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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 September 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)
(203) 425-8000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
There were 31,088,790 shares of Common Stock issued and outstanding as of
October 31, 2002.
NYFIX, INC.
FORM 10-Q
For the quarter ended September 30, 2002
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signature 27
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 28
2
NYFIX, INC.
CONSOLIDATED BALANCE SHEETS
(in 000's, except share and per share data)
September 30, December 31,
2002 2001
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 10,040 $ 4,968
Short-term investments in marketable securities 11,394 28,974
Accounts receivable - less allowance of $984 and $511 17,278 12,949
Inventory, net 1,350 1,599
Prepaid expenses and other current assets 7,029 2,582
Due from NYFIX Millennium -- 5,222
--------- ---------
Total Current Assets 47,091 56,294
PROPERTY AND EQUIPMENT, net 17,942 14,366
INVESTMENT IN NYFIX MILLENNIUM -- 27,500
NOTE RECEIVABLE FROM NYFIX MILLENNIUM -- 6,043
GOODWILL AND OTHER ACQUIRED INTANGIBLES, net 83,325 34
INVESTMENT IN EUROLINK NETWORK 3,729 --
OTHER ASSETS 5,380 4,335
--------- ---------
TOTAL ASSETS $ 157,467 $ 108,572
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,958 $ 3,848
Accrued expenses 4,032 3,530
Current portion of capital lease obligations 1,180 952
Current portion of other long-term liabilities 91 --
Advance billings 2,977 451
--------- ---------
Total Current Liabilities 11,238 8,781
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 902 549
OTHER LONG-TERM LIABILITIES 241 --
--------- ---------
12,381 9,330
--------- ---------
Total Liabilities
SHAREHOLDERS' EQUITY:
Preferred stock - par value $1.00; 5,000,000 shares authorized; none issued -- --
Common stock - par value $.001; 60,000,000 shares authorized, 32,083,275 and
28,869,800 shares issued 32 29
Additional paid-in capital 160,032 110,498
Retained earnings 4,715 8,442
Due from officers and directors (738) (592)
Accumulated other comprehensive gain (loss) 145 (35)
Treasury stock, at cost (1,301,300 shares) (19,100) (19,100)
--------- ---------
Total Shareholders' Equity 145,086 99,242
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 157,467 $ 108,572
========= =========
The accompanying notes to the consolidated financial statements are an integral part of these statements.
3
NYFIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in 000's, except share and per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES:
Subscription $ 8,326 $ 7,733 $ 23,567 $ 20,457
Sale 2,509 2,484 5,113 5,646
Service contract 2,258 1,187 5,849 3,234
Transaction 2,275 -- 3,996 --
------------ ------------ ------------ ------------
Total Revenues 15,368 11,404 38,525 29,337
------------ ------------ ------------ ------------
COST OF REVENUES:
Subscription 2,566 1,770 7,016 5,084
Sale 598 277 1,427 653
Service contract 792 398 1,856 904
Transaction 613 -- 1,364 --
------------ ------------ ------------ ------------
Total Cost of Revenues 4,569 2,445 11,663 6,641
------------ ------------ ------------ ------------
GROSS PROFIT 10,799 8,959 26,862 22,696
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 9,448 3,822 27,644 10,977
Research and development 309 125 805 311
Depreciation and amortization 2,878 687 5,702 1,860
------------ ------------ ------------ ------------
Total Operating Expenses 12,635 4,634 34,151 13,148
------------ ------------ ------------ ------------
(LOSS) EARNINGS FROM OPERATIONS (1,836) 4,325 (7,289) 9,548
Interest expense (73) (71) (216) (291)
Investment income 276 360 474 471
Other expense (132) (1) (271) (15)
------------ ------------ ------------ ------------
(LOSS) EARNINGS BEFORE INCOME TAX (BENEFIT)
PROVISION AND MINORITY INTEREST (1,765) 4,613 (7,302) 9,713
INCOME TAX (BENEFIT) PROVISION (859) 1,855 (3,074) 3,890
------------ ------------ ------------ ------------
(LOSS) EARNINGS BEFORE MINORITY INTEREST (906) 2,758 (4,228) 5,823
MINORITY INTEREST IN NYFIX MILLENNIUM -- -- 501 --
------------ ------------ ------------ ------------
NET (LOSS) EARNINGS $ (906) $ 2,758 $ (3,727) $ 5,823
============ ============ ============ ============
BASIC (LOSS) EARNINGS PER COMMON SHARE $ (0.03) $ 0.10 $ (0.13) $ 0.22
============ ============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 30,771,900 27,732,516 29,808,138 26,529,204
============ ============ ============ ============
DILUTED (LOSS) EARNINGS PER COMMON SHARE $ (0.03) $ 0.10 $ (0.13) $ 0.21
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 30,771,900 28,955,730 29,808,138 27,849,436
============ ============ ============ ============
The accompanying notes to the consolidated financial statements are an integral part of these statements.
4
NYFIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(000's omitted)
Nine Months Ended
-----------------
September 30, September 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $ (3,727) $ 5,823
Adjustments to reconcile net (loss) earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization 8,956 4,627
Provision for bad debts 473 97
Loss on equity investment in EuroLink Network 271 --
Minority interest in NYFIX Millennium (501) --
Other, net (106) 44
Changes in assets and liabilities (net of business acquisitions):
Accounts receivable (877) 1,557
Inventory 249 (90)
Prepaid expenses and other current assets (4,064) (829)
Accounts payable, accrued expenses and other liabilities (3,667) 2,609
Advance billings (182) (5,589)
-------- --------
Net cash (used in) provided by operating activities $ (3,175) $ 8,249
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (9,786) (64,550)
Proceeds from sales of marketable securities 31,542 29,000
Capital expenditures (2,361) (5,444)
Proceeds from sale of equipment 380 63
Payments for acquisition of Javelin Technologies, net of cash acquired (10,001) --
Investment in EuroLink Network (4,000) --
Cash acquired from NYFIX Millennium 3,206 --
Due from (advances to) NYFIX Millennium prior to acquisition 2,140 (1,115)
Payments for product enhancement costs and other assets (2,231) (2,417)
-------- --------
Net cash provided by (used in) investing activities 8,889 (44,463)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (863) (624)
Repayment of borrowings -- (2,000)
Purchases of treasury stock -- (13,082)
Net proceeds from issuance of common stock 237 58,716
-------- --------
Net cash (used in) provided by financing activities (626) 43,010
-------- --------
EFFECT OF FOREIGN CURRENCY TRANSLATION (16) --
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 5,072 6,796
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,968 4,867
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,040 $ 11,663
======== ========
The accompanying notes to the consolidated financial statements are an integral part of these statements.
5
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - NYFIX, Inc. (together with its subsidiaries, the
"Company") is a leading provider of electronic trading infrastructure and
technologies to the professional trading segment of the brokerage community.
With its desktop solutions, stationary and wireless exchange floor systems,
electronic automation systems and straight-through processing, the Company
streamlines data entry, routing and execution and eliminates many processing
inefficiencies. The Company's infrastructure, which consists of an extensive
network of electronic circuits, links industry participants across equities and
derivatives markets.
The Company's products and services are broadly categorized into electronic
trading infrastructure and applications and provide the Company's customers a
complete solution to enter, manage and route orders and execution data
electronically. The NYFIX network is a proprietary centralized electronic
infrastructure linking various market participants to provide efficient, secure
and reliable order routing. A single dedicated circuit between the Company's
customers and the NYFIX network enables connectivity to buyside and sellside
institutions and major international exchanges and alternative execution venues
such as electronic communication networks (ECNs) and alternative trading systems
(ATSs). The Company also has developed and offers an integrated portfolio of
modular desktop trading applications, exchange floor automation and exchange
access applications for trading domestic and international equities, futures and
options. The Company's outsourced application solutions reside upon its
centralized system and are delivered through the NYFIX network. The Company's
products and services operate using the industry standard Financial Information
eXchange ("FIX") protocol.
To date, the Company has principally derived its revenues from recurring
subscriptions, product sales and services. In addition to developing the
Company's subscription revenues, the Company has begun to develop transaction
revenues. Rather than a monthly per terminal fee, transaction revenues will be
derived by charging a per share fee for trades executed by the Company, either
within the NYFIX Millennium, LLC ("NYFIX Millennium") ATS or through NYFIX
Transaction Services, Inc. ("NYFIX Transaction Services"). The Company is well
positioned to distribute order routing terminals in certain domestic and
international market segments seeking more direct exchange and execution access
and trade processing services in return for per share based transaction fees.
The Company believes there is a substantial market for these types of
transaction revenue streams. The Company's order routing connectivity
capabilities and technology platform also enable us to support transaction
revenue generation in the Company's subsidiaries, NYFIX Millennium and NYFIX
Transaction Services, as well as the Company's Madrid, Spain-based affiliate,
EuroLink Network, Inc ("EuroLink").
The large quantity of orderflow processed by the NYFIX network has uniquely
positioned the Company to develop, together with NYFIX Millennium, an ATS that
functions similarly to an ECN in that it matches buy and sell orders. NYFIX
Millennium can match either buy and sell orders or pass them through to the
exchange or execution venue of the trader's choice, in real-time, which the
Company believes is a unique feature and key differential from other ATSs and
ECNs that rely on captive order liquidity. NYFIX Millennium augments traditional
auction markets by combining the electronic execution technology of an ECN with
the liquidity of traditional primary markets. Institutional traders benefit from
the order invisibility and anonymity provided by NYFIX Millennium, which
eliminates the negative price impact associated with displaying large blocks of
shares. The NYFIX Millennium ATS went into full production on September 5, 2001
and the Company is currently focusing on expanding NYFIX Millennium's user base
and execution volumes.
The Company is headquartered in Stamford, Connecticut and maintains operations
in New York City, Chicago and London.
6
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Basis of Presentation - The accompanying interim consolidated financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission's Regulation S-X and consequently do not
include all of the disclosures required under accounting principles generally
accepted in the United States of America. The Company believes that the
disclosures are adequate to make the information presented not misleading. The
consolidated balance sheet as of September 30, 2002, the consolidated statements
of operations for the three and nine months ended September 30, 2002 and 2001
and the consolidated statements of cash flows for the nine months ended
September 30, 2002 and 2001 are unaudited. The consolidated financial statements
reflect all adjustments, which comprise normal and recurring accruals,
considered necessary for a fair presentation of the Company's financial
condition and results of operations. The operating results for the nine months
ended September 30, 2002 and 2001 are not necessarily indicative of the results
to be expected for any other interim period or any future year. These
consolidated financial statements should be read in conjunction with the audited
financial statements and footnotes thereto in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
Management 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 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.
Reclassifications - Certain reclassifications have been made in the prior period
consolidated financial statements to conform to the current period presentation.
Recently Issued Accounting Pronouncements - In June 2001, the Financial
Accounting Standards Board ("FASB") issued two new pronouncements: Statement of
Financial Accounting Standards ("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 recorded
goodwill as a result of its first quarter 2002 acquisitions of a controlling
interest in NYFIX Millennium and 100% of Javelin Technologies, Inc. ("Javelin
Technologies"), but has not completed the final allocation of the purchase price
to the acquired tangible and intangible assets. Asset valuations for both
acquisitions and the Company's annual goodwill impairment test are being
performed by an independent third party and will be completed by year end. Based
on the results of this test, the Company may be required to record goodwill
impairment charges in the fourth quarter of 2002.
In June 2001, the FASB issued SFAS No. 143 ("SFAS 143"), "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS 143 requires the recognition of the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred if a reasonable estimate of fair value can be made. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The Company does not
expect that adoption of SFAS 143 will have a material effect on the Company's
financial condition, results of operations or cash flows.
7
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
In August 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 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. 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 a material effect on the
Company's financial condition, results of operations or cash flows.
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
Company does not expect that adoption of SFAS 145 will have a material effect on
the Company's financial condition, results of operations or cash flows.
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 does not
expect that adoption of SFAS 146 will have a material effect on the Company's
financial condition, results of operations or cash flows.
2. INVENTORY
Inventory consisting of parts, finished goods and minor materials was stated at
the lower of cost, determined on an average cost basis, or market, as follows
(in 000's):
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
Parts and materials $ 987 $1,120
Work in process 85 152
Finished goods 360 409
------------- -----------
1,432 1,681
Less: Allowance for obsolescence 82 82
------------- -----------
Total $1,350 $1,599
============= ===========
8
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following (in 000's):
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
Owned equipment:
Computer software $ 3,767 $ 1,124
Leasehold improvements 1,935 1,312
Furniture and equipment 5,580 3,253
Subscription and service bureau equipment 18,046 15,881
------------- ------------
Owned equipment - gross 29,328 21,570
------------- ------------
Leased equipment:
Furniture and equipment 138 --
Service bureau equipment under capital leases 2,969 2,547
------------- ------------
Leased equipment - gross 3,107 2,547
------------- ------------
Total property and equipment - gross 32,435 24,117
Less: accumulated depreciation 14,493 9,751
------------- ------------
Property and equipment, net $17,942 $14,366
============= ============
Depreciation expense for subscription equipment of $0.5 million and $1.6 million
for the three and nine months ended September 30, 2002, respectively, and $0.6
million and $1.5 million for the three and nine months ended September 30, 2001,
respectively, was included in Cost of Revenues on the consolidated statements of
operations.
4. ACQUISITIONS, GOODWILL AND OTHER ACQUIRED INTANGIBLES, NET
Goodwill and other acquired intangibles at September 30, 2002, primarily related
to the Company's acquisitions of NYFIX Millennium and Javelin in 2002, consisted
of the following (in 000's):
September 30,
2002
------------
(unaudited)
Goodwill $73,009
Acquired intangible assets 11,856
-------
84,865
Less: accumulated amortization of intangible assets 1,540
-------
Goodwill and other acquired intangibles, net $83,325
=======
9
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
While it is anticipated that the majority of the purchase prices for the
acquisitions of NYFIX Millennium and Javelin will be classified as goodwill, the
Company has not completed the final allocation of the purchase prices to the
acquired tangible and intangible assets. Preliminary allocations have been made
to the intangible assets and have been amortized through September 30, 2002, as
set forth in the preceding table. Asset valuations for the acquisitions and the
Company's annual goodwill impairment test are being performed by an independent
third party and will be completed by year end. Upon completion of the
valuations, assets other than goodwill will be adjusted, if necessary, and
amortized over their remaining respective useful lives. Based upon the results
of the annual impairment tests, the Company may be required to record goodwill
impairment charges related to one or both of these acquisitions in the fourth
quarter of 2002.
NYFIX Millennium:
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, as a limited liability company,
by the Company and seven international investment banks and brokerage firms,
consisting of Deutsche Bank, ABN Amro Securities (formerly ING Barings), Lehman
Brothers, Morgan Stanley, Alliance Capital (formerly Sanford C. Bernstein &
Co.), Societe Generale (SG Cowen) and UBS Warburg (the "Initial Partners"). Each
of the Initial Partners invested $2.0 million in NYFIX Millennium in exchange
for 25,000 units of NYFIX Millennium, collectively owning a 50% membership
interest in NYFIX Millennium. The Company also invested $2.0 million and owned
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 NYFIX Millennium Operating Agreement,
each New Partner invested $2.0 million in NYFIX Millennium in exchange for
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.
On January 23, 2002, the Company notified the Initial Partners and New Partners
that the Company would exercise its 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 $4.5 million, 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 increased its ownership of
NYFIX Millennium to 80%. This transaction was accounted for as an acquisition
under the purchase method. The results of operations of NYFIX Millennium have
been included in the consolidated results of operations since the acquisition
date.
The Company's total investment in NYFIX Millennium of $27.5 million at December
31, 2001, consisted of $25.5 million (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 its capital cash contribution of $2.0 million. The Company funded certain
10
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
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 $9.0 million, plus accrued interest, to NYFIX Millennium,
of which $3.0 million was loaned in 2002. All such advances and loans, including
accrued interest, have been eliminated in consolidation commencing on February
1, 2002.
Pursuant to the NYFIX Millennium Operating Agreement, as amended, the first
$22.0 million in NYFIX Millennium losses since inception was allocated to the
Initial Partners and New Partners, which equaled the extent of their capital
contribution to NYFIX Millennium. In addition, the Company has recognized NYFIX
Millennium losses of $4.8 million in the nine months ended September 30, 2002,
which were $2.8 million greater than the Company's capital contribution of $2.0
million. While the Company expects NYFIX Millennium to be profitable in the
future, there can be no assurances of such profitability. As a result, the
Company has not allocated to the Initial Partners and New Partners their pro
rata share of the NYFIX Millennium losses in excess of the Company's capital
contribution, aggregating $0.7 million, as of September 30, 2002, since the
Company cannot assure recoverability of the asset that such an allocation would
create. At such time when NYFIX Millennium achieves profitability, 24% of its
profits, net of the Company's recovering its unallocated losses, will be
allocated to the Initial Partners and New Partners.
Javelin:
Javelin is a leading supplier of electronic trade communication technology and a
leading provider of 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) $10.0 million in net
cash; (ii) 2,784,896 shares of common stock of the Company having a fair value
of $41.2 million; and (iii) 493,636 shares of common stock of the Company having
a fair value of $3.5 million reserved for issuance upon exercise of Javelin
stock options assumed by the Company. In addition, the Company agreed to a
conditional payment to the Javelin stockholders based on attainment of certain
objectives for Javelin's revenues for the year ending December 31, 2002. This
transaction was accounted for as an acquisition under the purchase method. The
results of operations of Javelin have been included in the consolidated results
of operations since the acquisition date.
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") to operate as a broker/dealer through the wholly owned
subsidiary, which was renamed NYFIX Transaction Services, Inc. The application
was approved in May 2002 and NYFIX Transaction Services started generating
revenue as of July 1, 2002. 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 following were the summarized unaudited pro forma combined results of
operations for the three and nine months ended September 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
11
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
operations presented below do not necessarily 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 the Company's future results of operations.
The summarized unaudited pro forma combined results of operations were as
follows (in 000's, except per share data):
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------------------- ---------------------------
Net revenues $15,368 $ 13,706 $ 42,286 $ 36,489
======================== ========================
Net (loss) earnings $ (906) $ 1,380 $ (4,935) $ 1,904
======================== ========================
Basic (loss) earnings per common share $ (0.03) $ .04 $ (0.15) $ 0.06
======================== ========================
Diluted (loss) earnings per common share $ (0.03) $ .04 $ (0.15) $ 0.06
======================== ========================
5. INVESTMENT IN EUROLINK
On March 6, 2002, the Company acquired a 40% ownership interest in EuroLink, a
Delaware Corporation with its operations 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 $4.0 million in cash. Under the terms of an agreement, EuroLink will offer
the Company's equity terminals, market access and services to the European
marketplace, primarily on a transaction fee basis. The Company has an 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 nine months ended September 30, 2002, the Company recorded losses
on the investment of $132,000 and $271,000, respectively, which are included in
Other Expense on the consolidated statements of operations.
6. OTHER ASSETS
Other assets included deferred product enhancement costs of $4.0 million as of
September 30, 2002 and $3.4 million as of December 31, 2001, net of accumulated
amortization of $6.7 million as of September 30, 2002 and $5.0 million as of
December 31, 2001. Amortization expense of deferred product enhancement costs of
$0.6 million and $1.7 million for the three and nine months ended September 30,
2002, respectively, and $0.5 million and $1.2 million for the three and nine
months ended September 30, 2001, respectively, was included in Cost of Revenues
on the consolidated statements of operations.
Federal and state income tax assets, including deferred tax assets, from
prepayments, research and development tax credits, from potential operating loss
carrybacks and carryforwards and other items amounting to $3.9 million were
included in Prepaid Expenses and Other Current Assets on the consolidated
balance sheets at September 30, 2002.
12
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
7. ACCRUED EXPENSES
Accrued expenses consisted of the following (in 000's):
September 30, December 31,
2002 2001
------------- ------------
(unaudited)
Income taxes payable $ - $ 536
Taxes, other than income taxes 2,078 1,729
Commissions payable 535 560
Payroll-related accruals 605 334
Other current liabilities 814 371
------ ------
Total $4,032 $3,530
====== ======
8. EQUITY TRANSACTIONS
In connection with the acquisitions mentioned in Note 4, the Company issued an
aggregate of 296,250 shares of common stock to the NYFIX Millennium Initial
Partners and New Partners on February 1, 2002, with a fair value of $4.5
million, and an aggregate of 2,784,896 shares of common stock to Javelin
stockholders on March 31, 2002, with a fair value of $41.2 million.
On April 16, 2002, the Board of Directors formally approved the first amendment
to the 2001 Stock Option Plan (the "Plan"). Under this amendment, the authorized
number of shares of common stock available for issuance under the Plan was
increased from 2,000,000 shares to 3,500,000. This amendment was approved at the
Company's Annual Meeting of Shareholders held on June 10, 2002.
9. INCOME TAXES
The Company recorded a tax benefit of $153,000 during the three months ended
September 30, 2002 attributable to recognition of certain research and
development tax credits from prior years. The Company's effective tax benefit
rates were 49% and 42% for the three and nine months ended September 30, 2002,
respectively, and its effective tax rates were 40% for both the three and nine
months ended September 30, 2001. The Company's effective tax benefit rate for
the three and nine months ended September 30, 2002 exceeds the Federal statutory
rate primarily due to the effect of the aforementioned tax credit and the effect
of state income taxes. The Company's effective tax rate for the three and nine
months ended September 30, 2001 exceeds the Federal statutory rate primarily due
to the effect of state income taxes.
10. PER SHARE INFORMATION
The Company's basic (loss) earnings per share ("EPS") was calculated based on
net (loss) earnings available to common shareholders and the weighted-average
number of shares outstanding during the reported period. Diluted EPS included
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options. Stock options representing 520,129
shares and 792,714 shares were excluded from the (loss) earnings per share
calculation for the three and nine months ended September 30, 2002,
respectively, as the effects were anti-dilutive.
13
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---------------------------- -----------------------------
Net (loss) earnings (in 000's) $ (906) $ 2,758 $ (3,727) $ 5,823
========================== ============================
Basic weighted average shares
outstanding 30,771,900 27,732,516 29,808,138 26,529,204
========================== ============================
Basic (loss) earnings per common share $ (0.03) $ 0.10 $ (0.13) $ 0.22
========================== ============================
Basic weighted average shares
outstanding 30,771,900 27,732,516 29,808,138 26,529,204
Dilutive options -- 1,223,214 -- 1,320,232
-------------------------- ------------------------------
Diluted weighted average shares 30,771,900 28,955,730 29,808,138 27,849,436
outstanding =========================== ==============================
Diluted (loss) earnings per common share $ (0.03) $ 0.10 $ (0.13) $ 0.21
============ ============== ==============================
11. 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. With the acquisitions of NYFIX
Millennium and NYFIX Transaction Services (see Note 4), 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, which is substantially comprised of the
Company's NYFIX Millennium and NYFIX Transaction Services businesses, provides
an electronic order routing and matching environment; anonymous order matching
and execution services to both the Company's existing technology customers and
web based desktop users; and execution and smart order routing solutions,
primarily to domestic and international broker-dealers and specialized trading
firms.
14
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
The summarized financial information by business segment was as follows (in 000's):
Three Months Ended Nine Months Ended
----------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------------------------- ---------------------------
Revenues:
Technology Services $13,093 $11,404 $34,529 $29,337
Transaction Services 2,275 -- 3,996 --
------------------------ ------------------------
Total revenues $15,368 $11,404 $38,525 $29,337
======================== ========================
Gross Profit:
Technology Services $ 9,137 $ 8,959 $24,230 $22,696
Transaction Services 1,662 -- 2,632 --
------------------------ ------------------------
Total gross profit $10,799 $ 8,959 $26,862 $22,696
======================== ========================
12. OTHER COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income, net of tax, were as follows (in 000's):
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------------------------ ------------------------------
Net (loss) earnings $ (906) $ 2,758 $(3,727) $ 5,823
Change in net unrealized gain on
available-for-sale securities 136 -- 196 --
Foreign currency translation adjustment
(3) -- (16) --
------------------------------ ------------------------------
Total comprehensive (loss) income $ (773) $ 2,758 $(3,547) $ 5,823
============================== ==============================
The components of accumulated other comprehensive gain (loss), net of tax, were as follows (in 000's):
September 30, December 31,
2002 2001
-----------------------------
Accumulated net unrealized gain (loss) on
available-for-sale securities $ 161 $ (35)
Foreign currency translation adjustment (16) --
-----------------------------
Total accumulated other comprehensive gain (loss) $ 145 $ (35)
=============================
15
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
13. CASH FLOW SUPPLEMENTAL INFORMATION (IN 000'S)
Nine Months Ended
-----------------
September 30, September 30,
2002 2001
----------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 216 $ 249
Cash paid during the period for income taxes 1,739 901
Supplemental schedule of noncash investing and financing
information:
Capital lease obligations incurred $ 1,278 $ 524
NYFIX Millennium:
Fair value of assets acquired, net of cash acquired $39,144 $ --
Fair value of liabilities assumed 10,344 --
Common stock issued for acquisition 4,506 8,000
Javelin:
Fair value of assets acquired, net of cash acquired $60,413 $ --
Fair value of liabilities assumed 5,765 --
Common stock issued for acquisition 41,189 --
Stock options assumed 3,459 --
14. SUBSEQUENT EVENT
On October 10, 2002, the Company announced that it had acquired an 18% interest
in Renaissance Trading Technologies LLC ("Renaissance"). Renaissance was formed
to commercialize a state of the art NASDAQ Trading Platform (the "Platform").
The Company has certain options to acquire a controlling interest at a later
date. In connection with its investment, the Company acquired for $1.0 million
and subsequently contributed to Renaissance the intellectual property rights and
all source code to the Platform, which was developed by a major bank and
brokerage firm over the last several years. The Company also loaned $1.5 million
to Renaissance, for which Renaissance issued a convertible secured promissory
note, which may be converted into additional equity in Renaissance by the
Company at certain times over the next five years. The current 18% minority
interest in Renaissance will be accounted for under the equity method.
16
NYFIX, Inc.
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 our 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 has been included in our
consolidated financial statements. Pursuant to the NYFIX Millennium Operating
Agreement, the first $22.0 million 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 has
been included in our consolidated financial statements.
For our critical accounting policies that we believe, among others, affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements, refer to Management's Discussion and Analysis
in our Annual Report on Form 10-K for the year ended December 31, 2001. With our
recording goodwill as a result of our first quarter 2002 acquisitions of a
controlling interest in NYFIX Millennium and 100% of Javelin, we have expanded
our critical accounting policy for long-lived assets to include goodwill and
other acquired intangible assets. While it is anticipated that the majority of
the purchase prices for our acquisitions of NYFIX Millennium and Javelin will be
classified as goodwill, we have not completed the final allocation of the
purchase prices to the acquired tangible and intangible assets. Preliminary
allocations have been made to the intangible assets and have been amortized
through September 30, 2002. Asset valuations for the acquisitions and our annual
goodwill impairment test are being performed by an independent third party and
will be completed by year end. Upon completion of the valuations, assets other
than goodwill will be adjusted, if necessary, and amortized over their remaining
respective useful lives. Based upon the results of the annual impairment tests,
we may be required to record goodwill impairment charges related to one or both
of these acquisitions in the fourth quarter of 2002.
Overview
Our revenues comprise subscription, sale, service contract and transaction
revenue. Subscription fees currently 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 is typically charged to customers as a fixed percentage of the
original sale contract. Transaction revenue consists of per-share fees charged
17
NYFIX, Inc.
to customers who route orders through our order matching system, and per-share
fees charged to customers, primarily domestic and international broker-dealers
and specialized trading firms, to provide execution and smart order routing
solutions.
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;
and execution and clearing fees.
Selling, general and administrative expenses account for the majority of our
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, we have expanded
our 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 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 our 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 our network and systems, and
amortization of acquired intangible assets.
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.
Historical Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Revenues
Total revenue increased 35% to $15.4 million for the three months ended
September 30, 2002, from $11.4 million for the same period in 2001, primarily
due to increases in service contract revenue attributable to our recently
acquired Javelin products and increases in our transaction revenue attributable
to our recently acquired broker/dealer subsidiaries.
Subscription revenue increased 8% to $8.3 million for the three months ended
September 30, 2002, from $7.7 million for the same period in 2001, primarily due
to increased demand among existing customers, 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 54% in the three months ended
September 30, 2002 from 68% in the same period in 2001, due primarily to the
effect on the percentage calculations of the addition of transaction revenue in
2002.
Sale revenue increased slightly to $2.5 million for the three months ended
September 30, 2002 from the same approximate amount for the same period in 2001.
The increase in sales revenue was due to sales of our recently acquired Javelin
products. As a percentage of total revenue, sales revenue decreased to 16% in
the three months ended September 30, 2002, from 22% in the same period in 2001,
due in part to the effect on the percentage calculations of the addition of
transaction revenue in 2002.
Service contract revenue increased 90% to $2.3 million for the three months
ended September 30, 2002, from $1.2 million in the same period in 2001. The
increase is due to service contracts related to our recently acquired Javelin
products. As a percentage of total revenue, service contract revenue comprised
15% of total revenue in the three months ended September 30, 2002, as compared
to 10% for the same period in 2001, due primarily to the additional service
contract revenue
18
NYFIX, Inc.
from our Javelin products, offset in part by the effect on the current period
calculation of the addition of transaction revenue.
Transaction revenue amounted to $2.3 million for the three months ended
September 30, 2002, and represented 15% of the total revenues for the current
period. Transaction revenue was attributable to NYFIX Transaction Services, a
broker/dealer subsidiary and NASD member, which provides execution and smart
order routing solutions and began generating revenue on July 1, 2002, and NYFIX
Millennium, an 80% owned broker/dealer subsidiary, whose results have been
included in our consolidated financial statements since February 1, 2002.
Cost of Revenues and Gross Profit Margin
Cost of revenues increased 87% to $4.6 million for the three months ended
September 30, 2002, from $2.4 million in the same period in 2001, due primarily
to increased costs resulting from the acquisitions in the current year and
increased communication charges. Labor costs increased, particularly for service
contracts, communication charges increased due to more desktop connections and
we had clearing and execution fees, which did not exist in the prior year's
quarter. Also included in cost of revenues was amortization expense of product
enhancement costs and depreciation expense for subscription-based equipment.
Gross profit margin decreased to 70% for the three months ended September 30,
2002, from 79% for the same period in 2001. On a dollar basis, gross profit
improved for service contracts in the three months ended September 30, 2002.
This increase was offset somewhat by a decline in higher margined OBMS sales due
to delays in customer order placement. We experienced increased communication
charges relating to increased desktop connections, higher labor costs due to
increased service contract revenues, clearing fees on transaction executions and
cost increases due to the Javelin acquisition, which were offset somewhat by
cost reduction and containment programs.
Selling, General and Administrative
Selling, general and administrative expenses increased 147% to $9.4 million for
the three months ended September 30, 2002, from $3.8 million for the same period
in 2001. The increase was primarily due to the expenses associated with our
recently acquired NYFIX Millennium and Javelin businesses and start-up expenses
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 our growth
and acquisitions. Also increasing were non-recoverable communication fees, and
software and computer support and maintenance contract fees due to the continued
investment in our infrastructure. As a percentage of total revenue, selling,
general and administrative expense was 61% for the three months ended September
30, 2002 as compared to 34% for the comparable period in 2001. The increase was
primarily attributable to the Javelin acquisition.
Research and Development
Research and development expenses increased to $0.3 million for the three months
ended September 30, 2002, from $0.1 million for the same period in 2001,
primarily as a result of our efforts in developing new product lines. As a
percentage of total revenue, research and development expense was 2% for the
three months ended September 30, 2002 as compared to 1% for the comparable
period in 2001.
Depreciation and Amortization
Depreciation and amortization expenses increased 319% to $2.9 million for the
three months ended September 30, 2002, from $0.7 million for the same period in
2001. Included in this increase is additional amortization expense related to
the acquisitions of NYFIX Millennium and Javelin. The increase, exclusive of
those from acquisitions, principally reflects amortization of intangible assets
of $1.6 million and the continued investment in our infrastructure, in addition
to administrative support equipment and leasehold improvements to support our
growth. As a percentage of total revenue, depreciation and amortization expense
was 19% for the three months ended September 30, 2002 as compared to 6% for the
comparable period in 2001. The increase was primarily attributable to the
amortization of intangible assets.
19
NYFIX, Inc.
Interest Expense
Interest expense increased 3% to $73,000 for the three months ended September
30, 2002, from $71,000 for the same period in 2001, as a result of miscellaneous
interest expense, offset by decreased interest on capital lease obligations and
due to the payoff of our line of credit during July 2001.
Investment Income
Investment income decreased 23% to $0.3 million for the three months ended
September 30, 2002, from $0.4 million for the same period in 2001, primarily due
to decreased interest and dividends earned on a lower balance of cash
equivalents and marketable securities in 2002 as compared to the prior year's
period offset by realized gains on sales of marketable securities. The higher
balance of cash equivalents and marketable securities in the prior year's period
is due to the proceeds received from our follow-on public offering in June 2001.
Income Taxes
We recorded a tax benefit of $0.9 million for the three months ended September
30, 2002, compared to a provision for income taxes of $1.9 million for the same
period in 2001. The tax benefit is attributable to our pretax losses in the
current year's quarter and recognition of certain research and development tax
credits from prior years. Our effective tax benefit rate of 49% for the three
months ended September 30, 2002 exceeds the Federal statutory rate primarily due
to the effect of the aforementioned tax credits and the effect of state income
taxes.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Revenues
Total revenue increased 31% to $38.5 million for the nine months ended September
30, 2002, from $29.3 million for the same period in 2001, primarily due to
increased service contract revenue attributable to our recently acquired Javelin
products, increased transaction revenue attributable to our recently acquired
broker/dealer subsidiaries, and increased subscription revenue from increased
demand from our existing customers, the addition of new customers, and new
product offerings sold to existing and new customers.
Subscription revenue increased 15% to $23.6 million for the nine months ended
September 30, 2002, from $20.5 million for the same period in 2001, primarily
due to increased demand from our existing customers, 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 61% in the nine
months ended September 30, 2002 from 70% in the same period in 2001, primarily
due to the effect on the percentage calculations of the addition of transaction
revenue in 2002.
Sale revenue decreased 9% to $5.1 million for the nine months ended September
30, 2002, from $5.6 million for the same period in 2001. The decrease in sales
revenue for the nine months ended September 30, 2002 is principally due to
customers deferring purchases to future periods, offset in part by sales of our
recently acquired Javelin products. As a percentage of total revenue, sales
revenue decreased to 13% in the nine months ended September 30, 2002, from 19%
in the same periods in 2001, partially due to the effect of the addition of
transaction revenue for the nine months ended September 30, 2002.
Service contract revenue increased 81% to $5.8 million for the nine months ended
September 30, 2002, from $3.2 million in the same period in 2001. The increase
is principally due to service contract revenue on our recently acquired Javelin
products and an increase in subscription contract revenue. As a percentage of
total revenue, service contract revenue comprised 15% of total revenue in nine
months ended September 30, 2002, as compared to 11% for the same period in 2001,
primarily due to the additional service contract revenue from our recently
acquired Javelin products offset in part by the effect of the addition of
transaction revenue for the nine months ended September 30, 2002.
20
NYFIX, Inc.
Transaction revenue amounted to $4.0 million for the nine months ended September
30, 2002, and represented 10% of total revenues for the period. Transaction
revenue was attributable to NYFIX Transaction Services, a broker/dealer
subsidiary and NASD member, which provides execution and smart order routing
solutions and began generating revenue on July 1, 2002, and NYFIX Millennium, an
80% owned broker/dealer subsidiary, whose results have been included in our
consolidated financial statements since February 1, 2002.
Cost of Revenues and Gross Profit Margin
Cost of revenues increased 76% to $11.7 million for the nine months ended
September 30, 2002, from $6.6 million in the same period in 2001, due primarily
to increased costs resulting from the acquisitions in the current year and
increased communication charges. Labor costs increased, particularly for service
contracts, communication charges increased due to more desktop connections and
we had clearing and execution fees, which did not exist in the prior year, and
amortization expense of product enhancement costs increased. Also included in
cost of revenues was depreciation expense for subscription-based equipment. We
obtain our 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.
Gross profit margin decreased to 70% for the nine months ended September 30,
2002, from 77% for the same period in 2001. On a dollar basis, gross profit
improved for service contracts and subscriptions in the current nine-month
period. This increase was offset somewhat by a decline in higher margined OBMS
sales due to delays in customer order placement. We experienced increased
communication charges relating to increased desktop connections, higher labor
costs due to increased service contract revenues, clearing fees on transaction
executions and cost increases due to the Javelin acquisition, which were offset
somewhat by cost reduction and containment programs introduced late in the
second quarter of 2002.
Selling, General and Administrative
Selling, general and administrative expenses increased 152% to $27.6 million for
the nine months ended September 30, 2002, from $11.0 million for the same period
in 2001 and increased as a percentage of total revenues to 72% in 2002 from 37%
in 2001. The increase was primarily due to the expenses associated with our
recently acquired NYFIX Millennium and Javelin businesses, and start-up expenses
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 our growth
and acquisitions. Also increasing were non-recoverable communication fees, and
software and computer support and maintenance contract fees due to the continued
investment in our infrastructure.
Research and Development
Research and development expenses increased to $0.8 million for the nine months
ended September 30, 2002, from $0.3 million for the same period in 2001,
primarily as a result of our efforts in developing new product lines. As a
percentage of total revenue, research and development expense was 2% for the
nine months ended September 30, 2002 as compared to 1% for the comparable period
in 2001.
Depreciation and Amortization
Depreciation and amortization expenses increased 207% to $5.7 million for the
nine months ended September 30, 2002, from $1.9 million for the same period in
2001. Included in this increase is additional amortization expense related to
the acquisitions of NYFIX Millennium and Javelin. The increase, exclusive of
those costs from acquisitions, principally reflects amortization of intangible
assets of $1.6 million and the continued investment in our infrastructure, in
addition to administrative, support, equipment and leasehold improvements to
support our growth. As a percentage of total revenue, depreciation and expense
was 15% for the nine months ended September 30, 2002 as compared to 6% for the
comparable period in 2001. The increase was primarily attributable to the
amortization of intangible assets and the acquisition of NYFIX Millennium.
21
NYFIX, Inc.
Interest Expense
Interest expense decreased 26% to $0.2 million for the nine months ended
September 30, 2002, from $0.3 million for the same period in 2001, principally
as a result of decreased interest on loans due to the payoff of our line of
credit during July 2001.
Investment Income
Investment income increased slightly to $0.5 million for the nine months ended
September 30, 2002, from a comparable amount for the same period in 2001,
principally due to higher miscellaneous investment interest offset by lower
yields on cash equivalents and marketable securities in 2002 as compared to
2001.
Income Taxes
We recorded an income tax benefit of $3.1 million for the nine months ended
September 30, 2002, compared to a provision for income taxes of $3.9 million for
the same period in 2001. The tax benefits are attributable to our pretax losses
in 2002 and recognition of certain research and development tax credits from
prior years. Our effective tax benefit rate of 42% in the current period exceeds
the Federal statutory benefit rate primarily due to state income taxes and the
effect of the tax credit.
Liquidity and Capital Resources
In June 2001, we raised $57.3 million from a follow-on public offering of
3,000,000 shares of our common stock, net of expenses. We used a portion of the
net proceeds for working capital, to re-purchase shares of our common stock and
for other general corporate purposes. We also used a portion of the net proceeds
for acquisitions of businesses, investments in products and technologies and
other investments that were complementary to our business. At September 30,
2002, our cash, cash equivalents and short-term investments totaled $21.4
million as compared to $33.9 million at December 31, 2001. Cash and cash
equivalents increased to $10.0 million from $5.0 million 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 (net of cash acquired), purchases of marketable securities,
investment in EuroLink, cash used in operating activities, capital expenditures,
the acquisition of other assets to support our infrastructure and repayments
under capital lease obligations. At September 30, 2002, we had investments of
$11.4 million in current marketable security instruments, having interest rates
ranging from 1.25% to 3.17%, $261,000 in a tax-free money fund with an average
yield of 0.83% and $4.9 million in money market funds with an average 30 day
yield of 1.32%.
On March 6, 2002, we acquired a 40% ownership interest in EuroLink, a Delaware
Corporation with operations based in Madrid, Spain, which offers direct
electronic access to the U.S. equity markets from Europe. We acquired our
interest in return for granting licensing and distribution rights and $4.0
million in cash. Under the terms of the agreement, EuroLink will offer our
equity terminals, market access and services to the European marketplace,
primarily on a transaction fee basis. The terms of the agreement give us the
option to increase our ownership interest in EuroLink to 80% at a later date.
This investment is accounted for under the equity method and we recorded a loss
of $0.3 million on this investment during the nine months ended September 30,
2002.
On March 31, 2002, we acquired Javelin, which is widely known as one of the
pioneers in FIX 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. We financed the transaction with a combination of $10.0 million in
net cash and the issuance and reserve of our common stock with a fair value of
approximately $44.6 million. The cash portion was financed through available
funds. In addition, we had agreed to issue additional shares to the Javelin
stockholders contingent on attainment of certain revenue targets for the year
ending December 31, 2002. We do not expect Javelin to attain these revenue
targets.
22
NYFIX, Inc.
Some of our 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 our acquisition of an inactive broker-dealer (NYFIX Transaction
Services) in December 2001, our exercise of the Option on NYFIX Millennium in
February 2002 and our agreement with EuroLink noted above, we 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 September 30, 2002, we had total debt of $2.1 million, which represents
amounts outstanding under capital lease obligations. At September 30, 2002, we
had no material commitments for capital expenditures or inventory purchases.
Our short-term significant commitments include capital and operating lease
payments over the next twelve months of $4.2 million. Our long-term capital
needs depends on numerous factors, including the rate we obtain new clients and
expand our staff and infrastructure, as needed, to accommodate such growth, as
well as the rate at which we choose to invest in new technologies to modify our
existing network and infrastructure. We have ongoing needs for capital,
including working capital for operations and capital expenditures to maintain
and expand our operations.
We believe that our cash and investments of $21.4 million, together with
anticipated cash to be generated from operations and our ability to issue common
stock, will be sufficient to support our capital and operating needs for at
least the next twelve months.
Working Capital
At September 30, 2002 and December 31, 2001, we had working capital of $35.9
million and $47.5 million, respectively. Our present capital resources include
proceeds from internal operations and from issuances of our common stock. The
decrease in working capital was principally due to the decrease in cash and
investments used for our acquisition of Javelin and for our investment in
EuroLink.
Cash Used in Operating Activities
During the nine months ended September 30, 2002, net cash used in operations was
$3.2 million as compared to net cash provided by operations for the nine months
ended September 30, 2001 of $8.2 million. The decrease was primarily due to the
change in earnings to a net loss of $3.7 million for the nine months ended
September 30, 2002 as compared to net earnings of $5.8 million in for the same
period in 2001. The decrease is also due to an increase in prepaid expenses and
other current assets of $4.1 million, a decrease in accounts payable, accrued
expenses and other liabilities of $3.7 million and an increase in accounts
receivable of $0.9 million, net of an increase in the allowance for doubtful
accounts of $0.5 million. All increases and decreases are net of assets and
liabilities assumed from our acquisitions of Javelin and NYFIX Millennium. The
decrease in accounts payable, accrued expenses and other liabilities is
primarily due to payments made to vendors during the nine months ended September
30, 2002. The increase in prepaid expenses and other current assets is
principally due to state and federal tax refunds and tax credits due to us and
tax benefits attributable to our pre-tax loss. The increase in accounts
receivable is primarily due to additional transaction receivables.
Cash Provided by Investing Activities
During the nine months ended September 30, 2002, net cash provided by investing
activities was $8.9 million as compared to $44.5 million of net cash used in
investing activities for the nine months ended September 30, 2001. The increase
was primarily due to proceeds from the sale of marketable securities of $31.5
million, cash acquired from NYFIX Millennium of $3.2 million, repayments of
advances to NYFIX Millennium prior to acquisition of $2.1 million and proceeds
23
NYFIX, Inc.
from the sale of equipment of $0.4 million, offset by payments for the
acquisition of Javelin (net of cash acquired) of $10.0 million, payments for the
investment in EuroLink Network of $4.0 million, purchases of marketable
securities of $9.8 million, capital expenditures of $2.4 million and payments
for product enhancements and other assets of $2.2 million.
Cash Used in Financing Activities
During the nine months ended September 30, 2002, net cash used in financing
activities was $0.6 million, compared to net cash provided by financing
activities of $43.0 million in the nine months ended September 30, 2001, when we
concluded a secondary offering of our common stock. During the nine months ended
September 30, 2002, principal repayment under capital lease obligations of $0.9
million were partially offset by proceeds of $0.2 million from the exercise of
stock options.
Seasonality
We believe that our 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, "Business
Combinations," and SFAS No. 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. We have adopted SFAS 141 and SFAS 142. We have recorded goodwill on our
consolidated financial statements as a result of our first quarter 2002
acquisitions of a controlling interest in NYFIX Millennium and 100% of Javelin,
but have not completed the final allocation of the purchase price to the
acquired tangible and intangible assets. Asset valuations for both acquisitions
and our annual goodwill impairment test are being performed by an independent
third-party and will be completed by year-end. Based on the results of this
test, we may be required to record goodwill impairment charges in the fourth
quarter of 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Statement addresses financial accounting and reporting
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS 143 requires the recognition of the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred if a reasonable estimate of fair value can be made. The Statement
is effective for fiscal years beginning after June 15, 2002. We do not expect
that adoption of SFAS 143 will have a material effect on our financial
condition, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets," which supercedes SFAS No. 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. We adopted SFAS 144 effective January 1, 2002. The
adoption of SFAS 144 did not have a material effect on our financial condition,
results of operations or cash flows.
24
NYFIX, Inc.
In April 2002, the FASB issued SFAS No. 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 on January 1, 2003. We do not expect that adoption of SFAS 145
will have a material effect on our financial condition, results of operations or
cash flows.
In July 2002, the FASB issued SFAS No. 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. We do not expect that adoption of
SFAS 146 will have a material effect on our financial condition, results of
operations or cash flows.
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, our ability to market and develop our products. Although we believe
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 us or any other
person that our objectives and plans 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. We are 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 $11.4 million of
current marketable securities and $5.2 million invested in money funds at
September 30, 2002. Risk is limited on the marketable securities portfolio due
to the fact that $7.6 million is invested in insured municipal bonds of which no
more than 5% of our portfolio can be invested in any one security issue.
The remaining $3.8 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 our investment portfolio at September 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 September 30, 2002, are recorded at a fair value of
$11.4 million, net of an unrealized gain of $267,000. 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. $3.8
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 $380,000.
25
NYFIX, Inc.
As discussed in Note 2 to the consolidated financial statements in our Form 10-K
for the year ended December 31, 2001, the financial statements of our 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 our consolidated financial condition, results of
operations or cash flows. We do not use derivative financial instruments for any
purpose.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c). In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
There have been no significant changes in our internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date we completed our evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
26
NYFIX, Inc.
PART II
OTHER INFORMATION
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
None
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period presented.
- --------------------------------------------------------------------------------
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.
By: /s/ Mark R. Hahn
-------------------------------------
Mark R. Hahn
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
Dated: November 13, 2002
27
NYFIX, Inc.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
- --------------
I, Peter K. Hansen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NYFIX, 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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we 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 us 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 our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
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
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Peter K. Hansen
- -----------------------
Peter K. Hansen
Chairman, President and
Chief Executive Officer
28
NYFIX, Inc.
I, Mark R. Hahn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NYFIX, 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. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we 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 us 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 our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
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
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Mark R. Hahn
- -----------------------
Mark R. Hahn
Chief Financial Officer
29
Exhibits Index
--------------
Exhibit
- -------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer