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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission File No. 0-21324
NYFIX, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 06-1344888
(State of incorporation) (I.R.S. Employer identification number)
333 LUDLOW STREET, STAMFORD, CONNECTICUT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 425-8000
-----------------------
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 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 |X| No |_|
30,767,147 shares of Common Stock were issued and outstanding as of July 31,
2002.
NYFIX, INC.
FORM 10-Q
For the quarterly period ended June 30, 2002
CONTENTS PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Operations (unaudited)
for the three and six month periods ended June 30,
2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six month periods ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 25
2
NYFIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 9,027,051 $ 4,967,537
Short-term investments in marketable securities 16,727,068 28,973,685
Accounts receivable - less allowance of $1,027,000 and $511,000 14,979,575 12,949,485
Inventory, net 1,524,214 1,599,592
Prepaid expenses and other current assets 5,377,242 2,138,912
Due from NYFIX Millennium -- 5,221,736
Deferred income taxes 402,000 443,000
-------------- -------------
Total Current Assets 48,037,150 56,293,947
PROPERTY AND EQUIPMENT, net 19,142,167 14,366,097
INVESTMENT IN NYFIX MILLENNIUM -- 27,500,000
NOTE RECEIVABLE FROM NYFIX MILLENNIUM -- 6,043,151
GOODWILL AND OTHER ACQUIRED INTANGIBLES 84,865,208 34,000
INVESTMENT IN EUROLINK NETWORK 3,860,683 --
DEFERRED INCOME TAXES 403,700 348,000
OTHER ASSETS 5,010,061 3,986,453
-------------- -------------
TOTAL ASSETS $ 161,318,969 $ 108,571,648
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,239,656 $ 3,847,546
Accrued expenses 4,270,559 3,530,427
Current portion of capital lease obligations 1,261,835 952,176
Current portion of other long-term liabilities 115,475 --
Advance billings 3,202,768 451,195
-------------- -------------
Total Current Liabilities 14,090,293 8,781,344
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 1,150,660 548,608
OTHER LONG-TERM LIABILITIES 240,647 --
-------------- -------------
Total Liabilities 15,481,600 9,329,952
-------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock - par value $1.00; 5,000,000 shares authorized; none issued -- --
Common stock - par value $.001; 60,000,000 authorized, 32,051,580 and
28,869,800 shares issued 32,052 28,870
Additional paid-in capital 159,950,888 110,497,679
Retained earnings 5,620,961 8,442,406
Due from officers and directors (678,791) (591,732)
Accumulated other comprehensive gain (loss) 12,111 (35,675)
Treasury stock, at cost (1,301,300 shares) (19,099,852) (19,099,852)
-------------- -------------
Total Shareholders' Equity 145,837,369 99,241,696
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 161,318,969 $ 108,571,648
============== =============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
3
NYFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Month Period Ended Six Month Period Ended
------------------------ ----------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Subscription $ 8,063,769 $ 6,936,183 $ 15,241,044 $ 12,724,581
Sale 1,294,647 1,456,427 2,603,469 3,161,650
Service contract 2,374,699 1,118,749 3,590,669 2,047,279
Transaction 1,352,978 -- 1,721,444 --
------------ ------------ ------------ ------------
Total Revenues 13,086,093 9,511,359 23,156,626 17,933,510
------------ ------------ ------------ ------------
COST OF REVENUES:
Cost of subscription 2,372,793 1,793,349 4,449,655 3,314,380
Cost of sale 606,996 208,172 829,246 375,680
Cost of service contract 870,461 254,434 1,063,769 506,311
Cost of transaction 501,375 -- 751,272 --
------------ ------------ ------------ ------------
Total Cost of Revenues 4,351,625 2,255,955 7,093,942 4,196,371
------------ ------------ ------------ ------------
GROSS PROFIT 8,734,468 7,255,404 16,062,684 13,737,139
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 11,759,421 3,772,624 18,195,608 7,154,745
Research and development 317,460 108,088 496,253 186,406
Depreciation and amortization 1,806,343 655,870 2,823,328 1,172,627
------------ ------------ ------------ ------------
Total Operating Expenses 13,883,224 4,536,582 21,515,189 8,513,778
------------ ------------ ------------ ------------
(LOSS) EARNINGS FROM OPERATIONS (5,148,756) 2,718,822 (5,452,505) 5,223,361
Interest expense (56,017) (108,870) (143,062) (219,965)
Investment income 115,638 62,954 197,589 111,200
Other expense (107,376) (5,133) (139,439) (14,456)
------------ ------------ ------------ ------------
(LOSS) EARNINGS BEFORE INCOME TAX (BENEFIT)
PROVISION AND MINORITY INTEREST (5,196,511) 2,667,773 (5,537,417) 5,100,140
INCOME TAX (BENEFIT) PROVISION (2,082,196) 1,065,778 (2,214,967) 2,034,603
------------ ------------ ------------ ------------
(LOSS) EARNINGS BEFORE MINORITY INTEREST (3,114,315) 1,601,995 (3,322,450) 3,065,537
MINORITY INTEREST IN NYFIX MILLENNIUM 195,124 -- 501,005 --
------------ ------------ ------------ ------------
NET (LOSS) EARNINGS $ (2,919,191) $ 1,601,995 $ (2,821,445) $ 3,065,537
============ ============ ============ ============
BASIC (LOSS) EARNINGS PER COMMON SHARE $ (0.10) $ 0.06 $ (0.10) $ 0.12
============ ============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 30,720,029 25,869,171 29,318,268 25,682,770
============ ============ ============ ============
DILUTED (LOSS) EARNINGS PER COMMON SHARE $ (0.10) $ 0.06 $ (0.10) $ 0.11
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 30,720,029 27,487,941 29,318,268 27,350,371
============ ============ ============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
4
NYFIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Month Period Ended
June 30, 2002 June 30, 2001
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (13,026) $ 5,012,150
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (9,730,642) (20,000,000)
Proceeds from sales of marketable securities 25,793,034 --
Capital expenditures (1,683,774) (4,073,179)
Proceeds from sale of equipment 372,825 --
Payments for acquisition of Javelin Technologies, net of cash acquired (9,987,112) --
Investment in EuroLink Network (4,000,000) --
Cash acquired from NYFIX Millennium 3,205,831 --
Repayment of advances to NYFIX Millennium prior to acquisition 2,139,605 125,128
Payments for product enhancement costs and other assets (1,707,890) (1,564,550)
------------ ------------
Net cash provided by (used in) investing activities 4,401,877 (25,512,601)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (532,312) (407,026)
Repayment of borrowings -- (500,000)
Net proceeds from issuance of common stock 215,832 58,065,013
------------ ------------
Net cash (used in) provided by financing activities (316,480) 57,157,987
------------ ------------
EFFECT OF FOREIGN CURRENCY TRANSLATION (12,857) --
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,059,514 36,657,536
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,967,537 4,866,629
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,027,051 $ 41,524,165
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
5
NYFIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- ------------------------------------------------------
1. ORGANIZATION
NYFIX, Inc. is listed on the Nasdaq Stock Market under the symbol
NYFX.
References herein to "we", "our" and the "Company" refer to NYFIX,
Inc. and consolidated subsidiaries unless the context specifically
requires otherwise.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form
10-Q. In the opinion of management, all adjustments, which comprise
normal and recurring accruals considered necessary for a fair
presentation, have been included. 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 and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Operating results for the six
month period ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2001.
3. INVENTORY
Inventory consists of parts, finished goods and minor materials and
is stated at the lower of cost, determined on an average cost basis,
or market.
June 30, December 31,
2002 2001
------------ -------------
(unaudited)
Parts and materials $1,221,597 $1,120,329
Work in process 80,009 151,702
Finished goods 304,652 409,561
---------- ----------
1,606,358 1,681,592
Less: Allowance for obsolescence 82,144 82,000
---------- ----------
Total $1,524,214 $1,599,592
========== ==========
6
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
Owned equipment:
Computer software $ 3,626,085 $ 1,124,341
Leasehold improvements 1,911,111 1,312,417
Furniture and equipment 5,529,042 3,252,658
Subscription and service bureau equipment 17,592,255 15,880,883
----------- -----------
Owned equipment - gross 28,658,493 21,570,299
----------- -----------
Leased equipment:
Furniture and equipment 137,768 --
Service bureau equipment under capital leases 2,968,684 2,546,842
----------- -----------
Leased equipment - gross 3,106,452 2,546,842
----------- -----------
Total property and equipment - gross 31,764,945 24,117,141
Less: Accumulated depreciation 12,622,778 9,751,044
----------- -----------
Property and equipment, net $19,142,167 $14,366,097
=========== ===========
5. GOODWILL AND OTHER ACQUIRED INTANGIBLES
Goodwill and other acquired intangibles at June 30, 2002 consists of
the following:
June 30,
2002
-----------
(unaudited)
NYFIX Millennium $30,005,963
Javelin Technologies 54,825,245
NYFIX Transaction Services 34,000
-----------
Total $84,865,208
===========
NYFIX Millennium:
NYFIX Millennium, L.L.C. ("NYFIX Millennium"), a broker-dealer, is
an Alternative Trading System which provides a real-time, anonymous
automated matching system for equity trading. NYFIX Millennium
leverages the NYFIX network's order routing share volume to provide
a more efficient liquidity source for the financial community.
In September 1999, NYFIX Millennium was formed by the Company and
seven international investment banks and brokerage firms, consisting
of Deutsche Bank, ABN Amro Securities (formerly ING Barings), Lehman
7
Brothers, Morgan Stanley, Alliance Capital (formerly Sanford C.
Bernstein & Co.), Societe Generale (SG Cowen) and UBS Warburg (the
"Initial Partners"). Each partner, including the Company, invested
$2.0 million in NYFIX Millennium. Each of the Initial Partners
received 25,000 units of NYFIX Millennium, collectively owning a 50%
membership interest in NYFIX Millennium, with the Company owning the
remaining 50%. In addition, the Company purchased an option to buy
from the Initial Partners an additional 30% membership interest in
NYFIX Millennium (the "Option"), for which the Company paid each of
the Initial Partners 281,250 shares of its common stock. The Option
allowed the Company to increase its membership interest in NYFIX
Millennium up to 80% of the total membership interest through the
exchange of one share of its common stock for each unit of NYFIX
Millennium purchased, subject to certain adjustments.
In March 2001, NYFIX Millennium added four more partners, consisting
of Bank of America, Wachovia Securities (formerly First Union
Securities) and LabMorgan Corporation (formerly J.P. Morgan & Co.
and Chase H&Q) (the "New Partners"). Pursuant to the terms of the
operating agreement of NYFIX Millennium, each New Partner invested
$2.0 million in NYFIX Millennium and received 25,000 units of NYFIX
Millennium. The Company maintained its 50% membership interest in
NYFIX Millennium in exchange for reducing certain of its rights to
share in future dividend distributions of NYFIX Millennium. The
Company issued 94,000 shares of its common stock to each New Partner
in return for the same Option noted above, with LabMorgan
Corporation (as the successor to two partners) receiving 188,000
shares.
In a letter dated January 23, 2002, the Company notified the Initial
Partners and New Partners that the Company was exercising the
Option, effective February 1, 2002. In exchange for the increased
membership interest in NYFIX Millennium, the Company paid the
Initial Partners and New Partners an aggregate of 296,250 shares of
its common stock with a fair value of $4,506,000, with each Initial
Partner receiving 33,750 shares of common stock and each New Partner
receiving 15,000 shares of common stock. As a result, the Company
has an 80% membership interest in NYFIX Millennium. The acquisition
was accounted for as a purchase. The results of operations of NYFIX
Millennium have been included in the consolidated results of
operations since the date of acquisition. While it is anticipated
that the majority of its purchase price will be classified as
goodwill, the Company has not completed the final allocation of the
purchase price to the tangible and intangible assets of NYFIX
Millennium. Asset valuations will be performed by an independent
third-party and are expected to be completed by year-end. Upon
completion of the valuation, assets other than goodwill will be
amortized over their respective useful lives.
The Company's total investment in NYFIX Millennium of $27,500,000 at
December 31, 2001, consists of $25,500,000 (1,968,750 shares in 1999
of Company stock x $8.89 and 376,000 shares in March and April 2001
of company stock x $21.28) and a capital cash contribution of
$2,000,000. The Company had temporarily funded certain operating
costs and capital expenditures on behalf of NYFIX Millennium. Such
advances were reflected as Due from NYFIX Millennium on the
Company's consolidated balance sheet as of December 31, 2001. In
addition the Company has loaned an aggregate of $9,000,000, plus
accrued interest, to NYFIX Millennium, of which $3,000,000 was
loaned during the three months ended June 30, 2002. All such
advances and loan have been eliminated in consolidation commencing
on February 1, 2002.
Pursuant to the NYFIX Millennium Operating Agreement, as amended,
the first $22,000,000 in losses since inception was allocated to the
Initial Partners and New Partners, which equaled the extent of their
capital investment in NYFIX Millennium. Pursuant to the Operating
Agreement, the Company recognized $1,762,000 in losses for the
period ended March 31, 2002, and an additional $238,000 in losses in
the period ended June 30, 2002, equaling the Company's cash
investment of $2,000,000. The Company also recognized an additional
$1,500,000 in losses during the period ended June 30, 2002. The
Company expects NYFIX Millennium to be profitable in the near term,
at which time profits will be allocated 76% to the Company and 24%
8
to the Initial Partners and New Partners pursuant to the Operating
Agreement, net of the Company's recovering its additional losses
recorded in excess of its $2,000,000 cash investment.
Javelin Technologies:
Javelin Technologies, Inc. ("Javelin") is a leading supplier of
electronic trade communication technology and a leading provider of
Financial Information Exchange (FIX) technology. Javelin solutions
provide universal connectivity, streamlining of workflow and
elimination of the high costs and risks associated with the
development of proprietary network links and protocol
implementations.
On March 31, 2002, the Company acquired the capital stock of
Javelin. The Company financed the transaction with a combination of
(i) $10,300,000 of cash, (ii) 2,784,896 shares of common stock of
the Company having a fair value of $41,189,000 and (iii) 493,636
shares of common stock of the Company having a fair value of
$3,459,000 reserved for issuance upon exercise of Javelin stock
options assumed by the Company. In addition, the Company agreed to
potentially pay additional consideration to the Javelin stockholders
based on Javelin's revenues for the year ending December 31, 2002.
The acquisition was accounted for as a purchase. While it is
anticipated that the majority of its purchase price will be
classified as goodwill, the Company has not completed the final
allocation of the purchase price to the tangible and intangible
assets of Javelin. Asset valuations will be performed by an
independent third-party and are expected to be completed by
year-end. Upon completion of the valuations, assets other than
goodwill will be amortized over their respective useful lives. The
results of operations of Javelin have been included in the
consolidated results of operations since the date of acquisition.
NYFIX Transaction Services:
In December 2001, the Company acquired an inactive broker-dealer for
$34,000 and filed a membership application with the National
Association of Securities Dealers NASD, which was approved in May
2002, to operate as a broker/dealer through the wholly owned
subsidiary, which was renamed NYFIX Transaction Services, Inc.
("NYFIX Transaction Services"). NYFIX Transaction Services provides
execution and smart order routing solutions, primarily to domestic
and international broker-dealers and specialized trading firms. The
acquisition was accounted for as a purchase and the cost of the
acquisition has been allocated to goodwill. The Company started
generating revenue from NYFIX Transaction Services business on July
1, 2002.
6. INVESTMENT IN EUROLINK NETWORK
On March 6, 2002, the Company acquired a 40% ownership interest in
EuroLink Network, Inc. ("Eurolink"), a privately held company based
in Madrid, Spain, which offers direct electronic access to the U.S.
equity markets from Europe. The Company acquired its interest in
return for granting licensing and distribution rights and
$4,000,000. Under the terms of the agreement, EuroLink will offer
the Company's equity terminals, market access and services to the
European marketplace, primarily on a transaction fee basis. The
terms of the agreement give the Company the option to increase its
ownership interest in EuroLink to 80% at a later date. The
investment in EuroLink is being accounted for under the equity
method. During the three and six months ended June 30, 2002, the
Company recorded losses of $107,000 and $139,000, respectively, on
the investment, which are included in other expense on the
consolidated statement of operations.
7. OTHER ASSETS
Included in other assets are deferred product enhancement costs of
$4,076,000 as of June 30, 2002 and $3,411,000 as of December 31,
2001, net of accumulated amortization of $6,082,000 as of June 30,
2002 and $5,038,000 as of December 31, 2001. Included in cost of
revenues is amortization expense of deferred product enhancement
9
costs of $570,000 and $1,044,000 for the three and six months ended
June 30, 2002, respectively, and $415,000 and $773,000 for the three
and six months ended June 30, 2001, respectively.
State and Federal income tax assets from prepayments and from
potential operating loss carrybacks and carryforwards amounting to
$2,253,000 are included in Prepaid Expenses and Other Current Assets
at June 30, 2002.
8. ACCRUED EXPENSES
Accrued expenses consists of the following:
June 30, December 31,
2002 2001
---- ----
(unaudited)
Income taxes payable $ -- $ 535,562
Taxes, other than income taxes 1,895,924 1,728,856
Commissions payable 680,046 560,474
Payroll-related accruals 969,182 334,323
Other current liabilities 725,407 371,212
---------- ----------
Total $4,270,559 $3,530,427
========== ==========
9. CAPITAL STOCK
In connection with the acquisitions mentioned in Note 5, the Company
issued 296,250 shares of common stock to the NYFIX Millennium
Initial Partners and New Partners on February 1, 2002, with a fair
value of $4,506,000, and 2,784,896 shares of common stock to Javelin
stockholders on March 31, 2002, with a fair value of $41,189,000.
10. PER SHARE INFORMATION
The Company's basic (loss) earnings per share ("EPS") is calculated
based on net (loss) earnings available to common shareholders and
the weighted-average number of shares outstanding during the
reported period. Diluted EPS includes additional dilution from
common stock equivalents, such as stock issuable pursuant to the
exercise of stock options and warrants. Stock options were excluded
from the (loss) earnings per share calculation for the three and six
month periods ended June 30, 2002, since the amounts would be
anti-dilutive.
10
Three Month Six Month
Period Ended Period Ended
--------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------------------------- -----------------------------
Net (loss) earnings $(2,919,191) $ 1,601,995 $ (2,821,445) $ 3,065,537
============ ============ ============ ============
Basic weighted average shares
outstanding 30,720,029 25,869,171 29,318,268 25,682,770
============ ============ ============ ============
Basic (loss) earnings per common share $ (0.10) $ 0.06 $ (0.10) $ 0.12
============ ============ ============ ============
Basic weighted average shares
outstanding 30,720,029 25,869,171 29,318,268 25,682,770
Dilutive options -- 1,586,377 -- 1,635,042
Dilutive warrants -- 32,393 -- 32,559
------------ ------------ ------------ ------------
Diluted weighted average shares
outstanding 30,720,029 27,487,941 29,318,268 27,350,371
============ ============ ============ ============
Diluted (loss) earnings per common share $ (0.10) $ 0.06 $ (0.10) $ 0.11
============ ============ ============ ============
11. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141
("SFAS 141"), "Business Combinations," and SFAS No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS 141 prohibits
the use of the pooling-of-interest method for business combinations
initiated after June 30, 2001, and also applies to all business
combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply
to business combinations completed before July 1, 2001, that were
accounted for by the purchase method. SFAS 142 is effective for
fiscal years beginning after December 15, 2001, to all goodwill and
other intangible assets recognized in an entity's balance sheet at
that date, regardless of when those assets were originally
recognized. SFAS 142 requires that goodwill and certain intangibles
with an indefinite life not be amortized, but subject to an
impairment test on an annual basis. The Company has adopted SFAS 141
and SFAS 142. The Company has recorded goodwill on its consolidated
financial statements as a result of acquisitions made in the first
quarter of 2002, but has not completed the final allocation of the
purchase price to the tangible and intangible assets of NYFIX
Millennium or Javelin Technologies. Asset valuations for both
acquisitions will be performed by independent third-parties and are
expected to be completed by year-end. Until those asset valuations
are completed, the impact of SFAS 142 on the Company's consolidated
financial statements will not be known.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"),
"Accounting for the Impairment of Long-Lived Assets," which
supercedes SFAS No. 121 ("SFAS 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 No. 30,
"Reporting the Results of Operation - 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. SFAS 144 retains many of the provisions of
SFAS 121, but addresses certain implementation issues associated
with that Statement. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 144
effective January 1, 2002. The adoption of SFAS 144 did not have an
impact on the financial position, results of operations, or cash
flows of the Company.
11
In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"),
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS 145 eliminates
extraordinary accounting treatment for reporting gain or loss on
debt extinguishment, and amends other existing authoritative
pronouncements to make various technical corrections. The provisions
of SFAS 145 are effective for the Company on January 1, 2003. The
adoption of SFAS 145 is not expected to have an impact on the
financial position, results of operations, or cash flows of the
Company.
In July 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting
for Exit or Disposal Activities." SFAS 146 requires recording costs
associated with exit or disposal activities at their fair values
when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit
plan. The provisions of SFAS 146 are effective for exit or disposal
activities initiated after December 31, 2002. The Company has not
yet completed its evaluation of the impact of adopting SFAS 146 on
its financial position or results of operations.
12. BUSINESS SEGMENT INFORMATION
Prior to 2002, the Company operated in a single industry segment as
a provider of electronic trading infrastructure and technologies to
the professional trading segment of the brokerage community. In
2002, the Company increased its ownership interest in NYFIX
Millennium from 50% to 80%, and filed a membership application with
the NASD, which was approved in May 2002, to operate as a
broker/dealer through NYFIX Transaction Services.
As a result of these acquisitions, the Company now operates as a
financial services technology company in two industry segments,
Technology Services and Transaction Services.
The Technology Services segment provides desktop solutions, wireless
exchange floor systems, electronic automation systems and
straight-through processing to the professional trading segment of
the brokerage community.
The Transaction Services segment provides an electronic order
routing and matching environment. This segment provides anonymous
order matching and execution services to both our existing
technology customers and web based desktop users. This segment also
will provide execution and smart order routing solutions, primarily
to domestic and international broker-dealers and specialized trading
firms, commencing on July 1, 2002.
12
Summarized financial information by business segment as follows (in
000's):
Three Month Period Ended Six Month Period Ended
------------------------------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------
Revenues:
Technology Services $11,733 $ 9,512 $21,435 $17,934
Transaction Services 1,353 -- 1,722 --
---------------------- ----------------------
Total revenues $13,086 $ 9,512 $23,157 $17,934
====================== ======================
Gross Profit:
Technology Services $ 7,883 $ 7,255 $15,093 $13,737
Transaction Services 852 -- 970 --
---------------------- ----------------------
Total gross profit $ 8,735 $ 7,255 $16,063 $13,737
====================== ======================
13. OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss), net of tax, were as
follows:
Three Month Period Ended Six Month Period Ended
--------------------------------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------------------------------------------------------
Net (loss) earnings $(2,919,191) $ 1,601,995 $(2,821,445) $ 3,065,537
Change in net unrealized gain on
available-for-sale securities 24,968 -- 60,643 --
Foreign currency translation adjustment (12,857) -- (12,857) --
----------- ----------- ----------- -----------
Total comprehensive (loss) income $(2,907,080) $ 1,601,995 $(2,773,659) $ 3,065,537
=========== =========== =========== ===========
The components of accumulated other comprehensive gain (loss), net of tax,
were as follows:
June 30, December 31,
2002 2001
-------------------------
Accumulated net unrealized gain (loss) on
available-for-sale securities $ 24,968 $(35,675)
Foreign currency translation adjustment (12,857) --
-------- --------
Total accumulated other comprehensive gain (loss) $ 12,111 $(35,675)
======== ========
13
14. CASH FLOW SUPPLEMENTAL INFORMATION
Six Month Period Ended
June 30, 2002 June 30, 2001
----------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 142,948 $ 183,571
Cash paid during the period for income taxes 1,558,046 155,405
Supplemental schedule of noncash investing and financing
information:
Capital lease obligations incurred $ 1,278,107 $ 523,950
NYFIX Millennium:
Fair value of assets acquired, net of cash acquired $39,144,071 --
Fair value of liabilities assumed 10,343,939 --
Common stock issued for acquisition 4,505,963 $ 8,000,000
Javelin:
Fair value of assets acquired, net of cash acquired $60,513,494 --
Fair value of liabilities assumed 5,778,845 --
Common stock issued for acquisition 41,188,612 --
Stock options assumed 3,458,925 --
15. PRO FORMA SUPPLEMENTAL INFORMATION
Following are the summarized unaudited pro forma combined results of
operations for the three and six months ended June 30, 2002 and
2001, assuming the acquisitions of NYFIX Millennium and Javelin had
taken place at the beginning of each of those fiscal periods, and
giving effect to the addition of the New Partners and the Option
exercise as of January 1, 2001. The unaudited pro forma combined
results of operations for both periods were prepared based upon the
consolidated statements of operations of NYFIX, the statements of
operations of NYFIX Millennium and the consolidated results of
operations of Javelin for the respective periods. The unaudited pro
forma combined results of operations presented below do not reflect
future events that may occur after the Option exercise or
acquisition. As a result of these assumptions, estimates and
uncertainties, the accompanying unaudited pro forma combined results
of operations does not purport to describe the actual financial
condition or results of operations that would have been achieved had
the Option exercise or acquisition in fact occurred on the date
indicated, nor does it purport to predict NYFIX's future results of
operations.
14
Summarized unaudited pro forma combined results of operations are as
follows (in 000's):
Three Month Six Month
Period Ended Period Ended
----------------------------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
----------------------------------------------------
Net revenues $13,086 $ 11,069 $ 26,918 $ 22,783
========================= =========================
Net (loss) earnings $(2,919) $ (101) $ (4,029) $ 524
========================= =========================
Basic (loss) earnings per common share $ (0.10) $ (0.00) $ (0.13) $ 0.02
========================= =========================
Diluted (loss) earnings per common share $ (0.10) $ (0.00) $ (0.13) $ 0.02
========================= =========================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management 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 the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgments, including those related to accounts receivable
reserves, investments, long-lived assets, revenue recognition, product
enhancement costs, income taxes and contingencies. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Effective February 1, 2002, NYFIX Millennium is included in the consolidated
financial statements of the Company. Pursuant to the NYFIX Millennium Operating
Agreement, the first $22,000,000 of losses was allocated to the Initial Partners
and New Partners of NYFIX Millennium, which equaled the extent of their capital
investment in NYFIX Millennium. Effective March 31, 2002, Javelin is included in
the consolidated financial statements of the Company.
For a list of the critical accounting policies that Management believes, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements, refer to Management's
Discussion and Analysis in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
Overview
The Company's revenues comprise subscription, sale, service contract and
transaction revenue. At this time, subscription fees represent a majority of
total revenues. Subscription revenue contracts are primarily with brokerage
firms, international banks and global exchanges trading in equities, and are
generally for an initial period of one to three years with one to three year
renewal periods. Subscription revenues are recognized ratably over the lives of
the subscription agreements with customers and begin once installation is
complete. Sale revenue, which is comprised of software and capital equipment
sales, is generated primarily by sales to customers in the futures, options and
currencies trading market, and is recognized upon shipment of the product and
acceptance by the customer. Service contract revenue is comprised of maintenance
contracts for software and capital equipment sales and subscription equipment
and is recognized ratably over the period that the service is provided. Service
contract revenue on subscription contracts is charged to customers as a fixed
percentage of such contracts. Transaction revenue consists of per-share fees
charged to customers who route orders through the Company's order matching
system.
Cost of revenues principally consists of communication lines for subscription
and transaction services, amortization of capitalized product enhancement costs
and depreciation of subscription-based equipment, labor, materials and overhead,
execution and clearing fees.
Selling, general and administrative expenses account for the majority of the
Company's operating expenses and consist of salaries and benefits, rent and
office expenses, non-customer specific communication fees, provisions for
doubtful accounts and marketing expenses. During the past several years, the
Company has expanded its efforts to support an increasing number of services and
to increase the number of exchanges, brokerage firms and "buy-side" institutions
connecting to the NYFIX Network. Management believes that its continued
16
investment in the development of the NYFIX system and its associated
applications and services has increased order flow, which in turn should
facilitate both revenue growth and further distribution of its products.
Research and development expenses relate to developing new products and
technologies to meet the current and future needs of the Company's customers.
These costs consist primarily of salaries and related costs for technical and
programming personnel.
Depreciation and amortization expense consists of depreciation and amortization
of equipment and software used to operate the Company's systems.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto. Historical results are not
necessarily indicative of the operating results for any future period.
Results of Operations
Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended
June 30, 2001
Revenues
Subscription revenue increased 16% and 20% to $8,064,000 and $15,241,000 for the
three and six months ended June 30, 2002, from $6,936,000 and $12,725,000 for
the same periods in 2001, principally due to increased demand among existing
customers, and also the addition of new customers and new product offerings sold
to existing and new customers. As a percentage of total revenues, subscription
revenue decreased to 62% and 66% in the three and six months ended June 30, 2002
from 73% and 71% in the same periods in 2001, due in part to the effect on the
percentage calculations of the addition of transaction revenue in 2002.
Sale revenue decreased 11% and 18% to $1,295,000 and $2,603,000 for the three
and six months ended June 30, 2002, from $1,456,000 and $3,162,000 for the same
periods in 2001. The decrease in sales revenue is principally due to customers
deferring purchases to future periods, offset in part by licensing fees of
Javelin's FIX technology. As a percentage of total revenue, sales revenue
decreased to 10% and 11% in the three and six months ended June 30, 2002, from
15% and 18% in the same periods in 2001, due in part to the effect on the
percentage calculations of the addition of transaction revenue in 2002.
Service contract revenue increased 112% and 75% to $2,375,000 and $3,591,000 for
the three and six months ended June 30, 2002, from $1,119,000 and $2,047,000 in
the same periods in 2001, principally due to service contract revenue on
Javelin's FIX technology and to a lesser extent by an increase in subscription
contract revenue. As a percentage of total revenue, service contract revenue
comprised 18% and 16% of total revenue in the three and six months ended June
30, 2002, as compared to 12% and 11% for the same periods in 2001, due in part
to the effect on the percentage calculations of the addition of transaction
revenue in 2002.
Transaction revenue amounted to $1,353,000 and $1,721,000 for the three and six
months ended June 30, 2002, and represented 10% and 7% of total revenues for
those respective periods. Transaction revenue is attributable to NYFIX
Millennium, our broker / dealer, whose results are included in the consolidated
financial statements since February 1, 2002.
Cost of Revenues and Gross Profit
Gross profit as a percentage of total revenues decreased to 67% and 69% for the
three and six months ended June 30, 2002, from 76% and 77% in the same periods
in 2001. On a dollar basis, gross profit improved for subscriptions and service
contracts, which was offset somewhat by higher costs attributable to the
Company's continued investment in its infrastructure and a decline in higher
margined OBMS sales due to delays in customer order placement. The Company
experienced increased communication charges relating to increased desktop
connections, higher labor costs due to increased service contract revenues,
higher amortization expense of product enhancement costs and cost increases due
17
to the Javelin acquisition, which were offset somewhat by cost reduction and
containment programs introduced late in the current year's quarter. Included in
cost of revenues was amortization expense of product enhancement costs of
$570,000 and $1,044,000 for the three and six months ended June 30, 2002, and
$415,000 and $773,000 for the same periods in 2001, respectively. Also included
in cost of revenues was depreciation expense for subscription-based equipment of
$539,000 and $1,065,000 for the three and six months ended June 30, 2002, and
$516,000 and $969,000 for the same periods in 2001, respectively. The Company
obtains its materials and supplies from a variety of vendors in the U.S. and
Asia and did not experience any significant price increases in its component
parts purchased during 2002.
Selling, General and Administrative
Selling, general and administrative expenses increased 212% and 154% to
$11,759,000 and $18,196,000 for the three and six months ended June 30, 2002,
from $3,773,000 and $7,155,000 for the same periods in 2001, respectively, and
increased for the six month period as a percentage of total revenues to 79% in
2002 from 40% in 2001. This increase in the current year includes cost increases
attributable to the acquisitions of NYFIX Millennium and Javelin, and start-up
costs related to NYFIX Transaction Services. The increase reflects increased
salaries and commissions, related personnel costs, rent expense, data center
expenses and various office expenses due to an increase in personnel to support
the Company's growth and the Company's acquisitions. Also increasing were
non-recoverable communication fees, and software and computer support and
maintenance contract fees due to the continued investment in the Company's
infrastructure.
Research and Development
Research and development expenses increased to $317,000 and $496,000 for the
three and six months ended June 30, 2002, from $108,000 and $186,000 for the
same periods in 2001, primarily as a result of the Company's efforts in
developing new product lines.
Depreciation and Amortization
Depreciation and amortization expenses increased 175% and 141% to $1,806,000 and
$2,823,000 for the three and six months ended June 30, 2002, from $656,000 and
$1,173,000 for the same periods in 2001. Included in this increase is additional
depreciation expense related to the acquisitions of NYFIX Millennium and
Javelin. The increase, exclusive of those costs from acquisitions, reflects
principally the continued investment in the Company's infrastructure, in
addition to administrative support equipment and leasehold improvements to
support the Company's growth.
Interest Expense
Interest expense decreased 49% and 35% to $56,000 and $143,000 for the three and
six months ended June 30, 2002, from $109,000 and $220,000 for the same periods
in 2001, principally as a result of decreased interest on capital lease
obligations of $25,000 and a $103,000 decrease in other interest expense due to
the payoff of the Company's line of credit during July 2001, offset by other
interest expense of $51,000.
Investment Income
Investment income increased 84% and 78% to $116,000 and $198,000 for the three
and six months ended June 30, 2002, from $63,000 and $111,000 for the same
periods in 2001, principally due to interest and dividends earned on a higher
balance of cash equivalents and marketable securities in 2002 as compared to
2001. The higher balance of cash equivalents and marketable securities is due to
the proceeds received from the Company's follow-on public offering in June 2001.
Income Tax (Benefit) Provision
The Company recorded tax benefits of $2,082,000 and $2,215,000 for the three and
six months ended June 30, 2002, compared to provisions for income taxes of
$1,066,000 and $2,035,000 for the same periods in 2001. The tax benefits are
attributable to the Company's pretax losses in 2002. The Company's effective tax
benefit rate of 40% in the current period exceeds the Federal statutory benefit
rate primarily due to state income taxes.
18
Liquidity and Capital Resources
In June 2001, the Company raised $57,284,000 from a follow-on public offering of
3,000,000 shares of its common stock, net of expenses. The Company used a
portion of the net proceeds for working capital, to purchase shares of its
common stock and for other general corporate purposes. The Company has also used
a portion of the net proceeds for acquisitions of businesses, products and
technologies or the establishment of joint ventures that are complementary to
our business. At June 30, 2002, the cash and cash equivalents balance increased
to $9,027,000 from $4,968,000 at December 31, 2001 primarily as a result of the
sale of marketable securities, cash acquired from the acquisition of NYFIX
Millennium, repayment of advances to NYFIX Millennium and proceeds from the sale
of equipment, offset by payments for the acquisition of Javelin Technologies
(net of cash acquired), purchases of marketable securities, investment in
EuroLink Network, capital expenditures, the acquisition of other assets to
support the Company's infrastructure and repayments under capital lease
obligations.
On March 6, 2002, the Company acquired a 40% ownership interest in EuroLink
Network, Inc. ("EuroLink"), a privately held company based in Madrid, Spain,
which offers direct electronic access to the U.S. equity markets from Europe.
The Company acquired its interest in return for granting licensing and
distribution rights and $4,000,000. Under the terms of the agreement, EuroLink
will offer the Company's equity terminals, market access and services to the
European marketplace, primarily on a transaction fee basis. The terms of the
agreement give the Company the option to increase its ownership interest in
EuroLink to 80% at a later date. This investment is accounted for under the
equity method and the Company recorded a loss of $139,000 on this investment
during the six months ended June 30, 2002.
On March 31, 2002, the Company acquired Javelin Technologies, Inc. ("Javelin").
Javelin, widely known as one of the pioneers in FIX (Financial Information
exchange Protocol) technology, has over 1,000 installations at more than 300
leading buy and sell-side institutions, exchanges and ECNs, including over 50
clients in Europe and 20 in Asia. Javelin possesses the leading market-share in
the buy-side institutional market for electronic order routing enabling
technology. The Company financed the transaction with a combination of
$10,300,000 in cash and the issuance and reserve of common stock with a fair
value of approximately $44,648,000. The cash portion was financed through
available funds. In addition, the Company agreed to potentially pay additional
consideration to the Javelin stockholders based on Javelin's revenues for the
year ending December 31, 2002.
Some of the Company's key considerations for the acquisition of Javelin include:
increased connectivity to the buy-side institutional market; consolidated
product offering; cross-selling of core products and transaction services; and a
single point of electronic exchange access across all major domestic and
international equity and derivatives exchanges. The plan is to embed NYFIX
Millennium capabilities in Javelin products, which should reduce implementation
time of the NYFIX Millennium ATS throughout the financial industry.
As a result of the Company's acquisition of an inactive broker-dealer in
December 2001, renamed NYFIX Transaction Services, Inc., the exercise of the
Option on NYFIX Millennium in February 2002 and the agreement with EuroLink
noted above, the Company began to record transaction revenue in 2002. NYFIX
Transaction Services moved into full operational status on July 1, 2002,
following NASD approval of its membership application late in the second
quarter.
At June 30, 2002, the Company had invested $16,727,000 in current marketable
security instruments, having interest rates ranging from 1.25% to 4.24%,
$334,000 in a tax-free money fund with an average yield of 0.91% and $3,742,000
in money market funds with a 30 day yield of 1.57%.
At June 30, 2002, the Company had total debt of $2,412,000, which represents
amounts outstanding under capital lease obligations. At June 30, 2002, the
Company had no material commitments for capital expenditures or inventory
purchases.
19
The Company believes it has sufficient liquidity, including cash generated from
operations and issuances of common stock, to support its cash needs for at least
the next twelve months.
The following summarizes the Company's contractual obligations at June 30, 2002,
and the effect such obligations are expected to have on its liquidity and cash
flows in future periods (in 000's):
Payments Due In
------------------------------------------
After
2002 2003 2004 2005 2005
---- ---- ---- ---- ----
Capital leases $ 740 $2,270 $ 551 $ 136 $ --
Non-cancelable
operating leases 1,588 2,885 2,721 1,762 2,994
------ ------ ------ ------ ------
Total obligations $2,328 $5,155 $3,272 $1,898 $2,994
====== ====== ====== ====== ======
Working Capital
At June 30, 2002 and December 31, 2001, the Company had working capital of
$33,947,000 and $47,513,000, respectively. The Company's present capital
resources include proceeds from internal operations and from issuances of common
stock. The decrease in working capital was principally due to the decrease in
cash and investments used for the acquisition of Javelin Technologies and for
the investment in EuroLink Network.
Cash Provided by Operating Activities
During the six months ended June 30, 2002, net cash used in operations was
$13,000 as compared to net cash provided by operations for the six months ended
June 30, 2001 of $5,012,000. The decrease is primarily due to the change in
earnings to a net loss of $2,821,000 in 2002 from net earnings of $3,066,000 in
2001. The decrease is also due to an increase in prepaid expenses and other
current assets of $2,723,000, and a decrease in accounts payable and accrued
expenses of $1,134,000, offset by a decrease in accounts receivable of
$1,377,000, net of an increase in the allowance for doubtful accounts of
$517,000. All increases and decreases are net of assets and liabilities acquired
from Javelin Technologies and NYFIX Millennium as of the date of their
respective acquisitions. The increase in prepaid expenses and other current
assets is principally due to state and federal tax refunds due the Company and
tax benefits attributable to the pre-tax loss. The decrease in accounts payable
and accrued expenses is primarily due to payments made to vendors during the six
months ended June 30, 2002. The decrease in accounts receivable is primarily due
to improved collections and amounts written off against the allowance for
doubtful accounts.
Cash Used in Investing Activities
During the six months ended June 30, 2002, net cash provided by investing
activities was $4,402,000 as compared to $25,513,000 of net cash used in
investing activities for the six months ended June 30, 2001. The increase is
primarily due to proceeds from the sale of marketable securities of $25,793,000,
cash acquired from NYFIX Millennium of $3,206,000, repayments of advances to
NYFIX Millennium prior to acquisition of $2,140,000 and proceeds from the sale
of equipment of $373,000, offset by payments for the acquisition of Javelin
Technologies (net of cash acquired) of $9,987,000, payments for the investment
in EuroLink Network of $4,000,000, purchases of marketable securities of
$9,731,000, capital expenditures of $1,684,000 and payments for product
enhancements and other assets of $1,708,000.
Cash Provided By Financing Activities
During the six months ended June 31, 2002, net cash used in financing activities
was $316,000, compared to net cash provided by financing activities of
$57,158,000 in the six months ended June 30, 2001, when the Company concluded a
secondary offering of common stock. During the six months ended June 30, 2002,
principal repayment under capital lease obligations of $532,000 were partially
offset by proceeds of $216,000 from the exercise of stock options.
20
Seasonality
The Company believes that its operations are not significantly effected by
seasonality.
Impact of Recently Issued Accounting Pronouncements
In June 2001, the FASB issued two new pronouncements: SFAS No. 141 ("SFAS 141"),
"Business Combinations," and SFAS No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 141 prohibits the use of the pooling-of-interest method
for business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS 142 is effective for fiscal years beginning after December
15, 2001, to all goodwill and other intangible assets recognized in an entity's
balance sheet at that date, regardless of when those assets were originally
recognized. SFAS 142 requires that goodwill and certain intangibles with an
indefinite life not be amortized, but subject to an impairment test on an annual
basis. The Company has adopted SFAS 141 and SFAS 142. The Company has recorded
goodwill on its consolidated financial statements as a result of acquisitions
made in the first quarter of 2002, but has not completed the final allocation of
the purchase price to the tangible and intangible assets of NYFIX Millennium or
Javelin Technologies. Asset valuations for both acquisitions will be performed
by independent third-parties and are expected to be completed by year-end. Until
those asset valuations are completed, the impact of SFAS 142 on the Company's
consolidated financial statements will not be known.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment of Long-Lived Assets," which supercedes SFAS No. 121 ("SFAS 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 No. 30,
"Reporting the Results of Operation - 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. SFAS 144
retains many of the provisions of SFAS 121, but addresses certain implementation
issues associated with that Statement. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 144 effective
January 1, 2002. The adoption of SFAS 144 did not have an impact on the
financial position, results of operations, or cash flows of the Company.
In April 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections. The
provisions of SFAS 145 are effective for the Company on January 1, 2003. The
adoption of SFAS 145 is not expected to have an impact on the financial
position, results of operations, or cash flows of the Company.
In July 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for Exit or
Disposal Activities." SFAS 146 requires recording costs associated with exit or
disposal activities at their fair values when a liability has been incurred.
Under previous guidance, certain exit costs were accrued upon management's
commitment to an exit plan. The provisions of SFAS 146 are effective for exit or
disposal activities initiated after December 31, 2002. The Company has not yet
completed its evaluation of the impact of adopting SFAS 146 on its financial
position or results of operations.
Risk Factors: Forward Looking Statements
This document contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to market and develop its products.
21
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this document will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may be expected to result
from the potential change in value of a financial instrument as a result of
fluctuations in credit ratings of the issuer, equity prices, interest rates or
foreign currency exchange rates. The Company is exposed to market risk
principally through changes in interest rates, equity prices and foreign
currency exchange rates. Interest rate exposure is principally limited to the
$16.7 million of current marketable securities and $4.1 million invested in
money funds at June 30, 2002. Risk is limited on the marketable securities
portfolio due to the fact that $10.3 million is invested in insured municipal
bonds of which no more than 5% of the Company's portfolio can be invested in any
one security issue.
The remaining $6.4 million of current marketable securities is invested in a
quoted fund that is managed by an institution which primarily invests in
investment grade securities, with up to a maximum of 10% invested in high yield
securities rated B or higher.
The fair value of the Company's investment portfolio at June 30, 2002,
approximated carrying value due to its short-term duration. The potential
decrease in fair value resulting from a hypothetical 10% change in interest
rates for the money funds would not be material to earnings, cash flows or fair
value. Current marketable securities at June 30, 2002, are recorded at a fair
value of $16.7 million, net of an unrealized gain of $42,000. The potential
decrease in fair value resulting from a hypothetical 10% decrease in interest
rates for the marketable securities contained in the investment portfolio and
the tax-free money funds would not be material to earnings, cash flows or fair
value. $6.4 million of the marketable securities has exposure to price risk. The
estimated potential loss in fair value resulting from a hypothetical 10%
decrease in the quoted price is $640,000.
As discussed in Note 2 to the consolidated financial statements in the Company's
Form 10-K for the year ended December 31, 2001, the financial statements of the
Company's London sales office are remeasured into U.S. dollars using the U.S.
dollar as the functional currency. The financial statements of Javelin
Technologies Limited, a subsidiary of Javelin operating in the United Kingdom,
are also remeasured into U.S. dollars. The market risk associated with foreign
currency exchange rates is not material in relation to the Company's
consolidated financial position, results of operations or cash flows. The
Company does not use derivative financial instruments for any purpose.
22
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The 2002 annual meeting of shareholders was held on June 10, 2002.
(b) Not applicable
(c) Matter voted on at the meeting and the number of votes cast:
Proposal 1 - Election of Directors for a term of one year.
Name Shares For Withheld Vote
---- ---------- -------------
Peter K. Hansen 24,937,541 1,817,033
George O. Deehan 26,555,136 199,438
William J. Lynch 26,562,551 192,023
Carl E. Warden 24,651,329 2,103,245
George Kledaras 26,566,874 187,700
Proposal 2 - To approve an amendment to the Company's 2001 Stock
Option Plan (the "2001 Plan") to increase the total number of shares
of the Company's Common Stock available for issuance upon the
exercise of options granted under the 2001 Plan by 1,500,000 shares
to an aggregate of 3,500,000.
For 23,040,775
Against 3,646,259
Abstain 67,540
Proposal 3 - To ratify the appointment of Deloitte & Touche LLP as
auditors of the Company for the year ending December 31, 2002.
For 26,295,566
Against 427,320
Abstain 31,688
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) REPORTS ON FORM 8-K
As reported in a Form 8-K dated March 31, 2002 (filed April 15, 2002) under Item
2, Acquisition or Disposition of Assets, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of March 12, 2002, to
acquire all of the capital stock of Javelin Technologies, Inc. ("Javelin") from
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the stockholders of Javelin at the time of the consummation of the transaction
(the "Javelin Stockholders") in exchange for a combination of cash and common
stock of the Company. The Merger Agreement was amended on March 20, 2002 and
again on March 26, 2002. The transaction was consummated as of March 31, 2002.
The Company financed the transaction with a combination of (i) approximately
$11,000,000 of cash and (ii) shares of common stock of the Company having a
market value of approximately $44,000,000. In addition, the Company agreed to
potentially pay additional consideration to the Javelin Stockholders based on
Javelin's revenues for the year ending December 31, 2002.
Also reported in the same Form 8-K, under Item 7, Financial Statements, Pro
Forma Financial Information and Exhibits, the Company announced it would file
the required financial statements as required by Item 7(a) and Item 7(b), no
later than June 14, 2002. The Form 8-K/A containing the required information
under Item 7 was filed on June 13, 2002.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period presented.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NYFIX, INC.
(Registrant)
By: /s/ Richard A. Castillo
------------------------
Richard A. Castillo
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
Dated: August 14, 2002