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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
Commission File Number 0-21324
------------------------
NYFIX, INC.
(Exact name of registrant as specified in its charter)
New York 06-1344888
(State of other jurisdiction of (I.R.S. Employer identification number)
incorporation or organization)
333 Ludlow Street
Stamford, Connecticut 06902
(203) 425-8000
(Address of principal executive offices)
---------------------------
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 31,151,915 shares of Common Stock issued and outstanding as of April
30, 2003.
1
NYFIX, INC.
FORM 10-Q
For the quarter ended March 31, 2003
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 3
Consolidated Statements of Income for the three months
ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 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 1. Legal Proceedings 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 29
2
NYFIX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31,
2003 2002
-------------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 9,043 $ 11,213
Short-term investments 9,853 10,727
Accounts receivable, less allowances of $1,216 and $1,207, respectively 18,921 16,601
Inventory, net 1,168 1,098
Due from unconsolidated affiliates 544 537
Deferred income taxes 568 590
Prepaid expenses and other 2,194 2,938
--------- ---------
Total current assets 42,291 43,704
Property and equipment, less accumulated depreciation of $18,402 and
$16,424, respectively 17,720 18,186
Goodwill 70,161 70,161
Acquired intangible assets, net 8,892 9,404
Investments in unconsolidated affiliates 5,149 5,510
Notes receivable from unconsolidated affiliates 2,542 1,519
Other amounts due from unconsolidated affiliates 1,468 1,002
Deferred income taxes 6,326 6,181
Other assets, less accumulated amortization of $8,139 and $7,556, respectively 5,427 5,150
--------- ---------
Total assets $ 159,976 $ 160,817
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,361 $ 3,729
Accrued expenses 4,662 5,360
Current portion of capital lease obligations 973 1,089
Deferred revenue 2,946 2,561
Other current liabilities 172 142
--------- ---------
Total current liabilities 12,114 12,881
Long-term portion of capital lease obligations 464 664
Other long-term liabilities 175 207
--------- ---------
Total liabilities 12,753 13,752
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $0.001 par value; 60,000,000 shares authorized; 32 32
32,444,175 and 32,420,558 issued, respectively
Additional paid-in capital 161,403 161,347
Retained earnings 5,352 5,276
Treasury stock, 1,301,300 shares, at cost (19,100) (19,100)
Due from employees for issuance of common stock (605) (597)
Accumulated other comprehensive income 141 107
--------- ---------
Total stockholders' equity 147,223 147,065
--------- ---------
Total liabilities and stockholders' equity $ 159,976 $ 160,817
========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements.
3
NYFIX, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-------------------------------
2003 2002
--------- ---------
Revenue:
Subscription $ 8,547 $ 7,177
Sale 2,655 1,309
Service contract 2,472 1,216
Transaction 3,609 369
-------- --------
Total revenue 17,283 10,071
-------- --------
Cost of Revenue:
Subscription 4,573 3,129
Sale 484 222
Service contract 542 231
Transaction 2,146 865
-------- --------
Total cost of revenue 7,745 4,447
-------- --------
Gross Profit:
Subscription 3,974 4,048
Sale 2,171 1,087
Service contract 1,930 985
Transaction 1,463 (496)
-------- --------
Total gross profit 9,538 5,624
-------- --------
Operating Expense:
Selling, general and administrative 7,835 5,212
Research and development 177 179
Depreciation and amortization 1,176 537
-------- --------
Total operating expense 9,188 5,928
-------- --------
Income (loss) from operations 350 (304)
Interest expense (31) (87)
Investment income 106 82
Equity in loss of unconsolidated affiliates (362) (32)
-------- --------
Income (loss) before income tax benefit and minority interest 63 (341)
Income tax benefit (13) (133)
-------- --------
Income (loss) before minority interest 76 (208)
Minority interest in NYFIX Millennium, net of tax of $195 -- 306
-------- --------
Net income $ 76 $ 98
======== ========
Basic income per common share $ 0.00 $ 0.00
======== ========
Basic weighted average common shares outstanding 31,131 27,901
======== ========
Diluted income per common share $ 0.00 $ 0.00
======== ========
Diluted weighted average common shares outstanding 31,936 29,210
======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
NYFIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31,
--------------------------------
2003 2002
--------- ------------
Cash flows from operating activities:
Net income $ 76 $ 98
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,075 2,018
Deferred income taxes (145) (13)
Provision for bad debts 15 26
Equity in loss of unconsolidated affiliates 362 32
Minority interest in NYFIX Millennium, net of income tax -- (306)
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable (2,335) (1,356)
Inventory (70) 80
Prepaid expenses and other 735 153
Deferred revenue 385 8
Accounts payable, accrued expenses and other (1,068) (1,943)
liabilities
Other, net (38) 136
-------- --------
Net cash provided by (used in) operating activities 992 (1,067)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (21) (2,346)
Sales of short-term investments 950 22,543
Capital expenditures for property and equipment (1,514) (766)
Capitalization of product enhancement costs and other (851) (562)
Proceeds from sale of equipment -- 373
Payments for acquisitions, net of cash acquired -- (6,230)
Investments in unconsolidated affiliates -- (4,000)
(Loans and advances to) repayments from
unconsolidated affiliates, net (1,466) 2,140
-------- --------
Net cash (used in) provided by investing activities (2,902) 11,152
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (316) (228)
Net proceeds from issuance of common stock 56 92
-------- --------
Net cash used in financing activities (260) (136)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,170) 9,949
Cash and cash equivalents, beginning of period 11,213 4,968
-------- --------
Cash and cash equivalents, end of period $ 9,043 $ 14,917
======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
NYFIX, Inc. (together with its subsidiaries, the "Company"), founded
in 1991, provides electronic trading technology infrastructure and execution
services to the professional trading segment of the brokerage industry. The
Company's products and services automate institutional trading workflows by
streamlining data entry and seamlessly integrate electronic order and execution
handling. The Company offers a complete electronic desktop order management
solution, stationary and wireless handheld exchange floor technology, and a high
volume trade execution platform. The Company's products deliver straight through
processing for front, middle and back office trade information handling. The
Company delivers its products mainly as a service bureau offering and maintains
an extensive data center with a network of electronic circuits that link
industry participants together and provide access to the domestic and
international equities and derivatives markets. Headquartered in Stamford,
Connecticut, the Company has additional offices in New York City, London,
Chicago and San Francisco.
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 March 31, 2003, the consolidated statements of income for the three months
ended March 31, 2003 and 2002 and the consolidated statements of cash flows for
the three months ended March 31, 2003 and 2002 are unaudited. The accompanying
consolidated financial statements include the accounts of NYFIX, Inc. and its
majority-owned and wholly-owned subsidiaries and reflect all adjustments, which
were comprised of normal and recurring accruals, considered necessary for a fair
presentation of the Company's financial condition and results of operations. All
significant intercompany balances and transactions have been eliminated in
consolidation. Prior to February 1, 2002, the Company's 50% ownership in NYFIX
Millennium, L.L.C. ("NYFIX Millennium") was accounted for under the equity
method. The Company's ownership of EuroLink Network, Inc. ("EuroLink") and
Renaissance Trading Technologies, LLC ("Renaissance") was accounted for by the
equity method, since the Company has the ability to exercise significant
influence over the operating and financial policies of those companies.
The operating results for the three months ended March 31, 2003 and
2002 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, 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of revenue and expense during the reporting periods in the
consolidated financial statements and accompanying notes. The estimates include
the collectibility of accounts receivable, the use and recoverability of
inventory, the useful lives of tangible and intangible assets and the
realization of deferred tax assets, among others. The markets for the Company's
products are characterized by intense competition, rapid technological
development and pricing pressures, all of which could affect the future
realizability of the Company's assets. Estimates and assumptions are reviewed
6
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period's
consolidated financial statements to conform to the current period's
presentation. In connection therewith, the Company reclassified certain
operating expenses to cost of revenue for the three months ended March 31, 2002.
STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for its stock-based employee compensation plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The Company does not recognize stock-based compensation expense
in its reported results as all stock options granted had an exercise price equal
to the fair value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and income (loss)
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, as required by
SFAS No. 148, to stock-based employee compensation:
Three months ended
March 31,
--------------------------
2003 2002
------------ ---------
(in thousands, except
per share amounts)
Net income, as reported $ 76 $ 98
Compensation expense based on the fair value
method, net of tax (1,732) (2,115)
------------- ------
Pro forma net (loss) income $ (1,656) (2,017)
============= ======
Basic income (loss) per common share:
As reported $ 0.00 $ 0.00
============= ======
Pro forma $ (0.05) $(0.07)
============= ======
Diluted income (loss) per common share:
As reported $ 0.00 $ 0.00
============= ======
Pro forma $ (0.05) $(0.07)
============= ======
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 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 No. 146 are effective for
exit or disposal activities initiated after December 31, 2002. The Company
adopted SFAS No. 146 effective January 1, 2003.
7
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
In November 2002, the FASB Emerging Issues Task Force ("EITF")
reached a consensus on No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." EITF No. 00-21 applies to certain contractually binding
arrangements under which a company performs multiple revenue generating
activities and requires that all companies account for each element within an
arrangement with multiple deliverables as separate units of accounting if (a)
the delivered item has value on a stand-alone basis, (b) there is objective and
reliable evidence of fair value and (c) the amount of the total arrangement
consideration is fixed. EITF No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company is
evaluating the provisions of EITF No. 00-21 and whether the implementation of
this statement will have a material effect on the Company's financial position,
results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for companies that voluntarily change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123 and APB No. 28, "Interim
Financial Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and income per share
in annual and interim financial statements. The disclosure provisions of SFAS
No. 148 are effective for both interim and annual periods ending after December
15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 at
December 31, 2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which requires the consolidation of certain entities
considered to be variable interest entities ("VIEs"). An entity is considered to
be a VIE when it has equity investors which lack the characteristics of a
controlling financial interest, or its capital is insufficient to permit it to
finance its activities without additional subordinated financial support.
Consolidation of a VIE by an investor is required when it is determined that the
investor will absorb a majority of the VIE's expected losses or residual returns
if they occur. FIN 46 provides certain exceptions to these rules, including
qualifying special purpose entities subject to the requirements of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. VIEs created after January 31, 2003 must be consolidated
immediately, while VIEs that existed prior to February 1, 2003 must be
consolidated as of July 1, 2003. The Company is evaluating the provisions of FIN
46 and whether the implementation of this statement, with regard to the
Company's unconsolidated affiliates, will have a material effect on the
Company's financial position, results of operations or cash flows.
2. INVENTORY
Inventory consisted of the following:
March 31, December 31,
2003 2002
---------- -----------
(in thousands)
Parts and materials $1,084 $ 912
Work in process -- 52
Finished goods 244 294
------ ------
Total inventory, gross 1,328 1,258
Less: Allowance for obsolescence 160 160
------ ------
Total inventory, net $1,168 $1,098
====== ======
8
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
3. ACQUISITIONS, GOODWILL AND OTHER ACQUIRED INTANGIBLES
ACQUISITIONS
NYFIX MILLENNIUM
NYFIX Millennium L.L.C. ("NYFIX Millennium"), a broker-dealer,
developed an ATS, which is an electronic system that matches buyers and sellers
in a completely anonymous environment. The system aims to provide high quality
execution for clients through computerized matching technologies. NYFIX
Millennium offers users access to multiple liquidity points through a single
terminal, complete anonymity and invisibility, intelligent order routing and the
opportunity for price improvement and liquidity enhancement. NYFIX Millennium
provides an efficient way for major financial institutions and traders to obtain
the best match available for their transactions in the listed equities
marketplace.
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 Dean Witter Equity Investments Ltd.,
Alliance Capital Management (formerly Sanford C. Bernstein & Co.), Societe
Generale Investment Corporation (formerly 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 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 4% of the 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 February 1, 2002, the Company exercised the Option. 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 the
Company's 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%. The results of operations of NYFIX Millennium have
been included in the accompanying consolidated statements of income since the
acquisition date. All advances and loans, including accrued interest, have been
eliminated in consolidation commencing on February 1, 2002. The excess of the
purchase price over the fair value of the net assets acquired was $27.8 million
and has been recorded as goodwill. Some of the Company's key considerations for
the acquisition of NYFIX Millennium included NYFIX Millennium's growth in
revenue, the attractiveness of the synergies anticipated with the Company's
recently acquired NYFIX Transaction Services broker-dealer, and the Company's
ability to exercise significant control over NYFIX Millennium's operations.
9
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
Pursuant to the NYFIX Millennium Operating Agreement, as amended,
the first $22.0 million in NYFIX Millennium operating losses since inception was
allocated to the Initial Partners and New Partners, which equaled the extent of
their capital contribution to NYFIX Millennium. The minority interest in NYFIX
Millennium disclosed on the accompanying consolidated statement of income for
the three months ended March 31, 2002 reflects the allocation of NYFIX
Millennium losses to the Initial Partners and New Partners post acquisition to
the extent of their capital contribution, thereby reducing their minority
interest to zero. In addition, the Company has recognized NYFIX Millennium
operating losses of $6.5 million post acquisition through March 31, 2003, which
was $4.5 million greater, on a cumulative basis, 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 NYFIX Millennium losses in excess of the Company's
capital contribution, aggregating $1.1 million through March 31, 2003, 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 over-allocated losses, will be
allocated to the Initial Partners and New Partners.
JAVELIN
Javelin Technologies, Inc. ("Javelin") is a provider of electronic
trade communication technology and FIX protocol technology. The FIX protocol is
the messaging standard underlying language, which was developed to enable
real-time electronic trading and communications. In utilizing the FIX protocol
technology, companies can eliminate the high costs and associated risks of
developing their own proprietary network links and implementing a non-standard
protocol.
On March 31, 2002, the Company acquired 100% of the capital stock of
Javelin. 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 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) 493,699 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. The Company incurred
approximately $1.2 million in costs directly associated with the acquisition,
which were included in the overall consideration. The cash portion of the
purchase price was financed through available funds. The results of operations
of Javelin have been included in the consolidated income statements since the
acquisition date. The excess of the purchase price over the fair value of the
net assets acquired was $42.3 million and has been recorded as goodwill.
Of the aforementioned purchase price, $1.0 million in cash and
270,945 shares of common stock, having a fair value of $4.0 million as of March
31, 2002, is being held in escrow by an unrelated third party and is subject to
a final working capital adjustment to be calculated as of March 31, 2002 and the
effect of the outcome of specific litigation to be determined based on
activities through March 31, 2003. The entire amount of cash and shares
continues to be held in escrow pending resolution of the appropriate
distribution of such cash and shares. See Note 10, Subsequent Event, to the
consolidated financial statements. The Company will record the return of escrow,
if any, based upon activities through March 31, 2003, as a reduction in
goodwill.
10
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
In connection with the acquisition of Javelin, the Company assumed
the liability for the servicing of Javelin's service maintenance contracts. The
Company has accounted for the deferred revenues related to these service
contracts of Javelin in connection with the acquisition in accordance with EITF
01-3, Accounting in a Business Combination for Deferred Revenue of an Acquiree.
The Company recorded a liability as of the date of the acquisition equal to the
fair value of this liability and adjusted the amount for the expected gross
profit that Javelin would normally realize on service maintenance contracts.
Such amounts since the date of acquisition were recognized as revenue on a
straight-line basis over the remaining service maintenance contract period
through March 31, 2003. The purchase price allocation of these obligations was
included in "deferred revenue" in the accompanying consolidated balance sheet at
December 31, 2002.
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 began
generating revenue on July 1, 2002. NYFIX Transaction Services provides
electronic execution, 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.
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangibles at March 31, 2003 and
December 31, 2002 primarily relate to the Company's 2002 acquisitions of NYFIX
Millennium and Javelin described above. The Company completed the asset
valuations for the acquisitions and the annual goodwill impairment test during
the fourth quarter of 2002.
Acquired intangible assets consisted of the following:
Weighted-
March 31, December 31, Average
2003 2002 Useful Life
------------- -------------- -----------
(in thousands)
Existing technology $ 7,500 $ 7,500 5.2 years
Customer related intangibles 2,700 2,700 10.5 years
Trademarks and other 800 800 5.3 years
------------- ----------
Total intangible assets, gross 11,000 11,000
Less: Accumulated amortization 2,108 1,596
------------- ----------
Total intangible assets, net $ 8,892 $ 9,404
============= ==========
Amortization expense of acquired intangible assets was $0.5 million
for the period ended March 31, 2003. During the period ended March 31, 2003, no
goodwill was acquired, impaired or written-off.
Based on identified intangible assets recorded at March 31, 2003,
and assuming no subsequent impairment of the underlying assets, the annual
amortization expense is expected to be as follows:
11
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
Amount
Year ending December 31, (in thousands)
- ------------------------
2003 $ 2,048
2004 2,048
2005 2,048
2006 2,048
2007 923
Thereafter 289
--------
Future estimated amortization expense $ 9,404
========
4. INVESTMENT IN AFFILIATES
EUROLINK
On March 6, 2002, the Company acquired a convertible preferred stock
interest in EuroLink, with its operations based in Madrid, Spain, for $4.0
million in cash. EuroLink offers the European securities industry direct
electronic access to the U.S. equity markets from Europe. EuroLink offers the
Company's equity terminals and market access services to the European
marketplace, primarily on a transaction fee basis. The preferred stock will
automatically convert into a 40% common stock interest upon the earlier of two
years from the date of the agreement or a change of control, as defined, of
EuroLink. The Company also has an option to purchase up to an additional 40%
common stock interest in EuroLink from certain of its stockholders at a price to
be determined based upon a formula of EuroLink's earnings, as defined. Such
exercise price ranges from a minimum of $1.0 million to a maximum of $10.0
million. The option is exercisable between April 1, 2004 and June 30, 2004 and
is payable in equal amounts of cash and the Company's common stock. The
investment in EuroLink is being accounted for under the equity method. During
the three months ended March 31, 2003 and 2002, the Company recorded a loss on
the investment of $179,000 and $32,000, respectively, which was included in
"equity in loss of unconsolidated affiliates" in the accompanying consolidated
statements of income. In addition, the Company had a note receivable from
EuroLink at March 31, 2003 and December 31, 2002 in the amount of $0.5 million
plus accrued interest at 6.0%, due October 2003, which was included in "due from
unconsolidated affiliates" in the accompanying consolidated balance sheets.
RENAISSANCE
On October 2, 2002, the Company acquired an 18% interest in
Renaissance. The Company acquired its interest in return for 300,000 shares of
the Company's stock with a fair value of $1.1 million. Renaissance was formed to
commercialize a NASDAQ trading platform (the "Platform"). The Company has an
option to purchase a minimum of 20% to a maximum of 40% of the total outstanding
membership units of Renaissance at a price to be determined based upon a
formula, between October 2004 and October 2006. In October 2002, the Company
loaned $1.5 million to Renaissance in exchange for a convertible secured
promissory note. The note bears an interest rate of 5.5%, is due in October
2007, and is convertible into 6,400,000 units (or 32% of the total outstanding
membership units, subject to dilution) of Renaissance, at the Company's option
anytime after October 2003. In February 2003, the Company loaned an additional
$1.0 million to Renaissance in exchange for a secured promissory note. The note
bears an interest rate of 5.5% and is due in February 2008. The Company's
investment in Renaissance is being accounted for under the equity method. During
the three months ended March 31, 2003, the Company recorded a loss on the
investment of $183,000, which was included in "equity in loss of unconsolidated
affiliates" in the accompanying consolidated statement of income.
12
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
In connection with its investment, the Company acquired, for $1.0
million, and contributed to Renaissance, the intellectual property rights and
source code to the Platform, which was developed over the last several years by
a major bank and brokerage firm and contributed such intellectual property
rights and source code to Renaissance. In addition, the Company advanced to
Renaissance $0.5 million and $1.0 million to fund certain operating costs and
capital expenditures during the three months ended March 31, 2003 and the three
months ended December 31, 2002, respectively. Such advances were reflected as
"other amounts due from unconsolidated affiliates" in the accompanying
consolidated balance sheets. In consideration for the intellectual property
rights contributed and the advanced funding of the operating costs and capital
expenditures, the Company will share in 50% of Renaissance's revenue for, at
minimum, 3 years. The Company subleases approximately 8,000 square feet of
office space to Renaissance at an annual cost of $0.2 million.
5. INCOME TAXES
The Company recorded tax benefits of $13,000 and $133,000 during the
three months ended March 31, 2003 and 2002, respectively. The Company's
effective tax benefit rate was 21% and 39% for the three months ended March 31,
2003 and March 31, 2002, respectively. The Company's effective tax rate for the
three months ended March 31, 2003 is lower than the Federal statutory rate
primarily due to the effect of the recognition of certain research and
development tax credits offset by the effect of state income taxes. The
Company's effective tax rate for the three months ended March 31, 2002 exceeds
the Federal statutory rate primarily due to the effect of state income taxes.
6. PER SHARE INFORMATION
The Company's basic income per common share ("EPS") was calculated
based on net income available to common stockholders 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 outstanding stock options.
Three Months Ended
March 31,
--------------------
2003 2002
-------- -------
(in thousands, except
per share amounts)
Net income $ 76 $ 98
====== =======
Basic income per common share $ 0.00 $ 0.00
====== =======
Basic weighted average common shares outstanding 31,131 27,901
Potentially dilutive effect of stock options 805 1,309
------ -------
Diluted weighted average shares outstanding 31,936 29,210
====== =======
Diluted income per common share $ 0.00 $ 0.00
====== =======
7. BUSINESS SEGMENT INFORMATION
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes standards for additional disclosure about operating segments for
13
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
interim and annual financial statements. This standard requires financial and
descriptive information be disclosed for segments whose operating results are
reviewed by the Company for decisions on resource allocation. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
The Company operates as a financial services technology company in
two industry segments, Technology Services and Transaction Services. The
Company's broker-dealer operations, NYFIX Millennium and NYFIX Transaction
Services, which are managed separately within the Company and are regulated by
the NASD, comprise the Transaction Services segment. NYFIX Millennium developed
an ATS, which is an electronic system that matches buyers and sellers in a
completely anonymous environment. NYFIX Transaction Services provides electronic
execution services, primarily to domestic and international broker-dealers and
specialized trading firms. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies contained herein within Note 1. The operating segments reported below
are the segments of the Company for which separate financial information is
available and for which operating results are evaluated regularly by senior
management in deciding how to allocate resources and in assessing performance.
The Technology Services segment, which classifies its revenue as
subscription, sale or service contract, 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 broker-dealer operations
and generally classifies its revenue as transaction.
Summarized financial information by business segment was as follows:
Three Months Ended
March 31,
-------------------------------
2003 2002
--------- -----------
Revenue: (in thousands)
Technology Services $ 13,919 $ 9,702
Transaction Services 3,849 369
Eliminations (485) --
-------- --------
Total revenue $ 17,283 $ 10,071
======== ========
Gross Profit:
Technology Services $ 8,243 $ 6,120
Transaction Services 1,295 (496)
-------- --------
Total gross profit $ 9,538 $ 5,624
======== ========
Reconciling information between business segments and the income
(loss) before income taxes and minority interest was as follows:
14
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
(in thousands)
Gross profit for reportable segments $ 9,538 $ 5,624
Operating expenses (9,188) (5,928)
Interest expense (31) (87)
Investment income 106 82
Equity in loss of unconsolidated affiliates (362) (32)
------- -------
Income (loss) before income taxes and minority interest $ 63 $ (341)
======= =======
8. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income, net of tax, were as
follows:
Three Months Ended
March 31,
------------------
2003 2002
------- --------
(in thousands)
Net income $ 76 $ 98
Changes in net unrealized gain on available-for-sale securities 34 35
---- ----
Total comprehensive income $110 $133
==== ====
Accumulated other comprehensive income, net of tax, at March 31,
2003 and December 31, 2002 consisted of the accumulated net unrealized gain on
available-for-sale securities of $141,000 and $107,000, respectively.
9. CASH FLOW SUPPLEMENTAL INFORMATION
Information about the cash flow activities related to acquisitions
was as follows:
Three Months Ended
March 31,
-----------------------------
2003 2002
------------ -----------
(in thousands)
Fair value of net assets acquired, net of cash acquired $ -- $ 98,073
Fair value of liabilities assumed -- (15,189)
Common stock issued for acquisitions -- (49,154)
Pre-acquisition investment basis -- (27,500)
------------- --------
Payments for acquisitions, net of cash acquired $ -- $ 6,230
============= ========
15
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
The above fair values of net assets and liabilities are based on the
preliminary values at March 31, 2002. The final allocation of assets acquired
differed from the fair values presented.
Information about other cash flow activities was as follows:
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Supplemental disclosures of cash flow information: (in thousands)
Cash paid for interest $ 31 $ 87
Cash paid for income taxes, net of refunds (688) 586
Supplemental schedule of noncash investing and
financing information:
Unrealized gain on available-for-sale securities (34) (35)
10. SUBSEQUENT EVENT
On May 13, 2003, the Company was served as a defendant in KLEDARAS
v. NYFIX, INC. (Sup. Ct. NY County) Index No. 601502/03, which had been filed on
the same date in New York State court in New York City. George Kledaras, as
representative of shareholders of Javelin, seeks the release of an escrow fund
established in connection with the Company's acquisition of Javelin in March
2002 and alleges damages of at least $18 million against the Company and its
Chairman and CEO, Peter K. Hansen, in connection with such acquisition. The
Company believes the lawsuit is without merit and intends to defend itself
vigorously.
16
NYFIX, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
NYFIX, Inc., a New York corporation founded in 1991, through our
subsidiaries and affiliates, provides electronic trading technology
infrastructure and execution services to the professional trading segment of the
brokerage industry. Our products and services automate institutional trading
workflows by streamlining data entry and seamlessly integrate electronic order
and execution handling. We offer a complete electronic desktop order management
solution, stationary and wireless handheld exchange floor technology, and a high
volume trade execution platform. Our products deliver straight through
processing ("STP") for front, middle and back office trade information handling.
We deliver our products mainly as a service bureau offering and maintain an
extensive data center with a network of electronic circuits that link industry
participants together and provide access to the domestic and international
equities and derivatives markets.
Headquartered in Stamford, Connecticut, we have additional offices
in New York City, London, Chicago and San Francisco.
Our electronic trading systems, industry-wide trade routing
connectivity, STP and execution services and systems supported by our desktop
solutions, stationary and wireless exchange floor systems and electronic
automation systems provide a complete electronic solution to enter, manage and
route trade data and execute orders for brokerage firms and international banks
trading in equities, futures and options.
We operate a diverse electronic order routing and communication
platform, our NYFIX Network, based on the FIX protocol. The FIX protocol is the
messaging standard underlying language, which was developed to enable real-time
electronic trading and communications. Our NYFIX Network is connected to
redundant data centers enabling electronic communications between our customers
throughout the equities and derivatives markets as well as offering long-term
optical disk storage and compliance retrieval of customer transactions. Through
our NYFIX Network, we provide the technology and infrastructure for trade
communication and global order routing between buy-side and sell-side
institutions, numerous exchange floors, as well as other electronic trade
execution venues, such as ECNs and ATSs. We sell an integrated portfolio of
modular desktop trading applications, exchange floor automation and exchange
access applications for trading in domestic and international equities, and
derivatives, including futures and options. Many of our applications reside on
our centralized system in our data center and are accessible through our NYFIX
Network. By seamlessly integrating our proprietary infrastructure and software
applications, we provide our customers with a complete electronic order
management and execution solution.
Through NYFIX Millennium, our 80% owned broker-dealer subsidiary, we
have developed 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 we believe 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. NYFIX Millennium's ATS went into full production on September
5, 2001 and we continue to focus on expanding NYFIX Millennium's user base and
execution volumes.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations discusses our consolidated financial statements, which
17
NYFIX, Inc.
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles require us to make estimates
and assumptions which could materially 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 revenue and expense
during the reporting period. On an on-going basis, we evaluate our estimates and
assumptions, including those related to accounts receivable reserves,
investments, goodwill, long-lived assets, revenue recognition, product
enhancement costs, income taxes and contingencies. We base our estimates and
assumptions 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 assumptions 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.
For our accounting policies that, among others, are critical to the
understanding of our results of operations due to the assumptions we must make
in their application, refer to Item 7, Management's Discussion and Analysis, in
our Annual Report on Form 10-K for the year ended December 31, 2002. Senior
management has discussed the development and selection of these accounting
policies, and estimates, and the related disclosures with the Audit Committee of
the Board of Directors ("Audit Committee"). See Note 1 in the Notes to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2002 for our significant accounting policies. In the first
three months of 2003, there have been no changes to our significant accounting
policies.
Our revenue is comprised of subscription, sale, service contract and
transaction components. Subscription fees currently represent a majority of
total revenue. 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 automatic renewal
periods, unless we receive prior notice of cancellation. Subscription revenue is
recognized on a straight-line basis over the lives of the subscription
agreements and begins once installation is complete and accepted by the
customer. 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 over the contract period on a straight-line basis. 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
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 revenue principally consists of costs associated with our
data centers where we maintain equipment and infrastructure to support our
operations, amortization of capitalized product enhancement costs, depreciation
of subscription equipment and execution, clearing fees and market data feeds.
Selling, general and administrative expense accounts for the
majority of our operating expense and consists of salaries and benefits, rent
and office expense, provision for doubtful accounts and marketing expense.
During the past several years, we have expanded our efforts to support an
increasing number of services and to increase the number of exchanges, sell-side
firms and buy-side institutions connecting to our NYFIX Network.
Research and development expense relates 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 corporate equipment and software, and amortization of intangible
assets.
18
NYFIX, Inc.
Certain reclassifications have been made in the prior period's
consolidated financial statements to conform to the current period's
presentation. In connection therewith, we reclassified certain operating expense
to cost of revenue for the three months ended March 31, 2002.
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 MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUE
Total revenue increased $7.2 million, or 71%, to $17.3 million for
the three months ended March 31, 2003, from $10.1 million for the three months
ended March 31, 2002, primarily due to increases in revenue attributable to our
recently acquired broker-dealer subsidiaries of $3.5 million, revenue
attributable to our recently acquired Javelin business of $3.0 million, and
subscription and service contract revenue from increased demand from our core
customers and the addition of new customers, of $0.7 million.
Subscription revenue increased $1.3 million, or 18%, to $8.5 million
for the three months ended March 31, 2003, from $7.2 million for the three
months ended March 31, 2002, primarily due to increased demand from our core
customers and the net addition of new customers, of $0.6 million, and increases
in subscription revenue attributable to our recently acquired Javelin and
broker-dealer businesses, of $0.8 million. As a percentage of total revenue,
subscription revenue decreased to 49% in the three months ended March 31, 2003
from 71% in the three months ended March 31, 2002, primarily due to the addition
of transaction revenue due to our recently acquired broker-dealer subsidiaries
and the increase of sale and service contract revenue of $2.5 million from our
recently acquired Javelin products. Subscription revenue from our core business
was 45% of total revenue.
Sale revenue increased $1.4 million, or 108%, to $2.7 million for
the three months ended March 31, 2003, from $1.3 million for the three months
ended March 31, 2002, primarily due to sale revenue from our recently acquired
Javelin business of $1.3 million. As a percentage of total revenue, sales
revenue increased to 15% in the three months ended March 31, 2003, from 13% in
the three months ended March 31, 2002, primarily due to the impact of sale
revenue for our Javelin products. This increase as a percentage of total revenue
was partially offset by the effect of the addition of transaction revenue for
the three months ended March 31, 2003.
Service contract revenue increased $1.3 million, or 108%, to $2.5
million for the three months ended March 31, 2003, from $1.2 million in the
three months ended March 31, 2002. The increase is due to service contract
revenue from our recently acquired Javelin business of $1.2 million. As a
percentage of total revenue, service contract revenue was 14% in the three
months ended March 31, 2003, as compared to 12% in the three months ended March
31, 2002, primarily due to the aforementioned service contract revenue from our
recently acquired Javelin business. This increase as a percentage of total
revenue was substantially offset by the effect of the addition of transaction
revenue for the three months ended March 31, 2003.
Transaction revenue increased $3.2 million to $3.6 million for the
three months ended March 31, 2003, from $0.4 million in the three months ended
March 31, 2002. As a percentage of total revenue, transaction revenue was 21% in
the three months ended March 31, 2003, as compared to 4% in the three months
ended March 31, 2002, primarily due to the aforementioned transaction revenue
for our recently acquired broker-dealer businesses, including NYFIX Transaction
Services, which started generating revenue on July 1, 2002, and NYFIX
19
NYFIX, Inc.
Millennium, whose results have been included in our consolidated financial
statements since our acquisition of NYFIX Millennium on February 1, 2002.
COST OF REVENUE
Total cost of revenue increased $3.3 million, or 75%, to $7.7
million for the three months ended March 31, 2003, from $4.4 million in the
three months ended March 31, 2002, due primarily to clearing, execution and
other costs related to our recently acquired NYFIX Millennium and NYFIX
Transaction Services businesses, of $0.7 million, increased data center costs of
$0.7 million, increased costs attributable to support our recently acquired
Javelin business of $0.7 million, increased telecommunication charges, due to
more desktop connections and increased capacity in our data centers to support
our core business, of $0.5 million, and increased depreciation expense
attributable to investment in data center equipment to support our subscription
revenue components of $0.2 million.
Subscription cost of revenue increased $1.5 million, or 48%, to $4.6
million for the three months ended March 31, 2003, from $3.1 million for the
three months ended March 31, 2002, primarily due to increased data center costs,
including telecommunication charges due to more desktop connections and
increased capacity in our data centers, of $0.7 million, increased costs
attributable to our recently acquired Javelin business of $0.3 million and
increased depreciation and amortization expense of $0.2 million, attributable
primarily to increased investment in our data center equipment to support our
subscription revenue. As a percentage of subscription revenue, subscription cost
of revenue increased to 53.5% in the three months ended March 31, 2003 from
43.6% in the three months ended March 31, 2002, primarily due to increases in
the aforementioned costs related to investments in our data centers, which we
believe will support future revenue growth.
Sale cost of revenue increased $0.3 million, or 150% to $0.5 million
for the three months ended March 31, 2003, from $0.2 million for the three
months ended March 31, 2002. The increase in sale cost of revenue was primarily
due to increased labor costs attributable to our recently acquired Javelin
business of $0.2 million, and increased amortization expense, of $0.1 million,
attributable to capitalized software included in our products. As a percentage
of sale revenue, sale cost of revenue increased to 18.2% in the three months
ended March 31, 2003, from 17.0% in the three months ended March 31, 2002.
Service contract cost of revenue increased $0.3 million, or 150% to
$0.5 million for the three months ended March 31, 2003, from $0.2 million in the
three months ended March 31, 2002. The increase was primarily due to service
contract labor costs of our recently acquired Javelin business of $0.2 million.
As a percentage of service contract revenue, service contract cost of revenue
increased to 21.9% in the three months ended March 31, 2003, as compared to
19.0% in the three months ended March 31, 2002, primarily attributable to the
aforementioned cost increases.
Transaction cost of revenue increased $1.2 million, or 133% to $2.1
million for the three months ended March 31, 2003, from $0.9 million in the
three months ended March 31, 2002, primarily due to the growth in transaction
revenue for the period. The increase in transaction cost of revenue was
primarily due to clearing and execution related fees of $0.6 million, an
increase in data center costs, including labor, maintenance, lease,
communication and data feed expenses, of $0.4 million, and depreciation and
amortization expense of $0.2 million. As a percentage of transaction revenue,
transaction cost of revenue decreased to 59.5% in the three months ended March
31, 2003, as compared to 234.4% in the three months ended March 31, 2002, due
primarily to the aforementioned increase in transaction revenue in the current
period. Transaction cost of revenue was a greater percentage of costs in the
three months ended March 31, 2002, due to the fact that NYFIX Transaction
Services had costs in that period but did not start generating revenue until
July 1, 2002.
GROSS PROFIT (AS A PERCENTAGE OF REVENUE)
Gross profit decreased to 55.2% for the three months ended March 31,
2003, from 55.8% for the three months ended March 31, 2002. The decrease in
20
NYFIX, Inc.
gross profit is primarily attributable to the impact of increased data center
costs to support our subscription and transaction revenue components and
increased telecommunication charges, due to more desktop connections and
increased capacity in our data centers to support our core business.
Subscription gross profit decreased to 46.5% for the three months
ended March 31, 2003, from 56.4% for the three months ended March 31, 2002. The
decrease in subscription gross profit is primarily attributable to the impact of
lower gross profit for our recently acquired Javelin business and depreciation
and amortization expense related to our capital and telecommunication
infrastructure investments made in our data center.
Sale gross profit decreased to 81.8% for the three months ended
March 31, 2003, from 83.0% for the three months ended March 31, 2002. The slight
decrease in sale gross profit was primarily attributable to the impact of
increased depreciation expense attributable to capitalized software, which is
included in our products delivered to our customers.
Service contract gross profit decreased to 78.1% for the three
months ended March 31, 2003, from 81.0% for the three months ended March 31,
2002. The decrease in service contract gross profit is primarily attributable to
the impact of higher costs to support our increase in service contract revenue.
Transaction gross profit increased to 40.5% for the three months
ended March 31, 2003, from a deficit of 134.4% for the three months ended March
31, 2002. The increase in gross profit was attributable to the increase in
transaction revenue, which grew at a higher rate than costs. As mentioned
previously, NYFIX Transaction Services had costs in the three months ended March
31, 2002, but did not start generating revenue until July 1, 2002.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased $2.6 million,
or 50% to $7.8 million for the three months ended March 31, 2003, from $5.2
million for the three months ended March 31, 2002. The increase was primarily
due to increased selling, general and administrative expense for our recently
acquired NYFIX Millennium and Javelin businesses and start-up expenses related
to NYFIX Transaction Services of $2.0 million, and increased costs of corporate
departments to support a larger organization as a result of our growth and
acquisitions of $0.6 million, which reflects increased salaries, commissions and
related benefit costs, rent expense, and various office expenses. As a
percentage of total revenue, selling general and administrative expense
decreased to 45% in the three months ended March 31, 2003 from 52% in the three
months ended March 31, 2002. The decrease as a percentage of total revenue was
attributable to a higher growth in revenue than selling, general and
administrative expense.
RESEARCH AND DEVELOPMENT
Research and development expense was constant at $0.2 million for
the three months ended March 31, 2003 and 2002. As a percentage of total
revenue, research and development expense decreased to 1.0% for the three months
ended March 31, 2003 from 1.8% for the three months ended March 31, 2002. The
decrease as a percentage of total revenue was attributable to a higher growth in
revenue than research and development expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $0.7 million, or
140%, to $1.2 million for the three months ended March 31, 2003 from $0.5
million for the three months ended March 31, 2002. This increase was primarily
21
NYFIX, Inc.
attributable to the amortization expense related to our acquired intangible
assets in connection with our recently acquired NYFIX Millennium and Javelin
businesses of $0.5 million, depreciation and amortization expense for our
recently acquired transaction and Javelin businesses of $0.1 million, and the
continued investment in our infrastructure and to administrative support
equipment and leasehold improvements to support our growth of $0.1 million. As a
percentage of total revenue, depreciation and amortization expense increased to
6.8% for the three months ended March 31, 2003 from 5.3% for the three months
ended March 31, 2002. The increase in percentage of revenue was primarily
attributable to the impact of the aforementioned costs.
INCOME (LOSS) FROM OPERATIONS
Income from operations was $0.4 million for the three months ended
March 31, 2003 as compared to a loss from operations of $0.3 million for the
three months ended March 31, 2002. The improvement in operating results was
primarily due to the increase in revenue from our recently acquired transaction
and Javelin businesses, which more than offset the higher costs associated with
these businesses. As a percentage of total revenue, income from operations was
2.0% in the three months ended March 31, 2003 as compared to a deficit of 3.0%
in the three months ended March 31, 2002. The improvement as a percentage of
total revenue was attributable to a higher growth in revenue than costs of our
acquired businesses.
INTEREST EXPENSE
Interest expense decreased $56,000, or 64%, to $31,000 for the three
months ended March 31, 2003, from $87,000 for the three months ended March 31,
2002, principally due to interest incurred in connection with late payments of
certain obligations of $43,000 for the three months ended March 31, 2002.
INVESTMENT INCOME
Investment income increased slightly to $106,000 for the three
months ended March 31, 2003, from $82,000 for the three months ended March 31,
2002. This increase was principally due to realized losses on sales of
short-term investments aggregating $136,000 for the three months ended March 31,
2002, offset by lower interest income of $112,000 in the current period,
principally from short-term investments, due to lower yields on lower average
investment balances for the current period when compared to the prior year's
three month period.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES
Equity in loss of unconsolidated affiliates increased $330,000 to
$362,000 for the three months ended March 31, 2003, from $32,000 for the three
months ended March 31, 2002, as a result of losses recognized from investments
in unconsolidated affiliates of $179,000 for EuroLink and of $183,000 for
Renaissance in the three months ended March 31, 2003. In 2002, we recorded only
one month of EuroLink results as we acquired our investment on March 1, 2002.
INCOME TAX
We recorded an income tax benefit of $13,000 for the three months
ended March 31, 2003, compared to $133,000 for the three months ended March 31,
2002. The income tax benefit in the three months ended March 31, 2003 was
attributable to a tax provision on our pretax income which was more than offset
by a tax benefit for certain estimated Federal research and development tax
credits aggregating $38,000, available for research and development expenses
incurred during the three months ended March 31, 2003. Our effective tax benefit
rate of 21% in the three months ended March 31, 2003 differs from the Federal
statutory rate primarily due to the effects of the aforementioned research and
development tax credits, offset slightly by state income taxes.
22
NYFIX, Inc.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, we raised $57.3 million, net of expenses, from a
follow-on public offering of 3 million shares of our common stock. We used a
portion of the net proceeds for working capital requirements, to re-purchase 1.3
million shares of our common stock, to continue to invest in our infrastructure
and products and, subsequently, to acquire Javelin in March of 2002 and invest
in EuroLink and Renaissance. At March 31, 2003, our cash, cash equivalents and
short-term investments totaled $18.9 million as compared to $21.9 million at
December 31, 2002. We had short-term investments in current marketable security
instruments of $9.9 million at March 31, 2003, having interest rates ranging
from 0.85% to 3.74%. Included in cash and cash equivalents at March 31, 2003 was
$3.1 million in money market funds with an average 30 day yield of 0.8% and $0.1
million in a tax-free money fund with an average 30 day yield of 0.5%.
At March 31, 2003, we had total debt of $1.4 million, which
represented current and long-term amounts outstanding under capital lease
obligations. At March 31, 2003, we had no material commitments for capital
expenditures or inventory purchases. Our long-term capital needs depend 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 NYFIX 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 we can achieve synergies from our recently acquired
NYFIX Millennium and Javelin businesses. Although our NYFIX Millennium business
has incurred losses through its development and start-up stages, we believe that
revenue will continue to increase as we gain greater acceptance of our product
offerings. However, we expect NYFIX Millennium to possibly need additional
working capital during the first six to nine months of 2003, until it achieves
positive cash flow from operations. Our strategy is to migrate Javelin to more
of a subscription-based revenue model, similar to our core NYFIX USA business.
This may cause Javelin capital sale revenue to be unpredictable and
inconsistent. Although Javelin generated cash from operations in the three
months ended March 31, 2003, there can be no assurance that this trend will
continue. In addition, our unconsolidated affiliates, Renaissance and EuroLink,
have required $4.6 million in cumulative funding from us through March 31, 2003,
including $1.5 million in the three months ended March 31, 2003. We may be
required to provide additional funding to them, until they generate positive
cash flow or obtain other sources of capital. Such additional funding, if
required, may unfavorably impact our working capital.
We believe that our cash and investments of $18.9 million, together
with anticipated cash to be generated from operations will be sufficient to
support our capital and operating needs, including the operating needs of NYFIX
Millennium, Javelin and our unconsolidated affiliates, EuroLink and Renaissance
for at least the next twelve months.
WORKING CAPITAL
Our present capital resources include proceeds from internal
operations. At March 31, 2003, we had working capital of $30.2 million as
compared to $30.8 million at December 31, 2002. The decrease in working capital
was principally due to the cash used to acquire property and equipment, make
working capital advances to our unconsolidated affiliates, EuroLink and
Renaissance, and fund product enhancements. This decrease was partially offset
by cash flows generated from operating activities and sales of short-term
investments.
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash provided by operating activities in the three months ended
March 31, 2003 was $1.0 million, as our net income of $0.1 million, adjusted for
non-cash items, such as depreciation, amortization, deferred taxes, provision
23
NYFIX, Inc.
for bad debts and equity in loss of unconsolidated affiliates provided $3.3
million. Unfavorable working capital changes, including accounts receivable of
$2.3 million and accounts payable and accrued expenses of $1.1 million, which
were partially offset by favorable net changes in other assets and liabilities
of $1.1 million, decreased cash by $2.3 million.
Net cash used in operating activities in the three months ended
March 31, 2002 was $1.1 million, as our net income of $0.1 million, adjusted for
non-cash items, such as depreciation, amortization, deferred taxes and provision
for bad debts provided $2.0 million. Unfavorable working capital, including
accounts receivable of $1.4 million and accounts payable and accrued expenses of
$1.9 million, decreased cash by $3.1 million.
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
For the three months ended March 31, 2003 net cash used in investing
activities was $2.9 million. This consisted primarily of loans and advances to
unconsolidated affiliates of $1.5 million, capital expenditures, mostly for data
center equipment and software, of $1.5 million and product enhancement costs of
$0.9 million, partially offset by net proceeds from the net sales of short-term
investments of $0.9 million.
For the three months ended March 31, 2002 net cash provided by
investing activities was $11.2 million. This consisted primarily of net sales of
short-term investments of $20.2 million to fund the cash required for our
Javelin acquisition and EuroLink investment, repayment of loans and net advances
from NYFIX Millennium of $2.1 million prior to our acquisition of an 80%
interest on February 1, 2002 and the sale of equipment of $0.4 million. These
items were partially offset by the net payments for the Javelin and NYFIX
Millennium acquisitions of $6.2 million, our investment in EuroLink of $4.0
million, capital expenditures, mostly for data center equipment and to support
our infrastructure, of $0.8 million and product enhancement costs of $0.6
million.
CASH USED IN FINANCING ACTIVITIES
For the three months ended March 31, 2003 and March 31, 2002, our
net cash used in financing activities totaled $0.3 million and $0.1 million,
respectively, consisting primarily of principal payments under capital lease
obligations, partially offset by net proceeds from the exercise of stock options
by employees.
SEASONALITY AND INFLATION
We believe that our operations have not been significantly affected
by seasonality or inflation.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 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 No. 146 are effective for
exit or disposal activities initiated after December 31, 2002. The Company
adopted SFAS No. 146 effective January 1, 2003.
In November 2002, the EITF reached a consensus on No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF No. 00-21
applies to certain contractually binding arrangements under which a company
performs multiple revenue generating activities and requires that all companies
account for each element within an arrangement with multiple deliverables as
separate units of accounting if (a) the delivered item has value on a
stand-alone basis, (b) there is objective and reliable evidence of fair value
and (c) the amount of the total arrangement consideration is fixed. EITF No.
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. We are evaluating the provisions of EITF No.
00-21 and whether the implementation of this statement will have a material
effect on our financial position, results of operations or cash flows.
24
NYFIX, Inc.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for companies that voluntarily change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123 and APB No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and income per share
in annual and interim financial statements. The disclosure provisions of SFAS
No. 148 are effective for both interim and annual periods ending after December
15, 2002. We adopted the disclosure provisions of SFAS No. 148 at December 31,
2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which requires the consolidation of certain entities
considered to be variable interest entities ("VIEs"). An entity is considered to
be a VIE when it has equity investors which lack the characteristics of a
controlling financial interest, or its capital is insufficient to permit it to
finance its activities without additional subordinated financial support.
Consolidation of a VIE by an investor is required when it is determined that the
investor will absorb a majority of the VIE's expected losses or residual returns
if they occur. FIN 46 provides certain exceptions to these rules, including
qualifying special purpose entities subject to the requirements of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. VIEs created after January 31, 2003 must be consolidated
immediately, while VIEs that existed prior to February 1, 2003 must be
consolidated as of July 1, 2003. We are evaluating the provisions of FIN 46 and
whether the implementation of this statement, with regard to our unconsolidated
affiliates, will have a material effect on our financial position, 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 do not use derivative
financial instruments for any purpose.
We are exposed to market risk principally through changes in
interest rates and equity prices. Our short-term investment portfolio of $9.9
million and $10.7 million at March 31, 2003 and December 31, 2002, respectively,
consisted of $5.9 million and $6.8 million, respectively, of auction rate
certificates and $4.0 million and $3.9 million, respectively, of mutual fund
securities. Risk is limited on the auction rate certificates portfolio due to
the fact that it is invested in insured municipal bonds of which no more than 5%
of our portfolio can be invested in any one security issue. The potential
25
NYFIX, Inc.
decrease in fair value resulting from a hypothetical 10% change in interest
rates for the auction rate certificates would not be material to income, cash
flows or fair value.
The mutual fund securities portfolio was 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. These securities are subject to equity price risk. The estimated
potential loss in fair value resulting from a hypothetical 10% decrease in the
quoted price is $0.4 million.
We are also subject to interest rate risk on our $3.1 million and
$2.0 million of notes receivable from unconsolidated affiliates at March 31,
2003 and December 31, 2002. A hypothetical 10% change in interest rates would
not result in a material change in their fair value.
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 its 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 1. LEGAL PROCEEDINGS
See Item 5, Other Information, for discussion of recently filed
litigation.
ITEM 5. OTHER INFORMATION
On May 13, 2003, the Company was served as a defendant in KLEDARAS
v. NYFIX, INC. (Sup. Ct. NY County) Index No. 601502/03, which had been filed on
the same date in New York State court in New York City. George Kledaras, as
representative of shareholders of Javelin Technologies, Inc. ("Javelin"), seeks
the release of an escrow fund established in connection with the Company's
acquisition of Javelin in March 2002 and alleges damages of at least $18 million
against the Company and its Chairman and CEO, Peter K. Hansen, in connection
with such acquisition. The Company believes the lawsuit is without merit and
intends to defend itself vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Secured Promissory Note from Renaissance Trading Technologies,
LLC to the Registrant, dated as of March 12, 2003, in the
principal amount of $1.0 million.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) REPORTS ON FORM 8-K
There were no Reports on Form 8-K filed during the three months ended
March 31, 2003.
Omitted from this Part II are items which are inapplicable or to
which the answer is negative for the period presented.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NYFIX, INC.
By: /s/ Mark R. Hahn
-----------------------------------------
Mark R. Hahn
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
Dated: May 15, 2003
28
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 officer 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 officer 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 officer 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: May 15, 2003
/s/ Peter K. Hansen
- ----------------------------------------
Peter K. Hansen
Chairman, President and
Chief Executive Officer
29
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 officer 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 officer 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 officer 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: May 15, 2003
/s/ Mark R. Hahn
- ----------------------
Mark R. Hahn
Chief Financial Officer
30
Exhibits Index
Exhibit
10.1 Secured Promissory Note from Renaissance Trading Technologies, LLC
to the Registrant, dated as of March 12, 2003, in the principal
amount of $1.0 million.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer