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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 September 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 31,782,630 shares of Common Stock issued and outstanding as of
October 31, 2003.
NYFIX, INC.
FORM 10-Q
For the quarter ended September 30, 2003
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002 3
Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30,
2003 and 2002 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 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 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 32
2
PART I. FINANCIAL INFORMATION
NYFIX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, December 31,
2003 2002
------------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 11,572 $ 11,213
Short-term investments 4,900 10,727
Accounts receivable, less allowances of $1,535 and $1,207, respectively 18,394 16,601
Inventory, net 950 1,098
Due from unconsolidated affiliates 610 537
Deferred income taxes 758 590
Prepaid expenses and other 3,116 2,938
--------- ---------
Total current assets 40,300 43,704
Property and equipment, net 17,514 18,186
Goodwill 78,526 70,161
Acquired intangible assets, net 10,785 9,404
Investments in unconsolidated affiliates 3,195 5,510
Notes receivable from unconsolidated affiliates -- 1,519
Other amounts due from unconsolidated affiliates -- 1,002
Deferred income taxes 6,778 6,181
Other assets, net 7,056 5,150
--------- ---------
Total assets $ 164,154 $ 160,817
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,887 $ 3,729
Accrued expenses 4,664 5,360
Current portion of capital lease obligations 653 1,089
Current portion of long-term debt and other liabilities 507 142
Deferred revenue 2,745 2,561
--------- ---------
Total current liabilities 13,456 12,881
Long-term portion of capital lease obligations 248 664
Long-term debt and other liabilities 2,500 207
--------- ---------
Total liabilities 16,204 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; 33 32
33,131,096 and 32,420,558 issued, respectively
Additional paid-in capital 164,777 161,347
Retained earnings 3,238 5,276
Treasury stock, 1,361,300 and 1,301,300 shares, respectively, at cost (19,480) (19,100)
Notes receivable issued for common stock (622) (597)
Accumulated other comprehensive income 4 107
--------- ---------
Total stockholders' equity 147,950 147,065
--------- ---------
Total liabilities and stockholders' equity $ 164,154 $ 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 Nine Months Ended
September 30, September 30,
--------------------------------------------
2003 2002 2003 2002
------- -------- --------- ---------
REVENUE:
Subscription $ 9,115 $ 8,326 $ 25,765 $ 23,566
Sale 2,117 2,509 6,800 5,113
Service contract 2,327 2,258 7,094 5,849
Transaction 2,836 2,275 9,715 3,997
-------- -------- -------- --------
Total revenue 16,395 15,368 49,374 38,525
-------- -------- -------- --------
COST OF REVENUE:
Subscription 5,365 4,364 14,750 11,399
Sale 496 630 1,394 1,535
Service contract 618 545 1,706 1,425
Transaction 1,871 1,909 5,990 4,421
-------- -------- -------- --------
Total cost of revenue 8,350 7,448 23,840 18,780
-------- -------- -------- --------
GROSS PROFIT:
Subscription 3,750 3,962 11,015 12,167
Sale 1,621 1,879 5,406 3,578
Service contract 1,709 1,713 5,388 4,424
Transaction 965 366 3,725 (424)
-------- -------- -------- --------
Total gross profit 8,045 7,920 25,534 19,745
-------- -------- -------- --------
OPERATING EXPENSE:
Selling, general and administrative 8,502 7,037 24,626 21,919
Research and development 381 431 943 1,070
Depreciation and amortization 1,316 2,288 3,695 4,045
-------- -------- -------- --------
Total operating expense 10,199 9,756 29,264 27,034
-------- -------- -------- --------
Loss from operations (2,154) (1,836) (3,730) (7,289)
Investment income 304 276 557 474
Interest expense (16) (73) (74) (216)
Other expense, net (62) (132) (649) (271)
-------- -------- -------- --------
Loss before income tax benefit and minority (1,928) (1,765) (3,896) (7,302)
interest
Income tax benefit (871) (859) (1,858) (3,269)
-------- -------- -------- --------
Loss before minority interest (1,057) (906) (2,038) (4,033)
Minority interest in NYFIX Millennium, net
of tax -- -- -- 306
-------- -------- -------- --------
Net loss $ (1,057) $ (906) $ (2,038) $ (3,727)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.03) $ (0.03) $ (0.06) $ (0.13)
======== ======== ======== ========
Basic and diluted weighted average common
shares outstanding 31,791 30,772 31,367 29,808
======== ======== ======== ========
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)
Nine Months Ended
September 30,
--------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $ (2,038) $ (3,727)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,505 8,956
Deferred income taxes (560) (108)
Provision for bad debts 589 969
Equity in loss of unconsolidated affiliates 725 271
(Gain) loss on sale of investments (235) 1
Minority interest in NYFIX Millennium, net of income tax -- (306)
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable (2,372) (1,373)
Inventory 148 249
Prepaid expenses and other (300) (3,882)
Deferred revenue 184 (182)
Accounts payable, accrued expenses and other liabilities (578) (3,733)
-------- --------
Net cash provided by (used in) operating activities 5,068 (2,865)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (4,129) (9,786)
Sales of short-term investments 9,986 31,542
Capital expenditures for property and equipment (4,098) (2,361)
Capitalization of product enhancement costs and other (3,857) (2,231)
Proceeds from sale of equipment -- 380
Payments for acquisitions, net of cash acquired 18 (6,795)
Investments in unconsolidated affiliates -- (4,000)
(Loans and advances to) repayments from unconsolidated affiliates, net (2,211) 2,140
(Advances to) payments from officers, net -- (402)
-------- --------
Net cash (used in) provided by investing activities (4,291) 8,487
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (852) (863)
Net proceeds from issuance of common stock 434 313
-------- --------
Net cash used in financing activities (418) (550)
-------- --------
Net increase in cash and cash equivalents 359 5,072
Cash and cash equivalents, beginning of period 11,213 4,968
-------- --------
Cash and cash equivalents, end of period $ 11,572 $ 10,040
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
NYFIX, INC.
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 brokerage firms and
institutional investors. The Company's products and services automate
institutional trading workflows by streamlining data entry and seamlessly
integrate electronic order and execution handling. The Company offers a complete
electronic desktop order management solution, stationary and wireless handheld
exchange floor technology, Financial Information eXchange ("FIX") protocol
messaging and monitoring tools, and a high volume trade execution platform. The
Company's products deliver straight through processing for front, middle and
back office trade transaction processing. The Company maintains multiple data
centers with an extensive network of electronic circuits that links industry
participants for electronic trade communication and provides access to the
global equities and derivatives financial markets. Headquartered in Stamford,
Connecticut, the Company has additional offices in New York City, London,
Chicago and San Francisco.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of the Securities and Exchange Commission's
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. The consolidated balance sheet as of September 30, 2003, the
consolidated statements of operations for the three and nine months ended
September 30, 2003 and 2002 and the consolidated statements of cash flows for
the nine months ended September 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.
The operating results for the three and nine months ended September 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.
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. Effective February 1, 2002, the Company acquired an additional 30%
ownership, increasing its ownership in NYFIX Millennium to 80%. As of that date,
the Company consolidated the financial position, results of operations and cash
flows of NYFIX Millennium (see Note 3). Prior to July 1, 2003, the Company's 18%
ownership in Renaissance Trading Technologies, LLC ("Renaissance") was accounted
for by the equity method, since the Company had the ability to exercise
significant influence over the operating and financial policies of Renaissance.
Effective July 1, 2003, the Company acquired the remaining 82% of Renaissance,
which the Company did not already own. As of that date, the Company consolidated
the financial position, results of operations and cash flows of Renaissance (see
Note 3). The Company's 40% ownership interest in EuroLink Network, Inc.
("EuroLink") is accounted for under the equity method (see Note 4).
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
6
NYFIX, INC.
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, recoverability of goodwill and the
realization of deferred tax assets, among others. The markets for the Company's
products are characterized by intense competition, rapid technological
development and pricing pressures, all of which could affect the future
realization 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
$2.9 million and $7.1 million to cost of revenue for the three and nine months
ended September 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 Nine months ended
September 30, September 30,
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
(in thousands, except per share amounts)
Net loss, as reported $ (1,057) $ (906) $ (2,038) $ (3,727)
Compensation expense based on the fair (1,200) (1,991) (4,220) (6,030)
value method, net of tax
----------- ----------- ----------- ---------
Pro forma net loss $ (2,257) $ (2,897) $ (6,258) $ (9,757)
=========== =========== =========== =========
Basic and diluted loss per common share:
As reported $ (0.03) $ (0.03) $ (0.06) $ (0.13)
=========== =========== =========== =======
Pro forma $ (0.07) $ (0.09) $ (0.20) $ (0.33)
=========== =========== =========== =======
7
NYFIX, INC.
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. On October 9,
2003, the FASB deferred until the first interim or annual period ending after
December 15, 2003, the provision that VIEs that existed prior to February 1,
2003 must be consolidated. The Company is evaluating the provisions of FIN 46 to
determine whether its unconsolidated affiliate, EuroLink, is a VIE. From the
inception of its investment through September 30, 2003, the Company recognized
its 40% ownership interest of EuroLink's net losses of $1.2 million, or $0.5
million, after tax. If the Company determines that EuroLink is a VIE, the
Company would be required to recognize the incremental losses of $0.7 million
after tax of EuroLink's net losses and the Company would consolidate the
financial position, results of operations and cash flows of EuroLink into the
Company's financial statements effective October 1, 2003 (see Note 4). Effective
July 1, 2003, the Company acquired the remaining 82% of its other unconsolidated
affiliate, Renaissance, which the Company did not already own. Accordingly, the
financial position, results of operations and cash flows of Renaissance were
consolidated into the Company's financial statements as of that date (see Note
3).
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 adoption of
Issue No. 00-21, effective July 1, 2003, did not have an effect on the Company's
financial position or results of operations.
2. INVENTORY
Inventory consisted of the following:
September 30, December 31,
2003 2002
------------- -------------
(in thousands)
Parts and materials $ 935 $ 912
Work in process -- 52
Finished goods 175 294
------ ------
Total inventory, gross 1,110 1,258
Less: Allowance for obsolescence 160 160
------ ------
Total inventory, net $ 950 $1,098
====== ======
8
NYFIX. INC.
3. ACQUISITIONS, GOODWILL AND OTHER ACQUIRED INTANGIBLES
ACQUISITIONS
RENAISSANCE
On October 2, 2002, the Company acquired an 18% interest in the
membership units of Renaissance. Renaissance was formed to commercialize a
NASDAQ trading platform (the "Platform"). The Company acquired its interest in
return for 300,000 shares of the Company's stock with a fair value of $1.1
million. In addition, the Company received an option to purchase, between
October 2004 and October 2006, 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. The intellectual property rights and source code to the Platform
were developed over the last several years by a major bank and brokerage firm.
In connection with its investment, the Company acquired, for $1.0 million, the
intellectual property rights and source code to the Platform from the major bank
and brokerage firm, and contributed such intellectual property rights and source
code to Renaissance. In consideration for the intellectual property rights
contributed and advanced funding of the operating costs and capital
expenditures, the Company was to share in 50% of Renaissance's revenue for, at
minimum, three years.
In October 2002, the Company loaned $1.5 million to Renaissance in
exchange for a convertible secured promissory note. The note bore an interest
rate of 5.5%, was due in October 2007, and was convertible into 6,400,000 units
(or 32% of the total outstanding membership units, subject to dilution) of
Renaissance, at the Company's option. In February 2003, the Company loaned an
additional $1.0 million to Renaissance in exchange for a secured promissory
note. The note bore an interest rate of 5.5% and was due in February 2008. In
addition, the Company advanced to Renaissance $1.0 million and $1.2 million
during the three months ended December 31, 2002 and six months ended June 30,
2003, respectively, to fund certain operating costs and capital expenditures of
Renaissance. The $1.0 million advance was reflected as "other amounts due from
unconsolidated affiliates" in the accompanying consolidated balance sheet at
December 31, 2002. The Company sublet approximately 8,000 square feet of office
space to Renaissance at an annual cost of $0.2 million. Prior to July 1, 2003,
the Company's investment in Renaissance was accounted for under the equity
method. During the six months ended June 30, 2003, the Company recorded losses
on the investment of $394,000, which were included in "other expense, net" in
the accompanying consolidated statement of operations for the nine months ended
September 30, 2003.
On July 1, 2003, the Company acquired the remaining 82% of the
membership units of Renaissance, which it did not already own. The Company's key
considerations for the acquisition of Renaissance included 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 financed the July 2003 Renaissance acquisition by (i)
exercising its option to convert the outstanding $1.5 million promissory note,
plus accrued interest of $0.1 million, for an additional 32% of the outstanding
membership units in Renaissance; and (ii) acquiring from the unitholders the
remaining 50% of the membership units in Renaissance, for a total value of $5.7
million, by issuing (a) 462,286 shares of its common stock into an irrevocable
trust for the benefit of certain unitholders of Renaissance, having a fair value
of $2.7 million; (b) promissory notes payable in, at the Company's option, its
common stock or cash to certain unitholders of Renaissance maturing in December
2004, having a present value of $1.3 million; (c) promissory notes payable in,
at the Company's option, its common stock or cash to certain unitholders of
Renaissance with annual maturity dates ranging between June 2004 and June 2007,
having a present value of $1.4 million; and (d) 59,653 shares of the Company's
common stock with certain selling restrictions to certain unitholders of
Renaissance, having a fair value of $0.3 million. There were nominal costs
incurred directly associated with the acquisition, which were included in the
overall consideration. In connection with the acquisition, the Company
contributed to capital certain obligations that Renaissance owed to the Company,
including the aforementioned promissory note and advances aggregating
9
NYFIX, INC.
$3.2 million. In addition, the Company reacquired 60,000 shares of its common
stock that it had issued in connection with its original investment in
Renaissance, and which Renaissance had acquired as an asset. The Company has
classified these 60,0000 shares as "treasury stock" in the accompanying
consolidated balance sheet at September 30, 2003.
The Renaissance acquisition was accounted for under the purchase
method. The financial position, results of operations and cash flows of
Renaissance have been included in the Company's consolidated results of
operations since the acquisition date. The total purchase price, including the
Company's pre-acquisition investment basis, converted note, incremental equity
acquired and contributed capital was $11.9 million. The excess of the purchase
price over the fair value of the net assets acquired was $8.4 million and has
been recorded as goodwill. Preliminary allocations have been made to the
tangible and intangible assets. While it is anticipated that a substantial
portion of the purchase price will be classified as goodwill, the Company has
not completed its final allocation of the purchase price to the tangible and
intangible assets of Renaissance. Asset valuations will be performed by an
independent third-party, and are expected to be completed by December 31, 2003.
NYFIX MILLENNIUM
NYFIX Millennium, a broker-dealer, developed an alternative trading
system ("ATS"), which is an electronic system that matches buyers and sellers in
a completely anonymous environment. The system provides high quality execution
for clients through computerized matching technologies. NYFIX Millennium offers
users access to multiple liquidity points through a single terminal, complete
anonymity and invisibility, intelligent order routing and the opportunity for
price improvement and liquidity enhancement. NYFIX Millennium provides an
efficient way for major financial institutions and traders to obtain the best
match available for their transactions in the listed equities marketplace.
In 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 exchange for 25,000 units of
NYFIX Millennium, collectively owning a 50% membership interest in NYFIX
Millennium. The Company also invested $2.0 million and owned the remaining 50%.
In addition, the Company purchased an option to buy, from the Initial Partners,
an additional 30% membership interest in NYFIX Millennium (the "Option"), for
which the Company paid each of the Initial Partners 281,250 shares of its common
stock with an aggregate market value of $17.5 million. The terms of the Option
enabled 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. The option had no expiration date and was exercisable at the
Company's discretion at any time.
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) (collectively,
the "New Partners"). Pursuant to the terms of the amended operating agreement,
each New Partner invested $2.0 million in NYFIX Millennium in exchange for
25,000 units 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. Accordingly, the Initial Partners and New Partners would collectively
own 50% of NYFIX Millennium with NYFIX continuing to own the remaining 50%. In
exchange for the Initial Partners being diluted from their ownership position,
the Company agreed to reduce its profit allocation from 80% to 76%, thereby
allocating 1% to each of the New Partners. In addition, NYFIX purchased a
10
NYFIX, INC.
similar option from the New Partners for $8.0 million ($2.0 million each), in
NYFIX stock, so that it continued to maintain the ability to increase its
ownership interest to 80%.
On February 1, 2002, the Company exercised the Option. In exchange for
increasing its membership interest in NYFIX Millennium to 80%, the Company paid
the Initial Partners and New Partners an aggregate of 296,250 shares of the
Company's common stock having 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. 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 amended operating agreements, the first $22.0 million
in NYFIX Millennium operating losses since its 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 nine months ended September 30, 2002 reflects the allocation of NYFIX
Millennium losses to the Initial Partners and New Partners since the 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 $8.4 million since the acquisition through September 30,
2003, which was $6.4 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 $1.5 million through
September 30, 2003 as 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
11
NYFIX, INC.
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. (Superior
Court, 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 condition, results of operations
or cash flows.
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 September 30, 2003 primarily
relate to the Company's 2003 acquisition of Renaissance and 2002 acquisitions of
NYFIX Millennium and Javelin described above. Goodwill and other acquired
intangibles at December 31, 2002 primarily relate to the Company's acquisitions
of NYFIX Millennium and Javelin. The Company completed the asset valuations for
the 2002 acquisitions and the annual goodwill impairment test during the fourth
quarter of 2002.
12
NYFIX, INC.
Acquired intangible assets consisted of the following:
Weighted-
September December Average
30, 2003 31, 2002 Useful Life
---------- ---------- ------------
(in thousands)
Existing technology $10,500 $ 7,500 5.1 years
Customer related intangibles 2,700 2,700 5.3 years
Trademarks and other 800 800 10.5 years
------- -------
Total intangible assets, gross 14,000 11,000
Less: Accumulated amortization 3,215 1,596
------- -------
Total intangible assets, net $10,785 $ 9,404
======= =======
Amortization expense of acquired intangible assets was $0.6 million and
$1.6 million for the three and nine months ended September 30, 2003,
respectively. During the three and nine months ended September 30, 2003, no
goodwill was deemed to be impaired or written-off.
Based on identified intangible assets recorded at September 30, 2003,
and assuming no subsequent impairment of the underlying assets, the future
amortization expense is expected to be as follows:
Remainder of 2003 $ 662
2004 2,648
2005 2,648
2006 2,648
2007 1,523
Thereafter 656
-------
Future estimated amortization expense $10,785
=======
The changes in the carrying amount of goodwill by segment for the nine
months ended September 30, 2003, were as follows:
Technology Transaction
Services Services Total
--------- -------------- -------
(in thousands)
Balance as of December 31, 2002 $42,321 $27,840 $70,161
Goodwill acquired during the period:
Renaissance (preliminary estimate) 8,365 -- 8,365
------- ------- -------
Balance as of September 30, 2003 $50,686 $27,840 $78,526
======= ======= =======
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
13
NYFIX, INC.
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 nine months ended September 30, 2003, the Company recorded losses
on the investment of $62,000 and $330,000, respectively, and during the three
and nine months ended September 30, 2002, the Company recorded losses on the
investment of $132,000 and $271,000, respectively, which were included in "other
expense, net" in the accompanying consolidated statements of operations. In
addition, the Company had a note receivable from EuroLink at September 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 will be required to recognize incremental 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 will be
consolidated into the Company's financial statements starting October 1, 2003.
5. INCOME TAXES
The Company recorded tax benefits of $0.9 million and $1.9 million for
the three and nine months ended September 30, 2003, and tax benefits of $0.9
million and $3.3 million for the three and nine months ended September 30, 2002,
respectively. The Company's effective tax benefit rate was 45% and 48% for the
three and nine months ended September 30, 2003, respectively, and 49% and 45%
for the three and nine months ended September 30, 2002, respectively. The
Company's effective tax benefit rate for the three and nine months ended
September 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 nine months ended September 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 reporting 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 1,208,916 and 1,038,184 shares for the three and nine months ended
September 30, 2003, respectively, and 520,129 and 792,714 shares for the three
and nine months ended September 30, 2002, respectively, were excluded from the
loss per share calculations since the amounts would be anti-dilutive.
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.
14
NYFIX, INC.
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, NYFIX Transaction Services and NYFIX
Clearing Corporation ("NYFIX Clearing"), 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. NYFIX
Clearing was approved, by the NASD, for broker-dealer status in August 2003, and
by the Depository Trust and Clearing Corporation and the National Securities
Clearing Corporation in November 2003. As a result, NYFIX Clearing expects to
begin clearing trades for its affiliated companies during the fourth quarter of
2003. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies contained herein
within Note 1. The operating segments reported below are the segments of the
Company for which separate financial information is available and for which
operating results are evaluated regularly by senior management in deciding how
to allocate resources and in assessing performance.
The Technology Services segment, which classifies its revenue as
subscription, sale or service contract, provides desktop solutions, wireless
exchange floor systems, electronic automation systems and straight through
processing to the professional trading segment of the brokerage community. The
Transaction Services segment provides broker-dealer operations and generally
classifies its revenue as transaction.
Summarized financial information by business segment was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- ---------
Revenue: (in thousands)
Technology Services $ 13,695 $ 13,031 $ 40,378 $ 34,344
Transaction Services 3,313 2,412 10,827 4,256
Eliminations (613) (75) (1,831) (75)
-------- -------- -------- --------
Total revenue $ 16,395 $ 15,368 $ 49,374 $ 38,525
======== ======== ======== ========
Gross Profit:
Technology Services $ 7,164 $ 7,580 $ 22,454 $ 20,098
Transaction Services 881 340 3,080 (353)
-------- -------- -------- --------
Total gross profit $ 8,045 $ 7,920 $ 25,534 $ 19,745
======== ======== ======== ========
Reconciling information between business segments and the loss before
income tax benefit and minority interest was as follows:
15
NYFIX, INC.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- --------- -------- ----------
(in thousands)
Gross profit for reportable segments $ 8,045 $ 7,920 $ 25,534 $ 19,745
Operating expenses (10,199) (9,756) (29,264) (27,034)
Interest expense (16) (73) (74) (216)
Investment income 304 276 557 474
Other expense, net (62) (132) (649) (271)
-------- -------- -------- --------
Loss before income tax benefit
and minority interest $ (1,928) $ (1,765) $ (3,896) $ (7,302)
======== ======== ======== ========
8. OTHER COMPREHENSIVE LOSS
The components of other comprehensive loss, net of tax, were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2003 2002 2003 2002
--------- --------- -------- ---------
(in thousands)
Net loss $(1,057) $ (906) $(2,038) $(3,727)
Changes in net unrealized gain on (207) 136 (103) 196
available-for-sale securities
------- ------- ------- -------
Total comprehensive loss $(1,264) $ (770) $(2,141) $(3,531)
======= ======= ======= =======
Accumulated other comprehensive income, net of tax, at September 30,
2003 and December 31, 2002 consisted of the accumulated net unrealized gain on
available-for-sale securities of $4,000 and $107,000, respectively.
9. CASH FLOW SUPPLEMENTAL INFORMATION
Information about the cash flow activities related to acquisitions was
as follows:
16
NYFIX, INC.
Nine Months Ended
September 30,
-----------------------------
2003 2002
--------- --------
(in thousands)
Fair value of assets acquired, net of cash acquired $ 12,649 $ 99,620
Fair value of liabilities assumed (1,017) (16,171)
Promissory note converted to equity (1,560) --
Fair value of capital contributed (3,181) --
Present value of notes issued (2,702) --
Common stock issued (2,997) (49,154)
Treasury stock acquired 380 --
Pre-acquisition investment basis (1,590) (27,500)
-------- --------
(Cash acquired from acquisition, net of payments)/Payments
for acquisitions, net of cash acquired $ (18) $ 6,795
======== ========
The preceding fair values of net assets and liabilities for the nine
months ended September 30, 2003 were based on the preliminary values at that
time. The final allocation of assets acquired at September 30, 2003 may differ
from the fair values presented.
Information about other cash flow activities was as follows:
Nine Months Ended
September 30,
---------------------------
2003 2002
--------- -------
Supplemental disclosures of cash flow information: (in thousands)
Cash paid for interest $ 74 $ 216
(Refunds received) cash paid for income taxes, net (1,084) 1,739
Supplemental schedule of noncash investing and
financing information:
Capital lease obligations incurred for the purchase -- 1,278
of property and equipment
Unrealized gain (loss) on available-for-sale securities 103 (196)
17
NYFIX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
NYFIX, Inc., founded in 1991, through our subsidiaries and affiliates,
provides electronic trading technology infrastructure and execution services to
brokerage firms and institutional investors. 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, Financial Information eXchange ("FIX") protocol
messaging and monitoring tools, and a high volume trade execution platform. Our
products deliver straight through processing ("STP") for front, middle and back
office trade transaction processing. We maintain multiple data centers with an
extensive network of electronic circuits that links industry participants for
electronic trade communication and we provide access to the global equities and
derivatives financial 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 L.L.C. ("NYFIX Millennium"), our 80% owned
broker-dealer subsidiary, we have developed an ATS that functions similarly to
an electronic communication networks ("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
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
18
NYFIX, INC.
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 nine 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. We
formed a clearing subsidiary, NYFIX Clearing Corporation ("NYFIX Clearing"),
which was approved, by the NASD, for broker-dealer status in August 2003, and by
the Depository Trust and Clearing Corporation ("DTCC") and the National
Securities Clearing Corporation in November 2003. As a result, NYFIX Clearing
expects to begin clearing trades for its affiliated companies during the fourth
quarter of 2003. 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 $2.9 million and $7.1
million to cost of revenue for the three and nine months ended September 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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
REVENUE
Total revenue increased $1.0 million, or 7%, to $16.4 million for the
three months ended September 30, 2003, from $15.4 million for the three months
ended September 30, 2002, primarily due to increased subscription revenue of
$0.8 million and increased transaction revenue of $0.6 million. These increases
were partially offset by lower sale revenue of $0.4 million.
Subscription revenue increased $0.8 million, or 9%, to $9.1 million for
the three months ended September 30, 2003, from $8.3 million for the three
months ended September 30, 2002, primarily as a result of increased subscription
revenue from our technology services segment of $0.5 million, due largely to an
increase for our Javelin products, increased subscriptions for connections to
our network, attributable to our buyside initiative, as well as an increase in
our transaction services segment. These increases were slightly offset by a
decrease in subscriptions for our derivatives products. As a percentage of total
revenue, subscription revenue increased to 56% in the three months ended
September 30, 2003, from 54% in the three months ended September 30, 2002,
primarily due to higher subscription revenue as described above and lower sale
revenue, primarily for our Javelin products. The acquisition of Renaissance on
July 1, 2003 did not have a significant effect on revenue for the three months
ended September 30, 2003.
Sale revenue decreased $0.4 million, or 16%, to $2.1 million for the
three months ended September 30, 2003, from $2.5 million for the three months
ended September 30, 2002, primarily due to decreased revenue for our Javelin
products. As a percentage of total revenue, sale revenue decreased to 13% for
the three months ended September 30, 2003 as compared to 16% for the three
months ended September 30, 2002, primarily due to the aforementioned decrease in
sale revenue for our Javelin products.
Service contract revenue was $2.3 million for the both the three months
ended September 30, 2003 and 2002. As a percentage of total revenue, service
contract revenue was 14% in the three months ended September 30, 2003, as
compared to 15% in the three months ended September 30, 2002.
Transaction revenue increased $0.5 million, or 25%, to $2.8 million for
the three months ended September 30, 2003 as compared to $2.3 million for the
three months ended September 30, 2002, primarily due to both increased customers
and increased transaction activity for existing customers. As a percentage of
total revenue, transaction revenue was 17% in the three months ended September
30, 2003, as compared to 15% in the three months ended September 30, 2002,
primarily due to the aforementioned increased transaction revenue.
20
NYFIX, INC.
COST OF REVENUE
Total cost of revenue increased $0.9 million, or 12%, to $8.4 million
for the three months ended September 30, 2003 as compared to $7.5 million for
the three months ended September 30, 2002, due primarily to increased
telecommunication charges, resulting from increased desktop connections and
capacity in our data centers, of $0.4 million; increased cross connection fees
to connect our subscription customers to third-party networks of $0.2 million;
increased depreciation expense attributable to increased investment in data
center infrastructure of $0.2 million; and increased transaction fees and data
feed costs of $0.2 million attributable to increased transaction revenue.
Subscription cost of revenue increased $1.0 million, or 23%, to $5.4
million for the three months ended September 30, 2003 as compared to $4.4
million for the three months ended September 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 $0.4
million; increased cross connection fees to connect our subscription customers
to third-party networks of $0.2 million; increased labor costs of $0.2 million;
and increased depreciation and amortization expense of $0.1 million,
attributable primarily to increased investment in our data center
infrastructure. As a percentage of subscription revenue, subscription cost of
revenue increased to 59% in the three months ended September 30, 2003 from 52%
in the three months ended September 30, 2002, primarily due to increases in the
aforementioned costs, which exceeded the increase in subscription revenue, and
the inclusion of Renaissance cost of revenue in the three months ended September
30, 2003 with minimal Renaissance subscription revenue.
Sale cost of revenue decreased $0.1 million, or 21%, to $0.5 million
for the three months ended September 30, 2003 as compared to $0.6 million for
the three months ended September 30, 2002. The decrease in sale cost of revenue
was primarily due to decreased labor costs. As a percentage of sale revenue,
sale cost of revenue decreased to 23% in the three months ended September 30,
2003, from 25% in the three months ended September 30, 2002, due primarily to
decreased Javelin labor costs and sale revenue.
Service contract cost of revenue increased $0.1 million, or 13%, to
$0.6 million for the three months ended September 30, 2003, from $0.5 million in
the three months ended September 30, 2002. The increase was primarily due to
increased labor costs. As a percentage of service contract revenue, service
contract cost of revenue increased to 27% in the three months ended September
30, 2003, as compared to 24% in the three months ended September 30, 2002,
primarily attributable to the aforementioned increased labor costs.
Transaction cost of revenue remained constant at $1.9 million for the
three months ended September 30, 2003 and 2002, as increased transaction fees
and data feed fees of $0.2 million were offset by reduced labor costs and data
center costs other than depreciation. As a percentage of transaction revenue,
transaction cost of revenue decreased to 66% in the three months ended September
30, 2003, as compared to 84% in the three months ended September 30, 2002, due
primarily to increased transaction revenue.
GROSS PROFIT (AS A PERCENTAGE OF REVENUE)
Gross profit decreased to 49% for the three months ended September 30,
2003 as compared to 52% for the three months ended September 30, 2002. The
decrease in gross profit is primarily attributable to the impact of reduced
subscription margin due to increased data center costs and increased
telecommunication charges, resulting from lower margin on desktop connections
and increased capacity in our data centers and increased cross connection fees
to connect our subscription customers to third-party networks, offset by the
impact of increased transaction revenue.
Subscription gross profit decreased to 41% for the three months ended
September 30, 2003, as compared to 48% for the three months ended September 30,
2002. The decrease in subscription gross profit is primarily attributable to
increased data center costs, including telecommunication charges, due to more
21
NYFIX, INC.
desktop connections and increased capacity in our data centers, increased
cross-connection fees to connect our subscription customers to third-party
networks, increased labor costs and increased depreciation and amortization
expense related to infrastructure investments in our data center. Also affecting
gross profit was the inclusion of Renaissance cost of revenue in 2003 with
minimal Renaissance subscription revenue.
Sale gross profit increased to 77% for the three months ended September
30, 2003 as compared to 75% for the three months ended September 30, 2002. The
increase in sale gross profit was primarily attributable to the impact of
decreased Javelin labor costs partially offset by decreased Javelin sale
revenue.
Service contract gross profit decreased to 73% for the three months
ended September 30, 2003 as compared to 76% for the three months ended September
30, 2002, primarily due to increased labor costs.
Transaction gross profit increased to 34% for the three months ended
September 30, 2003 as compared to 16% for the three months ended September 30,
2002. The increase in gross profit was attributable to the increase in
transaction revenue, as costs remained the same.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased $1.5 million, or
21%, to $8.5 million for the three months ended September 30, 2003 as compared
to $7.0 million for the three months ended September 30, 2002. The increase was
primarily attributable to increased salaries and benefits of $0.4 million due to
higher health insurance expenses and the staff associated with the Renaissance
acquisition, increased bad debt expense of $0.3 million due to increased
reserves for accounts receivable, and increased administrative fees of $0.3
million. As a percentage of total revenue, selling general and administrative
expense increased to 52% in the three months ended September 30, 2003 from 46%
in the three months ended September 30, 2002. The increase as a percentage of
total revenue was primarily attributable to increased salaries and commissions,
related personnel costs and various office expenses due to an increase in
personnel to support our growth and acquisitions, increased bad debt allowances,
professional fees and other selling, general and administrative expenses.
RESEARCH AND DEVELOPMENT
Research and development expense remained constant at $0.4 million for
the three months ended September 30, 2003 and 2002. As a percentage of total
revenue, research and development expense decreased to 2% for the three months
ended September 30, 2003, from 3% for the three months ended September 30, 2002.
The decrease as a percentage of total revenue was attributable to a growth in
revenue while research and development expense remained constant.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $1.0 million, or 42%,
to $1.3 million for the three months ended September 30, 2003 as compared to
$2.3 million for the three months ended September 30, 2002. Amortization expense
for the three months ended September 30, 2002 includes a change in estimate for
acquired intangibles related to our acquisitions of NYFIX Millennium and Javelin
of $0.9 million. As a percentage of total revenue, depreciation and amortization
expense decreased to 8% for the three months ended September 30, 2003 from 15%
for the three months ended September 30, 2002. The decrease as a percentage of
total revenue was primarily attributable to the decreased amortization expense
and the increase in revenue.
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NYFIX, INC.
LOSS FROM OPERATIONS
Loss from operations increased $0.3 million, or 17%, to $2.1 million
for the three months ended September 30, 2003, as compared to $1.8 million for
the three months ended September 30, 2002. The additional losses were primarily
due to higher selling, general and administrative expense, subscription cost of
revenue and costs associated with Renaissance, which were partially offset by
increased revenue, primarily transaction and subscription revenue for our
broker-dealer subsidiaries, and lower amortization expense on intangible assets.
As a percentage of total revenue, loss from operations was a deficit of 13% in
the three months ended September 30, 2003 as compared to a deficit of 12% in the
three months ended September 30, 2002. The slight decline as a percentage of
total revenue was attributable to a combination of the increase in cost of
revenue and operating expenses offset by the growth in revenue.
INVESTMENT INCOME
Investment income increased $28,000, or 10%, to $304,000 for the three
months ended September 30, 2003, from $276,000 for the three months ended
September 30, 2002. The increase was primarily due to interest income on a
refund on 2002 estimated Federal income tax payments of $26,000, as increased
gains on sales of investments of $101,000 were offset by reduced investment
interest of $99,000 due to lower average investment balances and lower yields.
INTEREST EXPENSE
Interest expense decreased $57,000, or 78%, to $16,000 for the three
months ended September 30, 2003, from $73,000 for the three months ended
September 30, 2002, principally due to reduced capital lease obligations and
reduced miscellaneous interest expense.
OTHER EXPENSE, NET
Other expense decreased $70,000 to $62,000 for the three months ended
September 30, 2003 as compared to $132,000 for the three months ended September
30, 2002, due primarily to reduced losses incurred from our equity in the loss
of EuroLink, our unconsolidated affiliate.
INCOME TAX BENEFIT
We recorded an income tax benefit of $0.9 million for the three months
ended September 30, 2003 and 2002. The income tax benefit for the three months
ended September 30, 2003 was attributable to a tax benefit on our pre-tax loss
of $1.9 million, a book to provision adjustment and certain Federal research and
development tax credits. Our effective tax benefit rate of 45% for the three
months ended September 30, 2003 exceeded the Federal statutory rate primarily
due to the effect of the aforementioned federal tax benefits and research and
development tax credits. The income tax benefit for the three months ended
September 30, 2002 was attributable to a tax benefit on our pre-tax loss of $1.8
million and recognition of certain Federal research and development tax credits
from prior years. Our effective tax benefit rate of 49% for the period exceeded
the Federal statutory rate primarily due to the effect of the aforementioned tax
credits and the effect of state tax benefits.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
REVENUE
Total revenue increased $10.9 million, or 28%, to $49.4 million for the
nine months ended September 30, 2003, as compared to $38.5 million for the nine
months ended September 30, 2002, primarily due to increased transaction revenue
of $5.7 million and increased revenue for our Javelin products of $3.4 million.
NYFIX Transaction Services, started generating revenue on July 1, 2002, and the
results of NYFIX Millennium have been included in our consolidated financial
statement since our acquisition of NYFIX Millennium on February 1, 2002.
23
NYFIX, INC.
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 increased revenue for our Javelin products of $3.4
million.
Subscription revenue increased $2.2 million, or 9%, to $25.8 million
for the nine months ended September 30, 2003 as compared to $23.6 million for
the nine months ended September 30, 2002, primarily due to increases in
subscription revenue attributable to a full nine months for our Javelin products
as compared to six months in 2002, increased demand and the net addition of new
customers from our NYFIX Transaction Services and increased subscriptions for
connections to our network, attributable to our buyside initiative. As a
percentage of total revenue, subscription revenue decreased to 52% in the nine
months ended September 30, 2003 from 61% in the nine months ended September 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 nine months revenue from our Javelin products as compared to six months
revenue in 2002. The acquisition of Renaissance on July 1, 2003 did not have a
significant effect on revenue for the nine months ended September 30, 2003.
Sale revenue increased $1.7 million, or 33%, to $6.8 million for the
nine months ended September 30, 2003 as compared to $5.1 million for the nine
months ended September 30, 2002, primarily due to increased sale revenue from
our Javelin products, which was attributable to a full nine months of revenue in
2003 as compared to six months in 2002. As a percentage of total revenue, sale
revenue increased to 14% in the nine months ended September 30, 2003, from 13%
in the nine months ended September 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 nine months ended September
30, 2003.
Service contract revenue increased $1.3 million, or 21%, to $7.1
million for the nine months ended September 30, 2003 as compared to $5.8 million
in the nine months ended September 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 nine months ended September 30, 2003, as
compared to 15% in the nine months ended September 30, 2002, primarily due to
the effect of increased transaction revenue for the nine months ended September
30, 2003, which was substantially offset by the aforementioned service contract
revenue increase from our Javelin business.
Transaction revenue increased $5.7 million to $9.7 million for the nine
months ended September 30, 2003 as compared to $4.0 million in the nine months
ended September 30, 2002, due to increased transaction activity for new and
existing customers of NYFIX Transaction Services and NYFIX Millennium. As a
percentage of total revenue, transaction revenue was 20% in the nine months
ended September 30, 2003, as compared to 10% in the nine months ended September
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 $5.0 million, or 27%, to $23.8 million
for the nine months ended September 30, 2003 as compared to $18.8 million in the
nine months ended September 30, 2002, due primarily to increased
telecommunication charges, resulting from more desktop connections and increased
capacity in our data centers to support our business, of $1.4 million; increased
clearing and specialist fees related to our transaction revenue of $1.2 million;
increased labor costs of $0.9 million; increased depreciation expense
attributable to investment in data center infrastructure of $0.7 million;
increased cross connection fees to connect our subscription customers to
third-party networks of $0.6 million; and increased amortization of product
enhancement costs attributable to new product releases of $0.2 million.
Subscription cost of revenue increased $3.4 million, or 29%, to $14.8
million for the nine months ended September 30, 2003 as compared to $11.4
million for the nine months ended September 30, 2002, primarily due to increased
data center costs, including telecommunication charges resulting from more
desktop connections and increased capacity in our data centers, of $1.6 million;
24
NYFIX, INC.
increased cross connection fees of $0.6 million to connect our subscription
customers to third-party networks; increased depreciation and amortization
expense of $0.5 million, attributable primarily to increased investment in our
data center infrastructure, and increased labor costs of $0.4 million. The
acquisition of Renaissance on July 1, 2003 did not have a significant effect on
cost of revenue for the nine months ended September 30, 2003. As a percentage of
subscription revenue, subscription cost of revenue increased to 57% in the nine
months ended September 30, 2003 from 48% in the nine months ended September 30,
2002, primarily due to higher increases in the aforementioned costs relative to
revenue.
Sale cost of revenue decreased $0.1 million, or 9%, to $1.4 million for
the nine months ended September 30, 2003 as compared to $1.5 million for the
nine months ended September 30, 2002, due to decreased costs of purchased
software of $0.2 million and reduced labor costs of $0.1 million offset by
increased amortization expense attributable to capitalized software included in
our products of $0.2 million. As a percentage of sale revenue, sale cost of
revenue decreased to 21% in the nine months ended September 30, 2003, from 30%
in the nine months ended September 30, 2002, due primarily to increased revenue.
Service contract cost of revenue increased $0.3 million, or 20%, to
$1.7 million for the nine months ended September 30, 2003, from $1.4 million in
the nine months ended September 30, 2002. The increase was primarily due to
increased service contract labor costs of $0.4 million. As a percentage of
service contract revenue, service contract cost of revenue was 24% for both the
nine months ended September 30, 2003 and 2002, as the increase in revenue kept
pace with the increase in labor costs.
Transaction cost of revenue increased $1.6 million, or 35%, to $6.0
million for the nine months ended September 30, 2003 as compared to $4.4 million
for the nine months ended September 30, 2002. The increase in transaction cost
of revenue was primarily due to increased clearing and specialist fees of $1.2
million; increased labor costs of $0.3 million; increased depreciation expense
attributable to investment in data center infrastructure of $0.3 million;
increased amortization expense attributable to capitalized software included in
our products of $0.1 million; partially offset by reduced commissions paid of
$0.1 million. As a percentage of transaction revenue, transaction cost of
revenue decreased to 62% in the nine months ended September 30, 2003, as
compared to 111% in the nine months ended September 30, 2002, due primarily to
the fact that NYFIX Transaction Services incurred costs in the nine months ended
September 30, 2002, but did not start generating revenue until July 1, 2002.
GROSS PROFIT (AS A PERCENTAGE OF REVENUE)
Gross profit increased to 52% for the nine months ended September 30,
2003 as compared to 51% for the nine months ended September 30, 2002. The
increase in gross profit is primarily attributable to the impact of increased
transaction revenue and Javelin sale revenue, offset by reduced subscription
margin due to increased data center costs and increased telecommunication
charges, resulting from lower margins on desktop connections and increased
capacity in our data centers to support our core business, and increased cross
connection fees to connect our subscription customers to third-party networks.
Subscription gross profit decreased to 43% for the nine months ended
September 30, 2003, from 52% for the nine months ended September 30, 2002. The
decrease in subscription gross profit is primarily attributable to increased
data center costs, including telecommunication charges, resulting from more
desktop connections and increased capacity in our data centers, increased cross
connection fees to connect our subscription customers to a third-party network,
increased depreciation and amortization expense related to our capital and
telecommunication infrastructure investments made in our data center and
increased labor costs.
Sale gross profit increased to 80% for the nine months ended September
30, 2003 as compared to 70% for the nine months ended September 30, 2002. The
increase in sale gross profit was primarily attributable to the impact of
increased Javelin revenue and decreased costs of purchased software and labor
25
NYFIX, INC.
offset by increased amortization expense attributable to capitalized software
included in our products delivered to our customers.
Service contract gross profit remained constant at 76% for the nine
months ended September 30, 2003 and 2002. The increase in Javelin service
contract revenue was offset by the impact of higher labor costs.
Transaction gross profit increased to 38% for the nine months ended
September 30, 2003 as compared to a deficit of 11% for the nine months ended
September 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 nine
months ended September 30, 2002, but did not start generating revenue until July
1, 2002.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased $2.7 million, or
12%, to $24.6 million for the nine months ended September 30, 2003 as compared
to $21.9 million for the nine months ended September 30, 2002. The increase was
primarily due to increased selling, general and administrative expense for
Javelin of $0.7 million due to the fact that costs were included for a full nine
months in 2003 as compared to six months in 2002; increased labor and benefit
costs of $0.9 million, including increased employee health insurance expense;
increased office rent, telephone expense and non-capital equipment purchases of
$0.4 million to support our growth; increased insurance expense of $0.3 million
due to rising premiums and expanded coverage; increased administrative fees of
$0.3 million; and increased promotion and trade show expense of $0.1 million;
offset by decreased bad debt expense of $0.4 million due to reduced reserves for
accounts receivable. As a percentage of total revenue, selling general and
administrative expense decreased to 50% in the nine months ended September 30,
2003 from 57% in the nine months ended September 30, 2002. The decrease as a
percentage of total revenue was attributable to a higher growth in revenue than
selling, general and administrative expense.
RESEARCH AND DEVELOPMENT
Research and development expense decreased $0.1 million, or 12%, to
$1.0 million for the nine months ended September 30, 2003 as compared to $1.1
million for the nine months ended September 30, 2002. As a percentage of total
revenue, research and development expense decreased to 2% for the nine months
ended September 30, 2003 from 3% for the nine months ended September 30, 2002.
The decrease as a percentage of total revenue was attributable primarily to the
increase in revenue.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $0.3 million, or 9%, to
$3.7 million for the nine months ended September 30, 2003 from $4.0 million for
the nine months ended September 30, 2002. This decrease was primarily
attributable to 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% for the nine months ended September 30,
2003 from 10% for the nine months ended September 30, 2002. The decrease as a
percentage of total revenue was attributable to the growth in revenue and lower
depreciation expense.
LOSS FROM OPERATIONS
Loss from operations decreased $3.6 million, or 49%, to $3.7 million
for the nine months ended September 30, 2003, as compared to a loss from
operations of $7.3 million for the nine months ended September 30, 2002. The
improvement in operating results was primarily due to the increase in revenue
from our transaction segment and Javelin business offset by higher cost of
revenues and operating expenses. As a percentage of total revenue, loss from
26
NYFIX, INC.
operations was a deficit of 8% in the nine months ended September 30, 2003 as
compared to a deficit of 19% in the nine months ended September 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 $0.1 million, or 18%, to $0.6 million for
the nine months ended September 30, 2003, from $0.5 million for the nine months
ended September 30, 2002. The increase was principally due to additional gains
on sales of short-term investments of $0.2 million, which were partially offset
by lower interest income of $0.1 million due to lower average investment
balances and lower yields.
INTEREST EXPENSE
Interest expense decreased $142,000, or 66%, to $74,000 for the nine
months ended September 30, 2003, from $216,000 for the nine months ended
September 30, 2002, principally due to reduced interest on capital lease
obligations of $63,000 and interest incurred in connection with late payments of
certain obligations of $70,000 in the nine months ended June 30, 2002.
OTHER EXPENSE, NET
Other expense increased $378,000 to $649,000 for the nine months ended
September 30, 2003 as compared to $271,000 for the nine months ended September
30, 2002, due primarily to losses incurred from our equity in losses of
unconsolidated affiliates. Our accounting for Renaissance by the equity method
was included through June 30, 2003. Effective July 1, 2003, we increased our
ownership in Renaissance to 100%, and accordingly, we consolidated the results
of operations of Renaissance as of that date. There was no impact for the nine
months ended September 30, 2002 as we made our initial investment in Renaissance
in the fourth quarter of 2002.
INCOME TAX BENEFIT
We recorded an income tax benefit of $1.9 million for the nine months
ended September 30, 2003, compared to an income tax benefit of $3.3 million for
the nine months ended September 30, 2002. The income tax benefits in the nine
months ended September 30, 2003 were attributable to a tax benefit on our
pre-tax loss of $3.9 million and tax benefits relating to a book to provision
adjustment and certain Federal and state research and development tax credits.
Our effective tax benefit rate of 48% in the nine months ended September 30,
2003 exceeded the Federal statutory rate primarily due to the effect of the
aforementioned state and federal tax benefits and research and development tax
credits. The income tax benefit in the nine months ended September 30, 2002 was
attributable to a tax benefit on our pre-tax loss of $7.3 million for that
period and recognition of certain Federal research and development tax credits
from prior years. Our effective tax benefit rate of 45% for the period exceeded
the Federal statutory rate primarily due to the effect of the aforementioned tax
credits and 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 and provide funding to EuroLink and Renaissance. At September 30, 2003 and
December 31, 2002, our cash, cash equivalents and short-term investments totaled
$16.5 million and $21.9 million, respectively. We had short-term investments in
current marketable security instruments of $4.9 million at September 30, 2003,
having interest rates ranging from 0.85% to 1.15%. Included in cash and cash
equivalents at
27
NYFIX, INC.
September 30, 2003 was $6.6 million in money market funds with an average 30 day
yield of 0.65%.
As discussed in Note 3 to the Consolidated Financial Statements, on
July 1, 2003 we acquired the remaining 82% of the membership units of
Renaissance, which we did not previously own. We financed the acquisition by (i)
exercising our option to convert the outstanding $1.5 million promissory note,
plus accrued interest of $0.1 million, for an additional 32% of the outstanding
membership units in Renaissance; and (ii) acquiring from its unitholders the
remaining 50% of the membership units in Renaissance, for a total value of $5.7
million, by issuing (a) 462,286 shares of our common stock into a trust for the
benefit of certain unitholders of Renaissance, having a fair value of $2.7
million; (b) promissory notes payable in, at our option, our common stock or
cash to certain unitholders of Renaissance maturing in December 2004, having a
present value of $1.3 million; (c) promissory notes payable in, at our option,
our common stock or cash to certain unitholders of Renaissance with annual
maturity dates ranging between June 2004 and June 2007, having a present value
of $1.4 million; and (d) 59,653 shares of our common stock with certain selling
restrictions to certain unitholders of Renaissance having a fair value of $0.3
million. There were nominal costs incurred directly associated with the
acquisition, which were included in the overall consideration. In connection
with the acquisition, we contributed, to capital, certain obligations that
Renaissance owed to us, including the aforementioned $1.5 million promissory
note and advances aggregating $3.2 million. In addition, we reacquired 60,000
shares of our common stock that we had issued in connection with our original
investment in Renaissance, and which Renaissance had acquired as an asset. Upon
receipt, we classified these shares as treasury stock on our balance sheet.
At September 30, 2003, we had total debt of $3.6 million, which
represented current and long-term amounts outstanding under promissory notes to
certain former unitholders of Renaissance of $2.7 million and under capital
lease obligations of $0.9 million. At September 30, 2003, we had no material
commitments for capital expenditures or inventory purchases. Our long-term
capital needs depend on numerous factors, including the rate we obtain new
clients and expand our staff and infrastructure, as needed, to accommodate such
growth, as well as the rate at which we choose to invest in new technologies to
modify our NYFIX Network and infrastructure. We have ongoing needs for capital,
including working capital for operations and capital expenditures to maintain
and expand our operations.
Our NYFIX Millennium, NYFIX Transaction Services and NYFIX Clearing
broker-dealer subsidiaries, individually, have to maintain certain minimum net
capital requirements as mandated by certain regulatory agencies. At September
30, 2003, we had cash and short-term investments of $12.0 million that was not
subject to our broker-dealer minimum net capital. During the fourth quarter
through November 13, 2003 we funded an additional $7.6 million and committed an
additional $2.5 million of our consolidated cash to NYFIX Clearing, to maintain
its minimum excess net capital requirement of $10.0 million as a condition of
its approval by the DTCC. Our broker-dealer operations may need additional funds
in the future to maintain their minimum and minimum excess net capital
requirements. If our broker-dealers fall below their minimum and minimum excess
net capital requirements, their operations would be restricted by their
respective regulatory agencies.
We believe that we can achieve synergies from combining our Javelin and
Renaissance businesses with regard to integrating the product offerings of these
operations with our existing product offerings. Although our broker-dealer
businesses have incurred losses through their development and start-up stages,
we believe that revenue will continue to increase as we gain greater acceptance
of our product offerings. Although we have only provided our unconsolidated
affiliate, EuroLink, with $0.6 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.
28
NYFIX, INC.
We believe that our cash and short-term investments of $16.5 million at
September 30, 2003, together with anticipated cash to be generated from
operations in the fourth quarter of 2003 and beyond will be sufficient to
support our capital and operating needs, our net capital requirements of our
broker-dealer operations and the operating needs of our unconsolidated affiliate
EuroLink, for at least the next twelve months. We believe, if needed, we would
be able to obtain sufficient credit facilities to provide any necessary funding
without negatively impacting our operating or investment strategy.
WORKING CAPITAL
At September 30, 2003, we had working capital of $26.8 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, fund pre-acquisition working capital advances to Renaissance and the
additional current liabilities recognized in conjunction with our acquisition of
Renaissance. 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 nine months ended
September 30, 2003 was $5.1 million, as our net loss of $2.0 million, adjusted
for non-cash items, such as depreciation, amortization, deferred taxes,
provision for bad debts and equity in loss of unconsolidated affiliates,
provided $8.0 million. Unfavorable working capital changes of $3.3 million,
including an increase in accounts receivable of $2.4 million, a decrease in
accounts payable and other liabilities of $0.6 million and an increase in
prepaid expenses and other assets of $0.3 million, were partially offset by
favorable net changes in other working capital items of $0.4 million, resulting
in a net cash decrease from working capital of $2.9 million.
Net cash used in operating activities in the nine months ended
September 30, 2002 was $2.9 million, as our net loss of $3.7 million, adjusted
for non-cash items, such as depreciation, amortization, deferred taxes and
provision for bad debts, provided $6.0 million. Unfavorable working capital
changes of $9.2 million, including an increase in prepaid expenses and other
assets of $3.9 million, a decrease in accounts payable and accrued expenses of
$3.7 million, an increase in accounts receivable of $1.4 million, and a decrease
in deferred revenue of $0.2 million, were partially offset by favorable
decreases in inventory of $0.3 million, resulting in a net cash decrease from
working capital of $8.9 million.
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
For the nine months ended September 30, 2003 net cash used in investing
activities was $4.3 million. This consisted primarily of capital expenditures,
primarily for data center equipment and software, of $4.1 million, product
enhancement costs of $3.9 million and loans and advances to unconsolidated
affiliates of $2.2 million. These amounts were partially offset by proceeds from
the net sales of short-term investments of $5.9 million.
For the nine months ended September 30, 2002 net cash provided by
investing activities was $8.5 million. This consisted primarily of net sales of
short-term investments of $21.8 million, which was partially 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
29
NYFIX, INC.
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 $2.4 million, product enhancement costs of $2.2 million and
other uses of $0.4 million.
CASH USED IN FINANCING ACTIVITIES
For the nine months ended September 30, 2003 and 2002, our net cash
used in financing activities totaled $0.4 million and $0.6 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.
(Superior Court- 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
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. On October 9,
2003, the FASB deferred until the first interim or annual period ending after
December 15, 2003, the provision that VIEs that existed prior to February 1,
2003 must be consolidated. We are evaluating the provisions of FIN 46 to
determine whether our unconsolidated affiliate, EuroLink, is a VIE. From the
inception of our investment through September 30, 2003, we have recognized our
40% ownership interest of EuroLink's net losses of $1.2 million, or $0.5
million, after tax. If we determine that EuroLink is a VIE, we will be required
to recognize the incremental losses of $0.7 million after tax of EuroLink's net
losses and we will consolidate the financial position, results of operations and
cash flows of EuroLink into our financial statements effective October 1, 2003
(see Note 4). Effective July 1, 2003, we acquired the remaining 82% of our other
unconsolidated affiliate, Renaissance, which we did not already own.
Accordingly, the financial position and results of operations of Renaissance
were consolidated into our financial statements as of that date (see Note 3).
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
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NYFIX, INC.
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 adoption of
Issue No. 00-21, effective July 1, 2003, did not have an effect on our financial
position or results of operations.
RISK FACTORS: FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, 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 $4.9 million and
$10.7 million at September 30, 2003 and December 31, 2002, respectively,
consisted of $4.9 million and $6.8 million, respectively, of auction rate
certificates and $3.9 million at December 31, 2002, 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
was managed by an institution which primarily invested in investment grade
securities, with up to a maximum of 10% invested in high yield securities rated
B or higher. These securities were subject to equity price risk.
We are also subject to interest rate risk on our $0.5 million and $2.0
million of notes receivable principal from unconsolidated affiliates at
September 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
Based on an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective 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.
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NYFIX, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2003, we were served as a defendant in Kledaras v. NYFIX, Inc.
(Superior Court - 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 our 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As of July 1, 2003, we issued 521,939 shares of our common stock,
acquired 60,000 previously issued shares of our common stock and issued notes
with a present value of $2.7 million to the unit holders of Renaissance Trading
Technologies, LLC in connection with acquiring the remaining 82% of the
membership interests of Renaissance, which we did not previously own.
In connection with the issuance of our shares to the above investors,
we relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Form of Option to Purchase Common Stock of EuroLink Network, Inc.
10.2 Purchase Agreement, dated as of September 26, 2003, by and between us
and the sellers of Renaissance Trading Technologies, LLC.
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.
(b) REPORTS ON FORM 8-K
On July 3, 2003, we reported under Items 5 and 7 of Form 8-K that we
had entered into a binding agreement to acquire 100% of Renaissance
Trading Technologies LLC.
On July 22, 2003, we reported under Items 5 and 7 of Form 8-K that
we had named William C. Jennings to our Board of Directors.
On July 24, 2003, we reported under Items 7 and 9 of Form 8-K
updated guidance for our second quarter 2003.
On July 29, 2003, we reported under Items 7 and 12 of Form 8-K our
results for the second quarter 2003.
32
On September 29, 2003, we reported under Items 5 and 7 of Form 8-K
that we had completed our acquisition of 100% of Renaissance Trading
Technologies LLC.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period presented.
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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: November 14, 2003
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NYFIX, INC.
Exhibits Index
Exhibit
10.1 Form of Option to Purchase Common Stock of EuroLink Network, Inc.
10.2 Purchase Agreement, dated as of September 26, 2003, by and between us
and the sellers of Renaissance Trading Technologies, LLC.
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.