UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
000-30527
(Commission file number)
OPTIMARK HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 22-3730995
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
10 Exchange Place, 24th Floor, Jersey City, NJ 07302
(Address of Principal Executive Offices) (Zip Code)
(201) 536-7141
(Registrant's telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 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 / / No /X/
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
At November 30, 2002, the number of shares outstanding of the registrant's
common stock was 33,369,913.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (Unaudited)
and December 31, 2001
Consolidated Statements of Operations and Comprehensive Loss for
the Three Months and Nine Months Ended September 30, 2002 and
September 30, 2001 (Unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and September 30, 2001 (Unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Report on Form 8-K
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements are based on our beliefs and
assumptions, and on information currently available to us. Forward-looking
statements include the information concerning our possible or assumed future
results of operations set forth in Part I, Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Forward-looking
statements also include statements in which such words as "expect,"
"anticipate," "contemplate," "intend," "plan," "believe," "estimate," "consider"
or similar expressions are used.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions, including the risks discussed
in Part I, Item 2 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's amended and restated Annual Report
on Form 10-K/A for the year ended December 31, 2001 as filed with the SEC and
elsewhere in this Quarterly Report. Our future results and stockholder values
may differ materially from those expressed in or indicated by these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Investors are
cautioned not to put undue reliance on any forward-looking statements. In
addition, we do not have any intention or obligation to update forward-looking
statements after the filing of this Quarterly Report, even if new information,
future events or other circumstances have made them incorrect or misleading. For
these statements, we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Exchange Act.
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002
(Unaudited) December 31, 2001
----------- -----------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 40,126 $ 1,624,017
Accounts receivable, less allowance for doubtful accounts of $73,002
at December 31, 2001 ................................................. 39,230 774,180
Other current assets .................................................... 218,369 446,911
------------- -------------
Total current assets ............................................ 297,725 2,845,108
PROPERTY AND EQUIPMENT - NET .............................................. 781,235 1,381,435
SOFTWARE LICENSES - NET ................................................... -- 59,347
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY ................................... 1,117,325 --
OTHER ASSETS .............................................................. 450,905 837,072
------------- -------------
TOTAL ASSETS .............................................................. $ 2,647,190 $ 5,122,962
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
LIABILITIES:
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .............................. $ 741,374 $ 678,901
Accrued compensation .................................................. 331,372 1,141,246
Loan payable .......................................................... 1,688,333 --
Liabilities of discontinued operations (Note 3) ....................... 13,491,846 13,816,260
Other current liabilities ............................................. 250,108 879,842
------------- -------------
Total current liabilities ....................................... 16,503,033 16,516,249
------------- -------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE STOCK
Series E preferred stock, convertible, $0.01 par value;
1,000,000 shares authorized; 983,333 and 926,665 issued and
outstanding at September 30, 2002 and , December 31, 2001, respectively 14,437,426 13,630,854
Series F preferred stock, $0.01 par value; 7,400,000 shares
authorized and no shares issued and outstanding at
September 30, 2002 and December 31, 2001 respectively ................. -- --
Series G preferred stock, $0
..01 par value; 300,000 shares
authorized, issued and outstanding at
September 30, 2002 and December 31, 2001 respectively ................. 3,000 3,000
------------- -------------
TOTAL MANDATORILY REDEEMABLE STOCK ........................................ 14,440,426 13,633,854
------------- -------------
STOCKHOLDERS' DEFICIENCY:
Preferred stock, authorized and unissued 8,577,932
at September 30, 2002 and December 31, 2001
Series A preferred stock, convertible and participating,
$0.01 par value; 3,222,068 shares authorized; 925,683 shares
issued and outstanding at September 30, 2002 and December 31, 2001 .... 9,257 9,257
Series B preferred stock, convertible, $0.01 par value;
11,000,000 shares authorized; 10,820,000 shares issued and
outstanding at September 30, 2002 and December 31, 2001 ............... 108,200 108,200
Series C preferred stock, convertible, $0.01 par value;
8,250,000 shares authorized, issued and outstanding
at September 30, 2002 and December 31, 2001 ........................... 82,500 82,500
Series D preferred stock, convertible, $0.01 par value;
250,000 shares authorized, issued and outstanding
at September 30, 2002 and December 31, 2001 ........................... 2,500 2,500
Common stock, $0.01 par value; 150,000,000 shares
authorized; issued 36,612,557 shares at September 30, 2002 and
December 31, 2001, respectively, of which 3,242,644 shares are
held as treasury stock at September 30, 2002 and December 31, 2001,
respectively .......................................................... 366,126 366,126
Warrants, common stock .................................................. 35,686,523 35,686,523
Additional paid-in capital .............................................. 307,627,770 301,687,065
Accumulated deficit ..................................................... (372,103,557) (362,906,807)
Accumulated other comprehensive loss .................................... (75,587) (62,504)
Treasury stock .......................................................... (1) (1)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIENCY .................................. (28,296,269) (25,027,141)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY ............................ $ 2,647,190 $ 5,122,962
============= =============
See notes to consolidated financial statements
4
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
Unaudited Unaudited Unaudited Unaudited
--------- --------- --------- ---------
REVENUE:
Revenue .......................................... $ -- $ 2,147,321 $ 514,991 $ 6,420,161
Revenue from affiliate ........................... -- 416,361 -- 2,817,841
------------ ------------ ------------ ------------
Total revenue ............................ -- 2,563,682 514,991 9,238,002
EXPENSES:
Cost of sales .................................... -- 1,348,372 -- 5,349,844
Sales and marketing .............................. (587) 308,427 394,911 1,132,827
Research and development ......................... 109,079 1,254,152 1,815,088 4,599,508
General and administrative ....................... 1,057,786 1,844,463 2,740,049 7,320,585
Depreciation and amortization .................... 211,104 1,000,500 620,686 3,120,766
Restructuring expense ............................ -- 29,541 -- 303,788
------------ ------------ ------------ ------------
Total operating expenses ................. 1,377,382 5,785,455 5,570,734 21,827,318
------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Interest income .................................. (1,661) (9,119) (7,342) (33,627)
Interest expense ................................. 913,596 15,382 1,234,383 116,582
Gain on recovery of investment ................... -- (530,000) -- (530,000)
Gain on disposal of assets ....................... (9,958) -- (349,395) --
Loss on equity investment ........................ 944,800 -- 944,800 --
Equity in loss of investee ....................... 1,327,198 -- 2,129,300 --
------------ ------------ ------------ ------------
Total other expense ...................... 3,173,975 (523,737) 3,951,746 (447,045)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS .................... (4,551,357) (2,698,036) (9,007,489) (12,142,271)
DISCONTINUED OPERATIONS:
Loss from discontinued operations ................ -- -- -- --
(Loss) gain on disposal of discontinued operations (5,609) 64,675 (189,261) (2,303,129)
------------ ------------ ------------ ------------
(Loss) gain from discontinued operations ......... (5,609) 64,675 (189,261) (2,303,129)
------------ ------------ ------------ ------------
NET LOSS ........................................... (4,556,966) (2,633,361) (9,196,750) (14,445,400)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments ......... (23,035) 67,677 (13,083) 85,702
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS ................................. $ (4,580,001) $ (2,565,684) $ (9,209,833) $(14,359,698)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED:
Continuing operations ............................ $ (0.14) $ (0.08) $ (0.26) $ (0.35)
Discontinued operations .......................... -- 0.01 $ (0.01) (0.06)
------------ ------------ ------------ ------------
Total loss per share ............................. $ (0.14) $ (0.07) $ (0.27) $ (0.41)
============ ============ ============ ============
Weighted average number of common shares
Basic and diluted ............................. 33,369,913 33,475,651 33,369,913 35,555,431
============ ============ ============ ============
See notes to consolidated financial statements
5
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---------------------------------
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................... $ (9,196,750) $(14,445,400)
Deduct loss from discontinued operations ............................... (189,261) (2,303,129)
------------ ------------
Loss from continuing operations ........................................ (9,007,489) (12,142,271)
Adjustments to reconcile net loss from continuing operations to
net cash used in continuing operations:
Depreciation and amortization ........................................ 620,686 3,120,766
(Gain) Loss on disposal of assets .................................... (349,395) 129,104
Non-cash loan repayment .............................................. (500,000)
Equity in loss of unconsolidated subsidiary .......................... 2,129,300 --
Loss on equity investment ............................................ 944,800
Non-cash interest expense ............................................ 1,118,333 --
Changes in operating assets and liabilities:
Receivables .......................................................... 734,950 2,135,324
Other current assets ................................................. 228,542 --
Other assets ......................................................... 485,447 779,814
Accounts payable and accrued liabilities ............................. 49,390 (1,016,965)
Accrued compensation ................................................. (809,874) --
Other current liabilities ............................................ (629,734) --
Other liabilities .................................................... -- (244,558)
------------ ------------
Net cash used in continuing operations ................................. (4,985,044) (7,238,786)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .................................... (27,000) (494,392)
Purchase of software licenses .......................................... -- (293,331)
Proceeds from disposal of assets ....................................... 415,256 11,960
------------ ------------
Net cash used in investing activities ................................ 388,256 (775,763)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock .......................... 806,572 5,588,860
Proceeds from stockholders' notes ...................................... 2,720,000 4,000,000
Payments on capital leases ............................................. -- (249,437)
------------ ------------
Net cash provided by (used in) financing activities .................. 3,526,572 9,339,423
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... (1,070,216) 1,324,874
NET CASH USED IN DISCONTINUED OPERATIONS ................................... (513,675) (2,361,357)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD ......................... 1,624,017 2,919,548
------------ ------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD ............................... $ 40,126 $ 1,883,065
============ ============
Supplemental disclosure of cash flow information:
Cash payments for interest - continuing operations ..................... $ 7,348 $ 116,582
Non-cash financing activities:
Conversion of stockholders' promissory notes to Series E preferred stock 4,000,000
Investment in unconsolidated subsidiary ................................ 4,290,705
Beneficial conversion feature of loan payable .......................... 1,650,000
See notes to consolidated financial statements
6
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
1. GENERAL INFORMATION
OptiMark Holdings, Inc. ("Holdings") was established on May 19, 2000,
and became the sole stockholder of two operating subsidiaries on June 12, 2000
pursuant to the reorganization of the legal structure of the company formerly
known as OptiMark Technologies, Inc. ("OTI"). OTI was the successor to a company
that had been founded in 1996 to begin development of the OptiMark matching
engine technology for use in an electronic trading system for equity securities
and related technologies. The reorganization was effected pursuant to which (i)
OTI formed Holdings as a direct wholly-owned subsidiary of OTI, (ii) Holdings
formed OTI Acquisition Corporation ("OTIA") as a direct wholly-owned subsidiary
of Holdings, (iii) OTI merged with OTIA pursuant to Section 251(g) of the
Delaware General Corporation Law, with the name of the surviving company
becoming OptiMark US Equities, Inc. ("UEI"), and with stockholders of UEI being
deemed to have received shares of Holdings by operation of law. As a result of
such merger, UEI became a direct wholly-owned subsidiary of Holdings. References
herein to the "Company" refer to Holdings and its subsidiaries, with respect to
periods following the reorganization, and to OTI and its subsidiaries, with
respect to periods prior to the reorganization.
Until September 19, 2000, the Company had operated in two segments, the
Exchange Solutions Services Business (formerly referred to as the Electronic
Markets Business) and the US Equities Business, under two separate wholly owned
subsidiaries, OptiMark, Inc. ("OptiMark"), and OptiMark US Equities, Inc.,
respectively. Effective September 19, 2000, the US Equities Business was
discontinued.
On December 28, 2001, OptiMark formed a then majority-owned subsidiary,
OptiMark Innovations Inc. (formerly known as OTSH, Inc. and referred to below as
"Innovations"). Innovations was capitalized on December 31, 2001, and at that
time OptiMark held a 67% voting interest and the remaining interest was held by
SOFTBANK Capital Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors'
Fund LP (collectively, "SOFTBANK"). Innovations has authorized capital stock of
7,000 shares of common stock, par value $.01 per share (the "Innovations Common
Stock"), and 3,000 shares of preferred stock, par value $.01 per share (the
"Innovations Preferred Stock"). Innovations has designated 2,000 shares of
Innovations Preferred Stock, as "Non-Qualified Preferred Stock," which has a
cumulative preferred dividend at an annual rate of $500 per share, payable when
and if declared by the Board of Directors of Innovations. The liquidation
preference of the Non-Qualified Preferred Stock is equal to $10,000 per share
plus the aggregate amount of accrued and unpaid dividends or distributions. The
Non-Qualified Preferred Stock is also subject to a mandatory redemption, at a
price equal to the liquidation preference amount, in four equal quarterly
installments on December 31, 2016, March 31, 2017, June 30, 2017 and September
30, 2017. Innovations designated 1,000 shares of Innovations Preferred Stock as
"Series B Preferred Stock," which has a cumulative preferred dividend at an
annual rate of $519.21 per share, payable when and if declared by the Board of
Directors of Innovations. The liquidation preference of the Series B Preferred
Stock is equal to $10,389.61 per share plus the aggregate amount of accrued and
unpaid dividends or distributions. On December 31, 2001, OptiMark received 200
shares of Innovations Common Stock in exchange for a cash payment of $500,000
and 2,000 shares of Non-Qualified Preferred Stock in exchange for the transfer
to Innovations of certain intangible assets consisting of software, a patent
application and other assets relating to a securities trading technology which
is under development (the "Assets"). The stated value of the Non-Qualified
Preferred Stock was the result of the evaluation by the Board of Directors of
Innovations of the value of the Assets based, in part, upon preliminary
discussions with independent parties regarding an approximate $10,000,000
investment for a one-third interest in Innovations. SOFTBANK received 100 shares
of Innovations Common Stock (the "SOFTBANK Shares") for $250,000 cash.
Simultaneously, SOFTBANK's remaining obligation to purchase shares of Series E
Cumulative Preferred Stock ("Series E Preferred Stock") from Holdings pursuant
to that certain Series E Preferred Stock Purchase Agreement, dated as of June
29, 2001 (as amended on August 16, 2001 and November 16, 2001), by and among
Holdings and SOFTBANK was reduced by $250,000. Upon its formation and initial
capitalization, Innovations' aggregate assets consisted of the Assets and
$750,000 in
7
cash. The principal business of Innovations is to hold a controlling interest in
Vie Financial Group, Inc. ("Vie", formerly known as The Ashton Technology Group,
Inc.) for the benefit of the shareholders of Holdings and Innovations.
OptiMark also had an approximately 15% voting interest in Japan
OptiMark Systems, Inc. ("JOS"), a Japanese corporation. The investment in JOS
previously accounted for on the equity method does not have any carrying value
in financial statements of the Company as of September 30, 2002. JOS has
realized continuing losses since its inception in 1998. Since the Company has
not provided any guarantees and is not committed to provide any future funding
to JOS it has not recorded its equity share of JOS' losses, as the investment
cannot have a carrying value below $0. On May 31, 2002, the shareholders of JOS
elected to dissolve the company.
Effective in January 2002, the development, sales and marketing efforts
of the Exchange Solutions Services Business were suspended. As of that date, the
primary purpose of the Company was to hold the securities of Innovations and to
consummate financing and strategic transactions with other parties.
As a result of the capitalization of Innovations, Holdings and SOFTBANK
have certain call and put rights described below. The Independent Committee of
the Board of Directors has the right commencing October 1, 2002 and exercisable
until September 30, 2003, to recommend to the Board of Directors that Holdings
purchase all, but not less than all, of the SOFTBANK Shares for $125,000 in cash
and 16,667 shares of Series E Preferred Stock of Holdings. If the Board of
Directors accepts such recommendation, SOFTBANK would be obligated to sell the
SOFTBANK shares for that consideration.
Upon the occurrence of a Liquidity Event (defined below) on or before
September 30, 2003, the SOFTBANK Shares will be purchased by Holdings for
$125,000 in cash and 16,667 shares of Series E Preferred Stock of Holdings. A
"Liquidity Event" means any of the following: (i) Innovations' sale, conveyance
or other disposition of all or substantially all of its assets, (ii) the
acquisition of Innovations by another entity by means of merger or consolidation
resulting in the exchange of the outstanding shares of Innovations for
securities or other consideration issued, or caused to be issued, by the
acquiring entity or its subsidiary, unless the stockholders of Innovations
immediately prior to the consummation of such transaction hold at least 50% of
the voting power of the surviving corporation as a result of such transaction,
(iii) the consummation by Innovations of a transaction or series of related
transactions, including the issuance or sale of voting securities, if the
stockholders of Innovations immediately prior to such transaction (or, in the
case of a series of transactions, the first of such transactions) hold less than
50% of the voting power of Innovations immediately after the consummation of
such transaction (or, in the case of a series of transactions, the last of such
transactions), or (iv) any initial underwritten public offering of Innovations
Common Stock. Notwithstanding the foregoing, Holdings will not exercise this
call option in the event that the Independent Committee of the Board of
Directors recommends that Holdings not purchase the SOFTBANK Shares.
In the event that: (i) the call rights of Holdings described above have
not been exercised on or before September 30, 2003, (ii) the Independent
Committee of the Board of Directors no longer exists and (iii) no independent
directors serve on the Holdings Board of Directors and, after reasonable good
faith efforts by the remaining members of the Holdings Board of Directors, no
independent persons qualified to serve on the Holdings Board of Directors have
been found or, if found, are not willing to serve on the Holdings Board of
Directors, then the Holdings Board of Directors will engage an independent
investment banking, accounting or third party valuation firm to evaluate whether
or not it is in the best interests of Holdings that it purchase the SOFTBANK
Shares. If such third party determines it is in the best interests of Holdings
to purchase the SOFTBANK Shares, Holdings will be obligated to purchase such
shares on or before December 31, 2003 for $125,000 in cash and 16,667 shares of
Series E Preferred Stock of Holdings.
SOFTBANK has the right, commencing on October 1, 2002 and continuing
until September 30, 2003, to put all, but not less than all, of the SOFTBANK
Shares to Holdings in exchange for 16,667 shares of Series E Preferred Stock of
Holdings.
8
In the event that no put of, or call on, the SOFTBANK Shares has been
exercised by October 31, 2003, then commencing on November 1, 2003 and
continuing until November 30, 2003, SOFTBANK has the right to require Holdings
to purchase all, but not less than all, of the SOFTBANK Shares for 16,667 shares
of Series E Preferred Stock of Holdings.
DISCONTINUED OPERATIONS
On September 19, 2000, the Company announced its intention to
discontinue its US Equities Business. The Company has discontinued all
operations of the equities trading system for the US Equities Business and
terminated all communications networks and other related systems that were
necessary to support that business. Accordingly, results of this operation have
been classified as discontinued operations in the consolidated financial
statements and prior periods have been reclassified to conform to this
classification.
CONTINUATION AS A GOING CONCERN
The Company's current cash and cash equivalents, plus the expected cash
flows for 2003, are not expected to be sufficient to meet its 2003 operating and
financial commitments. The Company is currently exploring financing
opportunities including borrowing cash from certain of its shareholders that
would be secured by shares of Innovations Common Stock and/or Non-Qualified
Preferred Stock owned by OptiMark. Accordingly, if the Company is unable to
raise additional cash, the Company will face the imminent and likely potential
for bankruptcy or liquidation. If the Company is forced to declare bankruptcy or
pursue liquidation, the value of the Company's assets may not be sufficient to
pay its creditors in full and, accordingly, the Company's common stock and
preferred stock would have no value. The Company will continue to seek
additional funding both to support its operation as a holding company as well as
its very limited efforts related to potential new product development. While the
Company hopes to be able to obtain additional financing for these limited
product development activities and continue to borrow money or raise capital,
the Company may not be able to raise this capital before it runs out of cash. In
addition, the Company has pledged a portion of its shares of capital stock in
Innovations to SOFTBANK as payment for loans that have already been provided. In
the event that the Company does not have enough cash to pay the principal and
interest on these loans as they come due, the Company's holdings in Innovations
will be reduced accordingly. This will reduce the Company's ability to utilize
these assets to raise additional capital necessary to ensure continuation as a
going concern. There is no assurance that the Company's holdings in Innovations
will have any value useable as collateral for a loan or sellable to raise cash
at any time or in a time frame that would let the Company continue as a going
concern.
2. PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Presentation - The accompanying unaudited, condensed, consolidated financial
statements include the accounts of the Company. In the opinion of management,
all adjustments have been made which are of a normal recurring nature, so as to
fairly state the results for the interim periods. All significant intercompany
transactions and balances have been eliminated. Certain footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to Securities and Exchange Commission ("SEC")
rules and regulations. The nature of the Company's business is such that the
results of an interim period are not necessarily indicative of the results for a
full year. These consolidated statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's audited
financial statements as of December 31, 2001 included in the Company's amended
and restated Annual Report on Form 10-K/A, as filed with the SEC on July 22,
2002.
Use of Estimates - The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting periods. It is
reasonably possible that actual results could differ significantly from those
estimates and significant changes to estimates could occur in the near term.
9
Recent Accounting Pronouncements - In July 2001, the FASB issued SFAS 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized, but instead tested for impairment at least annually. In addition, the
standard includes provisions for the reclassification of certain existing
intangibles as goodwill and reassessment of the useful lives of existing
recognized intangibles. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. As of January 1, 2002, OptiMark had no goodwill or intangible
assets recorded on its books. Therefore, management does not believe the
adoption of SFAS 142 has a significant impact on its financial position and
results of operations.
In July 2001 the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which requires the recognition of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the carrying amount of the related long-lived
asset is correspondingly increased. Over time, the liability is accreted to its
present value and the related capitalized charge is depreciated over the useful
life of the asset. SFAS 143 is effective for fiscal years beginning after June
15, 2002. The Company is currently reviewing the impact of SFAS 143 on the
Company.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes FASB Statement 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the
accounting and reporting provisions of APB Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This Statement also amends ARB 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this Statement are required to be applied starting with fiscal years beginning
after December 15, 2001. The Company adopted the new accounting standard for
2002 and determined it had no impact on its financial statements for the first,
second and third quarters.
3. DISCONTINUED OPERATIONS
Changes in Liabilities of Discontinued Operations from December 31,
2001 to September 30, 2002 is as follows:
Additional
Balance at Paid or Charged Accruals and Balance at
December 31, 2001 Against Liability Other Adjustments September 30, 2002
----------------- ------------------ ----------------- ------------------
Liabilities of
Discontinued Operations (13,816,260) 513,675 (189,261) (13,491,846)
4. FINANCING ACTIVITIES
On February 4, 2002, Vie and Innovations entered into a securities
purchase agreement (as amended on March 6, 2002 and May 3, 2002, the "Securities
Purchase Agreement"). Pursuant to the terms of the Securities Purchase
Agreement, Innovations purchased 608,707,567 shares of Vie common stock, par
value $.01 per share (the "Vie Common Stock") in exchange for $7,272,727 in cash
and intellectual property and other non-cash assets of Innovations valued by Vie
and Innovations for the purposes of the Securities Purchase Agreement at $20
million. The value ascribed to the intellectual property and other non-cash
assets by Innovations was based in part on preliminary discussions with a
potential investor in Innovations. Vie did not obtain an appraisal or other
third party valuation of the fair market value of the intellectual property and
other non-cash assets. There can be no assurance that the fair market value of
the intellectual property and other non-cash assets is equal to the value
ascribed to these assets by Innovations in the Securities Purchase Agreement.
10
On May 7, 2002 (the "Closing Date"), Innovations and Vie closed the
transactions contemplated by the Securities Purchase Agreement.
In addition, pursuant to the terms of the Securities Purchase
Agreement, Innovations loaned approximately $2.7 million in cash to Vie in
exchange for that certain senior secured convertible note of Vie in favor of
Innovations (the "Note"). The Note will mature in five years, and is
convertible, at the option of Innovations, into shares of Vie Common Stock at a
rate of $.0515838 per share (subject to customary anti-dilution adjustments
after the closing) and will accrue interest at a rate of 7.5% per annum.
Currently, the Note is convertible into 52,870,757 shares of Vie Common Stock.
The Note is secured by a pledge and security agreement pursuant to which
Innovations has received a blanket lien on Vie's assets, including, without
limitation, the pledge of the equity interests of Vie and Universal Trading
Technologies Corporation, a Delaware corporation and majority-owned subsidiary
of Vie ("UTTC"), in each of Vie Securities, LLC (formerly known as ATG Trading
LLC), wholly-owned subsidiary of Vie, Electronic Market Center, Inc., a
majority-owned subsidiary of Vie, Ashton Technology Canada, Inc., a
majority-owned subsidiary of Vie, Vie Institutional Services, Inc. (formerly
known as Croix Securities, Inc.), a wholly-owned subsidiary of UTTC, REB
Securities Inc., a wholly-owned subsidiary of UTTC; and NextExchange, Inc., a
wholly-owned subsidiary of UTTC.
As of the Closing Date, Innovations owns approximately 80% of the
diluted outstanding shares of the Vie Common Stock calculated as of May 3, 2002.
Diluted shares include the outstanding shares of the Vie Common Stock and (i)
shares of any series of capital stock of Vie or its subsidiaries that vote
together with the Vie Common Stock, (ii) any outstanding options issued to
employees and third parties, and (iii) shares of the Vie Common Stock, or any
securities described in clause (i) above, issuable pursuant to or upon
conversion or exercise of all rights granted to any party. Assuming conversion
of the Note, Innovations would own approximately an additional 7% of Vie's
fully-diluted shares of the Vie Common Stock, calculated as of May 3, 2002.
On March 21, 2002, the Company entered into a loan agreement with
certain of its shareholders. Under the terms of the agreement, the Company
borrowed $500,000 for a period of 180 days at an interest rate of 10% per annum
compounded every ninety days. The loan is secured by substantially all of the
assets of the Company. In lieu of repayment of principal in cash, the lenders
may require the Company to repay the principal amount of the loan by causing
OptiMark to transfer eight shares of Innovations Common Stock and forty-eight
shares of the Non-Qualified Preferred Stock of Innovations subject to adjustment
as provided in the loan agreement with accrued interest payable in cash at
maturity.
On April 11, 2002, the Company entered into a second loan agreement
with certain of its shareholders. Under this second loan agreement, the Company
borrowed $570,000 for a period of 180 days at an interest rate of 10% per annum
compounded every ninety days. The second loan is secured by substantially all of
the assets of the Company. In lieu of repayment of principal in cash, the
lenders may require the Company to repay the principal amount of the loan by
causing OptiMark to transfer twelve shares of Innovations Common Stock and
fifty-four shares of the Non-Qualified Preferred Stock of Innovations subject to
adjustment as provided in the second loan agreement with accrued interest
payable in cash at maturity.
On April 30, 2002, Draper Fisher Jurvetson ePlanet Ventures, L.P.,
Draper Fisher Jurvetson ePlanet Partners Fund, L.L.C. and Draper Fisher
Jurvetson ePlanet Ventures GmbH & Co. KG (collectively, "Draper") purchased 150
shares of Innovations Common Stock for an aggregate cash purchase price of
$375,000. On May 7, 2002, Draper purchased 963 shares of Innovations Series B
Preferred Stock for an aggregate cash purchase price of $9,630,000. As a result
of these transactions,
OptiMark's percentage ownership of equity of Innovations was reduced to
less than 50%. Therefore, OptiMark's investment in Innovations will be accounted
for using the equity method of accounting.
On May 3, 2002, Innovations transferred its interest in the software
license and related obligation (see Note 6) to Vie.
11
On May 24, 2002, the Company's agreement with Asset International was
terminated. Under the terms of the agreement, the Company returned the shares
representing its investment in Asset International and the Company was relieved
of any obligation to provide services to Asset International.
On May 31, 2002, the Company entered into a third loan agreement with
certain of its shareholders. Under this third loan agreement, the Company
borrowed $1,650,000 for a period of 180 days at an interest rate of 10% per
annum compounded every ninety days. The third loan is secured by substantially
all of the assets of the Company. In lieu of repayment of principal in cash, the
lenders may require the Company to repay the principal amount of the loan by
causing OptiMark to transfer twenty-eight shares of Innovations Common Stock and
one hundred fifty-eight shares of the Non-Qualified Preferred Stock of
Innovations subject to adjustment as provided in the third loan agreement with
accrued interest payable in cash at maturity.
At issuance, the loan was convertible into shares of Innovations Common
Stock at a price below market value of such stock. The intrinsic value of the
beneficial conversion feature of the loan was recorded as an additional
discount, such that the full $1,650,000 issued was discounted, with a
corresponding increase to additional paid-in-capital.
On September 17, 2002, the loan the Company executed with certain of
its shareholders on March 21, 2002, came due. In accordance with the terms of
the agreement, the lenders caused the Company to transfer to the lenders eight
shares of Innovations' common stock and forty-eight shares of Innovations'
Non-Qualified Preferred Stock.
5. RELATED PARTY TRANSACTIONS
On February 7, 2002, a loan to an officer in the amount of $150,000
plus accrued interest was forgiven in accordance with the terms and conditions
of the officer's employment agreement.
On August 16, 2002, the Company entered into a new one-year employment
agreement with an officer of the Company, which provides for annual compensation
of $250,000, a guaranteed bonus of $200,000, to be paid ratably over the term of
the agreement, a guaranteed bonus of $45,000, paid upon the execution of the
agreement and a guaranteed bonus of $80,000, to be paid upon the employment of a
full time Chief Executive Officer of Vie.
6. COMMITMENTS AND CONTINGENCIES
OptiMark and certain of its subsidiaries are subject to the legal
proceedings described in the Company's amended and restated Annual Report on
Form 10-K/A for the year ended December 31, 2001, as filed with the SEC on July
22, 2002.
Finova Capital Corporation (Plaintiff) v. OptiMark Technologies, Inc.,
OptiMark, Inc. and OptiMark Holdings, Inc. (Defendants), Superior Court of New
Jersey - Hudson County. Plaintiff filed this action on June 15, 2001, asserting
claims that allegedly arise out of an equipment lease agreement pursuant to
which it is alleged that OptiMark Technologies, Inc. (now known as OptiMark US
Equities, Inc.) agreed to lease certain equipment. Plaintiff contends that
OptiMark Technologies, Inc. breached the equipment lease by, among other things,
failing to pay the amounts due under the equipment lease. Based on these
allegations, Plaintiff has made claims for breach of contract, tortuous
interference, fraudulent conveyance of such equipment lease agreement and/or the
related equipment and/or other assets from OptiMark Technologies, Inc. to
OptiMark and/or the Company and damages in unspecified amounts exceeding
$6,000,000, plus interest, late charges, litigation costs and expenses, and
reasonable counsel fees. In the fourth quarter of 2001, most, if not all, of the
equipment that was the subject of the equipment lease was returned consensually
to Plaintiff. The parties currently are engaged in exchanging responses to
written discovery requests. On February 14, 2002, Plaintiff made a motion to add
Innovations as a defendant in the case. In the motion, Plaintiff alleges that
the transfer of certain assets from OptiMark to Innovations on December 31, 2001
constituted a fraudulent conveyance of such assets. On March 25, 2002, the court
granted Finova permission to amend its complaint to include Innovations. The
amended complaint was
12
served on Innovations on April 22, 2002. Innovations filed a response to the
complaint on August 15, 2002. On June 13, 2002, Finova amended the complaint to
include Vie. The Defendants, Innovations and Vie intend to defend this action
and the motion vigorously. The outcome of this litigation cannot be predicted at
this time, although it may have a material affect on the Company's financial
condition and results of operations.
Comdisco, Inc. (Plaintiff) v. OptiMark Technologies, Inc. (now known as
OptiMark US Equities, Inc.) (Defendant) and Avnet, Inc. State of Connecticut
Superior Court, Judicial District of Fairfield at Bridgeport. Plaintiff filed a
Complaint on December 18, 2000. The action seeks possession of leased equipment,
proceeds from the sale of leased equipment, a deficiency judgment in an
unspecified amount, and fees and costs and interest. Since the complaint was
filed, most, if not all, of the equipment was returned consensually to
Plaintiff. Based on the complaint filed in a related action in New Jersey
(described below) and on other information received from Comdisco, it is
believed that amount of damages claimed is approximately $6,500,000. On March
30, 2001, the parties agreed to consolidate a related case captioned Comdisco,
Inc. v. OptiMark Technologies, Inc., Superior Court of New Jersey Law Division
Hudson County (filed on January 23, 2001) with the Connecticut proceeding. To
effect the consolidation, on or about April 2, 2001, the parties filed a
stipulation withdrawing Defendant's motion to dismiss Comdisco's Complaint filed
in the Superior Court of New Jersey. That motion had sought dismissal
principally on grounds that an identical action alleging breach of contract had
previously been filed by Comdisco in Connecticut State Court. In exchange for
Defendant's agreement to withdraw its motion, Comdisco agreed to withdraw its
New Jersey Complaint without prejudice. In June 2001, Comdisco made a motion for
summary judgment with respect to a claim against Avnet relating to a guaranty by
Avnet of Defendant's obligations under a Master Lease Agreement for computer
equipment leased from Comdisco. Avnet responded to Comdisco's motion by denying
liability under the guaranty and asserting a variety of special defenses. In
addition, Avnet filed a cross claim against Defendant. The cross claim alleges
that if Avnet is found liable under the guaranty, then Avnet becomes subrogated
to Comdisco's rights under the Master Lease Agreement to the extent of the
payments Avnet makes to Comdisco and that OptiMark is liable to Avnet for any
such payments. Defendant has responded to the cross-claim by denying its
material allegations. The Company intends to defend this action vigorously. On
February 12, 2002, Plaintiff filed a motion for default for failure to plead,
alleging that OptiMark Technologies, Inc. did not file a pleading responsive to
Plaintiff's second amended complaint. This default will be set aside if OptiMark
Technologies, Inc. files an answer before a judgment after default has been
rendered. OptiMark Technologies, Inc. filed its answer on September 27, 2002.
The outcome of this litigation cannot be predicted at this time, although it may
have a material affect on the Company's financial condition and results of
operations.
Management intends to vigorously contest these suits; however, the
likelihood that these claims will result in loss or impairment of an asset is
probable. Any loss or impairment resulting from any of these suits may have a
material impact on the Company's financial position, results of operations and
cash flows in future years. An accrual with respect to these loss contingencies
has been recorded by the Company as part of its loss on discontinued operations,
which represents management's best estimate of the outcome of the negotiations.
On February 21, 2002, Innovations entered into a software license
agreement in connection with the development of a Volume Weighted Average Price
trading platform. Under the terms of the agreement, Innovations is required to
pay $25,000 per month for ten years for the license and related support.
7. SUBSEQUENT EVENTS
On October 8, 2002, the loan the Company executed with certain of its
shareholders on April 11, 2002, came due. In accordance with the terms of the
agreement, the lenders caused the Company to transfer to the lenders twelve
shares of Innovations' common stock and fifty-four shares of Innovations'
Non-Qualified Preferred Stock.
On October 9, 2002, Vie hired a full time Chief Executive Officer. The
bonus amounts due to an officer of the Company (see Note 5) were paid in full by
December 16, 2002.
13
On November 27, 2002, the loan the Company executed with certain of its
shareholders on May 31, 2002, came due. In accordance with the terms of the
agreement, the lenders caused the Company to transfer twenty-eight shares of
Innovations' common stock and one hundred fifty-eight shares of Innovations'
Non-Qualified Preferred Stock.
On November 27, 2002, the Company entered into a fourth loan agreement
with certain of its shareholders. Under this fourth loan agreement, the Company
borrowed $750,000 for a period of 180 days at an interest rate of 10% per annum
compounded every ninety days. The fourth loan is secured by substantially all of
the assets of the Company. In lieu of repayment of principal in cash, the
lenders may require the Company to repay the principal amount of the loan by
causing OptiMark to transfer twelve shares of Innovations Common Stock and
seventy-two shares of the Non-Qualified Preferred Stock of Innovations subject
to adjustment as provided in the fourth loan agreement with accrued interest
payable in cash at maturity.
On December 17, 2002, the lenders and the Company executed a letter
agreement (the "Letter Agreement") pursuant to which the lenders will receive
three shares of Innovations Common Stock and fifteen shares of Innovations
Non-Qualified Preferred Stock in lieu of cash payment of all remaining
obligations, including accrued and unpaid interest, the Company owed the lenders
under the terms of the first three loan agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Discontinued Operations
On September 19, 2000, the Company announced its intention to
discontinue its US Equities Business. The Company has discontinued all
operations of the equities trading system for the US Equities Business and
terminated all communications networks and other related systems that were
necessary to support that business. Accordingly, results of this operation have
been classified as discontinued operations in the consolidated financial
statements and prior periods have been reclassified to conform to this
classification. The discussion of results of operations in this section relates
only to the Company's continuing operations, its Exchange Solutions Business.
Continuation as a Going Concern
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has realized net
losses from operations each year since inception.
The Company's current cash and cash equivalents, plus the expected cash
flows for 2003, are not expected to be sufficient to meet its 2003 operating and
financial commitments. The Company is currently exploring financing
opportunities including borrowing cash from certain of its shareholders that
would be secured by shares of Innovations Common Stock and/or Non-Qualified
Preferred Stock owned by OptiMark. Accordingly, if the Company is unable to
raise additional cash, the Company will face the imminent and likely potential
for bankruptcy or liquidation. If the Company is forced to declare bankruptcy or
pursue liquidation, the value of the Company's assets may not be sufficient to
pay its creditors in full and, accordingly, the Company's common stock and
preferred stock would have no value. The Company will continue to seek
additional funding both to support its operation as a holding company as well as
its very limited efforts related to potential new product development. While the
Company hopes to be able to obtain additional financing for these limited
product development activities and continue to borrow money or raise capital,
the Company may not be able to raise this capital before it runs out of cash. In
addition, the Company has pledged a portion of its shares of capital stock in
Innovations to SOFTBANK as payment for loans that have already been provided. In
the event that the Company does not have enough cash to pay the principal and
interest on these loans as they come due, the Company's holdings in Innovations
will be reduced accordingly. This will reduce the Company's ability to utilize
these assets to
14
raise additional capital necessary to ensure continuation as a going concern.
There is no assurance that the Company's holdings in Innovations will have any
value useable as collateral for a loan or sellable to raise cash at any time or
in a time frame that would let the Company continue as a going concern.
History of Losses
OptiMark has experienced losses each quarter since its inception.
Although the business has been restructured, losses are likely to continue for
the foreseeable future. As of September 30, 2002 the Company's accumulated
deficit was approximately $372,104,000.
Critical Accounting Policies
As a result of the Company's having discontinued its US Equities
Business and suspended its Exchange Solutions Services Business, the Company
considers the two critical policies described below to be most important to the
portrayal of its financial condition and that require the most subjective
judgment and, as a result decrease the inherent level of precision in our
financial statements.
Reserve Related to Contract Renegotiations and Terminations. At the
time we discontinued the US Equities Business, this reserve was recorded to
reflect the contingent liability to those companies from which we had previously
contracted for leased equipment and related services. The reserve balance is
substantially less than the gross claims made by the former suppliers and
management must use substantial judgment based on, among other factors,
disputing the size of the gross claims based on contractual provisions,
asserting counterclaims and affirmative defenses, mitigating the claims through
returns or sales of leased equipment and negotiating substantial reductions in
the net amounts claimed after mitigation.
Impairment of Property and Equipment. As a result of the Company having
discontinued its US Equities Business in September 2000 and having suspended its
Exchange Solutions Services Business in January 2002, certain property and
equipment is no longer in use and must be considered impaired. Some of these
assets may be directly identifiable to the discontinued business; however many
others are shared and/or non-specific and careful judgment is required to
determine the appropriate impairment reserve.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue. Total revenue for the three months ended September 30, 2002
was $0 as compared to approximately $2,564,000 for the three months ended
September 30, 2001. Of these amounts, $0 in 2002 and approximately $416,000 in
2001 was derived from services provided to our affiliate, Japan OptiMark
Systems, Inc. ("JOS"). The balance in 2001 was derived from services to the
Nasdaq Stock Market, Inc. ("Nasdaq") and the recognition of revenue previously
deferred. The reduction in services to JOS resulted from the suspension of the
JOS trading system which operated on the Osaka Securities Exchange, per
OptiMark's amended agreement with JOS dated May 23, 2001. Billings for
enhancement and maintenance ceased as of August 31, 2001. The development
contract with Nasdaq and the related billings terminated on December 31, 2001.
Operating Expense. Operating expenses for the three months ended
September 30, 2002 totaled approximately $1,377,000 as compared to approximately
$5,785,000 for the three months ended September 30, 2001. The following is a
discussion of the decrease as it relates to each of the components:
Cost of Sales. Cost of sales includes all direct costs and expenses
incurred in order to develop and implement our products. Cost of sales for the
three months ended September 30, 2002 totaled $0 as compared to approximately
$1,348,000 for the three months ended September 30, 2001. The decrease of
$1,348,000 is due to the absence of revenue generating projects in 2002.
15
Sales and Marketing. Sales and marketing expense for the three months
ended September 30, 2002 totaled approximately $(1,000) as compared to
approximately $308,000 for the three months ended September 30, 2001. The
decrease of $309,000 was primarily due to a decrease in personnel related
expenses, communication expense, travel and entertainment expense and public
relations expenses in connection with the decrease in resources utilized in
promoting the company's products and headcount reductions within the marketing
department. The credit balance for the quarter was due to a credit memo issued
on an invoice settled for a lesser amount than the original.
Research and Development. Research and development expense totaled
approximately $109,000 for the three months ended September 30, 2002 compared to
approximately $1,254,000 for the three months ended September 30, 2001. The
decrease of $1,145,000 is primarily due to reductions in expenditures to
customize and develop OptiMark's proprietary matching technology for use in
future applications and the reimbursement of development expenses by a formerly
majority-owned subsidiary. The decrease consists primarily of decreases in
personnel related expenses and communications expense.
General and Administrative Expense. General and administrative expense
totaled approximately $1,058,000 for the three months ended September 30, 2002
as compared to approximately $1,844,000 for the three months ended September 30,
2001. The decrease of $786,000 is primarily due to a decrease in the cost of
OptiMark's bonus program and decreases in personnel related expenses,
professional fees, communication expense and other general office expenses. The
cost of the bonus program was $0 for the three months ended September 30, 2002
and approximately $411,000 for the three months ended September 30, 2001.
Depreciation and Amortization Expense. Depreciation and amortization
expense totaled approximately $211,000 for the three months ended September 30,
2002 as compared to approximately $1,001,000 for the three months ended
September 30, 2001. The decrease of $790,000 is primarily due to the write off
of assets deemed permanently impaired during the latter part of 2001 and the
first quarter of 2002.
Other Income and Expense. Other income and expense includes interest
income on cash and cash equivalents, interest expense on loans and capital
leases, gain realized by the recovery of an investment previously written off,
gain on the disposal of assets, loss on equity investment and equity in the
loss of an investee. Other expense, net, was approximately $3,174,000 for the
three months ended September 30, 2002 as compared to other income, net of
approximately $524,000 for the three months ended September 30, 2001. The
decrease of $3,698,000 is primarily due to the equity in the loss of an
investee, OptiMark Innovations, Inc., an increase in interest expense generated
by shareholder loans, the financing of insurance policies and the beneficial
conversion feature of the loan with certain of its shareholders, loss realized
on the partial disposal of an equity investment, gain realized on the disposal
of assets, a decrease in interest income and the gain on the recovery on an
investment realized in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue. Total revenue for the nine months ended September 30, 2002 was
approximately $515,000 as compared to approximately $9,238,000 for the nine
months ended September 30, 2001. Of these amounts, $0 in 2002 and approximately
$2,818,000 in 2001 was derived from services provided to our affiliate, JOS. The
balance in 2002 was derived from the recognition of revenue previously deferred.
The balance in 2001 was derived from services to Nasdaq and the recognition of
revenue previously deferred. The reduction in services to JOS resulted from the
suspension of the JOS trading system which operated on the Osaka Securities
Exchange, per OptiMark's amended agreement with JOS dated May 23, 2001. Billings
for enhancement and maintenance ceased as of August 31, 2001. The development
contract with Nasdaq and the related billings terminated on December 31, 2001.
Operating Expense. Operating expenses for the nine months ended
September 30, 2002 totaled approximately $5,571,000 as compared to approximately
$21,827,000 for the nine months ended September 30, 2001. The following is a
discussion of the decrease as it relates to each of the components:
16
Cost of Sales. Cost of sales includes all direct costs and expenses
incurred in order to develop and implement our products. Cost of sales for the
nine months ended September 30, 2002 totaled $0 as compared to approximately
$5,350,000 for the nine months ended September 30, 2001. The decrease of
$5,350,000 is due to the absence of revenue generating projects in 2002.
Sales and Marketing. Sales and marketing expense for the nine months
ended September 30, 2002 totaled approximately $395,000 as compared to
approximately $1,133,000 for the nine months ended September 30, 2001. The
decrease of $738,000 was primarily due to a decrease in personnel related
expenses, communication expense, travel and entertainment expense and public
relations expenses in connection with the decrease in resources utilized in
promoting the company's products and headcount reductions within the marketing
department.
Research and Development. Research and development expense totaled
approximately $1,815,000 for the nine months ended September 30, 2002 compared
to approximately $4,600,000 for the nine months ended September 30, 2001. The
decrease of $2,785,000 is primarily due to reductions in expenditures to
customize and develop OptiMark's proprietary matching technology for use in
future applications and the reimbursement of development expenses by a formerly
majority-owned subsidiary. The decrease consists primarily of decreases in
personnel related expenses and communications expense.
General and Administrative Expense. General and administrative expense
totaled approximately $2,740,000 for the nine months ended September 30, 2002 as
compared to approximately $7,321,000 for the nine months ended September 30,
2001. The decrease of $4,581,000 is primarily due to a decrease in the cost of
OptiMark's bonus program and decreases in personnel related expenses, corporate
insurance expense, professional fees and other general office expenses. The cost
of the bonus program was $0 for the nine months ended September 30, 2002 and
approximately $1,430,000 for the nine months ended September 30, 2001.
Depreciation and Amortization Expense. Depreciation and amortization
expense totaled approximately $621,000 for the nine months ended September 30,
2002 as compared to approximately $3,121,000 for the nine months ended September
30, 2001. The decrease of $2,500,000 is primarily due to the write off of assets
deemed permanently impaired during the latter part of 2001 and the first quarter
of 2002.
Restructuring Expense. OptiMark recorded a restructuring charge of
approximately $304,000 for the nine months ended September 30, 2001 related to a
workforce reduction of thirty-nine employees. Included in this charge is
approximately $287,000 representing severance costs and approximately $17,000
representing other employee related costs.
Other Income and Expense. Other income and expense includes interest
income on cash and cash equivalents, interest expense on loans and capital
leases, gain realized by the recovery of an investment previously written off,
gain on the disposal of assets, loss on equity investment and equity in the loss
of an investee. Other expense, net, was approximately $3,952,000 for the nine
months ended September 30, 2002 as compared to other income, net, of
approximately $447,000 for the nine months ended September 30, 2001. The
decrease of $4,399,000 is primarily due to the equity in the loss of an
investee, OptiMark Innovations, Inc., an increase in interest expense generated
by shareholder loans, the financing of insurance policies and the beneficial
conversion feature of the loan with certain of its shareholders, loss realized
on the partial disposal of an equity investment, gain realized on the disposal
of assets and a decrease in interest income and the gain on the recovery on an
investment realized in 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, OptiMark's principal sources of liquidity
consisted of approximately $40,000 of cash and cash equivalents as compared to
approximately $1,624,000 of cash and cash equivalents as of December 31, 2001.
17
Net cash used in continuing operating activities was approximately
$4,985,000 and $7,239,000 for the nine months ended September 30, 2002 and 2001,
respectively. The change in net operating cash flows were attributable to net
losses for the nine months ended September 30, 2002 and 2001, offset by non-cash
charges including depreciation and amortization, gain on disposal of assets,
non-cash loan repayment, equity in loss of unconsolidated subsidiary, loss on
equity investment and non-cash interest expense. The fluctuation between periods
was also affected by net changes in working capital.
Net cash provided by investing activities for the nine months ended
September 30, 2002 was approximately $388,000 and net cash used in investing
activities for the nine months ended September 30, 2001 was approximately
$776,000. The cash provided by investing activities in 2002 primarily consisted
of the proceeds received from the sale of assets, chiefly computer equipment.
The uses of cash in 2001 for investing activities primarily consisted of the
purchase of a mainframe computer as part of a settlement of all amounts owed to
a company from which OptiMark had previously leased equipment and the purchase
of software licenses.
Net cash provided from financing activities was approximately
$3,527,000 and $9,339,000 for the nine months ended September 30, 2002 and 2001,
respectively. In 2002, cash was provided from the sale of Series E Preferred
Stock and shareholder loans. In 2001, cash was provided from the sale of Series
E Preferred Stock and shareholder loans reduced by principal payments on capital
leases. On September 29, 2001, the obligation to repay the shareholder loans was
cancelled in exchange for shares of the Series E Preferred Stock.
On March 21, 2002, the Company entered into a loan agreement with
certain of its shareholders. Under the terms of the agreement, the Company
borrowed $500,000 for a period of 180 days at an interest rate of 10% per annum
compounded every ninety days. The loan is secured by substantially all of the
assets of the Company. In lieu of repayment of principal in cash, the lenders
may require the Company to repay the principal amount of the loan by causing
OptiMark to transfer eight shares of Innovations Common Stock and forty-eight
shares of the Non-Qualified Preferred Stock of Innovations subject to adjustment
as provided in the loan agreement with accrued interest payable in cash at
maturity.
On April 11, 2002, the Company entered into a second loan agreement
with certain of its shareholders. Under this second loan agreement, the Company
borrowed $570,000 for a period of 180 days at an interest rate of 10% per annum
compounded every ninety days. The second loan is secured by substantially all of
the assets of the Company. In lieu of repayment of principal in cash, the
lenders may require the Company to repay the principal amount of the loan by
causing OptiMark to transfer twelve shares of Innovations Common Stock and
fifty-four shares of the Non-Qualified Preferred Stock of Innovations subject to
adjustment as provided in the second loan agreement with accrued interest
payable in cash at maturity.
On May 31, 2002, the Company entered into a third loan agreement with
certain of its shareholders. Under this third loan agreement, the Company
borrowed $1,650,000 for a period of 180 days at an interest rate of 10% per
annum compounded every ninety days. The third loan is secured by substantially
all of the assets of the Company. In lieu of repayment of principal in cash, the
lenders may require the Company to repay the principal amount of the loan by
causing OptiMark to transfer twenty-eight shares of Innovations Common Stock and
one hundred fifty-eight shares of the Non-Qualified Preferred Stock of
Innovations subject to adjustment as provided in the third loan agreement with
accrued interest payable in cash at maturity.
On September 17, 2002, the loan the Company executed with certain of
its shareholders on March 21, 2002, came due. In accordance with the terms of
the agreement, the lenders caused the Company to transfer eight shares of
Innovations' common stock and forty-eight shares of Innovations' Non-Qualified
Preferred Stock. The Company recorded a loss of approximately $945,000 on the
exchange, which is included in loss on equity investment on the accompanying
statement of operations and other comprehensive loss.
18
On October 8, 2002, the loan the Company executed with certain of its
shareholders on April 11, 2002, came due. In accordance with the terms of the
agreement, the lenders caused the Company to transfer twelve shares of
Innovations' common stock and fifty-four shares of Innovations' Non-Qualified
Preferred Stock.
On November 27, 2002, the loan the Company executed with certain of its
shareholders on May 31, 2002, came due. In accordance with the terms of the
agreement, the lenders caused the Company to transfer twenty-eight shares of
Innovations' common stock and one hundred fifty-eight shares of Innovations'
Non-Qualified Preferred Stock.
On November 27, 2002, the Company entered into a fourth loan agreement
with certain of its shareholders. Under this fourth loan agreement, the Company
borrowed $750,000 for a period of 180 days at an interest rate of 10% per annum
compounded every ninety days. The fourth loan is secured by substantially all of
the assets of the Company. In lieu of repayment of principal in cash, the
lenders may require the Company to repay the principal amount of the loan by
causing OptiMark to transfer twelve shares of Innovations Common Stock and
seventy-two shares of the Non-Qualified Preferred Stock of Innovations subject
to adjustment as provided in the fourth loan agreement with accrued interest
payable in cash at maturity.
On December 17, 2002, the lenders and the Company executed a Letter
Agreement pursuant to which the lenders will receive three shares of Innovations
Common Stock and fifteen shares of Innovations Non-Qualified Preferred Stock in
lieu of cash payment of all remaining obligations, including accrued and unpaid
interest, the Company owed the lenders under the terms of the first three loan
agreements.
The results indicated for continuing operations in the Condensed
Consolidated Statements of Cash Flows for the nine months ended September 30,
2002 are not necessarily indicative of the spending rates for the continuing
operations. The results from operations in future periods may differ materially
as we continue to focus our resources on the new business model.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only exposure to market risk at September 30, 2002 is
related to interest rates.
Interest Rate Risk. As of September 30, 2002 OptiMark had cash and cash
equivalents of approximately $40,000 that consisted of cash and highly liquid
overnight investments. These investments may be subject to interest rate risk.
However, because of the low level of cash balances, any such risk would not be
material.
Foreign Currency Exchange Rate Risk. As of September 30, 2002, the
Company is not subject to foreign currency exchange rate risk.
Equity Price Risk. As of September 30, 2002, the Company is not subject
to equity price risk.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and
procedures performed by the Company's Chief Executive Officer and Principal
Financial and Accounting Officer within 90 days of the filing of this report,
the Company's Chief Executive Officer and Principal Financial and Accounting
Officer concluded that the Company's disclosure controls and procedures have
been effective.
As used herein, "disclosure controls and procedures" means controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms issued by the
SEC. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
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Exchange Act is accumulated and communicated to the Company's management,
including its principal executive officer or officers and its principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Since the date of the evaluation described above, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
OptiMark and certain of its subsidiaries are subject to the legal
proceedings described in the Company's amended and restated Annual Report on
Form 10-K/A for the year ended December 31, 2001, as filed with the SEC on July
22, 2002.
Finova Capital Corporation (Plaintiff) v. OptiMark Technologies, Inc.,
OptiMark, Inc. and OptiMark Holdings, Inc. (Defendants), Superior Court of New
Jersey - Hudson County. Plaintiff filed this action on June 15, 2001, asserting
claims that allegedly arise out of an equipment lease agreement pursuant to
which it is alleged that OptiMark Technologies, Inc. (now known as OptiMark US
Equities, Inc.) agreed to lease certain equipment. Plaintiff contends that
OptiMark Technologies, Inc. breached the equipment lease by, among other things,
failing to pay the amounts due under the equipment lease. Based on these
allegations, Plaintiff has made claims for breach of contract, tortuous
interference, fraudulent conveyance of such equipment lease agreement and/or the
related equipment and/or other assets from OptiMark Technologies, Inc. to
OptiMark and/or the Company and damages in unspecified amounts exceeding
$6,000,000, plus interest, late charges, litigation costs and expenses, and
reasonable counsel fees. In the fourth quarter of 2001, most, if not all, of the
equipment that was the subject of the equipment lease was returned consensually
to Plaintiff. The parties currently are engaged in exchanging responses to
written discovery requests. On February 14, 2002, Plaintiff made a motion to add
Innovations as a defendant in the case. In the motion, Plaintiff alleges that
the transfer of certain assets from OptiMark to Innovations on December 31, 2001
constituted a fraudulent conveyance of such assets. On March 25, 2002, the court
granted Finova permission to amend its complaint to include Innovations. The
amended complaint was served on Innovations on April 22, 2002. Innovations filed
a response to the complaint on August 15, 2002. On June 13, 2002, Finova amended
the complaint to include Vie. The Defendants, Innovations and Vie intend to
defend this action and the motion vigorously. The outcome of this litigation
cannot be predicted at this time, although it may have a material affect on the
Company's financial condition and results of operations.
Comdisco, Inc. (Plaintiff) v. OptiMark Technologies, Inc. (now known as
OptiMark US Equities, Inc.) (Defendant) and Avnet, Inc. State of Connecticut
Superior Court, Judicial District of Fairfield at Bridgeport. Plaintiff filed a
Complaint on December 18, 2000. The action seeks possession of leased equipment,
proceeds from the sale of leased equipment, a deficiency judgment in an
unspecified amount, and fees and costs and interest. Since the complaint was
filed, most, if not all, of the equipment was returned consensually to
Plaintiff. Based on the complaint filed in a related action in New Jersey
(described below) and on other information received from Comdisco, it is
believed that amount of damages claimed is approximately $6,500,000. On March
30, 2001, the parties agreed to consolidate a related case captioned Comdisco,
Inc. v. OptiMark Technologies, Inc., Superior Court of New Jersey Law Division
Hudson County (filed on January 23, 2001) with the Connecticut proceeding. To
effect the consolidation, on or about April 2, 2001, the parties filed a
stipulation withdrawing Defendant's motion to dismiss Comdisco's Complaint filed
in the Superior Court of New Jersey. That motion had sought dismissal
principally on grounds that an identical action alleging breach of contract had
previously been filed by Comdisco in Connecticut State Court. In exchange for
Defendant's agreement to withdraw its motion, Comdisco agreed to withdraw its
New Jersey Complaint without prejudice. In June 2001, Comdisco made a motion for
summary judgment with respect to a claim against Avnet relating to a guaranty by
Avnet of Defendant's obligations under a Master Lease Agreement for computer
equipment leased from Comdisco. Avnet responded to Comdisco's motion by denying
liability under the guaranty and asserting a variety of special defenses. In
addition, Avnet filed a cross claim against Defendant. The cross claim alleges
that if Avnet is found liable under the guaranty, then Avnet becomes subrogated
to Comdisco's rights under the Master Lease Agreement to the extent of the
payments Avnet makes to Comdisco and that OptiMark is liable to Avnet for any
such payments. Defendant has responded to the cross-claim by denying its
material allegations. The Company intends to defend this action vigorously. On
February 12, 2002, Plaintiff filed a motion for default for failure to plead,
alleging that OptiMark Technologies, Inc. did not file a pleading responsive to
Plaintiff's second amended complaint. This default
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will be set aside if OptiMark Technologies, Inc. files an answer before a
judgment after default has been rendered. OptiMark Technologies, Inc. filed its
answer on September 27, 2002. The outcome of this litigation cannot be predicted
at this time, although it may have a material affect on the Company's financial
condition and results of operations.
Management intends to vigorously contest these suits; however, the
likelihood that these claims will result in loss or impairment of an asset is
probable. Any loss or impairment resulting from any of these suits may have a
material impact on the Company's financial position, results of operations and
cash flows in future years. An accrual with respect to these loss contingencies
has been recorded by the Company as part of its loss on discontinued operations,
which represents management's best estimate of the outcome of the negotiations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
B. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OPTIMARK HOLDINGS, INC.
December 30, 2002
By: /s/ Robert J. Warshaw
-----------------------
Name: Robert J. Warshaw
Title: Chief Executive Officer
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CERTIFICATION
BY CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14
I, Robert J. Warshaw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OPTIMARK
HOLDINGS, INC.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those entities,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report my conclusions about
the effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
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6. I have indicated in this quarterly report whether there were
any significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 30, 2002
/s/ Robert J. Warshaw
-------------------------------------
Robert J. Warshaw
President and Chief Executive Officer
(Principal executive officer and
principal financial officer)
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