or claim of any kind in favor of the investment
company or Penson. Any credits which have been swept into money market
funds or mutual funds must be maintained in the name of Correspondent
or for the benefit of Correspondent. This treatment of credit balances
applies only to the PAIB reserve computation.
(h) Exclusions from PAIB reserve computation
(i) Commissions receivable and other receivables of Correspondent
from Penson (excluding clearing deposits) that are otherwise
allowable assets under the Net Capital Rule will not be included
in the PAIB reserve computation, provided the amounts have been
clearly identified as receivables on the books and records of the
Correspondent and as payables on the books of Penson.
(ii) The proprietary account of Correspondent that is a guaranteed
subsidiary of a clearing broker or who guarantees a clearing
broker (i.e. guarantees all liabilities and obligations) will be
excluded from the PAIB reserve computation.
(i) Clearing Deposits. Clearing deposits required to be maintained at
Penson may be included as debits in the PAIB reserve computation to
the extent the percentage of the deposit which is based upon Penson's
aggregate deposit requirements that relates to the proprietary
business of the Correspondent can be identified.
(j) Notification Requirements
(i) Within two business days of the execution of his Agreement,
Correspondent will notify its designated examining authority
("DEA") in writing that it has entered into such agreement with
Penson.
(ii) Upon discovery that any deposit made to the PAIB Reserve Account
does not satisfy its deposit requirement, Penson shall by
facsimile or telegram immediately notify its DEA and the
Securities and Exchange Commission ("SEC"). Unless a corrective
plan is found acceptable by the SEC and the DEA, Penson will
provide written notification within 5 business days of the date
of discovery to Correspondent that PAIB assets held by Penson
will not be deemed allowable assets for net capital purposes. In
the event Correspondent wishes to continue to count its PAIB
assets as allowable, it will have until the last business day of
the month following the month in which notification is made to
transfer all PAIB assets to another clearing broker. However, if
the deposit deficiency is remedied before the time at which
Correspondent must transfer its PAIB assets to another clearing
broker, Correspondent may choose to keep its assets at Penson.
19. MISCELLANEOUS
(a) Tax Reporting. Penson shall be responsible for providing IRS Form 1099
(or any successor form) and other information required to be reported
by federal, state or local tax laws, rules or regulations, to Accounts
solely with respect to events subsequent to the effective date of this
Agreement and for the mailing of same at Penson's expense.
(b) Scope of Services. Penson shall limit its services pursuant to the
terms of this Agreement to those services expressly set forth herein
and related thereto.
(c) Modification. This Agreement may be modified only by a writing signed
by both parties to this Agreement. Such modification shall not be
deemed as a cancellation of this Agreement. Subject to the NASD's
Conduct Rules, this agreement and all modifications may be required to
be submitted to the NASD for approval prior to effectiveness. It is
expressly understood that brokerage services cannot be provided by
Correspondent under this Agreement until such approval, if required,
is received.
(d) Assignment. This Agreement shall be binding upon all successors,
assigns or transferees of both parties hereto, irrespective of any
change with regard to the name of or the personnel of Correspondent or
Penson. Any assignment of this Agreement shall be subject to the
requisite review and/or approval of any regulatory or self-regulatory
agency or body whose review and/or approval must be obtained prior to
the effectiveness and validity of such assignment. No assignment of
this Agreement shall be valid unless the non-assigning party, in its
sole discretion consents to such an assignment in writing. Neither
this Agreement nor any operation hereunder is intended to be, shall
not be deemed to be, and shall not be treated as a general or limited
partnership, association or joint venture or agency relationship
between Correspondent and Penson.
(e) Account Documentation. Applicable laws and regulations require that
Penson must have proper documentation and support for any Account
opened on its books. If, after reasonable requests, the necessary
documents to enable Penson to comply with such account documentation
requirements of the laws and regulations have not been received by
Penson, Correspondent shall receive notification that no further
orders will be accepted for the Account involved.
(f) Construction. The construction and effect of every provision of this
Agreement, the rights of the parties hereunder and any questions
arising out of the Agreement, shall be subject to the statutory and
common law of the state of Texas.
(g) Arbitration. In the event of a dispute between the parties, such
dispute shall be settled by arbitration before arbitrators sitting in
Dallas, Texas, in accordance with the rules of the Arbitration
Committee of the NASD then in effect. The arbitrators may allocate
attorneys' fees and arbitration costs between parties, and such award
shall be final and binding between the parties and judgment thereon
may be entered in any court of competent jurisdiction.
(h) Headings. The headings preceding the text, articles and sections
hereof have been inserted for convenience and reference only and shall
not be construed to affect the meaning, construction or effect of this
Agreement.
(i) Entire Agreement. This Agreement shall cover only the types of
services set forth herein and is in no way intended nor shall it be
construed to bestow upon Correspondent or Penson any special treatment
regarding any other arrangements, agreements or understandings that
presently exist between Correspondent and Penson or that may
hereinafter exist. Correspondent shall be under no obligation
whatsoever to deal with Penson or any of its subsidiaries or any
companies controlled directly or indirectly by or affiliated with
Penson, in any capacity other than as set forth in this Agreement.
Likewise, Penson shall be under no obligation whatsoever to deal with
Correspondent or any of its affiliates in any capacity other than as
set forth in this Agreement.
(j) Severability. If any provision or condition of this Agreement shall be
held to be invalid or unenforceable by any court, or regulatory or
self-regulatory agency or body, such invalidity or unenforceability
shall attach only to such provision or condition. The validity of the
remaining provisions and conditions shall not be affected thereby and
this Agreement shall be carried out as if any such invalid or
unenforceable provision or condition were not contained herein.
(k) Force Majeure. In addition to any excuse provided by applicable law,
all parties hereto shall be excused from liability for non-performance
of this Agreement arising from any event beyond any party's control,
whether or not foreseeable by either party, including but not limited
to, labor disturbance, war, fire, accident, adverse weather, inability
to secure transportation, governmental act or regulation, inability to
obtain raw materials or other causes or events beyond either party's
control, whether or not similar to those enumerated above.
(l) Interpleader. If Penson receives conflicting claims from
Correspondent, a Customer and/or other persons regarding money,
securities or other property held by Penson, Penson may, in its sole
discretion, tender such money, securities or other property to a court
of competent jurisdiction and institute an action in interpleader or
other appropriate legal proceeding to determine the rights of the
respective claimants. Penson shall have no liability to Correspondent
or Customers in connection with any such action, and shall be entitled
to reimbursement for its costs and expenses in connection with such
action from Correspondent.
(m) Notice. For the purposes of any and all notices, consents, directions,
approvals, restrictions, requests or other communications required or
permitted to be delivered hereunder, Penson's address shall be:
Attention: Daniel P. Son
President
Penson Financial Services, Inc.
1700 Pacific Avenue, Suite 1400
Dallas, Texas 75201
and Correspondent's address shall be:
Martin Kaye
Executive Vice President
691 Fulton Street
Brooklyn, NY 11217
Either party may provide such notice or change its address for notice
purposes by giving written notice pursuant to registered or certified
mail, return receipt requested, of the new address to the other party.
(n) Counterparts: NASD Approval. This Agreement may be executed in one or
more counterparts, all of which taken together shall constitute a
single agreement. When each party hereto has executed and delivered to
the other a counterpart, this Agreement shall become binding on both
parties, subject only to any required approval by the NASD. If
required by the NASD, Penson will submit this Agreement to the NASD
promptly following execution and will notify Correspondent, or cause
Correspondent to be notified promptly upon receipt of such approval.
MADE AND EXECUTED THIS 13th DAY OF October, 2000.
PENSON: PENSON FINANCIAL SERVICES, INC.
(A Division of Service Asset Management Company)
By: /S/
----------------------------------
Philip A. Pendergraft, EVP
1700 Pacific Avenue, Suite 1400
Dallas, Texas 75201
CORRESPONDENT:
ENTITY: Track Data Securities Corp.
[Name]
Corporation
[Type of Entity, i.e., corporation,
partnership, etc.]
By: /S/
----------------------------------
Martin Kaye
Its: Executive Vice President
95 Rockwell Place
Brooklyn, NY 11217