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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2004
COMMISSION FILE NUMBER 0-21324
------------------------
NYFIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 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 32,263,781 shares of Common Stock issued and outstanding as of April
30, 2004.
NYFIX, INC.
FORM 10-Q
For the quarter ended March 31, 2004
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 6. Exhibits and Reports on Form 8-K 37
Signatures 38
2
NYFIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2004 2003
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,021 $ 21,006
Short-term investments 6,175 3,448
Accounts receivable, less allowances of $1,552 and $1,839 11,531 10,371
Brokerage receivables 25,124 1,945
Deferred income taxes 976 976
Prepaid expenses and other current assets 5,010 3,929
--------- ---------
Total current assets 66,837 41,675
Property and equipment, less accumulated depreciation of $26,489 and $24,476 16,113 16,592
Goodwill 57,927 55,966
Acquired intangible assets, net 10,612 10,235
Investments in unconsolidated affiliates -- 3,088
Notes receivable and other amounts due from unconsolidated affiliates -- 814
Deferred income taxes 16,424 16,424
Other assets, net 8,835 7,378
--------- ---------
Total assets $ 176,748 $ 152,172
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,274 $ 6,664
Accrued expenses 4,713 4,807
Brokerage payables 25,302 1,700
Current portion of capital lease obligations 441 531
Current portion of long-term debt and other liabilities 1,919 1,894
Deferred revenue 2,869 2,732
--------- ---------
Total current liabilities 43,518 18,328
Long-term portion of capital lease obligations 25 135
Long-term debt and other liabilities 1,612 1,137
--------- ---------
Total liabilities 45,155 19,600
--------- ---------
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;
33,248,735 and 33,222,475 issued 33 33
Additional paid-in capital 182,962 182,863
Accumulated deficit (31,847) (30,770)
Treasury stock, 1,361,300 shares, at cost (19,480) (19,480)
Notes receivable issued for common stock (75) (74)
--------- ---------
Total stockholders' equity 131,593 132,572
--------- ---------
Total liabilities and stockholders' equity $ 176,748 $ 152,172
========= =========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements
3
NYFIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
REVENUE:
Subscription $ 9,305 $ 8,547
Capital sale 1,988 2,655
Service contract 2,480 2,472
Transaction 3,363 3,609
-------- --------
Total revenue 17,136 17,283
-------- --------
COST OF REVENUE:
Subscription 5,675 4,573
Capital sale 817 779
Service contract 917 669
Transaction 2,079 2,236
-------- --------
Total cost of revenue 9,488 8,257
-------- --------
GROSS PROFIT:
Subscription 3,630 3,974
Capital sale 1,171 1,876
Service contract 1,563 1,803
Transaction 1,284 1,373
-------- --------
Total gross profit 7,648 9,026
-------- --------
OPERATING EXPENSE:
Selling, general and administrative 8,523 7,835
Research and development 313 177
Depreciation and amortization 541 664
-------- --------
Total operating expense 9,377 8,676
-------- --------
(Loss) income from operations (1,729) 350
Interest expense (74) (31)
Investment income 46 106
Equity in loss of unconsolidated affiliates (74) (362)
-------- --------
(Loss) income before income tax benefit (1,831) 63
Income tax benefit (754) (13)
-------- --------
Net (loss) income $ (1,077) $ 76
======== ========
Basic (loss) income per common share $ (0.03) $ 0.00
======== ========
Basic weighted average common shares outstanding 31,873 31,131
======== ========
Diluted (loss) income per common share $ (0.03) $ 0.00
======== ========
Diluted weighted average common shares outstanding 31,873 31,936
======== ========
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements
4
NYFIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
--------- -----------
Cash flows from operating activities:
Net (loss) income $ (1,077) $ 76
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 3,451 3,075
Deferred income taxes -- (145)
Provision for doubtful accounts -- 15
Equity in loss of unconsolidated affiliates 74 362
Changes in assets and liabilities (net of business
acquisition):
Accounts receivable (1,160) (2,335)
Prepaid expenses and other assets (1,328) 665
Brokerage receivables (23,179) --
Deferred revenue 137 385
Accounts payable, accrued expenses and other liabilities 1,378 (1,068)
Brokerage payables 23,602 --
Other, net (8) (38)
-------- --------
Net cash provided by operating activities 1,890 992
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (3,725) (21)
Sales of short-term investments 998 950
Capital expenditures for property and equipment (1,418) (1,514)
Capitalization of product enhancement costs and other (1,833) (851)
Cash acquired from acquisitions 1,405 --
Loans and advances to unconsolidated affiliates, net of repayments (205) (1,466)
-------- --------
Net cash used in investing activities (4,778) (2,902)
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (200) (316)
Net proceeds from issuance of common stock 103 56
-------- --------
Net cash used in financing activities (97) (260)
-------- --------
Net decrease in cash and cash equivalents (2,985) (2,170)
Cash and cash equivalents, beginning of period 21,006 11,213
-------- --------
Cash and cash equivalents, end of period $ 18,021 $ 9,043
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
NYFIX, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
NYFIX, Inc., (together with its subsidiaries, the "Company"), founded in
1991 through the acquisition of a New York corporation, is headquartered in
Stamford, Connecticut. In December 2003, the Company reincorporated as a
Delaware corporation. The Company is an established provider to the domestic and
international financial markets of trading workstations, middle office trade
automation technologies and trade communication technologies. The Company's
NYFIX Network connects broker-dealers, institutions and exchanges. In addition
to its headquarters in Stamford, the Company has offices on Wall Street in New
York City, in London's Financial District, in Chicago, and in San Francisco. The
Company operates three data centers in the northeastern United States and has
established additional data center hubs in London and Amsterdam. The Company has
two business segments: its Technology Services segment and its Transaction
Services segment. The Company provides trading technology, industry network
connectivity and execution services, offering certain underlying, universally
applicable network inter-connectivity products, systems, facilities, and
supporting operations to its segments. The Company's Technology Services segment
is a technology provider, focusing on offering trade-management systems, a
centralized industry order-routing network, order-routing software,
exchange-floor automation systems, exchange and market access technology and
post-trade processing systems. The Company's Technology Services segment
customers consist primarily of United States securities brokerage firms and
international derivatives brokerage firms. The Company's Transaction Services
segment is primarily comprised of its NASD registered broker-dealers, which in
addition to the technology provided by the Company's Technology Services
segment, provides an electronic execution venue for trading in United States
stocks and direct market access and execution links.
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 accompanying condensed 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 months ended March 31, 2004 and 2003
are not necessarily indicative of the results to be expected for any future
interim period or any future year. These condensed 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, 2003 ("2003 Form 10-K"). The Company's significant accounting
policies are the same as those listed in Note 1 to the 2003 Form 10-K.
Prior to July 1, 2003, the Company's 18% ownership in Renaissance
Trading Technologies, Inc. ("Renaissance") was accounted for under 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 Renaissance. Prior to
March 29, 2004, the Company's 40% ownership interest in EuroLink Network, Inc.
("EuroLink") was accounted for under the equity method. Effective March 29,
2004, the Company acquired the remaining 60% of EuroLink, which the Company did
not already own. As of that date, the Company consolidated EuroLink (see Note
3).
6
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
On February 1, 2002, the Company acquired an additional 30% ownership
interest in NYFIX Millennium resulting in a total ownership interest of 80% and
regained control of the NYFIX Millennium Board of Directors. Effective on that
date, the Company consolidated the financial statements of NYFIX Millennium and
recognized 100% of NYFIX Millennium's operating losses. If and when NYFIX
Millennium achieves profitability, 24% of its profits will be allocated to the
Initial Partners and New Partners in accordance with the contractual agreement
amongst the parties.
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 condensed consolidated financial statements and the reported
amounts of revenue and expense during the reporting periods in the condensed
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 realizability of the Company's assets. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
condensed 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 condensed
consolidated financial statements to conform to the current period's
presentation. In connection therewith, amortization expense of intangible assets
of $0.5 million was reclassified from depreciation and amortization expense to
cost of revenue for the three months ended March 31, 2003.
STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for its stock-based employee compensation plans
under the recognition and measurement provisions of the Accounting Principles
Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and
related interpretations and has elected the disclosure-only alternative under
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. 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) income
and (loss) income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, as required by SFAS No. 148, ACCOUNTING
FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, to stock-based
employee compensation:
7
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
-------------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net (loss) income, as reported $ (1,077) $ 76
Compensation expense based on the fair value
method, net of tax (713) (1,732)
----------- --------
Pro forma net loss $ (1,790) $ (1,656)
=========== ========
Basic and diluted (loss) income per common share:
As reported $ (0.03) $ 0.00
=========== ========
Pro forma $ (0.06) $ (0.05)
=========== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. ("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. In December 2003, the FASB issued FIN
46 (revised) ("FIN 46R"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN 46R
clarified some of the provisions of FIN 46 and deferred the effective date of
implementation for certain entities. Under the guidance of FIN 46R, entities
that do not have interests in structures that are commonly referred to as
special purpose entities ("SPEs") are required to apply the provisions of FIN
46R in financial statements for periods ending after March 15, 2004, for VIEs
that existed prior to February 1, 2003. The Company does not have interests in
SPEs and has adopted the provisions of FIN 46R starting with the Company's first
quarter 2004 financial statements. The adoption of FIN 46R did not have an
effect on the Company's condensed consolidated financial statements.
2. BROKER-DEALER OPERATIONS
BROKER-DEALER NET CAPITAL REQUIREMENTS
The SEC and the NASD, as well as other regulatory agencies and
securities exchanges within and outside the United States, have stringent rules
with respect to the maintenance of specific levels of net capital by regulated
broker-dealers. These rules include the SEC's net capital rule, to which the
Company's United States broker-dealer subsidiaries are subject. The failure by
one of these subsidiaries to maintain its required net capital may lead to
suspension or revocation of its registration by the SEC and its suspension or
expulsion by the NASD and other United States or international regulatory
bodies, and ultimately could require its liquidation. In addition, a change in
8
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
the net capital rules, the imposition of new rules or any unusually large charge
against the net capital of one of the Company's broker-dealer subsidiaries could
limit its operation, particularly those that are capital intensive. A large
charge to the net capital of one of these subsidiaries could result from an
error or other operational failure or a failure of a customer to complete one or
more transactions, including as a result of that customer's insolvency or other
credit difficulties, and the Company cannot assure that it would be able to
furnish the affected subsidiary with the requisite additional capital to offset
that charge. The net capital rules could also restrict the Company's ability to
withdraw capital from its broker-dealer subsidiaries, which could limit the
Company's ability to pay cash dividends, repay debt or repurchase shares of its
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect the Company's financial condition,
results of operations or cash flows.
NYFIX Clearing Corporation ("NYFIX Clearing"), NYFIX Transaction
Services Inc. ("NYFIX Transaction Services") and NYFIX Millennium L.L.C. ("NYFIX
Millennium"), as registered broker-dealers, are subject to the minimum net
capital requirements of the NASD. These broker-dealers have consistently
operated in excess of such requirements. NYFIX Clearing's net capital was $10.8
million at March 31, 2004, which exceeded the amount required by $10.5 million.
NYFIX Transaction Services' net capital was $1.5 million at March 31, 2004,
which exceeded the amount required by $1.4 million. NYFIX Millennium's net
capital was $0.4 million at March 31, 2004, which exceeded the amount required
by $0.2 million. During 2003, the Company funded $10.8 million to NYFIX Clearing
to enable it to maintain its minimum excess net capital requirement of $10.0
million as a condition of its approval by the Depository Trust and Clearing
Corporation ("DTCC"). The Company's broker-dealer subsidiaries may need the
Company to fund or commit more of its consolidated cash, cash-equivalents and
short-term investments in the future to maintain their individual minimum and
minimum excess net capital requirements. If any or all of these broker-dealer
subsidiaries were to fall below their minimum or minimum excess net capital
requirements, their operations may be restricted.
BROKERAGE RECEIVABLES AND PAYABLES
In connection with its clearing operations, NYFIX Clearing may borrow
securities either to complete transactions for which the securities have not
been received by the required settlement date, or to lend the securities as part
of a matched-book trading strategy in which both a securities borrowed and
loaned agreement are transacted with the same underlying securities for the same
period of time but usually at slightly different rates. Securities borrowed and
securities loaned are treated as financing transactions and are carried at the
amounts of cash collateral advanced and received in connection with the
transactions. In the accompanying condensed consolidated balance sheets,
securities borrowed is reflected in brokerage receivables, and securities loaned
is reflected in brokerage payables. NYFIX Clearing earns interest revenue from
the cash collateral it provides the borrower of securities and pays interest on
the cash collateral received from the party borrowing the securities. NYFIX
Clearing monitors the fair market value of the securities borrowed and loaned on
a daily basis and requests additional collateral or returns excess collateral as
required. .
Brokerage receivables consisted of the following:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
(IN THOUSANDS)
Stock receivable (matched and reserved) $24,770 $ 1,466
Other 354 479
------- -------
Total brokerage receivables $25,124 $ 1,945
======= =======
9
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Brokerage payables consisted of the following:
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
(IN THOUSANDS)
Stock payable $24,216 $ 1,385
Other 1,086 315
------- -------
Total brokerage payables $25,302 $ 1,700
======= =======
3. ACQUISITIONS, GOODWILL AND OTHER ACQUIRED INTANGIBLES
ACQUISITIONS
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 United States equity markets from Europe. EuroLink
offers the Company's equity products and services to the European marketplace,
primarily on a transaction fee basis. The preferred stock automatically
converted into a 40% common stock interest two years from the date of the
Company's original investment, or March 6, 2004. The Company also had 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 ranged from a minimum of
$1.0 million to a maximum of $10.0 million. The option was exercisable between
April 1, 2004 and June 30, 2004 and was payable in equal amounts of cash and the
Company's common stock. The investment in EuroLink was being accounted for under
the equity method. Since its initial investment, the Company has recorded its
equity in the losses of EuroLink aggregating $1.0 million through March 29,
2004. During the three months ended March 31, 2004 and 2003, the Company
recorded its equity in the losses of EuroLink of $0.1 million and $0.2 million,
respectively, which were included in "equity in loss of unconsolidated
affiliates" in the accompanying condensed consolidated statements of operations.
In addition, the Company had notes receivable from EuroLink at March 29, 2004
and December 31, 2003 of $0.6 million, bearing an interest rate of 6.0%. The
Company also advanced to EuroLink $0.2 million during the first quarter of 2004
and $0.2 million during the year ended December 31, 2003 to fund certain
operating costs. Such notes and advances were reflected as "notes receivable and
other amounts due from unconsolidated affiliates" in the accompanying condensed
consolidated balance sheet at December 31, 2003.
On March 29, 2004, the Company executed a binding agreement to acquire
the remaining 60% of EuroLink that it did not already own. The transaction
closed on April 28, 2004. The Company's key consideration for the acquisition of
EuroLink was the expected synergies to be achieved by consolidating EuroLink
with NYFIX International Ltd., the Company's newly formed London-based
subsidiary through which it plans to capture order flow to and from the United
States and within Europe. The Company paid for the acquisition with $24,000 in
cash and one-year promissory notes payable in its common stock or cash, at the
Company's option, having a fair value of $0.5 million. The cash payment was
included in "current portion of long-term debt and other liabilities" and the
fair value of the notes, which mature on April 28, 2005, was included in
10
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
"long-term debt and other liabilities" in the accompanying condensed
consolidated balance sheet at March 31, 2004. In connection with the
acquisition, the Company contributed to EuroLink's capital certain obligations
that EuroLink owed to the Company, including the aforementioned notes receivable
and advances, aggregating $1.0 million.
The total purchase price for 100% of EuroLink, including the Company's
basis of $3.0 million, the notes receivable and advances of $1.0 million, the
promissory notes of $0.5 million and accruals for acquisition-related expenses
of $50,000 was $4.6 million. The excess of the purchase price over the fair
value of the net assets acquired was $3.2 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
EuroLink. Asset valuations will be performed by an independent third-party, and
are expected to be completed by December 31, 2004.
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 common stock with a fair value of
$3.74 per share, totaling $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 a 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, or was convertible into 6,400,000
membership 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 funded to Renaissance $2.2 million, in the
aggregate through June 30, 2003 to fund certain operating costs and capital
expenditures of Renaissance. 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 three months ended March 31, 2003, the Company
recorded its equity in the loss of Renaissance of $0.2, which was included in
"equity in loss of unconsolidated affiliates" in the accompanying condensed
consolidated statement of operations for the three months ended March 31, 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 over the counter ("OTC") market, or 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
11
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
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, at the Company's option, in its
common stock or cash to certain unitholders of Renaissance, maturing in December
2004, having a fair value of $1.3 million; (c) promissory notes payable, at the
Company's option, in its common stock or cash to certain unitholders of
Renaissance with annual maturity dates ranging between June 2004 and June 2007,
having a fair value of $1.3 million; and (d) 59,653 shares of the Company's
common stock with selling restrictions to certain unitholders of Renaissance,
having a fair value of $0.3 million. On April 7, 2004, pursuant to notice from
certain payees after default on the notes, the Company issued shares of its
common stock in payment of $2.0 million of such notes. Certain contingent
liabilities remain with respect to such notes.
In connection with the acquisition, the Company contributed to
Renaissance's capital certain obligations that Renaissance owed to the Company,
including the aforementioned promissory note and advances aggregating $3.2
million. In addition, the Company acquired 60,000 shares of its common stock,
valued at $0.4 million, that it had issued in connection with its original
investment in Renaissance, and which Renaissance had acquired. The Company has
classified these 60,000 shares as "treasury stock" in the accompanying condensed
consolidated balance sheets.
The total purchase price for 100% of Renaissance, including the
Company's pre-acquisition basis of $1.3 million, was $11.8 million. The excess
of the purchase price over the fair value of the net assets acquired was $8.2
million and has been recorded as goodwill.
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangibles primarily relate to the
Company's 2004 acquisition of EuroLink, 2003 acquisition of Renaissance, and
2002 acquisitions of an additional 30% ownership interest in NYFIX Millennium
and the acquisition of Javelin Technologies, Inc. ("Javelin"). In the absence of
circumstances requiring impairment testing on a quarterly or other more frequent
basis, the Company has set October 1 as its annual testing date for goodwill
impairment. Effective October 1, 2003, the Company performed its annual test for
impairment using the discounted cash flow valuation method. There was no
indication of impairment to the value of goodwill for the quarter ended March
31, 2004 or any other prior periods. The Company completed the asset valuations
for the Renaissance acquisition during the fourth quarter of 2003.
The changes in the carrying amount of goodwill by segment for the three
months ended March 31, 2004, were as follows:
TECHNOLOGY TRANSACTION
SERVICES SERVICES TOTAL
---------- ------------ ----------
(IN THOUSANDS)
Balance as of December 31, 2003 $ 50,164 $ 5,802 $ 55,966
Goodwill acquired or (adjusted) during the
period
EuroLink (preliminary estimate) -- 3,211 3,211
Javelin (1,250) -- (1,250)
-------- -------- --------
Balance as of March 31, 2004 $ 48,914 $ 9,013 $ 57,927
======== ======== ========
12
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
In connection with the Company's March 31, 2002 acquisition of Javelin,
$1.0 million in cash and 270,945 shares of common stock, having a fair value of
$4.0 million at March 31, 2002, were being held in escrow by an unrelated party,
subject to a final working capital adjustment. On March 15, 2004, a
representative of the former shareholders of Javelin executed a settlement
agreement with the Company that, among other things, paid the Company $1.3
million and distributed the Company's common stock held in the escrow fund to
the former Javelin shareholders. The Company recorded the $1.3 million of net
proceeds received in the first quarter of 2004 as a reduction in goodwill.
Acquired intangible assets consisted of the following:
MARCH 31, DECEMBER 31, USEFUL LIVES
2004 2003 (YEARS)
--------- ---------- -----------
(IN THOUSANDS)
Existing technology $10,600 $10,600 5-7
Customer related intangibles 3,700 2,700 5
Trademarks and other 800 800 6-14
------- -------
Total intangible assets, gross 15,100 14,100
Less: Accumulated amortization 4,488 3,865
------- -------
Total intangible assets, net $10,612 $10,235
======= =======
Amortization expense of acquired intangible assets was $0.6 million and
$0.5 million for the three months ended March 31, 2004 and 2003, respectively,
and was included in cost of revenue.
Based on identified intangible assets recorded at March 31, 2004, the
future amortization expense is expected to be as follows:
AMOUNT
------
(IN THOUSANDS)
Remainder of 2004 $ 2,018
2005 2,691
2006 2,691
2007 1,566
2008 726
Thereafter 920
-------
Future amortization expense $10,612
=======
4. INCOME TAXES
The Company recorded tax benefits of $0.8 million and $13,000 for the
three months ended March 31, 2004 and 2003, respectively. The Company's
effective tax rate was 41% and 21% for the three months ended March 31, 2004 and
2003, respectively. The Company's effective tax rate for the three months ended
March 31, 2004 is higher than the Federal statutory rate primarily due to the
benefits of certain research and development tax credits and state income taxes.
The Company's effective tax rate for the three months ended March 31, 2003 is
lower than the Federal statutory rate primarily due to the effect of the
recognition of certain research and development tax credits offset by the effect
of state income taxes.
13
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
5. PER SHARE INFORMATION
The Company's basic (loss) income per common share ("EPS") was
calculated based on the net (loss) income available to common stockholders and
the weighted-average number of shares outstanding during the reporting period.
Diluted EPS includes additional dilution from common stock equivalents, such as
stock issuable pursuant to the exercise of outstanding stock options. Stock
options representing 1,245,033 shares for the three months ended March 31, 2004
were excluded from the loss per share calculation since the amounts would be
anti-dilutive.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net (loss) income $ (1,077) $ 76
======== =======
Basic (loss) income per common share $ (0.03) $ 0.00
======== =======
Basic weighted average common shares outstanding 31,873 31,131
Potentially dilutive effect of stock options -- 805
-------- -------
Diluted weighted average shares outstanding 31,873 31,936
======== =======
Diluted (loss) income per common share $ (0.03) $ 0.00
======== =======
6. BUSINESS SEGMENT INFORMATION
The Company has adopted the disclosure requirements of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
establishes standards for additional disclosure about operating segments for
interim and annual financial statements. This standard requires financial and
descriptive information be disclosed for segments whose operating results are
reviewed by the Company for decisions on resource allocation. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
The Company operates as a financial services technology company in two
industry segments, Technology Services and Transaction Services.
The Company's Technology Services segment is comprised of four of its
subsidiaries, which work together as technology providers, focusing on offering
trade-management systems, a centralized industry order-routing network,
order-routing software, exchange-floor automation systems, exchange and market
access technology and post-trade processing systems. The Technology Services
segment customers consist primarily of United States securities brokerage firms
and international derivatives brokerage firms. The Company's Technology Services
segment primarily generates subscription, capital sale and service revenue.
The Company's Transaction Services segment is comprised of six of its
subsidiaries. Three are NASD registered broker-dealers; one is an introducing
broker-dealer for derivatives and was granted its broker-dealer license in 2002
by the National Futures Association; one was incorporated in the United Kingdom
on March 29, 2004 and is applying for its Financial Services Authority ("FSA")
broker-dealer license in anticipation of the Company's expansion into Europe and
other international markets; and EuroLink, of which we acquired the remaining
14
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
60% we did not already own effective March 29, 2004 and which represented the
Company's initial transaction efforts in the European markets. Currently, the
customers of the NASD registered broker-dealers consist primarily of United
States securities brokerage firms and United States buy-side institutions,
including banks, mutual funds and other professional money managers. The
Company's Transaction Services segment primarily generates revenues from the
application of fees charged on executed trades.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies contained in Note 1
to the 2003 Form 10-K. 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.
Summarized financial information by business segment was as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
2004 2003
----------- -----------
Revenue: (in thousands)
Technology Services $ 13,870 $ 13,919
Transaction Services 3,925 3,849
Eliminations (659) (485)
-------- --------
Total revenue $ 17,136 $ 17,283
======== ========
Gross Profit:
Technology Services $ 6,431 $ 7,983
Transaction Services 1,217 1,043
-------- --------
Total gross profit $ 7,648 $ 9,026
======== ========
Reconciling information between business segments and the (loss) income
before income tax benefit was as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- -----------
(IN THOUSANDS)
Gross profit for reportable segments $ 7,648 $ 9,026
Operating expenses (9,377) (8,676)
Interest expense (74) (31)
Investment income 46 106
Equity in loss of unconsolidated affiliates (74) (362)
------- -------
(Loss) income before income tax benefit $(1,831) $ 63
======= =======
15
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
7. OTHER COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income, net of tax, were as
follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
----------- -----------
(IN THOUSANDS)
Net (loss) income $(1,077) $ 76
Changes in net unrealized gain on available-for-sale securities -- 34
------- -------
Total comprehensive (loss) income $(1,077) $ 110
======= =======
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
In May 2003, the Company was served as a defendant in Kledaras v. NYFIX,
Inc. Mr. George Kledaras, as representative of former shareholders of Javelin,
sought the release of an escrow fund consisting of $1.0 million in cash and
270,945 shares of common stock, having a fair value of $4.0 million at March 31,
2002 and alleged damages of at least $18 million against the Company and its
Chairman and CEO, Mr. 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. On March 15, 2004, Mr. Kledaras, as
representative of former shareholders of Javelin executed a settlement agreement
with us that, among other things: (a) paid the Company $1.3 million; (b)
distributed the Company's common stock from the escrow fund to the former
Javelin shareholders; (c) deemed that Kledaras v. NYFIX, Inc. be dismissed with
prejudice; and (d) provided for mutual releases with respect to all claims
related to its acquisition of Javelin. The Company received the $1.3 million of
net proceeds in the first quarter of 2004.
9. CASH FLOW SUPPLEMENTAL INFORMATION
Information about the cash flow activities related to the EuroLink and
Javelin acquisitions was as follows:
16
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
THREE MONTHS
ENDED MARCH 31,
2004
--------------
(in thousands)
Fair value of assets acquired, including cash of $155 $ 4,520
Fair value of liabilities assumed (136)
Fair value of capital contributed (1,026)
Fair value of notes issued (499)
Pre-acquisition investment basis (3,014)
Javelin working capital adjustment settlement (1,250)
-------
Cash acquired from acquisitions $(1,405)
=======
The preceding fair values of net assets and liabilities for the three
months ended March 31, 2004 were based on the preliminary values at that time.
The final allocation of assets acquired at March 31, 2004 may differ from the
fair values presented.
Information about other cash flow activities was as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------
2004 2003
--------- ----------
Supplemental disclosures of cash flow information: (IN THOUSANDS)
Cash paid for interest $ 74 $ 31
Cash paid (refunds received) for income taxes, net 18 (688)
Supplemental schedule of noncash investing and
financing information:
Unrealized gain on available-for-sale securities -- (34)
10. SUBSEQUENT EVENTS
LITIGATION
On or about May 13, 2004, an action entitled Fuller & Thaler Asset
Management v. NYFIX, Inc., et al. was filed in the United States District Court
for the District of Connecticut. The Complaint names the Company, its Chairman
and CEO, its former CFO, its current CFO and certain of its directors as
defendants. The Complaint asserts a proposed class action claim on behalf of all
buyers of the Company's stock between March 30, 2000 and March 30, 2004 and
seeks an unspecified amount of damages. The Complaint alleges violations of
Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, based on
the issuance of a series of allegedly false and misleading financial statements
and press releases concerning, among other things, the Company's investment in
NYFIX Millennium. The Company and the other defendants intend to defend the
lawsuit vigorously.
17
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
RENAISSANCE NOTES
On April 7, 2004, pursuant to notice from certain payees after default
on the notes, the Company issued shares of its common stock in payment of $2.0
million of such notes (see Note 3). Certain contingent liabilities remain with
respect to such notes.
NASDAQ DELISTING PROCEEDING
On April 1, 2004, Nasdaq notified the Company that the Company was not
in compliance with Nasdaq's listing requirements because the Company had not
timely filed its 2003 Form 10-K. On April 8, 2004, the Company requested a
hearing with the Nasdaq Listing Qualifications Panel (the "Panel") for continued
listing on the Nasdaq National Market. At the April 29, 2004 hearing, the
Company requested an extension to May 30, 2004 to meet Nasdaq's listing
requirements. On May 19, 2004, Nasdaq notified the Company that Nasdaq viewed
the delay in the filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 as an additional delinquency with respect to the
Company's compliance with its listing requirements and that the Panel will
consider this factor in its decision. The Company is awaiting a decision from
the Panel regarding the Company's request for an extension.
Once the Company files its 2003 Form 10-K and its Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004, the Company believes that it
will be in compliance with its SEC reporting obligations. At that time, the
Company will request that Nasdaq dismiss the pending delisting action against
it.
If the Company's common stock is delisted from Nasdaq, stockholders may
find it more difficult to obtain timely and accurate quotes and execute trades
in our common stock. In addition, if our common stock is delisted from Nasdaq
and the market price of our common stock is less than $5.00 per share, our
common stock could be considered a penny stock and become subject to the
regulations applicable to penny stocks.
18
NYFIX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of management's discussion and analysis of financial
condition and results of operations ("MD&A") is to provide an overview of
NYFIX, Inc. to help facilitate an understanding of the significant factors
influencing our financial statements and also to convey our expectations of the
potential impact of known trends, events, or uncertainties that may impact our
future financial statements. Our MD&A includes forward-looking statements,
including, without limitations, our expectations. Our actual results may differ
materially from those expressed or implied in the forward-looking statements as
a result of various factors including, but not limited to, those discussed in
the "Risk Factors" section of our 2003 Form 10-K, and below. We assume no
obligation to update the forward-looking statements or such risk factors. You
should read this discussion in conjunction with our condensed consolidated
financial statements and related notes included in this Report on Form 10-Q and
our consolidated financial statements and related notes, "Selected Consolidated
Financial Data" and "Risk Factors" included in our 2003 Form 10-K.
OVERVIEW
NYFIX, founded in 1991 through the acquisition of a New York
corporation, is headquartered in Stamford, Connecticut. In December 2003, we
reincorporated as a Delaware corporation.
We are an established provider to the domestic and international
financial markets of trading workstations, middle-office trade automation
technologies and trade communication technologies. Our NYFIX Network is one of
the industry's largest networks, connecting broker-dealers, institutions and
exchanges. In addition to our headquarters in Stamford, we have offices on Wall
Street in New York City, in London's Financial District, in Chicago, and in San
Francisco. We operate three data centers in the northeastern United States and
have established additional data center hubs in London and Amsterdam.
We are a provider of trading technology, industry network connectivity
and execution services, offering certain underlying, universally applicable
network inter-connectivity products, systems, facilities, and supporting
operations to our two business segments: our Technology Services segment and our
Transaction Services segment. These segments, in turn, package these products
and services and add others to address the needs of their specific markets. We
also provide to our segments products specifically developed to support the
marketing strategy of that segment. We provide product development, systems
development, data center and network operations support to our segments.
Our Technology Services segment is comprised of four of our
subsidiaries: NYFIX USA, NYFIX Overseas, Javelin, and Renaissance. These
businesses work together as technology providers, focusing on offering
trade-management systems, a centralized industry order-routing network,
order-routing software, exchange-floor automation systems, exchange and market
access technology and post-trade processing systems. Our Technology Services
segment customers consist primarily of United States securities brokerage firms
and international derivatives brokerage firms. Our Technology Services segment
generates subscription, capital sale and service revenue.
Our Transaction Services segment is comprised of six of our subsidiaries
- - NYFIX Millennium, NYFIX Transaction Services, and NYFIX Clearing, which are
NASD registered broker-dealers; NYFIX Partners, which is our introducing
broker-dealer for derivatives and was granted its broker-dealer license in 2002
by the NFA; NYFIX International, which we incorporated in the United Kingdom on
March 29, 2004 and which has applied for its FSA broker-dealer license in
anticipation of our expansion into European and other international markets; and
EuroLink, of which we acquired the remaining 60% we did not already own
effective March 29, 2004 and which represented our initial transaction efforts
in the European markets. NYFIX Millennium provides a modernized electronic
19
NYFIX, INC.
execution venue under Regulation ATS for trading in United States stocks. NYFIX
Transaction Services provides technology and direct market access and execution
links. NYFIX Clearing, a member of the DTCC, settles and clears transactions on
behalf of NYFIX Millennium and NYFIX Transaction Services. While NYFIX Partners
has not initiated any active business, we are discussing opportunities with
sponsoring broker-dealers and potential customers for the derivatives markets to
augment our future business plans. Our Transaction Services segment generates
subscription and transaction revenue.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
This MD&A reviews our condensed 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,
based on assumptions, which if not accurate, could materially affect our
financial statements, including the assets, liabilities, revenue and expense and
the disclosure of contingent assets and liabilities at the date of the financial
statements and future reporting periods. The markets for our products are
characterized by intense competition, rapid technological development and
pricing pressures, all of which could affect the future realization of our
assets.
Estimates, including assumptions related to: the collectibility of
accounts receivable; the useful lives of tangible and intangible assets; the
recoverability of goodwill; the realization of deferred tax assets; revenue
recognition; product enhancement costs; income taxes; and contingencies are
reviewed periodically and the effects of revisions are reflected in the
condensed consolidated financial statements in the period they are determined to
be necessary. We base our estimates on historical experience and on various
other factors and assumptions that we believe to be reasonable, the results of
which form the bases for making estimates and assumptions about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions.
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 2003 Form 10-K. We have reviewed the development and selection of these
accounting policies, estimates, including the underlying assumptions, and the
related disclosures in the financial statements and this MD&A with our Audit
Committee. Refer to Note 1 in the Notes to the Consolidated Financial Statements
in Item 15 of our 2003 Form 10-K for our significant accounting policies. In the
first three months of 2004, there have been no material changes to our
significant accounting policies.
OVERVIEW OF FINANCIAL RESULTS
The tables provided below present additional views of our revenue and
gross profit. The following table presents our revenue, gross profit and gross
profit as a percentage of revenue, by reportable segment for the periods
indicated:
20
NYFIX, INC.
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
------------- ----------
($ IN THOUSANDS)
Segment revenue:
Technology Services $ 13,870 $ 13,919
Transaction Services 3,925 3,849
Eliminations (659) (485)
-------- --------
Total revenue $ 17,136 $ 17,283
======== ========
Segment revenue, as a percentage of total
revenue:
Technology Services 81% 81%
Transaction Services 23% 22%
Eliminations (4)% (3)%
-------- --------
Total 100% 100%
======== ========
Segment gross profit:
Technology Services $ 6,431 $ 7,983
Transaction Services 1,217 1,043
-------- --------
Total gross profit $ 7,648 $ 9,026
======== ========
Segment gross profit, as a percentage of
revenue:
Technology Services 46% 57%
Transaction Services 31% 27%
Total 45% 52%
The following table shows our revenue, cost of revenue, gross profit and
operating expense expressed as percentages of revenue for the periods indicated:
21
NYFIX, INC.
THREE MONTHS ENDED
MARCH 31,
-----------------
2004 2003
------- -------
REVENUE:
Subscription 54% 50%
Capital sale 12% 15%
Service contract 14% 14%
Transaction 20% 21%
--- ---
Total revenue 100% 100%
--- ---
COST OF REVENUE:
Subscription 61% 54%
Capital sale 41% 29%
Service contract 37% 27%
Transaction 62% 62%
--- ---
Total cost of revenue 55% 48%
--- ---
GROSS PROFIT:
Subscription 39% 46%
Capital sale 59% 71%
Service contract 63% 73%
Transaction 38% 38%
--- ---
Total gross profit 45% 52%
--- ---
OPERATING EXPENSE:
Selling, general and administrative 50% 45%
Research and development 2% 1%
Depreciation and amortization 3% 4%
--- ---
Total operating expense 55% 50%
--- ---
We recognize revenue in accordance with the SEC's Staff Accounting
Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as
amended by SAB 101A and 101B ("SAB 101") and SAB 104, REVENUE RECOGNITION. SAB
101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. Determination of criteria (3) and
(4) are based on our judgment regarding the fixed nature of the fee charged for
products delivered and the collectibility of those fees. Should changes in
conditions cause us to determine these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
impacted.
We recognize revenue from software arrangements in accordance with
Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION as amended by
SOP 98-9, MODIFICATION OF SOP 97-2 WITH RESPECT TO CERTAIN TRANSACTIONS. Revenue
is recognized when persuasive evidence of an arrangement exists and delivery has
occurred, provided the fee is fixed or determinable, collectibility is probable
and the arrangement does not require significant customization or modification
of the software.
22
NYFIX, INC.
We recognize revenue for contracts with multiple deliverables, which are
not covered under SOP 97-2, in accordance with the Financial Accounting
Standards Board's ("FASB") Emerging Issues Task Force 00-21, ACCOUNTING FOR
REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES ("EITF No. 00-21"). EITF No.
00-21 applies to certain contractually binding arrangements under which a
company performs multiple revenue generating activities and requires that all
companies account for each element within an arrangement with multiple
deliverables as separate units of accounting if (a) the delivered item has value
on a stand-alone basis, (b) there is objective and reliable evidence of fair
value and (c) the amount of the total arrangement consideration is fixed.
Our revenue is comprised of subscription, capital sale, service contract
and transaction components, described as follows:
Subscription revenue contracts are primarily with brokerage firms,
international banks and global exchanges trading in equities and/or derivatives.
Subscription revenue contracts are for providing equipment and services and for
use of our NYFIX Network, with an initial term of generally one to three years
with automatic renewal periods unless we receive prior written notice of
cancellation. Additional services, provided under schedules, or addendums to the
contract, are either co-terminus with the original contract or have provisions
similar to the original contract. Under the terms of the subscription contracts
and addendums, customers typically contract for a flat periodic charge after
initial installation and acceptance. The revenue related to these contracts is
recognized over the term of the contract, or addendum, on a straight-line basis.
We also include within our subscription revenue, telecommunication and other
charges, which we provide to the customer at cost plus a normal profit. Such
revenue is recognized as the services are provided. As we have no history of
significant cancellations, we do not record a reserve for cancellations.
Capital 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 or to those customers who typically
acquire licenses in perpetuity, and is recognized upon shipment of the product
and acceptance by the customer. Capital sale revenue is recognized in accordance
with SOP 97-2, described above. As we have no history of significant sales
returns or allowances, we do not record a reserve for sales returns and
allowances.
Service contract revenue, which is comprised of maintenance contracts
for subscription equipment and software and capital equipment, is recognized
over the contract period on a straight-line basis. Service contracts for
subscription equipment are generally co-terminus with the subscription contract.
Service contracts for software and capital equipment, typically characterized as
a percentage of the original capital sale contract, are generally for an initial
term of one to three years with automatic renewal periods unless we receive
prior written notice of cancellation. Certain service contracts provide for
invoicing in advance of the service being performed, generally quarterly.
Transaction revenue consists of per-share fees charged to customers who
send and receive a match and execution in our ATS order matching system,
customers to whom we provide execution and smart order routing technology and
gateways to access markets in: (1) their own name, (2) a third party "give up"
name, or (3) our name. Revenue on these contracts is generally invoiced monthly
in arrears or is extracted from the clearing process within three days of the
trade date and recognized in the period in which it is earned. Certain
transaction revenue contracts, which include multiple deliverables, or other
types of our revenue are accounted for in accordance with EITF 00-21, described
above. Some of these contracts have minimum volume commitments or are invoiced
at a minimum transaction-based fee. The arrangement consideration is allocated
to each element based on the relative fair values of each element. We account
for each element of an arrangement with multiple deliverables separately. Vendor
specific objective evidence for fair value of services is primarily determined
by reference to renewal pricing.
Revenue on contracts invoiced in advance of the services being performed
is deferred and recognized as revenue over the period earned and is included in
"deferred revenue" in our condensed consolidated balance sheets. Shipping,
23
NYFIX, INC.
handling and installation charges, if any, are generally invoiced to a customer
and are included in revenue upon completion of the installation.
Cost of revenue principally consists of costs associated with our data
center operations where we maintain equipment and infrastructure to support our
operations, amortization of capitalized product enhancement costs, depreciation
of subscription equipment, amortization of intangible assets and other direct
costs, including customer-specific telecommunication costs, execution, clearing
fees and market data feeds. Certain data center costs, such as labor, equipment
maintenance, software support and depreciation and amortization, are allocated
to our segments based on usage estimates.
Operating expense is comprised of selling, general and administrative
("SG&A"), research and development ("R&D") and depreciation and amortization.
SG&A expense consists of salaries and benefits, office rent and other office
expense, provision for doubtful accounts, and marketing expense. Corporate SG&A
expense is allocated to our segments based on usage estimates. R&D expense
relates to our cost of developing new products and technologies to meet the
current and future needs of our customers, up to the point of technical
feasibility at which point we capitalize such costs to bring our products to
market. R&D expense consists primarily of salaries and related costs for our
technical and development staff. Depreciation and amortization expense consists
of such expense for our corporate equipment and software.
MD&A related to segment revenue, cost of revenue and gross profit
includes intercompany revenue and cost of revenue, which have been eliminated in
consolidation.
HISTORICAL RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
REVENUE
The following table presents an overview of our revenue:
24
NYFIX, INC.
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
2004 2003
$ % $ %
---------------------- --------------------
($ IN THOUSANDS)
Technology Services:
Subscription $ 9,402 68% $ 8,792 63%
Capital sale 1,988 14% 2,655 19%
Service contract 2,480 18% 2,472 18%
-------- --------
Sub-total 13,870 81% 13,919 81%
-------- --------
Transaction Services:
Subscription 562 14% 240 6%
Transaction 3,363 86% 3,609 94%
-------- --------
Sub-total 3,925 23% 3,849 22%
-------- --------
Eliminations:
Subscription (659) n/a (485) n/a
-------- --------
Sub-total (659) n/a (485) n/a
-------- --------
Total revenue
Subscription 9,305 54% 8,547 50%
Capital sale 1,988 12% 2,655 15%
Service contract 2,480 14% 2,472 14%
Transaction 3,363 20% 3,609 21%
-------- --------
Consolidated revenue $ 17,136 100% $ 17,283 100%
======== ========
Segment subtotals are presented as a percentage of consolidated revenue.
Consolidated revenue decreased $0.2 million, or 1%, to $17.1 million for
the three months ended March 31, 2004 as compared to $17.3 million for the three
months ended March 31, 2003.
Our Technology Services segment revenue remained constant at $13.9
million for the three-months ended March 31, 2004 as compared to March 31, 2003.
Our traditional equity products subscription and service contract revenue
increased to $8.8 million for the three months ended March 31, 2004 from $8.7
million for the three months ended March 31, 2003. This $0.1 million increase
was primarily attributable to a net increase of 21 customers from 273 customers
in the three months ended March 31, 2003 to 294 customers in the three months
ended March 31, 2004. This increase was offset by lower average annual revenue
per customer of $120,000 for the three months ended March 31, 2004, as compared
to $127,000 for the three months ended March 31, 2003. In August 2002, we began
an initiative to sell circuits to buy-side institutions in order to leverage our
NYFIX Network in various ways. As of March 31, 2004, we had executed agreements
with 102 customers initially requesting basic broker connectivity valued at
approximately $7.0 million if fully implemented. For the three months ended
March 31, 2004, we recognized $0.8 million of revenue attributed to the 70
buy-side circuits installed by the end of the quarter. There was nominal revenue
for buy-side initiatives recognized in the three months ended March 31, 2003. We
expect revenue related to our buy-side initiatives to increase throughout the
year. Subscription and service revenue for our Javelin products was $1.6 million
for the three months ended March 31, 2004 as compared to $1.7 million for the
three months ended March 31, 2003. Subscription and service revenue for our
derivative products were $0.6 million for the three months ended March 31, 2004
as compared to $0.4 million for the three months ended March 31, 2003. Capital
sale revenue for our Javelin and derivatives products was $2.0 million for the
three months ended March 31, 2004 as compared to $2.7 million for the three
25
NYFIX, INC.
months ended March 31, 2003, respectively. While we had a nominal amount of
revenue in the first quarter of 2004 from our Renaissance products, we believe
that with our acquisition of Renaissance, we will be able to more effectively
compete for customers who are consolidating their Nasdaq and listed trading
desks and desire to migrate to one platform. In addition, we believe we continue
to realize the synergies as expected with our Javelin and Renaissance
acquisitions and will more effectively compete for new customers in 2004. As a
percentage of total revenue, our Technology Services segment increased to 81%
for the three months ended March 31, 2004 from 80% for the three months ended
March 31, 2003.
Our Transaction Services segment revenue increased $0.1 million, or 2%,
to $3.9 million for the three months ended March 31, 2004 as compared to $3.8
million for the three months ended March 31, 2003. Our Transaction Services
customer base increased in the three months ended March 31, 2004 to 146 from 83
at March 31, 2003, with average revenue per customer of $27,000 in the current
year's quarter compared to average revenue per customer of $46,000 in the prior
year's quarter. The decrease in average revenue per customer was attributed to a
decrease in revenue from several large customers from whom we generate revenue
from Designated Order Turnaround ("DOT") flow to the NYSE. We compete with
various companies that also offer certain execution services that we view as a
low-margin, "loss-leader" service to our customers. The revenue attributed to
these customers' DOT flow was lower during the three months ended March 31, 2004
than in the three months ended March 31, 2003 as a result of competitive pricing
for such customers. For our Transaction Services segment, we expect to continue
to add customers during the year and expect our average revenue per customer to
increase from our first quarter 2004 average due to a targeted change in the
customer mix, with our emphasis on the buy-side. As a percentage of total
revenue, our Transaction Services segment increased to 23% for the three months
ended March 31, 2004 from 23% for the three months ended March 31, 2003. We
expect our Transaction Services segment revenue to be a larger percentage of our
consolidated revenue in 2004 as compared to 2003.
COST OF REVENUE
The following table presents an overview of our cost of revenue:
26
NYFIX, INC.
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
2004 2003
$ % $ %
------------------------ -----------------------
($ in thousands)
Technology Services:
Subscription $ 5,705 77% $ 4,488 76%
Capital sale 817 11% 779 13%
Service contract 917 12% 669 11%
------- -------
Sub-total 7,439 54% 5,936 43%
------- -------
Transaction Services:
Subscription 537 20% 85 3%
Transaction 2,171 80% 2,721 97%
------- -------
Sub-total 2,708 69% 2,806 73%
------- -------
Corporate and Eliminations:
Corporate:
Data center and telecommunications 3,042 2,800
Fixed asset depreciation and amortization 1,468 1,276
Amortization of product enhancement costs 815 581
Allocated to:
Technology Services (4,572) (3,892)
Transaction Services (753) (765)
------- -------
Sub-total -- --
------- -------
Eliminations:
Subscription (567) n/a -- n/a
Transaction (92) n/a (485) n/a
------- -------
Sub-total (659) n/a (485) n/a
------- -------
Consolidated cost of revenue $ 9,488 55% $ 8,257 48%
======= =======
Segment subtotals are presented as a percentage of segment revenue.
Consolidated cost of revenue increased $1.2 million, or 15%, to $9.5
million for the three months ended March 31, 2004 as compared to $8.3 million
for the three months ended March 31, 2003. Included in the $1.2 million increase
were $0.4 million of costs associated with Renaissance, which we acquired on
July 1, 2003. The primary factors for the increase in 2004 were labor costs of
$0.6 million, telecommunication expense of $0.3 million, data feed costs of $0.2
million, depreciation expense of $0.2 million, product enhancement cost
amortization of $0.2 million, which was primarily due to an increase in
infrastructure and capacity in our data center operations and product
enhancements costs to support our Technology Services segment, including our
derivatives, Renaissance and Javelin products as we integrated them with our
traditional equity products and onto our NYFIX Network, cross connection fees of
$0.1 million to connect our subscription customers to third-party networks and
amortization of Renaissance intangible assets of $0.1 million. Slightly
offsetting these increases was a decrease of $0.2 million, due to reduced
execution and clearing fees related to our Transaction Services revenue. As a
percentage of revenue, cost of revenue increased to 55% for the three months
ended March 31, 2004, from 48% for the three months ended March 31, 2003, as the
increase in the aforementioned Technology Services costs offset the increase in
our Transaction Services revenue and decrease in Transaction Services costs as
mentioned below.
Our Technology Services segment cost of revenue increased $1.5 million,
or 25%, to $7.4 million for the three months ended March 31, 2004 compared to
$5.9 million for the three months ended March 31, 2003. This increase was
primarily attributable to higher labor costs of $0.8 million, amortization of
acquired intangible assets of $0.1 million due to the Renaissance acquisition,
data feed costs of $0.1 million, cross connection fees of $0.1 million and the
27
NYFIX, INC.
aforementioned increases in allocated corporate expenses, such as
telecommunications expenses, depreciation and amortization of fixed assets and
amortization of product enhancement costs, of $0.8 million. Included in the
increase was additional service contract cost of revenue of $0.2 million, or
37%, to $0.9 million for the three months ended March 31, 2004, from $0.7
million for the three months ended March 31, 2003. This increase was primarily
due to increased labor costs to support our products. As a percentage of
revenue, cost of revenue increased to 54% in 2004, from 43% in 2003, as the
increase in the aforementioned costs grew at a faster rate than our revenue. We
expect to see a slight decrease in our cost of revenue as a percentage of
revenue in 2004 as many of the investments in property and equipment in our data
center and network infrastructure made in 2002 and 2003 should yield lower costs
as a percentage of revenue.
Our Transaction Services segment cost of revenue decreased $0.1 million,
or 3%, to $2.7 million for the three months ended March 31, 2004 compared to
$2.8 million for the three months ended March 31, 2003. In addition to the
aforementioned decrease in transaction related expenses, cost of revenue
decreased by $0.4 million, to $0.1 million, related to intercompany charges from
the Technology Services segment, which are passed through to Transaction
Services customers. These intercompany costs were eliminated in our consolidated
cost of revenue. Cost of revenue also increased $0.1 million due to increased
data feed costs and $0.1 million due to increased labor costs. As a percentage
of revenue, cost of revenue decreased to 69% for the three months ended March
31, 2004, from 73% for the three months ended March 31, 2003, as the increased
segment revenue absorbed relatively fixed costs and self-clearing of our trades
through NYFIX Clearing reduced our variable costs. We expect our cost of revenue
to continue to decline as a percentage of Transaction Services segment revenue
in 2004. This is attributable to the expected increases in revenue and the
change in customer mix as described above, which should enable us to spread our
fixed costs over a greater revenue base, and reduced clearing expenses as a
result of self-clearing our trades through NYFIX Clearing.
GROSS PROFIT AND GROSS PROFIT MARGIN (AS A PERCENTAGE OF REVENUE)
The following table presents an overview of our gross profit and gross
profit margin:
28
NYFIX, INC.
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
2004 2003
$ % $ %
----------------------- -----------------------
($ in thousands)
Technology Services:
Subscription $ 3,697 39% $ 4,304 49%
Capital sale 1,171 59% 1,876 71%
Service contract 1,563 63% 1,803 73%
------- -------
Sub-total 6,431 46% 7,983 57%
------- -------
Transaction Services:
Subscription 25 4% 155 65%
Transaction 1,192 35% 888 25%
------- -------
Sub-total 1,217 31% 1,043 27%
------- -------
Eliminations:
Subscription (92) n/a (485) n/a
Transaction 92 n/a 485 n/a
------- -------
Sub-total -- --
------- -------
Total gross profit:
Subscription 3,630 39% 3,974 46%
Capital sale 1,171 59% 1,876 71%
Service contract 1,563 63% 1,803 73%
Transaction 1,284 38% 1,373 38%
------- -------
Consolidated gross profit $ 7,648 45% $ 9,026 52%
======= =======
Percentages are presented as a percentage of segment revenue, except for
consolidated gross profit percentages, which are presented as a percentage of
consolidated revenue.
Consolidated gross profit decreased $1.4 million to $7.6 million for the
three months ended March 31, 2004 from $9.0 million for the three months ended
March 31, 2003. The aforementioned increase in Technology Services cost of
revenue offset the decrease in Transaction Services cost of revenue.
Accordingly, our gross profit margin decreased to 45% for the three months ended
March 31, 2004, as compared to 52% for the three months ended March 31, 2003.
Our Technology Services segment gross profit decreased $1.6 million to
$6.4 million for the three months ended March 31, 2004 from $8.0 million for the
three months ended March 31, 2003. As a percentage of segment revenue, gross
profit margin decreased to 46% for the three months ended March 31, 2004 from
57% for the three months ended March 31, 2003. The decrease in gross profit is
primarily attributable to the aforementioned increases in our costs, which grew
faster than revenue, as we were generally unable to pass increased costs to our
customers due to competitive pricing pressures. We expect to see slight
improvements in our Technology Services segment gross profit margin in 2004, as
many of the improvements to our data center and network infrastructure made in
2002 and 2003 should yield lower costs as a percentage of revenue.
Our Transaction Services segment gross profit increased $0.2 million to
$1.2 million for the three months ended March 31, 2004 from $1.0 million for the
three months ended March 31, 2003. Transaction Services segment gross profit
margin increased to 31% for the three months ended March 31, 2004, as compared
to 27% for the three months ended March 31, 2003. The increase in gross profit
was primarily attributable to the aforementioned decrease in transaction cost of
revenue. We expect our Transaction Services segment gross margin to continue to
improve as a percentage of Transaction Services segment revenue in 2004. This is
attributable to the expected increases in revenue and change in customer mix as
described above, which should enable us to spread our fixed costs over a greater
revenue base, as well as reduced clearing expenses as a result of self-clearing
our trades through NYFIX Clearing.
29
NYFIX, INC.
SG&A
The following table presents an overview of our SG&A expense:
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2004 2003
$ % $ %
------------------ ----------------
($ in thousands)
Salaries and benefits $5,238 62% $4,745 60%
Occupancy and related 953 11% 910 12%
Marketing, travel and entertainment 636 7% 539 7%
General and other 1,696 20% 1,641 21%
------ ------
Total SG&A $8,523 50% $7,835 45%
====== ======
The total SG&A is presented as a percentage of consolidated revenue.
SG&A expense increased $0.7 million, or 9%, to $8.5 million for the
three months ended March 31, 2004, as compared to $7.8 million for the three
months ended March 31, 2003. The increase was primarily attributable to
increased salaries and benefits of $0.5 million primarily due to increased
staffing related to our July 2003 Renaissance acquisition, annual merit
increases effective January 1, 2004 and increased health care costs. We expect
these trends to continue for the remainder of 2004. As a percentage of total
revenue, SG&A expense increased to 50% for the three months ended March 31, 2004
from 45% for the three months ended March 31, 2003, as SG&A expense increased
with no corresponding increase in consolidated revenue.
Effective February 1, 2004, we entered into an agreement to lease
additional space at our 100 Wall Street office. In connection with this
agreement, we intend to cease use, in the second quarter 2004, of one of our
other offices on Wall Street and consolidate its operations into the new space
at 100 Wall Street. At that time, in accordance with SFAS No. 146, ACCOUNTING
FOR EXIT OR DISPOSAL ACTIVITIES, we expect to record a charge to operating
expense of up to $3.0 million, which includes the remaining rent payments, net
of estimated sub-lease income, and other write-offs, including unamortized
leasehold improvements.
R&D
R&D expense increased $0.1 million, or 77%, to $0.3 million for the
three months ended March 31, 2004, from $0.2 million for the three months ended
March 31, 2003,due to continued efforts to bring new products to market As a
percentage of total revenue, research and development expense increased to 2%
for the three months ended March 31, 2004, from 1% for the three months ended
March 31, 2003, due to the increase in R&D expense. We expect a similar amount
of R&D expense for each of the remaining quarters of 2004.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $0.1 million, or 19%, to
$0.6 million for the three months ended March 31, 2004, from $0.7 million for
the three months ended March 31, 2003 due to a slight decrease in net property
and equipment. As a percentage of total revenue, depreciation and amortization
30
NYFIX, INC.
expense decreased to 3% for the three months ended March 31, 2004 from 4% for
the three months ended March 31, 2003. The decrease as a percentage of total
revenue was primarily attributable to the decreased amortization expense.
LOSS FROM OPERATIONS
Loss from operations was $1.7 million for the three months ended March
31, 2004, as compared to net income from operations of $0.4 million for the
three months ended March 31, 2003. The operating loss was primarily due to
higher subscription cost of revenue and SG&A expense, primarily due to costs
associated with Renaissance, which we acquired in July 2003. These increases
were partially offset by decreased cost of transaction revenue and subscription
revenue for our broker-dealer subsidiaries as described above. As a percentage
of total revenue, loss from operations was a deficit of 10% for the three months
ended March 31, 2004 as compared to 2% on the income from operations for the
three months ended March 31, 2003. The decline as a percentage of total revenue
was attributable to a combination of the increase in cost of revenue and
operating expenses, and the decrease in revenue.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES, NET
We recognized equity in the loss of unconsolidated affiliates of $0.1
million for the three months ended March 31, 2004, compared to $0.4 million for
the three months ended March 31, 2003. In 2004, EuroLink was our only
unconsolidated affiliate; in 2003 both EuroLink and Renaissance were
unconsolidated affiliates. We accounted for Renaissance by the equity method
through June 30, 2003. Effective July 1, 2003, we acquired the remaining 82% of
the membership units in Renaissance that we did not already own, and
consolidated Renaissance as of that date. Effective March 29, 2004, we acquired
the remaining 60% of EuroLink that we did not already own, and consolidated
EuroLink as of that date.
INCOME TAX BENEFIT
We recorded an income tax benefit of $0.8 million for the three months
ended March 31, 2004, compared to a benefit of $13,000 for the three months
ended March 31, 2003. The income tax benefit for the three months ended March
31, 2004 was attributable to a tax benefit on our pre-tax loss of $1.8 million
and tax benefits relating to certain research and development tax credits. Our
effective tax rate of 41% in the three months ended March 31, 2004 differed from
the Federal statutory rate primarily due to the effects of the aforementioned
research and development tax credits, offset slightly by state income taxes. The
income tax benefit in the three months ended March 31, 2003 was attributable to
a tax provision on our pre-tax income which was more than offset by a tax
benefit for certain estimated research and development tax credits aggregating
$38,000, available for R&D expenses incurred during the three months ended March
31, 2003. Our effective tax rate of 21% in the three months ended March 31, 2003
differed from the Federal statutory rate primarily due to the effects of the
aforementioned research and development tax credits, offset slightly by state
income taxes. We expect our effective tax rate to be slightly below 40%, which
includes the statutory federal and state rates offset by certain R&D tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
Historically, a significant source of our funding has been the sale of
equity securities. Between 1997 and 1999 we raised a total of $9.5 million in
net proceeds through several private placements where we issued an aggregate of
3,431,000 shares of our common stock. In 2001, we raised $57.3 million, net of
expenses, from a follow-on public offering of three million shares of our common
stock. We used a portion of the net proceeds from the follow-on public offering
to repurchase 1.3 million shares of our common stock at an aggregate cost of
$19.1 million. We also have historically received funding from the exercise of
stock options by employees, which aggregated $3.7 million from 2001 through
March 31, 2004. We funded our acquisitions of Javelin, NYFIX Millennium,
Renaissance and EuroLink primarily through the issuance of our common stock or
promissory notes payable in our common stock, or at our option, cash. Refer to
Item 1 Acquisitions and Investments in our 2003 Form 10-K.
31
NYFIX, INC.
Another significant source of funding for us is cash generated from
operations, which was $1.9 million for the three months ended March 31, 2004 and
$15.4 million, $3.7 million and $10.6 million in the years ended December 31,
2003, 2002 and 2001, respectively, aggregating $31.6 million. Excluding the
impact of changes in assets and liabilities, net of business acquisitions, which
tend to be subject to short-term fluctuations, the comparable amount of cash
generated from operations was $34.7 million in the aggregate. Our primary source
of cash from operations is from revenue received from our customers. Our primary
uses of cash for operations include data center expenses, including its
operations and telecommunication costs, and operating expenses, including
salaries and benefits, marketing, travel and entertainment, office rent and
related occupancy, and other general and administrative expenses.
We have invested $1.4 million for the three months ended March 31, 2004
and $5.3 million, $4.6 million and $7.1 million in the years ended December 31,
2003, 2002 and 2001, respectively, aggregating $18.4 million, in our data center
infrastructure and other property and equipment to keep current with technology
trends. We expect to invest at a similar level in 2004 as compared to 2003.
We have capitalized product enhancements of $1.8 million for the three
months ended March 31, 2004 and $5.3 million, $2.8 million and $2.7 million, in
the years ended December 31, 2003, 2002 and 2001, respectively, to keep our
products competitive. The increase in capitalized product enhancement costs
since 2003 is primarily attributable to our Javelin and Renaissance product
lines. We have many projects in development, as described in Item 1 of our 2003
Form 10-K, which we expect to release into production during 2004. We anticipate
we will capitalize a comparable amount to 2003 for product enhancements in 2004.
We acquired net cash of $1.4 million in the three months ended March 31,
2004, and have invested $2.5 million, $12.1 million and $17.2 million of cash in
the years ended December 31, 2003, 2002 and 2001, respectively, aggregating a
net $30.4 million, from our acquisitions of Javelin, Renaissance, NYFIX
Millennium, NYFIX Transaction Services and EuroLink. Included in our 2004
amount was net proceeds of $1.3 million received primarily as a return of funds
held in escrow pursuant to a settlement agreement with a representative of the
former shareholders of Javelin. In regards to our Renaissance acquisition, we
have issued notes payable over the next several years, aggregating $3.0 million,
payable, at our option, in cash or our common stock. On April 7, 2004, pursuant
to notice from certain payees after default on the notes, we issued shares of
our common stock in payment of $2.0 million of such notes. Certain contingent
liabilities remain with respect to such notes that could require cash payments
up to $0.8 million. We intend to pay the remainder of this debt with our common
stock, thus not requiring cash. On March 29, 2004, we acquired the remaining 60%
of EuroLink's common stock that we did not already own. We paid for the EuroLink
acquisition with $24,000 in cash and one-year promissory notes payable in our
common stock or cash, at our option, valued at $0.5 million. We intend to
integrate EuroLink with NYFIX International. To date, we have committed $0.9
million of our capital resources to its operation and do not expect to invest a
significant additional amount within the next twelve months. We have no current
plans for any other acquisitions. We plan to continue to focus on the synergies
arising from our previous acquisitions.
Our long-term capital needs depend on numerous factors, including the
rate at which we obtain new customers and expand our staff and infrastructure,
as needed, to accommodate such growth, and 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.
At March 31, 2004, our principal sources of liquidity were cash, cash
equivalents and short-term investments in the aggregate of $24.2 million and
accounts receivable of $11.5 million. At March 31, 2004, we had current accounts
payable and accrued expenses aggregating $12.9 million. We believe these
accounts payable and accrued expense balances were unusually high at March 31,
32
NYFIX, INC.
2004, and expect them to be lower by the end of the second quarter of 2004 due
to timing of payments made to vendors and payments of commissions to our sales
staff. We do not expect to make any significant income tax payments in 2004 due
to available net operating loss carryforwards and research and development tax
credits.
NYFIX Clearing, NYFIX Transaction Services and NYFIX Millennium, as
registered broker-dealers, are subject to the minimum net capital requirements
of the NASD. These broker-dealers have consistently operated in excess of these
requirements. At March 31, 2004, NYFIX Clearing, NYFIX Transaction Services, and
NYFIX Millennium had net capital of $10.8 million, $1.6 million and $0.4
million, respectively, exceeding the minimum required by $10.5 million, $1.4
million and $0.2 million, respectively. During 2003, we funded $10.8 million to
our broker-dealer subsidiary, NYFIX Clearing, to enable it to maintain its
minimum excess net capital requirement of $10.0 million as a condition of its
approval by the DTCC. At March 31, 2004, we had an aggregate of $14.8 million of
our consolidated cash, cash-equivalents and short-term investments committed to
maintain our three broker-dealer subsidiaries' minimum and minimum excess net
capital requirements of $10.5 million. Our broker-dealer subsidiaries may need
us to fund or commit more of our consolidated cash, cash-equivalents and
short-term investments in the future to maintain their individual minimum and
minimum excess net capital requirements. If any or all of these broker-dealer
subsidiaries were to fall below their minimum or minimum excess net capital
requirements, their operations may be restricted by certain regulatory agencies.
We believe that we will achieve greater synergies by integrating the
product offerings of Javelin and Renaissance 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
provided EuroLink with only $0.8 million in cumulative funding through March 31,
2004, it may need additional working capital funding until it generates positive
cash flow.
We believe that our cash and short-term investments of $24.2 million at
March 31, 2004, together with anticipated cash to be generated from operations,
will be sufficient to support our capital and operating needs and our net
capital requirements of our broker-dealer operations for at least the next
twelve months. However, we may obtain credit facilities to provide incremental
availability of working capital to further support our operating and investment
strategy.
WORKING CAPITAL
At both March 31, 2004 and December 31, 2003, we had working capital of
$23.3 million. Items affecting working capital in the three months ended March
31, 2004 were principally cash used to acquire property and equipment, enhance
products and fund pre-acquisition working capital advances to EuroLink, offset
by cash flows provided by operating activities, net cash acquired from the
Javelin escrow settlement and the additional net working capital recognized in
conjunction with our acquisition of Renaissance.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in the three months ended
March 31, 2004 was $1.9 million, as our net loss of $1.1 million, adjusted for
non-cash items, such as depreciation, amortization, deferred taxes and equity in
loss of unconsolidated affiliates, provided $2.4 million. Unfavorable working
capital changes of $0.6 million, including prepaid and other assets of $1.3
million and accounts receivable of $1.2 million were partially offset by
increases in brokerage payables (net of brokerage receivables) of $0.4 million,
accounts payable and other liabilities of $1.4 million and deferred revenue of
$0.1 million. In 2004, we expect to continue to generate positive cash flows
from operating activities.
Net cash provided by operating activities in the three months ended
March 31, 2003 was $1.0 million, as our net income of $0.1 million, adjusted for
non-cash items, such as depreciation, amortization, deferred taxes, provision
for bad debts and equity in loss of unconsolidated affiliates, provided $3.4
33
NYFIX, INC.
million. Unfavorable working capital changes, including accounts receivable of
$2.3 million and accounts payable and accrued expenses of $1.1 million, which
were partially offset by favorable net changes in other assets and liabilities
of $1.1 million, decreased cash by $2.3 million.
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
For the three months ended March 31, 2004, net cash used in investing
activities was $4.8 million. This consisted primarily of the net purchase of
short-term investments of $2.7 million, product enhancement costs of $1.9
million, capital expenditures, primarily for data center equipment and software,
of $1.4 million and loans and advances to EuroLink of $0.2 million. These
amounts were partially offset by cash acquired from acquisitions of $1.4
million, which included cash of $1.3 million received primarily as a return of
funds held in escrow pursuant to a settlement agreement with a representative of
the former shareholders of Javelin. On a quarterly basis in 2004, we expect to
invest a similar amount of cash for capital expenditures for property and
equipment as well as product enhancement costs, as compared to the first quarter
of 2004.
For the three months ended March 31, 2003, net cash used in investing
activities was $2.9 million. This consisted primarily of capital expenditures of
$1.5 million, generally for data center equipment and software, loans and
advances to unconsolidated affiliates of $1.5 million and product enhancement
costs of $0.8 million. These amounts were partially offset by proceeds from the
net sales of short-term investments of $0.9 million.
CASH USED IN FINANCING ACTIVITIES
For the three months ended March 31, 2004 and March 31, 2003, our net
cash used in financing activities totaled $0.1 million and $0.3 million,
respectively, consisting primarily of principal payments under capital lease
obligations, partially offset by net proceeds from the issuance of common stock
resulting from the exercise of stock options by employees.
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 FASB issued Interpretation No. ("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. In December 2003, the FASB issued FIN
46 (revised) ("FIN 46R"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN 46R
clarified some of the provisions of FIN 46 and deferred the effective date of
implementation for certain entities. Under the guidance of FIN 46R, entities
that do not have interests in structures that are commonly referred to as
special purpose entities ("SPEs") are required to apply the provisions of FIN
46R in financial statements for periods ending after March 15, 2004, for VIEs
that existed prior to February 1, 2003. The Company does not have interests in
SPEs and has adopted the provisions of FIN 46R starting with the Company's first
quarter 2004 financial statements. The adoption of FIN 46R did not have an
effect on the Company's consolidated financial statements.
34
NYFIX, INC.
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
INTEREST RATES
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 $6.2 million and
$3.4 million at March 31, 2004 and December 31, 2003, respectively, consisted of
$2.5 million and $2.4 million, respectively, of auction rate certificates and
$1.0 million of mutual fund securities at March 31, 2004. We also had $2.7
million and $1.0 million of treasury bills at March 31, 2004 and December 31,
2003, respectively. Risk is limited on the auction rate certificates portfolio
due to the fact that it is invested in insured municipal bonds. 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 operations,
cash flows or fair value.
We are subject to interest rate risk on our $2.7 million and $1.0
million of treasury bills at March 31, 2004 and December 31, 2003, respectively.
A hypothetical 10% change in interest rates would not result in a material
change in their fair value.
The mutual fund securities portfolio was invested in a quoted fund that
was managed by an institution that primarily invests in investment grade
securities, with up to a maximum of 20% invested in fixed income securities
rated BB or B. These securities were subject to equity price risk. The estimated
potential loss in fair value resulting from a hypothetical 10% decrease in the
quoted price is $0.1 million.
We were also subject to interest rate risk on our $0.6 million of notes
receivable from unconsolidated affiliates at December 31, 2003. A hypothetical
10% change in interest rates would not result in a material change in their fair
value.
FOREIGN CURRENCY RISK
Our earnings are affected by fluctuations in the value of the United
States dollar as compared with foreign currencies, predominately the British
pound and the euro, due to our operations in the United Kingdom and Europe.
We manage foreign currency risk through the structure of our business.
In the substantial majority of our transactions, we receive payments denominated
in the United States dollar or British pounds sterling. Therefore, we do not
35
NYFIX, INC.
rely on international currency markets to obtain and pay illiquid currencies.
The foreign currency exposure that does exist is limited by the fact that the
majority of transactions are paid according to our standard payment terms, which
are generally short-term in nature. The foreign exchange translation gain for
the three months ended March 31, 2004 was not material.
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 control 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.
On May 27, 2004, we restated our consolidated financial statements that
appeared in our Form 10-K/A for the year ended December 31, 2002 and the
consolidated financial statements that appeared in our Forms 10-Q/A for each of
the interim periods ended March 31, 2003, June 30, 2003 and September 30, 2003
to change our accounting for our 1999 and 2001 investments in and 2002
acquisition of an additional 30% interest in NYFIX Millennium. Based on an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, in light of, among other things, the facts and
circumstances of our May 27, 2004 restatement of our financial statements, 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.
In light of our determination on May 27, 2004 to restate our
consolidated financial statements that appeared in our Form 10-K/A for the year
ended December 31, 2002 and our Forms 10-Q/A for each of the interim periods
ended March 31, 2003, June 30, 2003 and September 30,2003, our management
directed that steps be taken to review the operation and effectiveness of our
internal controls and procedures with respect to our accounting for investment
and acquisition transactions.
36
NYFIX, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about May 13, 2004, an action entitled Fuller & Thaler Asset
Management v. NYFIX, Inc., et al. was filed in the United States District Court
for the District of Connecticut. The Complaint names us, our Chairman and CEO
Peter Kilbinger Hansen, our former CFO Richard Castillo, our CFO Mark R. Hahn
and our Directors George O. Deehan, William J. Lynch and Carl E. Warden as
defendants. The Complaint asserts a proposed class action claim on behalf of all
buyers of our stock between March 30, 2000 and March 30, 2004 and seeks an
unspecified amount of damages. The Complaint alleges violations of Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934, based on the issuance
of a series of allegedly false and misleading financial statements and press
releases concerning, among other things, our investment in NYFIX Millennium,
L.L.C. We and the other defendants intend to defend the lawsuit vigorously.
During the course of normal business, we become involved in various
routine legal proceedings. We believe that we are not presently a party to any
other material litigation the outcome of which could reasonably be expected to
have a material adverse effect on our consolidated financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Employment Agreement dated October 22, 1997 by and between the Company
and Keith Jamaitis.
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 March 9, 2004, we reported under Item 12 of Form 8-K our results for
the fourth quarter and year ended December 31, 2003.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period presented.
37
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: May 28, 2004
38
Exhibits Index
Exhibit
10.1 Employment Agreement dated October 22, 1997 by and between the Company
and Kieth Jamaitis
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.