Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2004
Commission File Number 0-21324
------------------------
NYFIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1344888
(State or 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 32,333,043 shares of Common Stock issued and outstanding as of July
31, 2004.
NYFIX, INC.
FORM 10-Q
For the quarter ended June 30, 2004
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 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 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
Item 4. Controls and Procedures 43
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 44
Item 6. Exhibits and Reports on Form 8-K 44
Signatures 46
2
NYFIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
2004 2003
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,241 $ 21,006
Short-term investments 5,163 3,448
Accounts receivable, less allowances of $1,313 and $1,839 11,999 10,371
Brokerage receivables 87,999 1,945
Deferred income taxes 788 976
Prepaid expenses and other current assets 3,926 3,929
--------- ---------
Total current assets 126,116 41,675
Property and equipment, less accumulated depreciation of $28,008 and $24,476 14,587 16,592
Goodwill 57,975 55,966
Acquired intangible assets, net 9,940 10,235
Investments in unconsolidated affiliates -- 3,088
Notes receivable and other amounts due from unconsolidated affiliates -- 814
Deferred income taxes 19,244 16,424
Other assets, net 9,837 7,378
--------- ---------
Total assets $ 237,699 $ 152,172
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,832 $ 6,664
Accrued expenses 6,025 4,807
Brokerage payables 88,332 1,700
Current portion of capital lease obligations 357 531
Current portion of long-term debt and other liabilities 1,719 1,894
Deferred revenue 2,592 2,732
--------- ---------
Total current liabilities 104,857 18,328
Long-term portion of capital lease obligations -- 135
Long-term debt and other liabilities 2,118 1,137
--------- ---------
Total liabilities 106,975 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;
33,640,415 and 33,222,475 issued 33 33
Additional paid-in capital 185,008 182,863
Accumulated deficit (34,762) (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 130,724 132,572
--------- ---------
Total liabilities and stockholders' equity $ 237,699 $ 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 Six Months Ended
June 30, June 30,
-------------------- ----------------------
2004 2003 2004 2003
-------- ------- ---------- --------
REVENUE:
Subscription $ 9,976 $ 8,103 $ 19,281 $ 16,650
Capital sale 2,055 2,028 4,043 4,683
Service contract 2,704 2,295 5,184 4,767
Transaction 3,494 3,270 6,857 6,879
-------- -------- -------- --------
Total revenue 18,229 15,696 35,365 32,979
-------- -------- -------- --------
COST OF REVENUE:
Subscription 5,731 4,812 11,406 9,385
Capital sale 740 709 1,557 1,488
Service contract 890 673 1,807 1,342
Transaction 2,392 2,063 4,471 4,299
-------- -------- -------- --------
Total cost of revenue 9,753 8,257 19,241 16,514
-------- -------- -------- --------
GROSS PROFIT:
Subscription 4,245 3,291 7,875 7,265
Capital sale 1,315 1,319 2,486 3,195
Service contract 1,814 1,622 3,377 3,425
Transaction 1,102 1,207 2,386 2,580
-------- -------- -------- --------
Total gross profit 8,476 7,439 16,124 16,465
-------- -------- -------- --------
OPERATING EXPENSE:
Selling, general and administrative 9,626 8,289 18,149 16,124
Restructuring charge 2,527 -- 2,527 --
Research and development 325 385 638 562
Depreciation and amortization 628 691 1,169 1,355
-------- -------- -------- --------
Total operating expense 13,106 9,365 22,483 18,041
-------- -------- -------- --------
Loss from operations (4,630) (1,926) (6,359) (1,576)
Interest expense (184) (27) (258) (58)
Investment income 17 147 63 253
Other income (expense), net 4 (225) (70) (587)
-------- -------- -------- --------
Loss before income tax benefit (4,793) (2,031) (6,624) (1,968)
Income tax benefit (1,878) (974) (2,632) (987)
-------- -------- -------- --------
Net loss $ (2,915) $ (1,057) $ (3,992) $ (981)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.09) $ (0.03) $ (0.12) $ (0.03)
======== ======== ======== ========
Basic and diluted weighted average common
shares outstanding 32,243 31,173 32,058 31,152
======== ======== ======== ========
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)
Six Months Ended
June 30,
------------------------
2004 2003
--------- ----------
Cash flows from operating activities:
Net loss $ (3,992) $ (981)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 7,045 6,196
Restructuring charge 2,527 --
Deferred income taxes (2,632) (522)
Provision for doubtful accounts 81 298
Equity in loss of unconsolidated affiliates 74 662
Loss on sale of investments 17 --
Other, net 157 (90)
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable (1,709) 1,921
Prepaid expenses and other assets (323) 104
Brokerage receivables (86,054) --
Deferred revenue (140) 80
Accounts payable, accrued expenses and other liabilities 138 (580)
Brokerage payables 86,632 --
-------- --------
Net cash provided by operating activities 1,821 7,088
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (5,751) (101)
Sales of short-term investments 4,019 950
Capital expenditures for property and equipment (2,240) (2,653)
Capitalization of product enhancement costs (3,649) (2,089)
Cash acquired from acquisitions, net of payments 1,381 --
Loans and advances to unconsolidated affiliates, net of repayments (205) (2,161)
-------- --------
Net cash used in investing activities (6,445) (6,054)
-------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (309) (603)
Net proceeds from issuance of common stock 168 240
-------- --------
Net cash used in financing activities (141) (363)
-------- --------
Net (decrease) increase in cash and cash equivalents (4,765) 671
Cash and cash equivalents, beginning of period 21,006 11,213
-------- --------
Cash and cash equivalents, end of period $ 16,241 $ 11,884
======== ========
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 broker-dealers registered with the
National Association of Securities Dealers ("NASD"), which in addition to the
technology provided by the Company's Technology Services segment, provides an
electronic execution venue for trading in United States equities 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 ("SEC")
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 and six months ended June 30, 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.
6
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
("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).
On February 1, 2002, the Company acquired an additional 30% ownership
interest in NYFIX Millennium, L.L.C. ("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 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 and $1.0 million was reclassified from depreciation and
amortization expense to cost of revenue for the three and six months ended June
30, 2003, respectively.
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 and loss
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 Six months ended
June 30, June 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------- -----------
(in thousands, except per share amounts)
Net loss, as reported $ (2,915) $ (1,057) $ (3,992) $ (981)
Compensation expense based on the fair
value method, net of tax (641) (1,288) (1,354) (3,020)
----------- ----------- ----------- -------
Pro forma net loss $ (3,556) $ (2,345) $ (5,346) $(4,001)
=========== =========== =========== =======
Basic and diluted loss per common share:
As reported $ (0.09) $ (0.03) $ (0.12) $ (0.03)
=========== =========== =========== =======
Pro forma $ (0.11) $ (0.08) $ (0.17) $ (0.13)
=========== =========== =========== =======
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
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, as registered
broker-dealers, are subject to the minimum net capital requirements of the NASD.
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"). These broker-dealers have consistently operated in excess of their
minimum and minimum excess net capital requirements. NYFIX Clearing's net
capital was $11.0 million at June 30, 2004, which exceeded the amount required
by $10.8 million. NYFIX Transaction Services' net capital was $0.3 million at
June 30, 2004, which exceeded the amount required by $0.2 million. NYFIX
Millennium's net capital was $0.8 million at June 30, 2004, which exceeded the
amount required by $0.7 million. During the six months ended June 30, 2004, the
Company provided additional capital of $150,000 and subordinated loans of
8
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
$650,000 to NYFIX Millennium to enable it to exceed its net capital requirement.
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 a
securities 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 operating 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:
June 30, December 31,
2004 2003
-------- ------------
(in thousands)
Stock receivable (matched and reserved) $80,051 $ 1,466
Other 7,948 479
------- -------
Total brokerage receivables $87,999 $ 1,945
======= =======
Brokerage payables consisted of the following:
June 30, December 31,
2004 2003
-------- ------------
(in thousands)
Stock payable $80,383 $ 1,385
Other 7,949 315
------- -------
Total brokerage payables $88,332 $ 1,700
======= =======
9
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
3. ACQUISITIONS, GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
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, the Company recorded its
equity in the losses of EuroLink of $0.1 million. During the three and six
months ended June 30, 2003, the Company recorded its equity in the losses of
EuroLink of $0.1 million and $0.3 million, respectively. Such losses were
included in "other income (expense), net" 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.
Effective March 29, 2004, the Company acquired the remaining 60% of
EuroLink that it did not already own. 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 electronic 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 fair value of the notes, which mature on April 28, 2005, was
included in "current portion of long-term debt and other liabilities" in the
accompanying condensed consolidated balance sheet at June 30, 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 $0.1 million was $4.7 million. The excess of the purchase price over the fair
value of the net assets acquired was $3.3 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 complete by December 31, 2004.
10
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
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 previous 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 and six months ended June 30, 2003, the Company
recorded its equity in the losses of Renaissance of $0.2 million and $0.4
million, respectively, which were included in "other income (expense), net" in
the accompanying condensed consolidated statement of operations.
Effective 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
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 promissory notes, the Company issued 375,346
shares of its common stock as payment in full for $2.0 million in principal
amount of such notes, subject to potential future adjustments that could require
cash payments up to $0.8 million, in lieu of up to 40% of the shares issued. The
Company recognized an additional $0.1 million in interest expense in the quarter
ended June 30, 2004, as a result of the accelerated payment of such notes.
11
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
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 three and six months
ended June 30, 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 six
months ended June 30, 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) -- 3,259 3,259
Javelin (1,250) -- (1,250)
-------- -------- --------
Balance as of June 30, 2004 $ 48,914 $ 9,061 $ 57,975
======== ======== ========
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.
12
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Acquired intangible assets consisted of the following:
June 30, 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 5,160 3,865
------- -------
Total intangible assets, net $ 9,940 $10,235
======= =======
Amortization expense of acquired intangible assets was $0.6 million and
$1.2 million for the three and six months ended June 30, 2004, and $0.5 million
and $1.0 million for the three and six months ended June 30, 2003, respectively,
and was included in cost of revenue.
Based on identified intangible assets recorded at June 30, 2004, the
future amortization expense is expected to be as follows:
Amount
(in thousands)
Remainder of 2004 $ 1,345
2005 2,691
2006 2,691
2007 1,566
2008 726
Thereafter 921
-------
Future amortization expense $ 9,940
=======
4. RESTRUCTURING CHARGE
Effective February 1, 2004, the Company entered into an agreement to
lease additional space at its New York City offices at 100 Wall Street. In
connection with this agreement, the Company ceased use, in the second quarter of
2004, of one of its other offices on Wall Street and commenced consolidating its
operations into the new space and eliminated 14 staff positions. In accordance
with SFAS No. 146, ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES, the Company
recorded a charge to operations of $2.5 million. This charge included the fair
value of the remaining rent payments, net of estimated sub-lease income,
severance and write-offs of fixed assets and leasehold improvements. Effective
January 1, 2005, the Company will maintain one office on Wall Street comprising
35,800 square feet, which is a 23% reduction from the 46,500 square feet
previously leased.
The Company has included the restructuring charge liabilities with
"current portion of long-term debt and other liabilities" and "long-term debt
and other liabilities" in the accompanying condensed consolidated balance sheet
at June 30, 2004, and has classified the expense as "restructuring charge" in
the accompanying condensed consolidated statement of operations for the three
and six months ended June 30, 2004. The restructuring charge established by the
Company, and activities related thereto, are summarized as follows:
13
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Balances at Balances at
December 31, Cash Non-Cash June 30,
2003 Charges Uses Uses 2004
------------ ------- -------------- -------- -----------
(in thousands)
Lease costs, net of
sublease income $ -- $2,097 $ -- $ -- $2,097
Fixed asset dispositions -- 319 -- (319) --
Severance -- 111 -- -- 111
------ ------ ------------- ------ ------
Total $ -- $2,527 $ -- $ (319) 2,208
====== ====== ============= ======
Less: current portion 832
------
Long-term portion $1,376
======
5. INCOME TAXES
The Company recorded tax benefits of $1.9 million and $2.6 million for
the three and six months ended June 30, 2004, respectively, and $1.0 million for
both the three and six months ended June 30, 2003. The Company's effective tax
rate was 39% and 40% for the three and six months ended June 30, 2004,
respectively, and 48% and 50% for the three and six months ended June 30, 2003,
respectively. The Company's effective tax rate for the three and six months
ended June 30, 2004 is higher than the Federal statutory rate primarily due to
the effect of state income taxes. The Company's effective tax rate for the three
and six months ended June 30, 2003 is higher than the Federal statutory rate
primarily due to the effects of certain research and development tax credits and
state income taxes.
6. PER SHARE INFORMATION
The Company's basic loss per common share ("EPS") was calculated based
on the net loss available to common stockholders and the weighted-average number
of shares outstanding during the reporting period. Diluted EPS includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of outstanding stock options. Stock options
representing 761,202 and 1,034,707 shares for the three and six months ended
June 30, 2004, respectively, and 1,111,542 and 926,051 shares for the three and
six months ended June 30, 2003, respectively, were excluded from the loss per
share calculation since the amounts would be anti-dilutive.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2004 2003 2004 2003
-------- --------- -------- ---------
(in thousands, except per share amounts)
Net loss $ (2,915) $ (1,057) $ (3,992) $ (981)
======== ======== ======== ========
Loss per common share - basic and diluted $ (0.09) $ (0.03) $ (0.12) $ (0.03)
======== ======== ======== ========
Weighted average shares outstanding 32,243 31,173 32,058 31,152
======== ======== ======== ========
7. BUSINESS SEGMENT INFORMATION
The Company has adopted the disclosure requirements of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
14
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
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
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 revenue from the
application of commissions 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 Six Months Ended
June 30, June 30,
------------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenue: (in thousands)
Technology Services $ 14,906 $ 12,764 $ 28,776 $ 26,683
Transaction Services 4,098 3,665 8,023 7,514
Eliminations (775) (733) (1,434) (1,218)
-------- -------- -------- --------
Total revenue $ 18,229 $ 15,696 $ 35,365 $ 32,979
======== ======== ======== ========
Gross Profit:
Technology Services $ 7,501 $ 6,463 $ 13,932 $ 14,446
Transaction Services 975 976 2,192 2,019
-------- -------- -------- --------
Total gross profit $ 8,476 $ 7,439 $ 16,124 $ 16,465
======== ======== ======== ========
15
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Reconciling information between business segments and the loss before
income tax benefit was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(in thousands)
Gross profit for reportable segments $ 8,476 $ 7,439 $ 16,124 $ 16,465
Operating expenses (13,106) (9,365) (22,483) (18,041)
Interest expense (184) (27) (258) (58)
Investment income 17 147 63 253
Other income (expense), net 4 (225) (70) (587)
-------- -------- -------- --------
Loss before income tax benefit $ (4,793) $ (2,031) $ (6,624) $ (1,968)
======== ======== ======== ========
8. COMPREHENSIVE LOSS
The components of comprehensive loss, net of tax, were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- -------- -------- --------
(in thousands)
Net loss $(2,915) $(1,057) $(3,992) $ (981)
Changes in net unrealized gain on
available-for-sale securities -- 70 -- 104
------- ------- ------- -------
Total comprehensive loss $(2,915) $ (987) $(3,992) $ (877)
======= ======= ======= =======
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
On 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 believes that this complaint is without merit. Although
it is not possible to forecast the outcome of this matter, the Company intends
to defend the lawsuit vigorously.
16
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
10. CASH FLOW SUPPLEMENTAL INFORMATION
Information about the cash flow activities related to the EuroLink and
Javelin acquisitions was as follows:
Six Months Ended
June 30,
2004
-------------
(in thousands)
Fair value of assets acquired, including cash of $155 $ 4,566
Fair value of liabilities assumed (207)
Fair value of capital contributed (1,026)
Fair value of notes issued, less note payment of $24 (450)
Pre-acquisition investment basis (3,014)
Javelin working capital adjustment settlement (1,250)
-------
Cash acquired from acquisitions $(1,381)
=======
The preceding fair values of net assets and liabilities for the six
months ended June 30, 2004 were based on the preliminary values at that time.
The final allocation of assets acquired may differ from the fair values
presented.
Information about other cash flow activities was as follows:
Six Months Ended
June 30,
--------------------
2004 2003
-------- ---------
Supplemental disclosures of cash flow information: (in thousands)
Cash paid for interest $ 86 $ 58
Cash paid (refunds received) for income taxes, net 13 (564)
Supplemental schedule of noncash investing and
financing information:
Common stock issued for promissory note payments 2,000 --
Unrealized gain on available-for-sale securities -- (104)
11. RELATED PARTY TRANSACTIONS
At June 30, 2004, the Company had a note receivable of $70,000, plus
accrued interest, from a former officer of the Company, in connection with his
exercise of options for the Company's common stock, with an annual interest rate
of 5.5%, and a maturity date of May 13, 2004. Such note was included in "notes
receivable issued for common stock" within stockholders' equity at June 30, 2004
and December 31, 2003 on the accompanying condensed consolidated balance sheets.
In addition, at June 30, 2004, the Company had a note receivable of $300,000,
plus accrued interest from the same former officer, with an annual interest rate
of 5.5%, and a maturity date of July 2, 2004. Such note was included in "prepaid
17
NYFIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
expense and other current assets" at June 30, 2004 and December 31, 2003 on the
accompanying condensed consolidated balance sheets.
On July 27, 2004, the Company received notes from the former officer for
$70,000 and $300,000 to replace the notes that matured on May 13, 2004 and July
2, 2004, respectively. Both new notes mature on July 27, 2006, accrue interest
annually at 4.0%, may be prepaid at any time without penalty and are
collateralized by assets in a brokerage account of the former officer, which
primarily consist of shares of the Company's stock. A director of the Company,
in a separate transaction, made an unsecured loan to the former officer, who
used the proceeds from the loan to purchase the Company's common stock, which is
included in the collateral, and pay accrued interest of $23,000 on the original
notes.
12. NASDAQ DELISTING PROCEEDING
On April 1, 2004 and May 19, 2004, Nasdaq notified the Company that it
was not in compliance with Nasdaq's listing requirements because the Company had
not timely filed its 2003 Form 10-K and its Quarterly Report on Form 10-Q ("Form
10-Q") for the quarter ended March 31, 2004, respectively. On April 29, 2004,
the Company requested with the Nasdaq Listing Qualifications Panel (the
"Panel"), and was granted, an extension to May 31, 2004 to meet Nasdaq's listing
requirements. On May 28, 2004, the Company filed its 2003 Form 10-K and its Form
10-Q for the quarter ended March 31, 2004 and requested that Nasdaq dismiss the
pending delisting action against it. On or about June 8, 2004, Nasdaq advised
the Company that the Panel had closed its hearing file regarding the delisting
of the Company and had determined that monitoring of the Company by the Panel
over the longer term was not necessary.
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 National Futures Association; 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 execution venue under Regulation ATS
for trading in United States stocks. NYFIX Transaction Services provides
19
NYFIX, INC.
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 of
our Financial Condition and Results of Operations ("MD&A"), 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 six
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 Six Months Ended
June 30, June 30,
----------------------------- -------------------------
2004 2003 2004 2003
------------- ------------ ------------ ---------
($ in thousands)
Segment revenue:
Technology Services $ 14,906 $ 12,764 $ 28,776 $ 26,683
Transaction Services 4,098 3,665 8,023 7,514
Eliminations (775) (733) (1,434) (1,218)
------------ ------------ ----------- --------
Total revenue $ 18,229 $ 15,696 $ 35,365 $ 32,979
============ ============ =========== ========
Segment revenue, as a percentage of total
revenue:
Technology Services 82 % 81% 81% 81%
Transaction Services 22% 24% 23 % 23%
Eliminations (4)% (5)% (4)% (4)%
------------ ------------ ----------- --------
Total 100% 100% 100% 100%
============ ============ =========== ========
Segment gross profit:
Technology Services $ 7,513 $ 6,630 $ 13,944 $ 14,613
Transaction Services 963 809 2,180 1,852
------------ ------------ ----------- --------
Total gross profit $ 8,476 $ 7,439 $ 16,124 $ 16,465
============ ============ =========== ========
Segment gross profit, as a percentage of
revenue:
Technology Services 50% 52% 48% 55%
Transaction Services 23% 22% 27% 25%
Total 46% 47% 46% 50%
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 Six Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
-------- ----- ------ -------
REVENUE:
Subscription 55% 52% 55% 51%
Capital sale 11% 13% 11% 14%
Service contract 15% 14% 15% 14%
Transaction 19% 21% 19% 21%
----- ----- ----- -----
Total revenue 100% 100% 100% 100%
----- ----- ----- -----
COST OF REVENUE:
Subscription 57% 59% 59% 56%
Capital sale 36% 35% 39% 32%
Service contract 33% 29% 35% 28%
Transaction 68% 63% 65% 62%
Total cost of revenue 54% 53% 54% 50%
GROSS PROFIT:
Subscription 43% 41% 41% 44%
Capital sale 64% 65% 61% 68%
Service contract 67% 71% 65% 72%
Transaction 32% 37% 35% 38%
Total gross profit 46% 47% 46% 50%
OPERATING EXPENSE:
Selling, general and administrative 53% 53% 51% 49%
Restructuring charge 14% 0% 7% 0%
Research and development 2% 2% 2% 2%
Depreciation and amortization 3% 4% 3% 4%
----- ----- ----- -----
Total operating expense 72% 59% 63% 55%
----- ----- ----- -----
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 commissions 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. Transaction revenue 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 JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
REVENUE
The following table presents an overview of our revenue:
24
NYFIX, INC.
Three Months Ended June 30,
------------------------------------------
2004 2003
$ % $ %
------- ------ -------- ------
($ in thousands)
Technology Services:
Subscription $ 10,147 68 % $ 8,441 66 %
Capital sale 2,055 14 % 2,028 16 %
Service contract 2,704 18 % 2,295 18 %
-------- --------
Sub-total 14,906 82 % 12,764 81 %
-------- --------
Transaction Services:
Subscription 604 15 % 395 11 %
Transaction 3,494 85 % 3,270 89 %
-------- --------
Sub-total 4,098 22 % 3,665 23 %
-------- --------
Eliminations:
Subscription (775) n/a (733) n/a
-------- --------
Sub-total (775) n/a (733) n/a
-------- --------
Total revenue
Subscription 9,976 55 % 8,103 52 %
Capital sale 2,055 11 % 2,028 13 %
Service contract 2,704 15 % 2,295 14 %
Transaction 3,494 19 % 3,270 21 %
-------- ------ -------- ------
Consolidated revenue $ 18,229 100 % $ 15,696 100 %
======== ====== ======== ======
Segment subtotals are presented as a percentage of consolidated revenue.
Consolidated revenue increased $2.5 million, or 16%, to $18.2 million
for the three months ended June 30, 2004 as compared to $15.7 million for the
three months ended June 30, 2003.
Our Technology Services segment revenue increased $2.1 million, or 16%,
to $14.9 million for the three months ended June 30, 2004 as compared to $12.8
million for the three months ended June 30, 2003. Our traditional equity
products subscription and service contract revenue increased to $10.3 million
for the three months ended June 30, 2004 from $8.7 million for the three months
ended June 30, 2003. This $1.6 million increase was primarily attributable to a
net increase of 15 customers from 285 customers at June 30, 2003 to 300
customers at June 30, 2004. This increase yielded higher average annual revenue
per customer of $131,000 for the three months ended June 30, 2004, as compared
to $115,000 for the three months ended June 30, 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 June 30, 2004, we had executed agreements
with 122 buy-side customers initially requesting connectivity to our NYFIX
network valued at, if fully implemented, approximately $6.0 million. For the
three months ended June 30, 2004, we recognized $1.3 million of revenue
attributed to 107 of those customers. There was nominal revenue for buy-side
initiatives recognized in the three months ended June 30, 2003. We expect this
buy-side related revenue to increase throughout the year as we continue to add
and implement services for buy-side customers. Subscription and service revenue
for our Javelin products was $1.8 million for the three months ended June 30,
2004 as compared to $1.7 million for the three months ended June 30, 2003.
Subscription and service revenue for our derivative products was $0.6 million
for the three months ended June 30, 2004 as compared to $0.4 million for the
three months ended June 30, 2003. Capital sale revenue for our Javelin and
derivatives products was $2.1 million for the three months ended June 30, 2004
as compared to $2.0 million for the three months ended June 30, 2003,
respectively. While we had $0.2 million of revenue in the second quarter of 2004
25
NYFIX, INC.
from our acquired Renaissance products, with our acquisition of Renaissance, we
have been 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 82% for the three months ended June 30, 2004 from 81% for
the three months ended June 30, 2003.
Our Transaction Services segment revenue increased $0.4 million, or 11%,
to $4.1 million for the three months ended June 30, 2004 as compared to $3.7
million for the three months ended June 30, 2003. Our Transaction Services
customer base increased in the three months ended June 30, 2004 to 148 from 77
at June 30, 2003, with average revenue per customer of $28,000 in the current
year's quarter compared to average revenue per customer of $48,000 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 June 30, 2004
than in the three months ended June 30, 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 second 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 decreased to 22% for the three months
ended June 30, 2004 from 23% for the three months ended June 30, 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 June 30,
-----------------------------------------------------
2004 2003
$ % $ %
------------------------ -------------------------
($ in thousands)
Technology Services:
Subscription $ 5,763 78% $ 4,752 77%
Capital sale 740 10% 709 12%
Service contract 890 12% 673 11%
------- -------
Sub-total 7,393 50% 6,134 48%
------- -------
Transaction Services:
Subscription 617 20% 409 14%
Transaction 2,518 80% 2,447 86%
------- -------
Sub-total 3,135 77% 2,856 78%
------- -------
Corporate and Eliminations:
Corporate:
Data center and telecommunications 3,014 2,991
Fixed asset depreciation and amortization 1,405 1,292
Amortization of product enhancement costs 891 622
Allocated to:
Technology Services (4,520) (4,112)
Transaction Services (790) (793)
------- -------
Sub-total -- --
------- -------
Eliminations:
Subscription (649) n/a (349) n/a
Transaction (126) n/a (384) n/a
------- -------
Sub-total (775) n/a (733) n/a
------- -------
Consolidated cost of revenue $ 9,753 54% $ 8,257 53%
======= =======
Segment subtotals are presented as a percentage of segment revenue.
Consolidated cost of revenue increased $1.5 million, or 18%, to $9.8
million for the three months ended June 30, 2004 as compared to $8.3 million for
the three months ended June 30, 2003. Included in the $1.5 million increase were
$0.6 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, product enhancement cost amortization of $0.3 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,
transaction related costs of $0.3 million, including execution and clearing
fees, amortization of EuroLink and Renaissance intangible assets of $0.1
million, telecommunication expense of $0.1 million, data feed costs of $0.1
million, depreciation expense of $0.1 million and cross connection fees of $0.1
million to connect our subscription customers to third-party networks. Slightly
offsetting these increases was a decrease of $0.2 million, due to reduced data
center maintenance and facility costs and other miscellaneous expenses. As a
percentage of revenue, cost of revenue increased to 54% for the three months
ended June 30, 2004, from 53% for the three months ended June 30, 2003, as the
increase in the aforementioned Technology Services costs was offset by our
Transaction Services revenue increasing greater than the increase in Transaction
Services costs as mentioned below.
Our Technology Services segment cost of revenue increased $1.3 million,
or 21%, to $7.4 million for the three months ended June 30, 2004 compared to
$6.1 million for the three months ended June 30, 2003. This increase was
primarily attributable to higher labor costs of $0.6 million, amortization of
acquired intangible assets of $0.1 million due to the Renaissance acquisition,
27
NYFIX, INC.
cross connection fees of $0.1 million and the aforementioned increases in
allocated corporate expenses, such as telecommunications expenses, depreciation
and amortization of fixed assets and amortization of product enhancement costs,
of $0.4 million. Included in the increase was additional service contract cost
of revenue of $0.2 million, or 37%, which increased to $0.9 million for the
three months ended June 30, 2004, from $0.7 million for the three months ended
June 30, 2003. This increase was primarily due to increased labor costs to
support our products. As a percentage of revenue, cost of revenue increased to
50% in 2004, from 48% 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 increased $0.3 million,
or 11%, to $3.1 million for the three months ended June 30, 2004 compared to
$2.8 million for the three months ended June 30, 2003. In addition to the
aforementioned increase in transaction related expenses, cost of revenue
decreased by $0.3 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. As a percentage of revenue, cost of revenue decreased to 77%
for the three months ended June 30, 2004, from 78% for the three months ended
June 30, 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 June 30,
------------------------------------------------
2004 2003
$ % $ %
---------------------- -----------------------
($ in thousands)
Technology Services:
Subscription $ 4,384 43% $ 3,689 44%
Capital sale 1,315 64% 1,319 65%
Service contract 1,814 67% 1,622 71%
------- -------
Sub-total 7,513 50% 6,630 52%
------- -------
Transaction Services:
Subscription (13) -2% (14) -4%
Transaction 976 28% 823 25%
------- -------
Sub-total 963 23% 809 22%
------- -------
Eliminations:
Subscription (126) n/a (384) n/a
Transaction 126 n/a 384 n/a
------- -------
Sub-total -- --
------- -------
Total gross profit:
Subscription 4,245 43% 3,291 41%
Capital sale 1,315 64% 1,319 65%
Service contract 1,814 67% 1,622 71%
Transaction 1,102 32% 1,207 37%
------- -------
Consolidated gross profit $ 8,476 46% $ 7,439 47%
======= =======
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 increased $1.1 million to $8.5 million for the
three months ended June 30, 2004 from $7.4 million for the three months ended
June 30, 2003. The aforementioned increase in Technology and Transaction
Services cost of revenue offset the increase in Technology and Transaction
Services revenue. Accordingly, our gross profit margin decreased to 46% for the
three months ended June 30, 2004, as compared to 47% for the three months ended
June 30, 2003.
Our Technology Services segment gross profit increased $0.9 million to
$7.5 million for the three months ended June 30, 2004 from $6.6 million for the
three months ended June 30, 2003. As a percentage of segment revenue, gross
profit margin decreased to 50% for the three months ended June 30, 2004 from 52%
for the three months ended June 30, 2003. The increase in gross profit is
primarily attributable to growth in our traditional equity products subscription
and service contract revenue, which outpaced the aforementioned increases in our
costs, and gross profit contributed by our buy-side initiative. 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
$1.0 million for the three months ended June 30, 2004 from $0.8 million for the
three months ended June 30, 2003. Transaction Services segment gross profit
margin increased to 23% for the three months ended June 30, 2004, as compared to
22% for the three months ended June 30, 2003. The increase in gross profit was
primarily attributable to the aforementioned increase in transaction 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 June 30,
--------------------------------------
2004 2003
$ % $ %
----------------- ------------------
($ in thousands)
Salaries and benefits $5,770 61% $5,303 63%
Provision for doubtful accounts 81 1% 282 3%
Occupancy and related 1,028 11% 970 12%
Marketing, travel and entertainment 680 7% 772 9%
General and other 2,067 21% 962 12%
------ ------
Total SG&A $9,626 53% $8,289 53%
====== ======
The total SG&A is presented as a percentage of consolidated revenue.
SG&A expense increased $1.3 million, or 16%, to $9.6 million for the
three months ended June 30, 2004, as compared to $8.3 million for the three
months ended June 30, 2003. The increase was primarily attributable to increased
professional and consulting fees of $0.8 million due principally to legal, audit
and consulting fees incurred in connection with the restatement of our financial
results, the class action lawsuit filed against us and compliance to section 404
of the Sarbanes-Oxley Act of 2002; and increased salaries and benefits of $0.5
million primarily due to increased staffing related to our July 2003 Renaissance
acquisition, company-wide annual merit increases effective January 1, 2004 and
increased health care costs. With the elimination of 14 staff positions, as
described below under "restructuring charge," we expect the savings from that
action to partially offset the aforementioned increases in SG&A expenses for the
remainder of 2004. As a percentage of total revenue, SG&A expense remained
constant at 53% for the three months ended June 30, 2004 and 2003, as the
increase in SG&A expense increase was offset by the increase in consolidated
revenue.
RESTRUCTURING CHARGE
Effective February 1, 2004, we entered into an agreement to lease
additional space at our New York City offices at 100 Wall Street. In connection
with this agreement, we ceased use, in the second quarter 2004, of one of our
other offices on Wall Street and commenced consolidating our operations into the
new space and eliminated 14 staff positions. In accordance with SFAS No. 146,
Accounting for Exit or Disposal Activities, we recorded a charge to operations
of $2.5 million. This charge included the fair value of the remaining rent
payments, net of estimated sub-lease income, severance and write-offs of fixed
assets and leasehold improvements. Effective January 1, 2005, we will maintain
one office on Wall Street comprising 35,800 square feet, which is a 23%
reduction from the 46,500 square feet previously leased. In addition to
operational efficiencies, we believe that we can realize an annual lease savings
of approximately 20%.
R&D
R&D expense decreased $0.1 million, or 25%, to $0.3 million for the
three months ended June 30, 2004, from $0.4 million for the three months ended
June 30, 2003, as our developers' efforts were concentrated on enhancing our
products. As a percentage of total revenue, research and development expense
remained constant at 2% for the three months ended June 30, 2004 and 2003. We
expect a similar amount of R&D expense for each of the remaining quarters of
2004.
30
NYFIX, INC.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $0.1 million, or 19%, to
$0.6 million for the three months ended June 30, 2004, from $0.7 million for the
three months ended June 30, 2003, due to a slight decrease in net property and
equipment. As a percentage of total revenue, depreciation and amortization
expense decreased to 3% for the three months ended June 30, 2004 from 4% for the
three months ended June 30, 2003. The decrease as a percentage of total revenue
was primarily attributable to the decreased amortization expense.
LOSS FROM OPERATIONS
Loss from operations was $4.6 million for the three months ended June
30, 2004, as compared to a loss of $1.9 million for the three months ended June
30, 2003. The operating loss was primarily due to the restructuring charge of
$2.5 million; higher SG&A expense, primarily due to legal and accounting fees
related to the restatement of our financial results, the class action lawsuit
and Sarbanes-Oxley Act compliance; and subscription cost of revenue, primarily
due to costs associated with Renaissance, which we acquired in July 2003. These
increases were partially offset by increased subscription and service contract
revenue as described above. As a percentage of total revenue, loss from
operations was a deficit of 25% for the three months ended June 30, 2004 as
compared to a deficit of 12% for the three months ended June 30, 2003. The
increase as a percentage of total revenue was primarily attributable to the
restructuring costs, without which the percentage would have been 12%.
INTEREST EXPENSE
Interest expense increased $0.2 million, primarily due to
accelerated interest expense on the notes to Renaissance unitholders for which
we were in default.
OTHER INCOME (EXPENSE), NET
Other income, net was nominal for the three months ended June 30, 2004.
We accounted for our previously unconsolidated affiliates, Renaissance and
EuroLink under the equity method through June 30, 2003 and March 28, 2004,
respectively. For the three months ended June 30, 2003, we recognized equity in
the losses of EuroLink of $0.1 million and equity in the losses of Renaissance
of $0.2 million. Slightly offsetting these losses for the three months ended
June 30, 2003 was a favorable settlement from a pending lawsuit of $75,000.
INCOME TAX BENEFIT
We recorded an income tax benefit of $1.9 million for the three months
ended June 30, 2004, compared to a benefit of $1.0 million for the three months
ended June 30, 2003. The income tax benefit for the three months ended June 30,
2004 was attributable to a tax benefit on our pre-tax loss of $4.8 million. Our
effective tax rate of 39% in the three months ended June 30, 2004 differed from
the Federal statutory rate primarily due to the effect of state income tax
benefits. The income tax benefit in the three months ended June 30, 2003 was
attributable to a tax benefit on our pre-tax loss of $2.0 million. Our effective
tax rate of 48% in the three months ended June 30, 2003 differed from the
Federal statutory rate primarily due to the effects of certain estimated
research and development tax credits and state tax benefits. 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.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
REVENUE
The following table presents an overview of our revenue:
31
NYFIX, INC.
Six Months Ended June 30,
----------------------------------------------
2004 2003
$ % $ %
-------------------- ----------------------
($ in thousands)
Technology Services:
Subscription $ 19,549 68 % $ 17,233 65 %
Capital sale 4,043 14 % 4,683 18 %
Service contract 5,184 18 % 4,767 18 %
-------- -------
Sub-total 28,776 81 % 26,683 81 %
-------- -------
Transaction Services:
Subscription 1,166 15 % 635 8 %
Transaction 6,857 85 % 6,879 92 %
-------- -------
Sub-total 8,023 23 % 7,514 23 %
-------- -------
Eliminations:
Subscription (1,434) n/a (1,218) n/a
-------- -------
b-total (1,434) n/a (1,218) n/a
-------- -------
Total revenue
Subscription 19,281 55 % 16,650 51 %
Capital sale 4,043 11 % 4,683 14 %
Service contract 5,184 15 % 4,767 14 %
Transaction 6,857 19 % 6,879 21 %
-------- ----- -------- -----
Consolidated revenue $ 35,365 100 % $ 32,979 100 %
======== ===== ======== =====
Segment subtotals are presented as a percentage of consolidated revenue.
Consolidated revenue increased $2.4 million, or 7%, to $35.4 million for
the six months ended June 30, 2004 as compared to $33.0 million for the six
months ended June 30, 2003.
Our Technology Services segment revenue increased $2.1 million, or 8%,
to $28.8 million for the six months ended June 30, 2004 as compared to $26.7
million for the six months ended June 30, 2003. Our traditional equity products
subscription and service contract revenue increased to $19.1 million for the six
months ended June 30, 2004 from $17.4 million for the six months ended June 30,
2003. This $1.7 million increase was primarily attributable to a net increase of
15 customers from 285 customers at June 30, 2003 to 300 customers at June 30,
2004. This increase yielded higher average annual revenue per customer of
$127,000 for the six months ended June 30, 2004, as compared to $117,000 for the
six months ended June 30, 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 June 30, 2004, we had executed agreements with 122 buy-side
customers initially requesting connectivity to our NYFIX network valued at, if
fully implemented, approximately $6.0 million. For the three months ended June
30, 2004, we recognized $2.1 million of revenue attributed to 107 of those
customers. There was nominal revenue for buy-side initiatives recognized in the
three months ended June 30, 2003. We expect this buy-side related revenue to
increase throughout the year as we continue to add and implement services for
buy-side customers. Subscription and service revenue for our Javelin products
was $3.4 million for both the six months ended June 30, 2004 and 2003.
Subscription and service revenue for our derivative products was $1.2 million
for the six months ended June 30, 2004 as compared to $0.8 million for the six
months ended June 30, 2003. Capital sale revenue for our Javelin and derivatives
products was $4.1 million for the six months ended June 30, 2004 as compared to
$4.7 million for the six months ended June 30, 2003, respectively. While we had
$0.4 million of revenue in the first six months of 2004 from our Renaissance
products, we believe that with our acquisition of Renaissance, we will be able
32
NYFIX, INC.
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 remained
constant at 81% for both the six months ended June 30, 2004 and the six months
ended June 30, 2003.
Our Transaction Services segment revenue increased $0.5 million, or 7%,
to $8.0 million for the six months ended June 30, 2004 as compared to $7.5
million for the six months ended June 30, 2003. Our Transaction Services
customer base increased in the six months ended June 30, 2004 to 148 from 77 at
June 30, 2003, with average revenue per customer of $54,000 in the current
year's six month period compared to average revenue per customer of $98,000 in
the prior year's six month period. The decrease in average revenue per customer
was attributed to a decrease in revenue from several large customers from whom
we generate revenue from 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 six months ended June 30, 2004 than in
the six months ended June 30, 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 six months of 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 remained constant at 23% for both the
six months ended June 30, 2004 and the six months ended June 30, 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:
33
NYFIX, INC.
Six Months Ended June 30,
------------------------------------------------------
2004 2003
$ % $ %
------------------------- --------------------------
($ in thousands)
Technology Services:
Subscription $ 11,468 77% $ 9,240 77%
Capital sale 1,557 10% 1,488 12%
Service contract 1,807 12% 1,342 11%
-------- --------
Sub-total 14,832 52% 12,070 45%
-------- --------
Transaction Services:
Subscription 1,154 20% 494 9%
Transaction 4,689 80% 5,168 91%
-------- --------
Sub-total 5,843 73% 5,662 75%
-------- --------
Corporate and Eliminations:
Corporate:
Data center and telecommunications 6,056 5,791
Fixed asset depreciation and amortization 2,873 2,568
Amortization of product enhancement costs 1,706 1,203
Allocated to:
Technology Services (9,092) (8,004)
Transaction Services (1,543) (1,558)
-------- --------
Sub-total -- --
-------- --------
Eliminations:
Subscription (1,216) n/a (349) n/a
Transaction (218) n/a (869) n/a
-------- --------
Sub-total (1,434) n/a (1,218) n/a
-------- --------
Consolidated cost of revenue $ 19,241 54% $ 16,514 50%
======== ========
Segment subtotals are presented as a percentage of segment revenue.
Consolidated cost of revenue increased $2.7 million, or 16%, to $19.2
million for the six months ended June 30, 2004 as compared to $16.5 million for
the six months ended June 30, 2003. Included in the $2.7 million increase were
$0.8 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 $1.2
million, telecommunication expense of $0.4 million, depreciation expense of $0.3
million, product enhancement cost amortization of $0.5 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,
data feed costs of $0.3 million, cross connection fees of $0.2 million to
connect our subscription customers to third-party networks and amortization of
Renaissance intangible assets of $0.1 million and transaction related costs of
$0.1 million. Slightly offsetting these increases was a decrease of $0.2
million, due to reduced data center maintenance and facility costs and other
miscellaneous expenses. As a percentage of revenue, cost of revenue increased to
54% for the six months ended June 30, 2004, from 50% for the six months ended
June 30, 2003, as the increase in the aforementioned Technology Services costs
and Transaction Services costs as mentioned below exceeded the increases in our
Transaction and Transaction Services revenue.
Our Technology Services segment cost of revenue increased $2.7 million,
or 22%, to $14.8 million for the six months ended June 30, 2004 compared to
$12.1 million for the six months ended June 30, 2003. This increase was
primarily attributable to higher labor costs of $1.4 million, amortization of
acquired intangible assets of $0.2 million due to the Renaissance acquisition,
34
NYFIX, INC.
data feed costs of $0.2 million, cross connection fees of $0.2 million and the
aforementioned increases in allocated corporate expenses, such as
telecommunications expenses, depreciation and amortization of fixed assets and
amortization of product enhancement costs, of $1.1 million. Included in the
increase was additional service contract cost of revenue of $0.5 million, or
38%, to $1.8 million for the six months ended June 30, 2004, from $1.3 million
for the six months ended June 30, 2003. This increase was primarily due to
increased labor costs to support our products. As a percentage of revenue, cost
of revenue increased to 52% in 2004, from 45% 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 increased $0.1 million,
or 2%, to $5.8 million for the six months ended June 30, 2004 compared to $5.7
million for the six months ended June 30, 2003. In addition to the
aforementioned increase in transaction related expenses, cost of revenue
decreased by $0.7 million, to $0.2 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. As a percentage of revenue, cost of revenue decreased to 73%
for the six months ended June 30, 2004, from 75% for the six months ended June
30, 2003, as the increase in the aforementioned costs grew at a faster rate than
our revenue. We expect our cost of revenue 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:
35
NYFIX, INC.
Six Months Ended June 30,
----------------------------------------------------
2004 2003
$ % $ %
------------------------- ------------------------
($ in thousands)
Technology Services:
Subscription $ 8,081 41% $ 7,993 46%
Capital sale 2,486 61% 3,195 68%
Service contract 3,377 65% 3,425 72%
-------- --------
Sub-total 13,944 48% 14,613 55%
-------- --------
Transaction Services:
Subscription 12 1% 141 22%
Transaction 2,168 32% 1,711 25%
-------- --------
Sub-total 2,180 27% 1,852 25%
-------- --------
Eliminations:
Subscription (218) n/a (869) n/a
Transaction 218 n/a 869 n/a
-------- --------
Sub-total -- --
-------- --------
Total gross profit:
Subscription 7,875 41% 7,265 44%
Capital sale 2,486 61% 3,195 68%
Service contract 3,377 65% 3,425 72%
Transaction 2,386 35% 2,580 38%
-------- --------
Consolidated gross profit $ 16,124 46% $ 16,465 50%
======== ========
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 $0.3 million to $16.1 million for
the six months ended June 30, 2004 from $16.4 million for the six months ended
June 30, 2003. The aforementioned increase in Technology and Transaction
Services cost of revenue offset the increase in Technology and Transaction
Services revenue. Accordingly, our gross profit margin decreased to 46% for the
six months ended June 30, 2004, as compared to 50% for the six months ended June
30, 2003.
Our Technology Services segment gross profit decreased $0.7 million to
$13.9 million for the six months ended June 30, 2004 from $14.6 million for the
six months ended June 30, 2003. As a percentage of segment revenue, gross profit
margin decreased to 48% for the six months ended June 30, 2004 from 55% for the
six months ended June 30, 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 the
second half of 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 $0.3 million to
$2.2 million for the six months ended June 30, 2004 from $1.9 million for the
six months ended June 30, 2003. Transaction Services segment gross profit margin
increased to 27% for the six months ended June 30, 2004, as compared to 25% for
the six months ended June 30, 2003. The increase in gross profit was primarily
attributable to the aforementioned increase in transaction 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.
36
NYFIX, INC.
SG&A
The following table presents an overview of our SG&A expense:
Six Months Ended June 30,
-------------------------------------
2004 2003
$ % $ %
------------------ -----------------
($ in thousands)
Salaries and benefits $11,008 62% $10,048 61%
Provision for doubtful accounts 81 0% 298 2%
Occupancy and related 1,981 11% 1,880 12%
Marketing, travel and entertainment 1,316 7% 1,311 8%
General and other 3,763 21% 2,587 16%
------- -------
Total SG&A $18,149 51% $16,124 49%
======= =======
The total SG&A is presented as a percentage of consolidated revenue.
SG&A expense increased $2.0 million, or 12%, to $18.1 million for the
six months ended June 30, 2004, as compared to $16.1 million for the six months
ended June 30, 2003. The increase was primarily attributable to increased
professional and consulting fees of $1.1 million due principally to legal, audit
and consulting fees incurred in connection with the restatement of our financial
results, the class action lawsuit filed against us and compliance to section 404
of the Sarbanes-Oxley Act of 2002; and increased salaries and benefits of $1.0
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. As a percentage of total revenue, SG&A expense increased to
51% for the six months ended June 30, 2004 from 49% for the six months ended
June 30, 2003, as the increase in SG&A expense outpaced the increase in
consolidated revenue.
RESTRUCTURING CHARGE
Effective February 1, 2004, we entered into an agreement to lease
additional space at our New York City offices at 100 Wall Street. In connection
with this agreement, we ceased use, in the second quarter 2004, of one of our
other offices on Wall Street and commenced consolidating our operations into the
new space and eliminated 14 staff positions. In accordance with SFAS No. 146,
Accounting for Exit or Disposal Activities, we recorded a charge to operations
of $2.5 million. This charge included the fair value of the remaining rent
payments, net of estimated sub-lease income, severance and write-offs of and
fixed assets and leasehold improvements. Effective January 1, 2005, we will
maintain one office on Wall Street comprising 35,800 square feet, which is a 23%
reduction from the 46,500 square feet previously leased. In addition to
operational efficiencies, we believe that we can realize an annual lease savings
of approximately 20%.
R&D
R&D expense remained constant at $0.6 million for both the six months
ended June 30, 2004 and the six months ended June 30, 2003, as efforts to bring
new products to market remained at the same level for both periods. As a
percentage of total revenue, research and development expense remained at 2% for
both the six months ended June 30, 2004 and the six months ended June 30, 2003.
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 $0.2 million, or 14%, to
$1.2 million for the six months ended June 30, 2004, from $1.4 million for the
six months ended June 30, 2003 due to a slight decrease in net property and
37
NYFIX, INC.
equipment. As a percentage of total revenue, depreciation and amortization
expense decreased to 3% for the six months ended June 30, 2004 from 4% for the
six months ended June 30, 2003. The decrease as a percentage of total revenue
was primarily attributable to the decreased amortization expense.
LOSS FROM OPERATIONS
Loss from operations was $6.4 million for the six months ended June 30,
2004, as compared to a loss from operations of $1.6 million for the six months
ended June 30, 2003. The operating loss was primarily due to the restructuring
charge of $2.5 million; higher SG&A expense, primarily due to legal and
accounting fees related to the restatement of our financial results, the class
action lawsuit and Sarbanes-Oxley Act compliance; and subscription cost of
revenue, primarily due to costs associated with Renaissance, which we acquired
in July 2003, and lower capital sale revenue. The cost increases were partially
offset by increased subscription and service contract revenue as described
above. As a percentage of total revenue, loss from operations was a deficit of
18% for the six months ended June 30, 2004 as compared to a deficit of 5% for
the six months ended June 30, 2003. The increased loss as a percentage of total
revenue was attributable primarily to the increase in operating expenses,
including the restructuring charge.
INTEREST EXPENSE
Interest expense increased $0.2 million, primarily due to
accelerated interest expense on the notes to Renaissance unitholders for which
we were in default.
INVESTMENT INCOME
Investment income decreased $0.2 million, principally due to reduced
interest on investments and loans to unconsolidated affiliates, as well as lower
overall invested balances.
OTHER INCOME (EXPENSE), NET
We recognized equity in the loss of EuroLink of $0.1 million for the
three months ended March 31, 2004. We accounted for our previously
unconsolidated affiliates, Renaissance and EuroLink under the equity method
through June 30, 2003 and March 28, 2004, respectively. For the six months ended
June 30, 2003, we recognized equity in the losses of EuroLink of $0.3 million
and equity in the losses of Renaissance of $0.4 million. Slightly offsetting
these losses is settlement income of $75,000, which we recognized during the six
months ended June 30, 2003.
INCOME TAX BENEFIT
We recorded an income tax benefit of $2.6 million for the six months
ended June 30, 2004, compared to a benefit of $1.0 million for the six months
ended June 30, 2003. The income tax benefit for the six months ended June 30,
2004 was attributable to a tax benefit on our pre-tax loss of $6.6 million. Our
effective tax rate of 40% in the six months ended June 30, 2004 differed from
the Federal statutory rate primarily due to the effect of state income tax
benefits. The income tax benefit in the six months ended June 30, 2003 was
attributable to a tax benefit on our pre-tax loss of $2.0 million. Our effective
tax rate of 50% in the six months ended June 30, 2003 differed from the Federal
statutory rate primarily due to the effects of certain estimated research and
development tax credits and state tax benefits. 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
38
NYFIX, INC.
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 $3.8 million from 2001 through June
30, 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.
Another significant source of funding for us is cash generated from
operations, which was $1.8 million for the six months ended June 30, 2004 and
$15.4 million, $3.7 million and $10.6 million in the years ended December 31,
2003, 2002 and 2001, respectively, aggregating $31.5 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 $35.5 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 $2.2 million for the six months ended June 30, 2004 and
$5.3 million, $4.6 million and $7.1 million in the years ended December 31,
2003, 2002 and 2001, respectively, aggregating $19.2 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 $3.6 million for the six
months ended June 30, 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 slightly higher amount in 2004 for product enhancements as
compared to 2003.
We acquired net cash of $1.4 million in the six months ended June 30,
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
were 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 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 as payment in full of $2.0 million in principal amount of such notes,
subject to potential future adjustments that could require cash payments up to
$0.8 million, in lieu of up to 40% of the shares issued. 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
39
NYFIX, INC.
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 June 30, 2004, our principal sources of liquidity were cash, cash
equivalents and short-term investments in the aggregate of $21.4 million and
accounts receivable of $12.0 million. At June 30, 2004, we had accounts payable
and accrued expenses aggregating $11.9 million. 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. 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.
These broker-dealers have consistently operated in excess of their minimum net
capital requirements. At June 30, 2004, NYFIX Clearing, NYFIX Transaction
Services, and NYFIX Millennium had net capital of $11.0 million, $0.3 million
and $0.8 million, respectively, exceeding the minimum net capital required by
$10.8 million, $0.2 million and $0.7 million, respectively. During the second
quarter of 2004, we provided additional capital of $150,000 and subordinated
loans of $650,000 to NYFIX Millennium to enable it to exceed its net capital
requirement. At June 30, 2004, we had an aggregate of $13.3 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 $10.4 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 June 30,
2004, it may need additional working capital funding until it generates positive
cash flow.
While, we believe that our cash and short-term investments of $21.4
million at June 30, 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, we are pursuing a credit facility to provide incremental
availability of working capital to further support our operating and investment
strategy.
WORKING CAPITAL
We had working capital of $21.3 million at June 30, 2004, down from
$23.3 million at December 31, 2003. Items affecting working capital in the six
months ended June 30, 2004 were principally cash used to acquire property and
equipment, enhance products and fund pre-acquisition working capital advances to
EuroLink and current liabilities recognized in conjunction with the
restructuring charge, 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.
40
NYFIX, INC.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in the six months ended June
30, 2004 was $1.8 million, as our net loss of $4.0 million, adjusted for
non-cash items, such as depreciation, amortization, deferred taxes and equity in
loss of unconsolidated affiliates, provided $3.3 million. Unfavorable working
capital changes of $1.5 million, including accounts receivable of $1.7 million,
prepaid expenses and other assets of $0.3 million and deferred revenue of $0.2
million were partially offset by increases in brokerage payables (net of
brokerage receivables) of $0.6 million, and accounts payable and other
liabilities of $0.1 million. For the remainder of 2004, we expect to generate
positive cash flows from operating activities.
Net cash provided by operating activities in the six months ended June
30, 2003 was $7.1 million, as our net loss of $1.0 million, adjusted for
non-cash items, such as depreciation, amortization, deferred taxes, provision
for bad debts and equity in loss of unconsolidated affiliates, provided $5.6
million. Favorable working capital changes, including accounts receivable of
$1.9 million and net changes in other assets and liabilities of $0.2 million,
which were partially offset by unfavorable net changes in accounts payable and
accrued expenses of $0.6 million, increased cash by $1.5 million.
CASH USED IN INVESTING ACTIVITIES
For the six months ended June 30, 2004, net cash used in investing
activities was $6.4 million. This consisted primarily of product enhancement
costs of $3.6 million, capital expenditures, primarily for data center equipment
and software, of $2.2 million, the net purchase of short-term investments of
$1.7 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. For the remainder of 2004, we expect to invest a
similar amount of cash for capital expenditures for property and equipment as
well as product enhancement costs.
For the six months ended June 30, 2003, net cash used in investing
activities was $6.1 million. This consisted primarily of capital expenditures of
$2.7 million, generally for data center equipment and software, loans and
advances to unconsolidated affiliates of $2.2 million and product enhancement
costs of $2.1 million. These amounts were partially offset by proceeds from the
net sales of short-term investments of $0.9 million.
CASH USED IN FINANCING ACTIVITIES
For the six months ended June 30, 2004 and June 30, 2003, our net cash
used in financing activities totaled $0.1 million and $0.4 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. For the remainder of
2004, we expect nominal activity in this category.
SEASONALITY AND INFLATION
We believe that our operations have not been significantly affected by
seasonality or inflation.
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
41
NYFIX, INC.
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 $5.2 million and
$3.4 million at June 30, 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 June 30, 2004. We also had $1.7
million and $1.0 million of treasury bills at June 30, 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 $1.7 million and $1.0
million of treasury bills at June 30, 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 have resulted 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
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 six months ended June 30, 2004 was not material.
42
NYFIX, INC.
ITEM 4. CONTROLS AND PROCEDURES
Based on an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
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
condensed 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 appear 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. That review is in progress.
43
NYFIX, INC.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 7, 2004, we issued 375,346 shares of our common stock to
certain unitholders of Renaissance Trading Technologies, LLC as payment in full
for $2.0 million in principal amount of promissory notes, subject to potential
future adjustments. We issued those shares in connection with our July 1, 2003
acquisition of the remaining 82% of the membership interests of Renaissance,
which we previously did not own, after we defaulted on such notes.
In connection with the issuance of our shares to the above individuals,
we relied on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. In addition, since all of the recipients of our shares
were "accredited investors" as defined in Rule 501 promulgated under the
Securities Act, we believe that the transaction falls within the safe harbor
provided by Regulation D, thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
On April 1, 2004, we reported under Items 7 and 12 of Form 8-K that we
were delaying the filing of our 2003 Annual Report on Form 10-K and that we
would restate our financial results relating to our investment in and
acquisition of NYFIX Millennium, L.L.C.
On April 2, 2004, we reported under Items 5 and 7 of Form 8-K European
market developments, including entering into a binding agreement to acquire 100%
of EuroLink Network, Inc., and an increase in new business.
On April 5, 2004, we reported under Items 5 and 7 of Form 8-K that we
would begin trading under the symbol NYFXE on NASDAQ on April 5, 2004.
On May 18, 2004, we reported under Item 5 of Form 8-K that 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.
On May 18, 2004, we reported under Items 5, 7 and 12 of Form 8-K our
results for the quarter ended March 31, 2004, the restatement of prior financial
statements and other matters.
On May 19, 2004, we reported under Item 5 of Form 8-K a correction of a
typographical error in our press release filed as an exhibit under Item 7 of our
Form 8-K filed on May 18, 2004.
On May 28, 2004, we reported under Items 5 and 7 of Form 8-K the
affirmation of our previously announced delay in filing our quarterly report on
Form 10-Q for the quarter ended March 31, 2004 and our expectation of filing in
a few days.
44
NYFIX, INC.
On June 8, 2004, we reported under Items 5 and 7 of Form 8-K that our
common stock would resume trading on the NASDAQ National Market under the symbol
NYFX effective with the open of business on Wednesday, June 9, 2004.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period presented.
45
NYFIX, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NYFIX, INC.
By: /s/ Mark R. Hahn
----------------------
Mark R. Hahn
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: August 9, 2004
46
Exhibits Index
Exhibit
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.