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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 June 30, 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 31,245,490 shares of Common Stock issued and outstanding as of July
31, 2003.
NYFIX, INC.
FORM 10-Q
For the quarter ended June 30, 2003
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 3
Consolidated Statements of Operations for the three
and six months ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
2
PART I. FINANCIAL INFORMATION
NYFIX, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
June 30, December 31,
2003 2002
------------ --------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 11,884 $ 11,213
Short-term investments 10,014 10,727
Accounts receivable, less allowances of $1,254 and $1,207, respectively 14,382 16,601
Inventory, net 1,105 1,098
Due from unconsolidated affiliates 552 537
Deferred income taxes 622 590
Prepaid expenses and other 2,652 2,938
--------- ---------
Total current assets 41,211 43,704
Property and equipment, net 16,874 18,186
Goodwill 70,161 70,161
Acquired intangible assets, net 8,380 9,404
Investments in unconsolidated affiliates 4,848 5,510
Notes receivable from unconsolidated affiliates 2,578 1,519
Other amounts due from unconsolidated affiliates 2,163 1,002
Deferred income taxes 6,741 6,181
Other assets, net 6,083 5,150
--------- ---------
Total assets $ 159,039 $ 160,817
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,010 $ 3,729
Accrued expenses 4,497 5,360
Current portion of capital lease obligations 793 1,089
Deferred revenue 2,641 2,561
Other current liabilities 171 142
--------- ---------
Total current liabilities 12,112 12,881
Long-term portion of capital lease obligations 357 664
Other long-term liabilities 158 207
--------- ---------
Total liabilities 12,627 13,752
--------- ---------
Commitments and contingencies (see notes)
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;
32,544,390 and 32,420,558 issued, respectively 33 32
Additional paid-in capital 161,586 161,347
Retained earnings 4,295 5,276
Treasury stock, 1,301,300 shares, at cost (19,100) (19,100)
Due from issuance of common stock (613) (597)
Accumulated other comprehensive income 211 107
--------- ---------
Total stockholders' equity 146,412 147,065
--------- ---------
Total liabilities and stockholders' equity $ 159,039 $ 160,817
========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements.
3
NYFIX, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue:
Subscription $ 8,103 $ 8,063 $ 16,650 $ 15,240
Sale 2,028 1,295 4,683 2,604
Service contract 2,295 2,375 4,767 3,591
Transaction 3,270 1,353 6,879 1,722
-------- -------- -------- --------
Total revenue 15,696 13,086 32,979 23,157
-------- -------- -------- --------
Cost of Revenue:
Subscription 4,812 3,906 9,385 7,035
Sale 414 683 898 905
Service contract 546 649 1,088 880
Transaction 1,973 1,647 4,119 2,512
-------- -------- -------- --------
Total cost of revenue 7,745 6,885 15,490 11,332
-------- -------- -------- --------
Gross Profit:
Subscription 3,291 4,157 7,265 8,205
Sale 1,614 612 3,785 1,699
Service contract 1,749 1,726 3,679 2,711
Transaction 1,297 (294) 2,760 (790)
-------- -------- -------- --------
Total gross profit 7,951 6,201 17,489 11,825
-------- -------- -------- --------
Operating Expense:
Selling, general and administrative 8,289 9,670 16,124 14,882
Research and development 385 460 562 639
Depreciation and amortization 1,203 1,220 2,379 1,757
-------- -------- -------- --------
Total operating expense 9,877 11,350 19,065 17,278
-------- -------- -------- --------
Loss from operations (1,926) (5,149) (1,576) (5,453)
Investment income 147 116 253 198
Interest expense (27) (56) (58) (143)
Other expense, net (225) (107) (587) (139)
-------- -------- -------- --------
Loss before income tax benefit and minority
interest (2,031) (5,196) (1,968) (5,537)
Income tax benefit (974) (2,277) (987) (2,410)
-------- -------- -------- --------
Loss before minority interest (1,057) (2,919) (981) (3,127)
Minority interest in NYFIX Millennium, net
of tax -- -- -- 306
-------- -------- -------- --------
Net loss $ (1,057) $ (2,919) $ (981) $ (2,821)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.03) $ (0.10) $ (0.03) $ (0.10)
======== ======== ======== ========
Basic and diluted weighted average common
shares outstanding 31,173 30,720 31,152 29,318
======== ======== ======== ========
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)
Six Months Ended
June 30,
-------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (981) $ (2,821)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,196 4,934
Deferred income taxes (522) (56)
Provision for bad debts 298 1,015
Equity in loss of unconsolidated affiliates 662 139
Minority interest in NYFIX Millennium, net of income tax -- (306)
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable 1,921 879
Inventory (7) 75
Prepaid expenses and other 111 (2,723)
Deferred revenue 80 44
Accounts payable, accrued expenses and other liabilities (580) (1,343)
Other, net (90) 119
-------- --------
Net cash provided by (used in) operating activities 7,088 (44)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (101) (9,731)
Sales of short-term investments 950 25,793
Capital expenditures for property and equipment (2,653) (1,684)
Capitalization of product enhancement costs and other (2,089) (1,708)
Proceeds from sale of equipment -- 373
Payments for acquisitions, net of cash acquired -- (6,781)
Investments in unconsolidated affiliates -- (4,000)
(Loans and advances to) repayments from unconsolidated affiliates, net (2,161) 2,140
-------- --------
Net cash (used in) provided by investing activities (6,054) 4,402
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (603) (533)
Net proceeds from issuance of common stock 240 233
-------- --------
Net cash used in financing activities (363) (300)
-------- --------
Net increase in cash and cash equivalents 671 4,058
Cash and cash equivalents, beginning of period 11,213 4,968
-------- --------
Cash and cash equivalents, end of period $ 11,884 $ 9,026
======== ========
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 majority-owned and wholly-owned
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
integrating 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 links industry participants together and
provides 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 contained
herein are adequate to make the information presented not misleading. The
consolidated balance sheet as of June 30, 2003, the consolidated statements of
operations for the three and six months ended June 30, 2003 and 2002 and the
consolidated statements of cash flows for the six months ended June 30, 2003 and
2002 are unaudited. The accompanying consolidated financial statements include
the accounts of the Company and reflect all adjustments, which were comprised of
normal and recurring accruals, considered necessary by management 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 interest in 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.
Subsequent to June 30, 2003, the Company executed a binding agreement to acquire
Renaissance, effective July 1, 2003 (see Note 10).
The operating results for the three and six months ended June 30, 2003
and 2002 are not necessarily indicative of the results to be expected for any
future 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,
6
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
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 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, primarily related to the Company's data center, totaling
$2.5 million and $4.2 million to cost of revenue for the three and six months
ended June 30, 2002, respectively.
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 loss and loss per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation", as required by SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure," to stock-based employee compensation:
Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share amounts)
Net loss, as reported $ (1,057) $ (2,919) $ (981) $(2,821)
Compensation expense based on the fair
value method, net of tax (1,288) (1,924) (3,020) (4,039)
------------ ------------ ------------ -------
Pro forma net loss $ (2,345) $ (4,843) $ (4,001) $(6,860)
============ ============ ============ =======
Basic and diluted loss per common share:
As reported $ (0.03) $ (0.10) $ (0.03) $ (0.10)
============ ============ ============ =======
Pro forma $ (0.08) $ (0.16) $ (0.13) $ (0.23)
============ ============ ============ =======
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("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
7
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
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 to determine whether its
unconsolidated affiliate, EuroLink, is a VIE. Through June 30, 2003, the Company
had recognized its 40% ownership interest, or $0.4 million, after tax, of
EuroLink's net losses since its investment. If the Company determines that
EuroLink is a VIE, the Company would be required to recognize additional losses
of $0.7 million, after tax, of EuroLink's net losses since its investment and
the financial position, results of operations and cash flows of EuroLink would
be consolidated into the Company's financial statements starting July 1, 2003.
Subsequent to June 30, 2003, the Company executed a binding agreement to acquire
the remaining 82% of its other unconsolidated affiliate, Renaissance, that the
Company did not already own, effective July 1, 2003. Accordingly, the financial
position and results of operations of Renaissance will be consolidated into the
Company's financial statements as of that date (see Note 10).
In May 2003, the FASB Emerging Issues Task Force ("EITF") finalized the
scope provisions of Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." Issue 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. Issue No. 00-21 is effective for revenue arrangements
entered into in reporting periods beginning after June 15, 2003. The Company is
evaluating the provisions of Issue No. 00-21 and whether its implementation will
have a material effect on the Company's financial position and results of
operations.
2. INVENTORY
Inventory consisted of the following:
June 30, December 31,
2003 2002
--------- ------------
(in thousands)
Parts and materials $1,066 $ 912
Work in process -- 52
Finished goods 199 294
------ ------
Total inventory, gross 1,265 1,258
Less: Allowance for obsolescence 160 160
------ ------
Total inventory, net $1,105 $1,098
====== ======
3. ACQUISITIONS, GOODWILL AND OTHER ACQUIRED INTANGIBLES
ACQUISITIONS
NYFIX Millennium
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
8
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
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%, or a total of 24%, 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 operations 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 NYFIX Transaction Services broker-dealer, and the Company's
ability to exercise significant control over NYFIX Millennium's operations.
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 statements of operations
for the three and six months ended June 30, 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 $7.5 million post acquisition through June 30,
9
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
2003, which was $5.5 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 24% share of NYFIX Millennium losses in excess
of the Company's capital contribution, aggregating $1.3 million through June 30,
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 a
messaging standard, 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
included: 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 statements of operations 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
resolution of a dispute with respect to the disposition of the assets held in
escrow, to be determined based on activities through March 31, 2003. In March
2003, the Company filed claims for partial reimbursement of such funds. In May
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 in New York State court in
New York City. Mr. George Kledaras, as representative of shareholders of
Javelin, sought the release of the escrow fund and alleged damages of at least
$18 million against the Company and its Chairman and CEO, Peter K. Hansen, in
connection with such acquisition. In June 2003, pursuant to a stipulation with
the Company, Mr. Kledaras dismissed his lawsuit without prejudice. The Company
and Mr. Kledaras are currently attempting to negotiate a settlement with respect
to disposition of the escrow fund. The entire amount of cash and shares
continues to be held in escrow pending resolution of its disposition. The
Company will record the return of the escrow funds, if any, as a reduction of
goodwill. The Company does not believe that the disposition of this matter will
have a material adverse impact on its financial conditions, results of
operations or cash flows.
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 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 respective remaining service maintenance contract
periods 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 June 30, 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-
June 30, 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 2,620 1,596
------- -------
Total intangible assets, net $ 8,380 $ 9,404
======= =======
Amortization expense of acquired intangible assets was $0.5 million and
$1.0 million for the three and six months ended June 30, 2003, respectively.
During the three and six months ended June 30, 2003, no goodwill was acquired,
impaired or written-off.
Based on identified intangible assets recorded at June 30, 2003, and
assuming no subsequent impairment of the underlying assets, the future
amortization expense is expected to be as follows:
11
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Amount
------
(in thousands)
Remainder of 2003 $ 1,024
2004 2,048
2005 2,048
2006 2,048
2007 923
Thereafter 289
--------
Future estimated amortization expense $ 8,380
========
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 and six months ended June 30, 2003, the Company recorded losses on the
investment of $89,000 and $268,000, respectively, and during the three and six
months ended June 30, 2002, the Company recorded losses on the investment of
$107,000 and $139,000, respectively, which were included in "other expense, net"
in the accompanying consolidated statements of operations. In addition, the
Company had a note receivable from EuroLink at June 30, 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. As previously noted, the Company is
evaluating the provisions of FIN 46 to determine whether its investment in
EuroLink is a VIE. If the Company determines that EuroLink is a VIE, the Company
would be required to recognize additional losses of $0.7 million, after tax, of
EuroLink's net losses since its investment and the financial position, results
of operations and cash flows of EuroLink would be consolidated into the
Company's financial statements starting July 1, 2003.
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 had 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
12
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
any time 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 and six months ended June 30, 2003, the Company recorded losses on the
investment of $211,000 and $394,000, which were included in "other expense, net"
in the accompanying consolidated statements of operations.
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 $0.8 million and $1.0 million to fund certain operating costs and
capital expenditures during the six months ended June 30, 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, three years. The Company subleases approximately 8,000 square feet of
office space to Renaissance at an annual cost of $0.2 million.
Subsequent to June 30, 2003, the Company executed a binding agreement to
acquire the remaining 82% of Renaissance not already owned by the Company,
effective July 1, 2003. Accordingly, the financial position and results of
operations of Renaissance will be consolidated into the Company's financial
statements as of that date (see Note 10).
5. INCOME TAXES
The Company recorded a tax benefit of $1.0 million for both the three
and six months ended June 30, 2003, and tax benefits of $2.3 million and $2.4
million for the three and six months ended June 30, 2002, respectively. The
Company's effective tax benefit rate was 48% and 50% for the three and six
months ended June 30, 2003, respectively, and 44% for both the three and six
months ended June 30, 2002. The Company's effective tax benefit rate for the
three and six months ended June 30, 2003 is higher than the Federal statutory
rate primarily due to the effects of the recognition of certain research and
development tax credits and state income taxes. The Company's effective tax
benefit rate for the three and six months ended June 30, 2002 exceeds the
Federal statutory rate primarily due to the effect of state income taxes.
6. PER SHARE INFORMATION
The Company's basic loss per common share ("EPS") was calculated based
on the net loss available to common stockholders and the weighted-average number
of shares outstanding during the reported period. Diluted EPS normally includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of outstanding stock options. Stock options
representing 1,111,542 and 926,051 shares for the three and six month periods
ended June 30, 2003, respectively, and 964,983 and 1,085,472 shares for the
three and six month periods ended June 30, 2002, respectively, were excluded
from the loss per share calculations since the amounts would be anti-dilutive.
13
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share amounts)
Net loss $ (1,057) $ (2,919) $ (981) $ (2,821)
======== ======== ====== ========
Loss per common share $ (0.03) $ (0.10) $(0.03) $ (0.10)
======== ======== ====== ========
Weighted average shares outstanding 31,173 30,720 31,152 29,318
======== ======== ====== ========
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
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:
14
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- --------- --------
Revenue: (in thousands)
Technology Services $ 12,764 $ 11,611 $ 26,683 $ 21,313
Transaction Services 3,665 1,475 7,514 1,844
Eliminations (733) -- (1,218) --
-------- -------- -------- --------
Total revenue $ 15,696 $ 13,086 $ 32,979 $ 23,157
======== ======== ======== ========
Gross Profit:
Technology Services $ 7,047 $ 6,398 $ 15,290 $ 12,518
Transaction Services 904 (197) 2,199 (693)
-------- -------- -------- --------
Total gross profit $ 7,951 $ 6,201 $ 17,489 $ 11,825
======== ======== ======== ========
Reconciling information between business segments and the loss before
income tax benefit and minority interest was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands)
Gross profit for reportable segments $ 7,951 $ 6,201 $ 17,489 $ 11,825
Operating expenses (9,877) (11,350) (19,065) (17,278)
Interest expense (27) (56) (58) (143)
Investment income 147 116 253 198
Other expense, net (225) (107) (587) (139)
-------- -------- -------- --------
Loss before income tax benefit
and minority interest $ (2,031) $ (5,196) $ (1,968) $ (5,537)
======== ======== ======== ========
8. OTHER COMPREHENSIVE LOSS
The components of other comprehensive loss, net of tax, were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- -------
(in thousands)
Net loss $(1,057) $(2,919) $ (981) $(2,821)
Changes in net unrealized gain on
available-for-sale securities 70 25 104 60
------- ------- ------- -------
Total comprehensive loss $ (987) $(2,894) $ (877) $(2,761)
======= ======= ======= =======
15
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Accumulated other comprehensive income, net of tax, at June 30, 2003 and
December 31, 2002 consisted of the accumulated net unrealized gain on
available-for-sale securities of $211,000 and $107,000, respectively.
9. CASH FLOW SUPPLEMENTAL INFORMATION
Information about the cash flow activities related to acquisitions was
as follows:
Six Months Ended
June 30,
-------------------------
2003 2002
----------- ---------
(in thousands)
Fair value of net assets acquired, net of cash acquired $ -- $ 99,619
Fair value of liabilities assumed -- (16,184)
Common stock issued for acquisitions -- (49,154)
Pre-acquisition investment basis -- (27,500)
----------- --------
Payments for acquisitions, net of cash acquired $ -- $ 6,781
=========== ========
The preceding fair values of net assets and liabilities were based on
the preliminary values at June 30, 2002. The final allocation of assets acquired
differed from the fair values presented.
Information about other cash flow activities was as follows:
Six Months Ended
June 30,
----------------------
2003 2002
-------- ---------
Supplemental disclosures of cash flow information: (in thousands)
Cash paid for interest $ 58 $ 143
(Refunds received) cash paid for income taxes, net (564) 1,558
Supplemental schedule of noncash investing and
financing information:
Capital lease obligations incurred for the purchase
of property and equipment -- 1,278
Unrealized gain on available-for-sale securities (104) (60)
10. SUBSEQUENT EVENT
On July 1, 2003, the Company executed a binding agreement to acquire the
remaining 82% of Renaissance. The transaction is expected to close during the
third quarter of 2003. The Company, previously an 18% owner of Renaissance (see
Note 4), will finance the transaction by exercising its option to convert an
outstanding $1.5 million promissory note for 32% additional equity and acquiring
the remaining 50% equity in Renaissance with a combination of newly issued
shares of the Company's common stock and cash, at the Company's discretion, with
a total value of $6.0 million.
16
NYFIX, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(unaudited)
Some of the Company's key considerations for the acquisition of
Renaissance include the ability to sell its products into the OTC market, by
integrating Renaissance features into existing NYFIX products to enable
customers to have a single view and access to the OTC and listed marketplaces
from one workstation.
The Company will consolidate Renaissance's operating results effective
July 1, 2003. The acquisition will be accounted for as a purchase. While it is
anticipated that a substantial portion of the purchase price will be classified
as goodwill, the Company expects that it will complete its final allocation of
the purchase price to the tangible and intangible assets of Renaissance by
December 31, 2003. Preliminary allocations will be made to the tangible and
intangible assets during the third quarter of 2003.
17
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 can eliminate 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 have been
18
NYFIX, Inc.
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 ("2002 Form
10-K"). 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 2002 Form 10-K for our
significant accounting policies. In the first six months of 2003, there have
been no material 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.
During the second quarter of 2003, we formed a clearing subsidiary, NYFIX
Clearing Corporation, which we expect to become operational later this year. We
believe that we can significantly lower the ticket and transaction charges that
we are currently incurring in our transaction segment by becoming self-clearing.
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.
19
NYFIX, Inc.
Depreciation and amortization expense consists of depreciation and
amortization of corporate equipment and software, and amortization of intangible
assets.
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
expenses, primarily related to our data center, totaling $2.5 million and $4.2
million to cost of revenue for the three and six months ended June 30, 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 JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
REVENUE
Total revenue increased $2.6 million, or 20%, to $15.7 million for the
three months ended June 30, 2003, from $13.1 million for the three months ended
June 30, 2002, primarily due to increased transaction revenue for our
broker-dealer subsidiaries of $1.9 million and revenue attributable to Javelin
products of $0.6 million.
Subscription revenue was $8.1 million for both the three months ended
June 30, 2003 and 2002. As a percentage of total revenue, subscription revenue
decreased to 52% in the three months ended June 30, 2003, from 62% in the three
months ended June 30, 2002, primarily due to the higher increase in transaction
revenue of our broker-dealer subsidiaries and sale revenue for our Javelin and
derivatives products.
Sale revenue increased $0.7 million, or 57%, to $2.0 million for the
three months ended June 30, 2003, from $1.3 million for the three months ended
June 30, 2002, primarily due to increased revenue for our Javelin products of
$0.6 million. As a percentage of total revenue, sale revenue increased to 13%
for the three months ended June 30, 2003 as compared to 10% for the three months
ended June 30, 2002, primarily due to the increase in sale revenue for our
Javelin products, which was partially offset by increased transaction revenue.
Service contract revenue decreased $0.1 million, or 3%, to $2.3 million
for the three months ended June 30, 2003 as compared to $2.4 million for the
three months ended June 30, 2002, due to a slight decrease in service contract
revenue from our Javelin products. As a percentage of total revenue, service
contract revenue was 15% in the three months ended June 30, 2003, as compared to
18% in the three months ended June 30, 2002, primarily due increased transaction
revenue.
Transaction revenue increased $1.9 million to $3.3 million for the three
months ended June 30, 2003 as compared to $1.4 million for the three months
ended June 30, 2002 due to revenue attributed to NYFIX Transaction Services,
which started generating revenue on July 1, 2002, an increase in the number of
NYFIX Millennium customers and increased transaction activity for existing
customers. As a percentage of total revenue, transaction revenue was 21% in the
three months ended June 30, 2003, as compared to 10% in the three months ended
June 30, 2002, primarily due to the aforementioned increased transaction
revenue.
COST OF REVENUE
Total cost of revenue increased $0.9 million, or 12%, to $7.8 million
for the three months ended June 30, 2003 as compared to $6.9 million for the
three months ended June 30, 2002, due primarily to clearing and specialist fees
for our transaction revenue of $0.4 million; increased telecommunication
charges, due to increased desktop connections and capacity in our data centers,
20
NYFIX, Inc.
of $0.4 million; increased amortization of product enhancement costs
attributable to new product releases, of $0.2 million; increased depreciation
expense attributable to investment in data center infrastructure, of $0.2
million; partially offset by reduced labor costs of $0.2 million.
Subscription cost of revenue increased $0.9 million, or 23%, to $4.8
million for the three months ended June 30, 2003 as compared to $3.9 million for
the three months ended June 30, 2002, primarily due to increased data center
costs, including telecommunication charges due to an increase in desktop
connections and capacity in our data centers, of $0.5 million; increased cross
connection fees to connect our subscription customers to third-party networks,
of $0.2 million; increased depreciation and amortization expense of $0.1
million, attributable primarily to increased investment in our data center
infrastructure, and increased labor costs of $0.1 million. As a percentage of
subscription revenue, subscription cost of revenue increased to 59.4% in the
three months ended June 30, 2003 from 48.4% in the three months ended June 30,
2002, primarily due to increases in the aforementioned costs without an increase
in subscription revenue.
Sale cost of revenue decreased $0.3 million, or 39%, to $0.4 million for
the three months ended June 30, 2003 as compared to $0.7 million for the three
months ended June 30, 2002. The decrease in sale cost of revenue was primarily
due to decreased labor costs of $0.2 million and decreased costs of purchased
software of $0.1 million. As a percentage of sale revenue, sale cost of revenue
decreased to 20.4% in the three months ended June 30, 2003, from 52.7% in the
three months ended June 30, 2002, due primarily to decreased Javelin labor costs
and an increase in sale revenue.
Service contract cost of revenue decreased $0.1 million, or 16%, to $0.5
million for the three months ended June 30, 2003, from $0.6 million in the three
months ended June 30, 2002. The decrease was primarily due to decreased service
contract labor costs. As a percentage of service contract revenue, service
contract cost of revenue decreased to 23.8% in the three months ended June 30,
2003, as compared to 27.3% in the three months ended June 30, 2002, primarily
attributable to the aforementioned decreased labor costs.
Transaction cost of revenue increased $0.3 million, or 20%, to $2.0
million for the three months ended June 30, 2003, from $1.7 million for the
three months ended June 30, 2002, primarily due to clearing and execution fees
of $0.4 million. As a percentage of transaction revenue, transaction cost of
revenue decreased to 60.3% in the three months ended June 30, 2003, as compared
to 121.7% in the three months ended June 30, 2002, due primarily to increased
transaction revenue. In addition, NYFIX Transaction Services incurred costs in
the three months ended June 30, 2002 prior to generating revenue, which occurred
on July 1, 2002.
GROSS PROFIT (AS A PERCENTAGE OF REVENUE)
Gross profit increased to 50.7% for the three months ended June 30, 2003
as compared to 47.4% for the three months ended June 30, 2002. The increase in
gross profit is primarily attributable to the impact of increased Javelin sale
revenue and transaction revenue, offset by reduced subscription margin due to
increased data center costs and increased telecommunication charges, due to more
desktop connections and increased capacity in our data centers.
Subscription gross profit decreased to 40.6% for the three months ended
June 30, 2003, as compared to 51.6% for the three months ended June 30, 2002.
The decrease in subscription gross profit is primarily attributable to increased
data center costs, including telecommunication charges, due to more desktop
connections and increased capacity in our data centers, increased
cross-connection fees to connect our subscription customers to third-party
networks, and increased depreciation and amortization expense related to
infrastructure investments in our data center.
Sale gross profit increased to 79.6% for the three months ended June 30,
2003 as compared to 47.3% for the three months ended June 30, 2002. The increase
in sale gross profit was primarily attributable to the impact of increased
21
NYFIX, Inc.
Javelin revenue and decreased costs of purchased software offset by increased
amortization expense attributable to capitalized software included in our
products delivered to our customers.
Service contract gross profit increased to 76.2% for the three months
ended June 30, 2003 as compared to 72.7% for the three months ended June 30,
2002. The increase in service contract gross profit was primarily attributable
to the impact of lower labor costs in the three-month period.
Transaction gross profit increased to 39.7% for the three months ended
June 30, 2003 as compared to a deficit of 21.7% for the three months ended June
30, 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 incurred costs in the three months ended
June 30, 2002, but did not start generating revenue until July 1, 2002.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense decreased $1.4 million, or
14%, to $8.3 million for the three months ended June 30, 2003 as compared to
$9.7 million for the three months ended June 30, 2002. The decrease was
primarily attributable to reduced bad debt expense of $0.7 million due to
improved collections and reduced salaries and benefits of $0.7 million due to
staffing reductions, which occurred subsequent to the acquisition of Javelin. As
a percentage of total revenue, selling general and administrative expense
decreased to 52.8% in the three months ended June 30, 2003 from 73.9% in the
three months ended June 30, 2002. The decrease as a percentage of total revenue
was attributable to a combination of growth in revenue and the reduction in
selling, general and administrative expense.
RESEARCH AND DEVELOPMENT
Research and development expense decreased $0.1 million to $0.4 million
for the three months ended June 30, 2003 as compared to $0.5 million for the
three months ended June 30, 2002. As a percentage of total revenue, research and
development expense decreased to 2.5% for the three months ended June 30, 2003,
from 3.5% for the three months ended June 30, 2002. The decrease as a percentage
of total revenue was attributable to a combination of the higher growth in
revenue and the decrease in research and development expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense remained constant at $1.2 million
for the three months ended June 30, 2003 and 2002. Increased amortization
expense of $0.5 million related to our acquired intangible assets in connection
with our NYFIX Millennium and Javelin businesses was offset by reduced
depreciation expense of $0.5 million, due primarily to reduced depreciation of
leased equipment. As a percentage of total revenue, depreciation and
amortization expense decreased to 7.7% for the three months ended June 30, 2003
from 9.3% for the three months ended June 30, 2002. The decrease as a percentage
of total revenue was primarily attributable to the increase in revenue without
an increase in depreciation and amortization expense.
LOSS FROM OPERATIONS
Loss from operations decreased $3.2 million, or 63%, to $1.9 million for
the three months ended June 30, 2003, as compared to $5.1 million for the three
months ended June 30, 2002. The improvement in operating results was primarily
due to increased revenue, primarily from our transaction and Javelin products
and lower selling, general and administrative expense, which was partially
offset by increased cost of revenue. As a percentage of total revenue, loss from
operations was a deficit of 12.3% in the three months ended June 30, 2003 as
compared to a deficit of 39.3% in the three months ended June 30, 2002. The
22
NYFIX, Inc.
improvement as a percentage of total revenue was attributable to a combination
of the growth in revenue and the decrease in expense.
INVESTMENT INCOME
Investment income increased $31,000, or 27%, to $147,000 for the three
months ended June 30, 2003, from $116,000 for the three months ended June 30,
2002. The increase was primarily due to interest income on higher yield
investments.
INTEREST EXPENSE
Interest expense decreased $29,000, or 52%, to $27,000 for the three
months ended June 30, 2003, from $56,000 for the three months ended June 30,
2002, principally due to reduced capital lease obligations.
OTHER EXPENSE, NET
Other expense increased $118,000 to $225,000 for the three months ended
June 30, 2003 as compared to $107,000 for the three months ended June 30, 2002,
due primarily to losses incurred from our equity in losses of unconsolidated
affiliates.
INCOME TAX BENEFIT
We recorded an income tax benefit of $1.0 million for the three months
ended June 30, 2003, compared to $2.3 million for the three months ended June
30, 2002. The income tax benefit for the three months ended June 30, 2003 was
attributable to a tax benefit on our pre-tax loss of $2.0 million and tax
benefits for certain Federal and state research and development tax credits. Our
effective tax benefit rate of 48% for the three months ended June 30, 2003
exceeded the Federal statutory rate primarily due to the effect of the
aforementioned research and development tax credits and state tax benefits. The
income tax benefit for the three months ended June 30, 2002 was attributable to
a tax benefit on our pre-tax loss of $5.2 million. Our effective tax benefit
rate of 44% for the period exceeded the Federal statutory rate primarily due to
the effect of state tax benefits.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
REVENUE
Total revenue increased $9.8 million, or 42%, to $33.0 million for the
six months ended June 30, 2003, as compared to $23.2 million for the six months
ended June 30, 2002, primarily due to transaction revenue, of $5.7 million,
derived from NYFIX Transaction Services, which started generating revenue on
July 1, 2002, and NYFIX Millennium, whose results have been included in our
consolidated financial statements since our acquisition of NYFIX Millennium on
February 1, 2002, and revenue for our Javelin products, of $3.6 million.
Subscription revenue increased $1.4 million, or 9%, to $16.6 million for
the six months ended June 30, 2003 as compared to $15.2 million for the six
months ended June 30, 2002, primarily due to increases in subscription revenue
attributable to a full six months for our Javelin products as compared to three
months in 2002 and increased demand from our core customers and the net addition
of new customers. As a percentage of total revenue, subscription revenue
decreased to 50% in the six months ended June 30, 2003 from 66% in the six
months ended June 30, 2002, primarily due to the increased transaction revenue
from our broker-dealer operations and the increase of sale and service contract
revenue attributable to a full six months revenue from our Javelin products as
compared to three months revenue in 2002.
Sale revenue increased $2.1 million, or 80%, to $4.7 million for the six
months ended June 30, 2003 as compared to $2.6 million for the six months ended
June 30, 2002, primarily due to increased sale revenue from our Javelin
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NYFIX, Inc.
products, which was attributable to a full six months of revenue in 2003 as
compared to three months in 2002. As a percentage of total revenue, sale revenue
increased to 14% in the six months ended June 30, 2003, from 11% in the six
months ended June 30, 2002, primarily due to the increase from the sale revenue
for our Javelin products, which was partially offset by the effect of the
increased transaction revenue for the six months ended June 30, 2003.
Service contract revenue increased $1.2 million, or 33%, to $4.8 million
for the six months ended June 30, 2003 as compared to $3.6 million in the six
months ended June 30, 2002, due to the addition of service contract revenue from
our Javelin products. As a percentage of total revenue, service contract revenue
was 14% in the six months ended June 30, 2003, as compared to 16% in the six
months ended June 30, 2002, primarily due to the effect of increased transaction
revenue for the six months ended June 30, 2003, which was partially offset by
the aforementioned service contract revenue increase from our Javelin business.
Transaction revenue increased $5.2 million to $6.9 million for the six
months ended June 30, 2003 as compared to $1.7 million in the six months ended
June 30, 2002. As a percentage of total revenue, transaction revenue was 21% in
the six months ended June 30, 2003, as compared to 7% in the six months ended
June 30, 2002, primarily due to the aforementioned transaction revenue derived
from NYFIX Transaction Services and NYFIX Millennium.
COST OF REVENUE
Total cost of revenue increased $4.2 million, or 37%, to $15.5 million
for the six months ended June 30, 2003 as compared to $11.3 million in the six
months ended June 30, 2002, due primarily to clearing and specialist fees
related to our transaction revenue, of $1.1 million; increased telecommunication
charges, due to more desktop connections and increased capacity in our data
centers to support our business, of $1.0 million; increased amortization of
product enhancement costs attributable to new product releases, of $0.7 million;
increased depreciation expense attributable to investment in data center
infrastructure, of $0.5 million and increased labor costs of $0.8 million.
Subscription cost of revenue increased $2.4 million, or 33%, to $9.4
million for the six months ended June 30, 2003 as compared to $7.0 million for
the six months ended June 30, 2002, primarily due to increased data center
costs, including telecommunication charges due to more desktop connections and
increased capacity in our data centers, of $1.3 million; increased cross
connection fees of $0.4 million to connect our subscription customers to
third-party networks; increased depreciation and amortization expense of $0.3
million, attributable primarily to increased investment in our data center
infrastructure, and increased labor costs of $0.2 million. As a percentage of
subscription revenue, subscription cost of revenue increased to 56.4% in the six
months ended June 30, 2003 from 46.2% in the six months ended June 30, 2002,
primarily due to higher increases in the aforementioned costs than revenue.
Sale cost of revenue remained constant at $0.9 million for the six
months ended June 30, 2003 and 2002, due to decreased costs of purchased
software offset by increased amortization expense attributable to capitalized
software included in our products. As a percentage of sale revenue, sale cost of
revenue decreased to 19.2% in the six months ended June 30, 2003, from 34.8% in
the six months ended June 30, 2002, due primarily to decreased Javelin labor
costs.
Service contract cost of revenue increased $0.2 million, or 24%, to $1.1
million for the six months ended June 30, 2003, from $0.9 million in the six
months ended June 30, 2002. The increase was primarily due to service contract
labor costs. As a percentage of service contract revenue, service contract cost
of revenue of 22.8% was lower for the six months ended June 30, 2003, as
compared to 24.5% for the six months ended June 30, 2002, as the increase in
revenue was greater than the increase in labor costs.
Transaction cost of revenue increased $1.6 million, or 64%, to $4.1
million for the six months ended June 30, 2003 as compared to $2.5 million for
24
NYFIX, Inc.
the six months ended June 30, 2002. The increase in transaction cost of revenue
was primarily due to clearing and execution related fees, of $1.0 million; an
increase in data center costs, including labor, maintenance, lease, and data
feed expenses, of $0.5 million; and depreciation and amortization expense of
$0.2 million. As a percentage of transaction revenue, transaction cost of
revenue decreased to 59.9% in the six months ended June 30, 2003, as compared to
145.9% in the six months ended June 30, 2002, due primarily to the fact that
NYFIX Transaction Services incurred costs in the six months ended June 30, 2002,
but did not start generating revenue until July 1, 2002.
GROSS PROFIT (AS A PERCENTAGE OF REVENUE)
Gross profit increased to 53.0% for the six months ended June 30, 2003
as compared to 51.1% for the six months ended June 30, 2002. The increase in
gross profit is primarily attributable to the impact of increased Javelin sale
revenue and transaction revenue, offset by reduced subscription margin due to
increased data center costs 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 43.6% for the six months ended
June 30, 2003, from 53.8% for the six months ended June 30, 2002. The decrease
in subscription gross profit is primarily attributable to increased data center
costs, including telecommunication charges, due to more desktop connections and
increased capacity in our data centers, increased cross connection fees to
connect our subscription customers to a third-party network, and depreciation
and amortization expense related to our capital and telecommunication
infrastructure investments made in our data center.
Sale gross profit increased to 80.8% for the six months ended June 30,
2003 as compared to 65.2% for the six months ended June 30, 2002. The increase
in sale gross profit was primarily attributable to the impact of increased
Javelin revenue and decreased costs of purchased software offset by increased
amortization expense attributable to capitalized software included in our
products delivered to our customers.
Service contract gross profit increased to 77.2% for the six months
ended June 30, 2003 as compared to 75.5% for the six months ended June 30, 2002.
The increase in service contract gross profit is primarily attributable to an
increase in service contract revenue, which more than offset the impact of
higher labor costs.
Transaction gross profit increased to 40.1% for the six months ended
June 30, 2003 as compared to a deficit of 45.9% for the six months ended June
30, 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 incurred costs in the six months ended
June 30, 2002, but did not start generating revenue until July 1, 2002.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased $1.2 million, or
8%, to $16.1 million for the six months ended June 30, 2003 as compared to $14.9
million for the six months ended June 30, 2002. The increase was primarily due
to increased selling, general and administrative expense for Javelin of $1.4
million due to the fact that costs were included for a full six months in 2003
as compared to three months in 2002, increased promotion and trade show expenses
of $0.2 million and increased insurance expense of $0.2 million due to rising
premiums and expanded coverage, offset by decreased bad debt expense of $0.7
million due to improved collections. As a percentage of total revenue, selling
general and administrative expense decreased to 48.9% in the six months ended
June 30, 2003 from 64.3% in the six months ended June 30, 2002. The decrease as
a percentage of total revenue was attributable to a higher growth in revenue
than selling, general and administrative expense.
25
NYFIX, Inc.
RESEARCH AND DEVELOPMENT
Research and development expense remained constant at $0.6 million for
the six months ended June 30, 2003 and 2002. As a percentage of total revenue,
research and development expense decreased to 1.7% for the six months ended June
30, 2003 from 2.8% for the six months ended June 30, 2002. The decrease as a
percentage of total revenue was attributable to the increase in revenue without
an increase in research and development expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $0.6 million, or 35%, to
$2.4 million for the six months ended June 30, 2003 from $1.8 million for the
six months ended June 30, 2002. This increase was primarily attributable to the
amortization expense related to our intangible assets acquired as a result of
the NYFIX Millennium and Javelin acquisitions, of $1.0 million, which was
partially offset by decreased depreciation expense of $0.4 million, due
primarily to reduced leased equipment. As a percentage of total revenue,
depreciation and amortization expense decreased to 7.2% for the six months ended
June 30, 2003 from 7.6% for the six months ended June 30, 2002. The decrease as
a percentage of total revenue was primarily attributable to a higher growth in
revenue than depreciation and amortization expense.
LOSS FROM OPERATIONS
Loss from operations decreased $3.9 million, or 71%, to $1.6 million for
the six months ended June 30, 2003, as compared to a loss from operations of
$5.5 million for the six months ended June 30, 2002. The improvement in
operating results was primarily due to the increase in revenue from our
transaction and Javelin businesses offset by higher cost of revenues and
operating expenses. As a percentage of total revenue, loss from operations was a
deficit of 4.8% in the six months ended June 30, 2003 as compared to a deficit
of 23.5% in the six months ended June 30, 2002. The improvement as a percentage
of total revenue was attributable to a higher growth in revenue than costs of
our acquired businesses.
INVESTMENT INCOME
Investment income increased $55,000, or 28%, to $253,000 for the six
months ended June 30, 2003, from $198,000 for the six months ended June 30,
2002. The increase was principally due to losses on sales of short-term
investments aggregating $136,000 that were recognized during the six months
ended June 30, 2002, as well as increased yield on certain investments for the
current period. These increases were partially offset by lower average
investment balances for the current period when compared to the prior year's six
month period.
INTEREST EXPENSE
Interest expense decreased $85,000, or 59%, to $58,000 for the six
months ended June 30, 2003, from $143,000 for the six months ended June 30,
2002, principally due to reduced capital lease obligations and interest incurred
in connection with late payments of certain obligations in the six months ended
June 30, 2002.
OTHER EXPENSE, NET
Other expense increased $448,000 to $587,000 for the six months ended
June 30, 2003 as compared to $139,000 for the six months ended June 30, 2002,
due primarily to losses incurred from our equity in losses of unconsolidated
affiliates.
INCOME TAX BENEFIT
We recorded an income tax benefit of $1.0 million for the six months
ended June 30, 2003, compared to an income tax benefit of $2.4 million for the
26
NYFIX, Inc.
six months ended June 30, 2002. The income tax benefits in the current year's
period were attributable to a tax benefit on our pre-tax loss of $2.0 million
and tax benefits for certain estimated Federal and state research and
development tax credits. Our effective tax benefit rate of 50% in the six months
ended June 30, 2003 exceeded the Federal statutory rate primarily due to the
effect of the aforementioned research and development tax credits and state tax
benefits. The income tax benefit in the prior year's period was attributable to
a tax benefit on our pre-tax loss of $5.5 million for the six months ended June
30, 2002. Our effective tax benefit rate of 44% in the six months ended June 30,
2002 exceeded the Federal statutory rate primarily due to the effect of state
tax benefits.
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 June 30, 2003 and December 31, 2002, our cash, cash
equivalents and short-term investments totaled $21.9 million. We had short-term
investments in current marketable security instruments of $10.0 million at June
30, 2003, having interest rates ranging from 0.70% to 4.45%. Included in cash
and cash equivalents at June 30, 2003 was $3.8 million in money market funds
with an average 30 day yield of 0.74% and $0.1 million in a tax-free money fund
with an average 30 day yield of 0.5%.
At June 30, 2003, we had total debt of $1.2 million, which represented
current and long-term amounts outstanding under capital lease obligations. At
June 30, 2003, we had no material commitments for capital expenditures or
inventory purchases. As discussed in Note 10 to the Consolidated Financial
Statements, we have agreed to acquire the remaining 82% of Renaissance that we
do not already own, effective July 1, 2003, by converting an outstanding $1.5
million promissory note from it and issuing a combination of newly issued common
stock and cash, at the Company's discretion, with a value of approximately $6.0
million. 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 NYFIX Millennium and
Javelin businesses with regard to integrating the product offerings of these
operations with our existing product offerings. 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. Our strategy is to migrate Javelin to more of a
subscription-based revenue model, similar to our NYFIX USA business. This may
cause Javelin capital sale revenue to be unpredictable and inconsistent.
Although Javelin generated cash from operations in the six months ended June 30,
2003, there can be no assurance that this trend will continue. NYFIX Transaction
Services and NYFIX Clearing Corporation may require additional funding to
support start-up costs related to new products. In addition, our unconsolidated
affiliate, Renaissance, has required $4.7 million in cumulative funding from us
through June 30, 2003, including $2.2 million in the six months ended June 30,
2003. Although we believe that we can achieve synergies from acquiring
Renaissance (see Note 10 to the Consolidated Financial Statements), we may be
required to provide additional working capital to Renaissance, until their
products gain greater acceptance in the marketplace. Although we have only
provided our unconsolidated affiliate, EuroLink, with $0.5 million in cumulative
funding, EuroLink may require additional working capital funding until it
generates positive cash flow, and is exploring several sources of funding,
including us.
We believe that our cash and investments of $21.9 million, together with
anticipated cash to be generated from operations will be sufficient to support
these start-up costs, as well as our capital and operating needs, including the
operating needs of all of our consolidated subsidiaries, and our unconsolidated
27
NYFIX, Inc.
affiliates Renaissance and EuroLink for at least the next twelve months.
WORKING CAPITAL
At June 30, 2003, we had working capital of $29.1 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, enhance
products and fund working capital advances to our unconsolidated affiliates.
These amounts were offset by cash flows provided by operating activities.
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash provided by operating activities in the six months ended June
30, 2003 was $7.1 million, as our net loss of $1.0 million, adjusted for
non-cash items, such as depreciation, amortization, deferred taxes, provision
for bad debts and equity in loss of unconsolidated affiliates provided $5.6
million. Favorable working capital changes, principally accounts receivable of
$1.9 million, were partially offset by unfavorable net changes in other working
capital items of $0.4 million, resulting in a net cash increase from working
capital of $1.5 million.
Net cash used in operating activities in the six months ended June 30,
2002 was $44,000, as our net loss of $2.8 million, adjusted for non-cash items,
such as depreciation, amortization, deferred taxes and provision for bad debts
provided $3.0 million. Unfavorable working capital, including prepaid expenses
and other, of $2.7 million and accounts payable and accrued expenses of $1.3
million, offset by favorable accounts receivable decreases of $0.9 million,
decreased cash by $3.0 million.
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
For the six months ended June 30, 2003 net cash used in investing
activities was $6.1 million. This consisted primarily of capital expenditures,
primarily for data center equipment and software, of $2.7 million, loans and
advances to unconsolidated affiliates of $2.2 million, and product enhancement
costs of $2.1 million. These amounts were partially offset by proceeds from the
net sales of short-term investments of $0.9 million.
For the six months ended June 30, 2002 net cash provided by investing
activities was $4.4 million. This consisted primarily of net sales of short-term
investments of $16.1 million which was primarily used to fund the cash required
for our Javelin acquisition of $10.0 million and EuroLink investment of $4.0
million, 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 $6.8 million, our
investment in EuroLink of $4.0 million, capital expenditures, mostly for data
center equipment and to support our infrastructure, of $1.7 million and product
enhancement costs of $1.7 million.
CASH USED IN FINANCING ACTIVITIES
For the six months ended June 30, 2003 and June 30, 2002, our net cash
used in financing activities totaled $0.4 million and $0.3 million,
respectively, consisting primarily of principal payments under capital lease
obligations, partially offset by net proceeds from the issuance of common stock
resulting from the exercise of stock options by employees.
LEGAL PROCEEDINGS
In May 2003, we were served as a defendant in Kledaras v. NYFIX, Inc.
(Sup. Ct. NY County) Index No. 601502/03, which had been filed in New York State
28
NYFIX, Inc.
court in New York City. Mr. George Kledaras, as representative of shareholders
of Javelin, sought the release of an escrow fund consisting of cash and
securities of the Company established in connection with the Company's
acquisition of Javelin. He also alleged damages of at least $18 million against
us and our Chairman and CEO, Peter K. Hansen, in connection with the Javelin
acquisition. In June 2003, pursuant to a stipulation with us, Mr. Kledaras
dismissed his lawsuit without prejudice. Mr. Kledaras and we are currently
attempting to negotiate a settlement with respect to disposition of the escrow
fund. The entire amount of cash and shares continues to be held in escrow
pending resolution of its disposition.
We do not believe that the disposition of this matter will have a
material adverse impact on our financial conditions, results of operations or
cash flows of the Company.
SEASONALITY AND INFLATION
We believe that our operations have not been significantly affected by
seasonality or inflation.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("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 to determine whether our unconsolidated
affiliate, EuroLink, is a VIE. Through June 30, 2003, we had recognized our 40%
ownership interest, or $0.4 million, after tax, of EuroLink's net losses since
our investment. If we determine that EuroLink is a VIE, we would be required to
recognize additional losses of $0.7 million, after tax, of EuroLink's net losses
since our investment and the financial position, results of operations and cash
flows of EuroLink would be consolidated into our financial statements starting
July 1, 2003. Subsequent to June 30, 2003, we executed a binding agreement to
acquire the remaining 82% of our other unconsolidated affiliate, Renaissance,
effective July 1, 2003. Accordingly, the financial position and results of
operations of Renaissance will be consolidated into our financial statements as
of that date (see Note 10 to the Consolidated Financial Statements).
In May 2003, the FASB Emerging Issues Task Force ("EITF") finalized the
scope provisions of Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." Issue 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. Issue No. 00-21 is effective for revenue arrangements
entered into in reporting periods beginning after June 15, 2003. We are
evaluating the provisions of Issue No. 00-21 and whether its implementation will
have a material effect on our financial position and results of operations.
RISK FACTORS: FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
29
NYFIX, Inc.
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 $10.0 million
and $10.7 million at June 30, 2003 and December 31, 2002, respectively,
consisted of $5.9 million and $6.8 million, respectively, of auction rate
certificates and $4.1 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
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 $3.0 million and $2.0
million of notes receivable principal from unconsolidated affiliates at June 30,
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 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-15(e). Management has designed disclosure controls and
procedures to provide a reasonable level of assurance of reaching our desired
control objectives.
As of June 30, 2003, 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.
30
NYFIX, Inc.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 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 in New York
State court in New York City. Mr. George Kledaras, as representative of
shareholders of Javelin, sought the release of an escrow fund consisting of cash
and securities of the Company established in connection with the Company's
acquisition of Javelin. He also alleged damages of at least $18 million against
the Company and its Chairman and CEO, Peter K. Hansen, in connection with the
Javelin acquisition. In June 2003, pursuant to a stipulation with the Company,
Mr. Kledaras dismissed his lawsuit without prejudice. The Company and Mr.
Kledaras are currently attempting to negotiate a settlement with respect to
disposition of the escrow fund.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2003 annual meeting of shareholders was held on June 10, 2003.
(b) All director nominees were elected.
(c) Matters voted on at the meeting and the number of votes cast:
Proposal No. 1 - Election of Directors for a term of one year.
Name Shares For Withheld Vote
---- ---------- -------------
Peter K. Hansen 25,451,612 1,134,746
Robert B. Corman 25,471,987 1,114,371
George O. Deehan 24,922,345 1,664,013
William J. Lynch 24,930,740 1,655,618
Carl E. Warden 23,603,804 2,982,554
Proposal No. 2 - To ratify the appointment of Deloitte & Touche LLP
as auditors of the Company for the year ending December 31, 2003.
For 24,937,558
Against 1,642,118
Abstain 6,682
Broker Non-votes 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31
NYFIX, Inc.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On April 29, 2003, the Company reported under Items 7 and 9 of Form
8-K that it had issued a press release reporting its results of
operations and financial position for the first quarter ended March
31, 2003 and guidance as to anticipated future results of
operations.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period presented.
32
NYFIX, Inc.
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
(Principal Financial and Accounting
Officer)
Dated: August 14, 2003
33
Exhibits Index
Exhibit
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.