Attached files
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EX-31.2 - NYFIX INC | v164910_ex31-2.htm |
EX-32.2 - NYFIX INC | v164910_ex32-2.htm |
EX-32.1 - NYFIX INC | v164910_ex32-1.htm |
EX-31.1 - NYFIX INC | v164910_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended September 30,
2009
|
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the transition period
from to
|
Commission
file number: 001-02292
NYFIX,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
06-1344888
(I.R.S.
Employer
Identification
Number)
|
100
Wall Street
New
York, New York
(Address
of principal executive offices)
|
10005
(Zip
code)
|
(646)
525-3000
(Registrant’s
telephone number, including area code)
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 o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files)
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated Filer ¨
|
Accelerated filer x
|
Non-accelerated
filer ¨
|
Smaller
reporting
company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
There
were 39,332,757 shares of our common stock outstanding on November 3,
2009.
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
Page
|
||
Item
1.
|
Unaudited
Financial Statements
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009 and December 31,
2008
|
4
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2009 and 2008
|
5
|
|
Condensed
Consolidated Statement of Changes in Stockholders’ Equity and
Comprehensive Loss for the Nine Months Ended September 30,
2009
|
6
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2009 and 2008
|
7
|
|
Notes
to Condensed Consolidated Financial Statements
|
8
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
Item
4.
|
Controls
and Procedures
|
33
|
PART
II – OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
34
|
Item
1A.
|
Risk
Factors
|
34
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35
|
Item
3.
|
Defaults
Upon Senior Securities
|
35
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
36
|
Item
5.
|
Other
Information
|
36
|
Item
6.
|
Exhibits
|
37
|
Signatures
|
38
|
Page
2
When we
use the terms “NYFIX”, the “Company”, “we”, “us” and “our”, we mean NYFIX, Inc.
and its consolidated subsidiaries.
Forward
Looking Statements
This
quarterly report on Form 10-Q contains statements that constitute
“forward-looking statements” within the meaning of the safe harbor provisions of
The Private Securities Litigation Reform Act of 1995. In some cases,
you can identify these statements by forward-looking words such as “may,”
“might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “potential” or “continue,” and the negative of these
terms and other comparable terminology. These forward-looking
statements, which are subject to known and unknown risks, uncertainties and
assumptions about us, may include projections of our future financial
performance based on our growth strategies and anticipated trends in our
business. These statements are only predictions based on our current
expectations and projections about future events. There are important
factors that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements. In particular, you should consider the numerous risks and
uncertainties described under Part I Item 1A. - Risk Factors in our Annual
Report on Form 10-K for the fiscal year December 31, 2008 (“2008 Form 10-K”) and
Part II Item 1A. - Risk Factors in our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2009.
These
risks and uncertainties are not exhaustive. Other sections of the
2008 Form 10-K and of this report describe additional factors that could
adversely impact our business and financial performance. Moreover, we
operate in a very competitive and rapidly changing environment. New
risks and uncertainties emerge from time to time, and it is not possible to
predict all risks and uncertainties, nor can we assess the impact of all factors
on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements.
Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements as
guarantees of future events. We disclaim any duty to update any of
these forward-looking statements after the filing of this report to conform our
prior statements to actual results or revised expectations and we do not intend
to do so, and these forward-looking statements should not be relied upon as
representing our views as of any date subsequent to the filing of this
report.
Forward-looking
statements include, but are not limited to, statements about:
·
|
our
ability to close the pending merger transaction with NYSE Technologies,
Inc. (“NYSE Technologies”),
|
·
|
the
impact of current market conditions on the financial stability of our
clients including consolidations and
closures;
|
·
|
our
expectations with respect to securities markets and general economic
conditions;
|
·
|
the
impact of regulation and regulatory
actions;
|
·
|
the
effects of current, pending and future legislation, including changes to
Regulation ATS;
|
·
|
actions
and initiatives by both current and future
competitors;
|
·
|
our
business’ competitive
position;
|
·
|
our
ability to keep up with rapid technological
change;
|
·
|
the
impact of recording a significant impairment charge due to the fact that
we have not been profitable;
|
·
|
our
business’ possible or assumed future results of operations and cash
flows;
|
·
|
potential
growth opportunities available to our
business;
|
·
|
our
ability to achieve and maintain effective internal control over financial
reporting in accordance with Securities and Exchange Commission (“SEC”)
rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”); and
|
·
|
the
likelihood of success and impact of
litigation.
|
We
expressly qualify in their entirety all forward-looking statements attributable
to us or any person acting on our behalf by the cautionary statements contained
or referred to in this section.
Page
3
PART I - FINANCIAL
INFORMATION
Item
1. Unaudited Financial Statements
NYFIX,
Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(in
thousands, except share and per share amounts)
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 50,204 | $ | 55,966 | ||||
Accounts
receivable, less allowances of $696 and $1,142,
respectively
|
16,962 | 14,120 | ||||||
Clearing
assets
|
517,022 | 400,638 | ||||||
Prepaid
expenses and other current assets
|
3,070 | 3,702 | ||||||
Total
current assets
|
587,258 | 474,426 | ||||||
Property
and equipment, net of accumulated depreciation and amortization of $29,648
and $28,963, respectively
|
17,506 | 20,508 | ||||||
Capitalized
software costs, net of accumulated amortization of $13,923 and $17,710,
respectively
|
9,695 | 8,701 | ||||||
Goodwill
|
47,325 | 47,170 | ||||||
Acquired
intangible assets, net of accumulated amortization of $12,484 and $11,787,
respectively
|
7,148 | 7,422 | ||||||
Other
assets, net
|
451 | 564 | ||||||
Total
assets
|
$ | 669,383 | $ | 558,791 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 21,063 | $ | 21,656 | ||||
Clearing
liabilities
|
515,671 | 399,927 | ||||||
Current
portion of capital lease obligations
|
1,267 | 1,358 | ||||||
Convertible
notes
|
9,993 | 9,971 | ||||||
Current
portion of other long-term liabilities
|
1,210 | 1,014 | ||||||
Deferred
revenue
|
7,973 | 5,271 | ||||||
Total
current liabilities
|
557,177 | 439,197 | ||||||
Long-term
portion of capital lease obligations
|
940 | 1,469 | ||||||
Other
long-term liabilities
|
870 | 1,021 | ||||||
Total
liabilities
|
558,987 | 441,687 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $1.00 par value; 5,000,000 shares authorized:
|
||||||||
Series
A, none issued
|
- | - | ||||||
Series
B Voting Convertible, 1,500,000 shares issued and outstanding; liquidation
preference of $76,313 at September 30, 2009
|
62,092 | 62,092 | ||||||
Series
C Non-Voting Convertible, none issued
|
- | - | ||||||
Common
stock, $0.001 par value; 100,000,000 shares authorized; 40,249,865 and
39,510,917 shares issued, respectively
|
275,868 | 271,319 | ||||||
Accumulated
deficit
|
(212,111 | ) | (200,012 | ) | ||||
Treasury
stock, 923,108 shares, at cost
|
(12,600 | ) | (12,600 | ) | ||||
Accumulated
other comprehensive loss
|
(2,853 | ) | (3,695 | ) | ||||
Total
stockholders' equity
|
110,396 | 117,104 | ||||||
Total
liabilities and stockholders' equity
|
$ | 669,383 | $ | 558,791 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Page
4
NYFIX,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations (Unaudited)
(in
thousands, except per share amounts)
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue:
|
||||||||||||||||
Subscription
and maintenance
|
$ | 18,725 | $ | 17,747 | $ | 54,893 | $ | 52,772 | ||||||||
Transaction
|
6,903 | 10,842 | 22,108 | 34,941 | ||||||||||||
Product
sales and services
|
280 | 586 | 1,382 | 1,491 | ||||||||||||
Total
revenue
|
25,908 | 29,175 | 78,383 | 89,204 | ||||||||||||
Cost
of revenue:
|
||||||||||||||||
Subscription
and maintenance
|
6,916 | 7,985 | 21,389 | 23,457 | ||||||||||||
Transaction
|
7,739 | 5,595 | 21,819 | 17,649 | ||||||||||||
Product
sales and services
|
22 | 86 | 79 | 254 | ||||||||||||
Total
cost of revenue
|
14,677 | 13,666 | 43,287 | 41,360 | ||||||||||||
Gross
profit
|
11,231 | 15,509 | 35,096 | 47,844 | ||||||||||||
Operating
expense:
|
||||||||||||||||
Selling,
general and administrative
|
13,402 | 18,251 | 41,659 | 58,871 | ||||||||||||
Strategic
initiative costs
|
3,317 | - | 3,754 | - | ||||||||||||
Depreciation
and amortization
|
391 | 471 | 1,188 | 1,412 | ||||||||||||
Restructuring
charge
|
- | - | 748 | 216 | ||||||||||||
SEC
investigation, restatement and related expenses
|
- | 170 | (634 | ) | 438 | |||||||||||
Integration
charges
|
- | 139 | - | 735 | ||||||||||||
Loss
from operations
|
(5,879 | ) | (3,522 | ) | (11,619 | ) | (13,828 | ) | ||||||||
Interest
expense
|
(197 | ) | (123 | ) | (623 | ) | (489 | ) | ||||||||
Investment
income
|
15 | 251 | 143 | 1,027 | ||||||||||||
Loss
before income tax provision
|
(6,061 | ) | (3,394 | ) | (12,099 | ) | (13,290 | ) | ||||||||
Income
tax provision
|
- | 128 | - | 383 | ||||||||||||
Net
loss
|
(6,061 | ) | (3,522 | ) | (12,099 | ) | (13,673 | ) | ||||||||
Accumulated
preferred dividends
|
(433 | ) | (827 | ) | (890 | ) | (2,796 | ) | ||||||||
Loss
applicable to common stockholders
|
$ | (6,494 | ) | $ | (4,349 | ) | $ | (12,989 | ) | $ | (16,469 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.17 | ) | $ | (0.11 | ) | $ | (0.33 | ) | $ | (0.44 | ) | ||||
Basic
and diluted weighted average common shares outstanding
|
39,317 | 38,044 | 38,891 | 37,611 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Page
5
NYFIX,
Inc. and Subsidiaries
Condensed
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss
(Unaudited)
For
the Nine Months Ended September 30, 2009
(in
thousands, except share amounts)
Series B Voting Convertible
preferred stock issued
|
Preferred stock
dividend
|
Common stock issued
|
Accumulated
|
Treasury
|
Accumulated
other
comprehensive
|
Total
stockholders'
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
distributable
|
Shares
|
Amount
|
deficit
|
stock
|
loss
|
equity
|
||||||||||||||||||||||||||||
Balance
December 31, 2008
|
1,500,000 | $ | 62,092 | $ | - | 39,510,917 | $ | 271,319 | $ | (200,012 | ) | $ | (12,600 | ) | $ | (3,695 | ) | $ | 117,104 | |||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (12,099 | ) | - | - | (12,099 | ) | |||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | - | - | 842 | 842 | |||||||||||||||||||||||||||
Total
comprehensive loss
|
(11,257 | ) | ||||||||||||||||||||||||||||||||||
Issuance
of common stock for restricted stock units settled in
shares
|
- | - | - | 213,948 | - | - | - | - | - | |||||||||||||||||||||||||||
Declaration
of preferred stock dividend
|
457 | (457 | ) | - | - | - | - | |||||||||||||||||||||||||||||
Common
shares issued in payment of preferred stock dividend
|
- | - | (457 | ) | 525,000 | 457 | - | - | - | - | ||||||||||||||||||||||||||
Contingent
conversion price adjustment related to convertible notes
|
- | - | - | - | 13 | - | - | - | 13 | |||||||||||||||||||||||||||
Stock-based
compensation expense
|
- | - | - | - | 4,536 | - | - | - | 4,536 | |||||||||||||||||||||||||||
Balance
September 30, 2009
|
1,500,000 | $ | 62,092 | $ | - | 40,249,865 | $ | 275,868 | $ | (212,111 | ) | $ | (12,600 | ) | $ | (2,853 | ) | $ | 110,396 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Page
6
NYFIX,
Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(in
thousands)
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Operating
activities:
|
||||||||
Net
loss
|
$ | (12,099 | ) | $ | (13,673 | ) | ||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
8,497 | 7,691 | ||||||
Restructuring
charge
|
748 | 216 | ||||||
Non-cash
integration charges
|
- | 502 | ||||||
Stock-based
compensation expense
|
4,536 | 6,406 | ||||||
Amortization
of debt discounts and premiums
|
35 | 36 | ||||||
Deferred
income taxes
|
- | 146 | ||||||
Provision
for (recovery of) doubtful accounts
|
307 | (46 | ) | |||||
Other,
net
|
21 | - | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(3,035 | ) | 1,025 | |||||
Clearing
assets
|
(116,202 | ) | 177,909 | |||||
Prepaid
expenses and other assets
|
836 | 1,928 | ||||||
Deferred
revenue
|
2,633 | 184 | ||||||
Accounts
payable, accrued expenses and other liabilities
|
(1,227 | ) | (2,911 | ) | ||||
Clearing
liabilities
|
115,652 | (180,567 | ) | |||||
Net
cash provided by (used in) operating activities
|
702 | (1,154 | ) | |||||
Investing
activities:
|
||||||||
Capital
expenditures for property and equipment
|
(1,760 | ) | (4,345 | ) | ||||
Capitalization
of software costs
|
(3,668 | ) | (4,191 | ) | ||||
Tax
benefit attributable to goodwill
|
- | 237 | ||||||
Payment
for acquisition of minority interests
|
- | (7,227 | ) | |||||
Payment
for acquisition, net of cash received
|
- | (6,946 | ) | |||||
Proceeds
from sale of discontinued operations, net
|
- | 2,066 | ||||||
Net
cash used in investing activities
|
(5,428 | ) | (20,406 | ) | ||||
Financing
activities:
|
||||||||
Principal
payments under capital lease obligations
|
(1,040 | ) | (798 | ) | ||||
Proceeds
from issuance of common stock, net of issuance costs
|
- | 12 | ||||||
Purchases
of treasury shares
|
- | (71 | ) | |||||
Other,
net
|
(167 | ) | (245 | ) | ||||
Net
cash used in financing activities
|
(1,207 | ) | (1,102 | ) | ||||
Effect
of exchange rate changes on cash
|
171 | (493 | ) | |||||
Net
decrease in cash and cash equivalents
|
(5,762 | ) | (23,155 | ) | ||||
Cash
and cash equivalents, beginning of period
|
55,966 | 75,657 | ||||||
Cash
and cash equivalents, end of period
|
$ | 50,204 | $ | 52,502 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Page
7
Notes
to Condensed Consolidated Financial Statements (Unaudited)
1.
Summary of Significant Accounting
Policies
Nature
of Operations
NYFIX,
Inc., together with its consolidated subsidiaries, provides electronic trading
services including trade messaging services, trade messaging software and
trading workstations to domestic and international market
participants. In addition, NYFIX’s registered broker-dealer
subsidiaries provide automated trade execution services to institutional
counterparties and operate a matched-book stock borrow/stock loan
business.
The
Company’s headquarters and principal office is located at 100 Wall Street, New
York, NY. The Company also has offices in London, Hong Kong, Tokyo,
Boston, MA and Lyndhurst, NJ. The Company operates redundant data
centers in the northeastern United States, as well as a data center hub in
London.
Basis
of Presentation of Interim Financial Statements
The
accompanying unaudited condensed consolidated financial statements were prepared
by the Company pursuant to the rules and regulations of the SEC and, in the
opinion of management, include all adjustments (consisting of normal recurring
accruals and adjustments necessary for adoption of new accounting standards)
necessary to present fairly the results of the interim periods
shown. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been condensed or omitted pursuant to such
SEC rules and regulations. Management believes that the disclosures
made are adequate to make the information presented not
misleading. The results for the interim periods are not necessarily
indicative of results for the full year. The financial statements
contained herein should be read in conjunction with the consolidated financial
statements and notes thereto included in the 2008 Form 10-K.
The
accompanying unaudited condensed consolidated financial statements include the
accounts of NYFIX, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Significant
Accounting Policies
There
have been no material changes during 2009 in the Company’s significant
accounting policies to those previously disclosed in the 2008 Form
10-K.
2.
Signed Merger Agreement
On August
26, 2009, the Company entered into an agreement and plan of merger (the “Merger
Agreement”) with NYSE Technologies, a wholly-owned subsidiary of NYSE Euronext,
which was approved by the Company’s stockholders at a special meeting of
stockholders on November 3, 2009. The completion of the merger is subject to the
satisfaction of certain remaining customary conditions. The Company
currently expects the transaction to close during the fourth quarter of
2009. Following completion of the merger, the Company will become a
wholly-owned subsidiary of NYSE Technologies, and the Company’s common stock
will no longer be quoted on Nasdaq or publicly held.
Pursuant
to the terms of the Merger Agreement, upon completion of the merger the
holders of the Company’s common stock will be entitled to receive $1.675 per
common share in cash, without interest, and holders of the Company’s Series B
Preferred Stock will receive $50.134 per preferred share in cash, without
interest. The total value of the all cash deal, including payments
for employee restricted stock units and the value of stock option awards, is
approximately $144 million.
The Merger Agreement was the result of
a process that was launched by the Company in December 2008. In connection with
this process, the Company incurred strategic initiative costs consisting of
advisory fees, legal fees, accounting and tax advisory fees, as well as meeting
fees for a special committee of the Board of Directors of $3.3 million and $3.8
million for the three and nine months ended September 30, 2009, respectively.
These costs do not include any amounts
that are contingent on the consummation of the proposed merger
transaction.
Page
8
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
3.
Equity Incentive Plans
The
Company has stock-based incentive plans under which time-based and
performance-based stock options and restricted stock units (“RSUs”) have been
granted to employees and non-employee members of the Board of Directors.
Generally, these options and RSUs vest over a period of four years and are
forfeited, except in certain circumstances, in the event the employee or
director terminates his or her employment or relationship with the
Company. Stock options expire in ten years from the date of the
grant.
The fair
value of options is estimated using the Black-Scholes option-pricing model which
considers, among other factors, the expected life of the award and the expected
volatility of the Company’s stock price. Although the Black-Scholes
model meets the requirements of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation, the fair
values generated by the model may not be indicative of the actual fair values of
the Company’s awards, as it does not consider other factors important to those
stock-based compensation awards, such as continued employment, periodic vesting
requirements, and limited transferability.
In
connection with the Merger Agreement discussed in Note 2, each outstanding RSUs
(including time-based, market-based and performance-based) will vest and be
cancelled and the holders will vest and receive in cash $1.675 per
share. Each outstanding stock options (including time-based and
performance-based) will be cancelled and exchanged for the amount, if any, by
which $1.675 exceeds the per share exercise price.
Time-based
Stock Option Awards
A summary
of activity under time-based stock option plans for the nine months ended
September 30, 2009, follows:
Options
|
Shares
|
Weighted
average
exercise price
|
Weighted
average
remaining
contractual
term (years)
|
Aggregate
intrinsic
value (in
thousands)
|
||||||||||||
Outstanding
at beginning of the year
|
8,834,714 | $ | 5.42 | |||||||||||||
Granted
|
144,922 | $ | 1.03 | |||||||||||||
Exercised
|
- | $ | - | |||||||||||||
Cancelled
|
(682,143 | ) | $ | 8.70 | ||||||||||||
Outstanding
at end of the period
|
8,297,493 | $ | 5.07 | 7.6 | $ | 142 | ||||||||||
Exercisable
at end of the period
|
5,476,457 | $ | 5.57 | 7.3 | $ | 14 |
Time-Based
RSUs
A summary
of activity under time-based RSUs for the nine months ended September 30, 2009,
follows:
Restricted Stock Units
|
Shares
|
Weighted
average grant
date fair value
|
Aggregate
intrinsic value
(in thousands)
(1)
|
|||||||||
Outstanding
at beginning of the year
|
652,472 | $ | 4.23 | |||||||||
Granted
|
218,548 | $ | 0.88 | |||||||||
Settled
with shares
|
(213,948 | ) | $ | 4.22 | $ | 186 | ||||||
Cancelled
|
(54,913 | ) | $ | 4.33 | ||||||||
Outstanding
at end of the period
|
602,159 | $ | 3.02 |
(1)
Represents the value of NYFIX stock on the date that the restricted stock units
vested.
On grant
date the fair value for these vested awards was $917,000.
Page
9
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
Equity
Awards with Performance and Market Conditions
Performance-based
stock options and performance-based RSUs are eligible to be earned (in amounts
ranging from 0% to 100% of the award) in equal pro rata installments over four
one-year performance periods based on the achievement of annual goals for
revenue and operating earnings before interest, taxes, depreciation and
amortization. Any portion of performance-based stock options and
performance-based RSUs not earned in years one through three is eligible to be
earned in year four based on the achievement of goals in year
four. The annual performance goals for 2009 were approved on March
30, 2009.
During
the first quarter of 2009, the Company issued RSUs with a market
condition. This type of RSU is eligible to be earned if the closing
price of the Company’s common stock exceeds established price targets for a
period of ten consecutive business days and if the executive is employed by the
Company one year from the date of grant. These RSUs may be earned in
increments of 25% to 100% if various price targets are met within a four year
period. The Company used a Monte Carlo simulation model to determine
the fair value and derived service period for these awards.
A summary
of activity of the Company’s performance-based stock options for the nine months
ended September 30, 2009, follows:
Options
|
Shares
|
Weighted
average
exercise price
|
Weighted
average
remaining
contractual
term (years)
|
Aggregate
intrinsic
value (in
thousands)
|
||||||||||||
Outstanding
at beginning of the year
|
1,728,855 | $ | 4.47 | |||||||||||||
Granted
|
- | - | ||||||||||||||
Exercised
|
- | - | ||||||||||||||
Cancelled
|
- | - | ||||||||||||||
Outstanding
at end of the period
|
1,728,855 | $ | 4.47 | 8.1 | $ | - | ||||||||||
Exercisable
at end of the period
|
- | $ | - | - | $ | - |
A summary
of activity of the Company’s RSUs with performance and market conditions for the
nine months ended September 30, 2009, follows:
Restricted Stock Units
|
Shares
|
Weighted
average
grant date
fair value
|
||||||
Outstanding
at beginning of the year
|
322,917 | $ | 4.60 | |||||
Granted
|
734,633 | $ | 0.80 | |||||
Settled
in shares
|
- | $ | - | |||||
Cancelled
|
(12,500 | ) | $ | 4.60 | ||||
Outstanding
at end of the period
|
1,045,050 | $ | 1.93 |
Stock-based
Compensation Expense
Stock-based
compensation expense during the three and nine months ended September 30, 2009
was approximately $1.6 million and $4.5 million,
respectively. Stock-based compensation expense during the three and
nine months ended September 30, 2008 was approximately $1.6 million and $6.4
million, respectively.
As of September 30, 2009, there was $8.7 million of unrecognized
compensation costs related to outstanding awards.
Page
10
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
4. Loss
Per Share Applicable to Common Stockholders
The
following table sets forth the computations of loss per share amounts applicable
to common stockholders for the three and nine months ended September 30, 2009
and 2008:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
(in thousands, except per share amounts)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
loss
|
$ | (6,061 | ) | $ | (3,522 | ) | $ | (12,099 | ) | $ | (13,673 | ) | ||||
Less:
Accumulated preferred dividends
|
(433 | ) | (827 | ) | (890 | ) | (2,796 | ) | ||||||||
Loss
applicable to common stockholders, basic and diluted
|
$ | (6,494 | ) | $ | (4,349 | ) | $ | (12,989 | ) | $ | (16,469 | ) | ||||
Basic
and diluted loss per common share
|
$ | (0.17 | ) | $ | (0.11 | ) | $ | (0.33 | ) | $ | (0.44 | ) | ||||
Weighted
average common shares outstanding (1):
|
||||||||||||||||
Basic
and diluted shares
|
39,317 | 38,044 | 38,891 | 37,611 | ||||||||||||
Potentially
dilutive securities (2):
|
||||||||||||||||
Outstanding
time-based stock options (3)
|
8,297 | 9,330 | 8,297 | 9,330 | ||||||||||||
Outstanding
time-based restricted stock units (3)
|
602 | 671 | 602 | 671 | ||||||||||||
Warrants
(3)
|
2,250 | 2,250 | 2,250 | 2,250 | ||||||||||||
Convertible
notes (3)
|
1,783 | 1,776 | 1,783 | 1,776 | ||||||||||||
Convertible
preferred stock (3)
|
15,000 | 15,000 | 15,000 | 15,000 |
(1)
|
Excludes
nonvested restricted stock and restricted stock
units.
|
(2)
|
Excludes
grants with performance and market conditions as the necessary conditions
have not been satisfied.
|
(3)
|
The
impact of time-based stock options, time-based restricted stock units,
warrants, the convertible notes and the convertible preferred stock on
earnings per share is antidilutive in a period of
loss.
|
5.
Other Balance Sheet Information
Accounts
payable and accrued expenses consisted of the following at September 30, 2009
and December 31, 2008:
September 30,
|
December 31,
|
|||||||
(in
thousands)
|
2009
|
2008
|
||||||
Accounts
payable
|
$ | 8,147 | $ | 11,260 | ||||
Compensation
and related
|
7,106 | 7,737 | ||||||
Strategic
initiative costs
|
3,107 | - | ||||||
Taxes,
other than income and payroll taxes
|
1,236 | 815 | ||||||
Other
|
1,467 | 1,844 | ||||||
Total
accounts payable and accrued expenses
|
$ | 21,063 | $ | 21,656 |
Page
11
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
6.
Broker-Dealer Operations
Clearing
Assets and Liabilities
Clearing
assets and liabilities consisted of the following at September 30, 2009 and
December 31, 2008:
September 30,
|
December 31,
|
|||||||
(in
thousands)
|
2009
|
2008
|
||||||
Securities
borrowed
|
$ | 513,553 | $ | 396,784 | ||||
Securities
failed-to-deliver
|
1,128 | 1,375 | ||||||
Deposits
with clearing organizations and others
|
1,534 | 1,502 | ||||||
Receivables
from clearing organizations and firms
|
807 | 977 | ||||||
Total
clearing assets
|
$ | 517,022 | $ | 400,638 | ||||
Securities
loaned
|
$ | 513,398 | $ | 397,269 | ||||
Securities
failed-to-receive
|
146 | 1,716 | ||||||
Payables
to clearing organizations and firms
|
2,127 | 942 | ||||||
Total
clearing liabilities
|
$ | 515,671 | $ | 399,927 |
Securities
Lending
The
Company receives collateral under securities borrowed transactions, which it is
allowed by contract or custom to sell or repledge. As of September
30, 2009, securities borrowed with a fair value of $495.8 million were repledged
for securities loaned. The gross amounts of interest earned on cash
provided to counterparties as collateral for securities borrowed and interest
incurred on cash received from counterparties as collateral for securities
loaned and the resulting net amount included in transaction revenue for the
three and nine months ended September 30, 2009 and 2008, were as
follows:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(in
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Interest
earned
|
$ | 670 | $ | 2,088 | $ | 2,741 | $ | 7,067 | ||||||||
Interest
incurred
|
(491 | ) | (1,811 | ) | (2,158 | ) | (6,274 | ) | ||||||||
Net
|
$ | 179 | $ | 277 | $ | 583 | $ | 793 |
Regulatory
Net Capital Requirements
U.S. registered broker-dealer
subsidiaries - NYFIX Securities Corporation (“NYFIX Securities”) and
NYFIX Millennium L.L.C. (“NYFIX Millennium”) are subject to the SEC’s Uniform
Net Capital Rule (15c3-1), which requires the maintenance of minimum regulatory
net capital. NYFIX Securities has elected to use the alternative
method, as permitted by the rule, which requires the maintenance of minimum
regulatory capital (as defined in the rule) equal to the greater of $250,000 or
2% of aggregate debit items arising from customer transactions (as defined in
the rule). NYFIX Securities’ membership in the Depository Trust &
Clearing Corporation (the “DTCC”) requires it to maintain excess regulatory net
capital of $10.0 million. NYFIX Millennium has elected to use the
aggregate indebtedness standard method, which requires that the ratio of
aggregate indebtedness to regulatory net capital (both as defined in the rule)
shall not exceed 15 to 1. The regulatory net capital ratio for NYFIX
Millennium at September 30, 2009 was 0.59 to 1.
U.K. registered subsidiaries
- NYFIX International Ltd. (“NYFIX International”) and FIXCITY, Ltd. (“FIXCITY”)
are registered firms of the Financial Services Authority (“FSA”) in the
U.K. NYFIX International and FIXCITY are required to maintain the greater
of the base capital resources requirement of €730,000 and €50,000, respectively,
or the variable capital resources requirement, which is made up of credit risk,
market risk and fixed overhead (equal to three months average expenditures)
requirements.
At
September 30, 2009, the aggregate regulatory net capital/resources of the
Company’s regulated subsidiaries in the U.S. and U.K. were $31.3 million, which
was $18.0 million in excess of the Company’s aggregate requirement of $13.3
million (including the $10 million excess required by DTCC).
Page
12
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
7. Income
Taxes
The
income tax provision differs from the statutory U.S. federal income tax rate due
primarily to a valuation allowance provided against net deferred tax
assets. As described in the Company’s 2008 Form 10-K, the Company
maintains a valuation allowance in accordance with ASC Topic 740, Income Taxes, on its net
deferred tax assets. Until the Company achieves and sustains an
appropriate level of profitability, it plans to maintain a valuation allowance
on its net deferred tax assets.
8. Restructuring
Charges
In April
2009, the Company consolidated a portion of the office space in its New York
headquarters and signed an agreement to sublet the office space previously
occupied. The Company recorded a restructuring charge of $0.7 million
in April 2009, which consisted of the fair value of the remaining rent payments
for the office space, net of expected sublease income, plus real estate
commissions, and write-offs of property and equipment.
The
liabilities related to the restructuring charges are included in the current
portion of other long-term liabilities and other long-term
liabilities. The following table summarizes the activity in the
liabilities related to the restructuring charges for the nine months ended
September 30, 2009:
(in thousands)
|
Lease costs, net
of sublease
income
|
Property and
equipment
write-offs
|
Total
|
|||||||||
2004
restructuring costs
|
||||||||||||
Remaining
liability at December 31, 2008
|
$ | 454 | $ | - | $ | 454 | ||||||
Cash
payments
|
(226 | ) | - | (226 | ) | |||||||
Non-cash
charges and other
|
38 | - | 38 | |||||||||
Remaining
liability at September 30, 2009
|
266 | - | 266 | |||||||||
2009
restructuring costs
|
||||||||||||
Restructuring
charge
|
521 | 227 | 748 | |||||||||
Cash
payments
|
(218 | ) | - | (218 | ) | |||||||
Non-cash
charges and other
|
106 | (227 | ) | (121 | ) | |||||||
Remaining
liability at September 30, 2009
|
409 | - | 409 | |||||||||
Total
restructuring liability at September 30, 2009
|
$ | 675 | 675 | |||||||||
Less: current
portion
|
(496 | ) | ||||||||||
Long-term
portion
|
$ | 179 |
Page
13
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
9.
Total Comprehensive Loss
The
components of total comprehensive loss were as follows:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
(in
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
loss
|
$ | (6,061 | ) | $ | (3,522 | ) | $ | (12,099 | ) | $ | (13,673 | ) | ||||
Foreign
currency translation adjustment
|
(437 | ) | (896 | ) | 842 | (1,062 | ) | |||||||||
Total
comprehensive loss
|
$ | (6,498 | ) | $ | (4,418 | ) | $ | (11,257 | ) | $ | (14,735 | ) |
10. Business
Segment Information
In
accordance with ASC Topic 280, Segment Reporting ("ASC
280"), the Company is reporting certain information relating to its operating
segments. The Company’s segments are organized into three operating
divisions through which the Company’s chief operating decision makers manage the
Company’s business. These divisions, as described in more detail
below, are organized around the products and services provided to customers and
represent the Company’s reportable segments under ASC 280.
FIX Division. The
FIX Division provides messaging channels for institutions that are members of
its trading community for order routing and other value-added
services. The FIX Division also provides software and consultative
services to enable global financial institutions to utilize the industry
established Financial Information Exchange (FIX) Protocol for messaging,
monitoring and processing transaction information. The operating
results of FIXCITY have been included in the FIX Division since April 4, 2008,
the date of acquisition.
Transaction Services
Division. The Transaction Services Division is currently
comprised of the two U.S. registered broker-dealer subsidiaries, NYFIX
Millennium and NYFIX Securities, together with NYFIX International in the
U.K. NYFIX Millennium, an alternative trading system (“ATS”)
registered under SEC Regulation ATS, provides anonymous matching and routing of
U.S. equity securities. NYFIX Securities provides direct electronic
market access and algorithmic trading products, operates a matched-book stock
borrow/stock loan business and clears trades on behalf of itself and NYFIX
Millennium. Effective January 1, 2009, the results of Euro Millennium
are reported within the Transaction Services Division as the Company determined
that this initiative is no longer in its introductory phase based on second half
2008 growth in executed volumes. During the three and nine months
ended September 30, 2008, the Company incurred costs of $2.0 million and $6.7
million, respectively, related to Euro Millennium. These costs are
included in Corporate & Other in the segment information reported
below.
Order Management Systems
Division. The OMS Division provides software applications for
the management of New York Stock Exchange (“NYSE”) and NASDAQ listed trading
activities. These products also enable customers to take advantage of
the broad range of products and services offered by the Company’s other
divisions. The Company does not allocate to the OMS Division any
introductory revenue for business generated by the FIX Division and the
Transaction Services Division from OMS Division clients. The
operating loss for the OMS Division during the nine months ended September 30,
2008 includes severance related restructuring charges associated with
discontinuing the Fusion OMS product of $0.7 million, as well as additional
operating losses of $0.8 million during the nine months ended September 30,
2008, associated with supporting the Fusion OMS product during the
wind-down phase.
The Company does not currently break
out total assets by reportable segment as there is a high level of shared
utilization between certain reportable segments.
The
following table presents information by reportable segment for the three and
nine months ended September 30, 2009 and 2008:
Page
14
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
Transaction
|
||||||||||||||||||||
Services
|
OMS
|
Corporate
&
|
||||||||||||||||||
(in
thousands)
|
FIX
Division
|
Division
(1)
|
Division
|
Other
(2)
|
Total
|
|||||||||||||||
Three
Months Ended September 30, 2009
|
||||||||||||||||||||
Revenue
- external customers
|
$ | 18,344 | $ | 6,972 | $ | 592 | $ | - | $ | 25,908 | ||||||||||
Revenue
(cost of revenues), net - intersegment
|
(102 | ) | 86 | 16 | - | - | ||||||||||||||
Net
revenue
|
18,242 | 7,058 | 608 | - | 25,908 | |||||||||||||||
Operating
income (loss) (3)
|
5,369 | (6,234 | ) | (1,070 | ) | (3,944 | ) | (5,879 | ) | |||||||||||
Three
Months Ended September 30, 2008
|
||||||||||||||||||||
Revenue
- external customers
|
$ | 16,690 | $ | 11,791 | $ | 694 | $ | - | $ | 29,175 | ||||||||||
Revenue
(cost of revenues), net - intersegment
|
645 | (766 | ) | 121 | - | - | ||||||||||||||
Net
revenue
|
17,335 | 11,025 | 815 | - | 29,175 | |||||||||||||||
Operating
income (loss) (3)
|
1,855 | (1,055 | ) | (1,316 | ) | (3,006 | ) | (3,522 | ) | |||||||||||
Nine
Months Ended September 30, 2009
|
||||||||||||||||||||
Revenue
- external customers
|
$ | 53,911 | $ | 22,300 | $ | 2,172 | $ | - | $ | 78,383 | ||||||||||
Revenue
(cost of revenues), net - intersegment
|
(405 | ) | 425 | (20 | ) | - | - | |||||||||||||
Net
revenue
|
53,506 | 22,725 | 2,152 | - | 78,383 | |||||||||||||||
Operating
income (loss) (3)
|
14,378 | (18,715 | ) | (3,021 | ) | (4,261 | ) | (11,619 | ) | |||||||||||
Nine
Months Ended September 30, 2008
|
||||||||||||||||||||
Revenue
- external customers
|
$ | 47,895 | $ | 38,004 | $ | 3,305 | $ | - | $ | 89,204 | ||||||||||
Revenue
(cost of revenues), net - intersegment
|
2,210 | (2,756 | ) | 546 | - | - | ||||||||||||||
Net
revenue
|
50,105 | 35,248 | 3,851 | - | 89,204 | |||||||||||||||
Operating
income (loss) (3)
|
5,380 | (4,103 | ) | (6,684 | ) | (8,421 | ) | (13,828 | ) |
(1) Includes an operating loss for Euro Millennium for the three and
nine months ended September 30, 2009 of $2.1 million and $6.0 million,
respectively.
(2)
Corporate & Other includes strategic initiative costs, SEC investigation,
restatement and other related expenses/recoveries, corporate restructuring
costs/reversals, Euro Millennium costs, certain transitional costs and other
corporate items which are not allocated to reportable segments.
(3)
Operating income (loss) by segment reflects a significant amount of costs which
are allocated by headcount, usage and other methods, depending on the nature of
the cost.
11.
Commitments and Contingencies
Shareholder
Litigation
Following
the announcement of the Merger Agreement on August 27, 2009, an action,
styled Wissinger, et al. v.
NYFIX, Inc., et al., purporting to challenge the merger, was filed in the
Supreme Court of the State of New York (County of New York, Commercial Division)
on September 2, 2009 (Index No. 650541/09). This case asserts claims
on behalf of a purported class of NYFIX stockholders against NYFIX, each of its
directors, NYSE Euronext and Warburg Pincus LLC, related to an alleged breach of
fiduciary duty in connection with the merger. The complaint alleges, among other
things, that the NYFIX directors, aided and abetted by NYSE Euronext and Warburg
Pincus LLC, breached their fiduciary duties by failing to maximize stockholder
value. Among other things, the complaint seeks to enjoin NYFIX and its
directors from completing the merger. The complaint also seeks
unspecified monetary damages.
On
September 14, 2009, a second action purporting to challenge the merger,
styled Minard,
et al. v. Warburg Pincus Private Equity IX, LP, et al.,
was filed in the Delaware Court of Chancery (Case No. 4894-VCS).
This case also asserts claims on behalf of a purported class of NYFIX
stockholders, and names as defendants NYFIX, each of NYFIX’s directors, NYSE
Euronext, NYSE, CBR Acquisition Corp., Warburg Pincus Private Equity IX, LP,
Warburg Pincus & Co. and Warburg Pincus LLC. The Minard complaint alleges,
among other things, that the NYFIX directors, aided and abetted by the NYSE and
Warburg Pincus defendants, breached their fiduciary duties by failing to
maximize stockholder value. Among other things, the complaint seeks to
enjoin NYFIX and NYFIX’s directors from completing the merger. The
complaint also seeks unspecified monetary damages.
Page
15
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
On
September 23, 2009, a third action purporting to challenge the merger, styled
Winspear, et al. v. Edelstein, et al.,
was filed in the Supreme Court of the State of New York (County of New York,
Commercial Division) (Index No. 602937/09). This case also asserts claims on
behalf of a purported class of NYFIX stockholders, and names NYFIX, each of
NYFIX’s directors, NYSE, CBR Acquisition Corp. and Warburg Pincus LLC as
defendants. Like the Wissinger and Minard complaints, the Winspear complaint
alleges that the NYFIX directors breached their fiduciary duties by failing to
maximize stockholder value. The Winspear complaint also asserts, among other
things, that NYFIX directors breached their fiduciary duty of disclosure by
making purportedly misleading and incomplete disclosures in the preliminary
proxy statement filed with the SEC on September 10, 2009 concerning
the merger. The complaint alleges that NYFIX, Warburg Pincus LLC and
the NYSE defendants aided and abetted these purported breaches of fiduciary
duties by NYFIX directors. Among other things, the complaint seeks to enjoin
NYFIX and NYFIX’s directors from completing the merger, and unspecified monetary
damages.
The
Company, the other defendants and the plaintiffs entered into a memorandum of
understanding dated as of October 23, 2009 regarding the settlement-in-principle
of the lawsuits described above. In connection with the settlement, the
parties agreed that the Company would make certain additional disclosures to its
stockholders beyond the information provided in the definitive proxy statement.
Those additional disclosures were made through a Current Report on Form 8-K
filed with the SEC on October 23, 2009. The
settlement-in-principle is subject to certain customary conditions, including
confirmatory discovery, consummation of the transaction, and court approval, and
is conditioned upon on the closing of the merger
transaction. The settlement will not change any of the terms of
the merger or the Merger Agreement.
The
Company and the other defendants have vigorously denied, and continue to
vigorously deny, any wrongdoing or liability with respect to the facts and
claims asserted, or which could have been asserted, in the lawsuits described
above, including that the Company or they have committed any violations of law
or breach of fiduciary duty, that the Company or they have acted improperly in
any way, or that the Company or they have any liability or owe any damages of
any kind to the plaintiffs or to the purported class. The settlement is
not, and should not be construed as, an admission of wrongdoing or liability by
any defendant. However, to avoid the risk and cost of continuing
litigation, the Company and its directors agreed to the settlement described
above. The parties considered it desirable that the action be settled to
avoid the substantial burden, expense, risk, inconvenience and distraction of
continued litigation and to fully and finally resolve the matter.
SEC
Investigation
The
Company is the subject of an SEC investigation dating to October
2004. The investigation relates to the Company’s historical stock
option granting practices and related matters. In March and April
2005, the SEC issued subpoenas to a current director and to former officers and
directors of the Company. The SEC has taken testimony from one
current director, at least three former directors and at least one of the
Company’s former employees, as well as from third parties, including the
Company’s former independent registered public accounting firm. The
SEC has also issued subpoenas to at least two current and former directors from
whom it has not asked for testimony. The Company provided more than
800,000 pages of documents to the SEC in relation to this investigation during
the period from January 2006 to April 2007 and believes that it has completed
producing responsive documents. The Company’s last communication with
the SEC regarding this investigation was in June 2007. This matter is
still pending as of September 30, 2009.
Grand
Jury Subpoena
In May
2006, the Company received a grand jury subpoena from the U.S. Attorney for the
Southern District of New York. The subpoena sought documents relating
to the Company’s granting of stock options. With the agreement of the
Assistant U.S. Attorney handling the case, the Company has responded to the
subpoena by producing the documents it produced to the staff of the Division of
Enforcement of the SEC. The U.S. Attorney has also conducted
interviews with at least one current employee and two former employees (one of
whom is a former officer) and with at least one employee of the Company’s former
independent registered public accounting firm. The Company’s last
communication with the U.S. Attorney regarding this investigation was in July
2006. This matter was still pending as of September 30,
2009.
Related
Tax Matters
Subsequent
to the sale of NYFIX Overseas, Inc. (“NYFIX Overseas”) in August 2006, GL Trade
S.A. (“GL”) forwarded correspondence from the Inland Revenue relating to NYFIX
Overseas’ potential liability for payroll tax withholdings on prior option
exercises by certain former employees.
Page
16
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
As a
result of indemnification provisions agreed to by the Company in connection with
its sale of NYFIX Overseas to GL, the Company determined that it has exposure
due to the fact that former management did not properly withhold employee income
and related payroll taxes related to historical stock option
activity. As a result, the Company has recorded a liability of $1.8
million related to stock option exercises under Pay As You Earn, or PAYE, and
National Insurance Contribution provisions. The Company’s ongoing
indemnity obligation to GL, however, relates solely to those representations and
warranties covering tax matters and employee benefits and terminates upon
expiration of any applicable statutory period of limitation. The
Company’s maximum liability under this ongoing indemnity obligation is $4.5
million.
Based
upon the current information available and the liabilities recognized, the
Company believes the resolution of this tax matter will not have a material
adverse effect on its consolidated financial condition or results of
operations.
NYFIX
Millennium SEC Inquiry
The
Company is the subject of a second SEC investigation dating to October
2004. The investigation relates to the restatement of the Company’s
1999 through 2002 consolidated financial statements filed in May 2004 and
questions the Company’s accounting for the losses incurred by NYFIX
Millennium. In March 2006, the Company announced that the SEC
Enforcement Staff had advised that it was recommending that the SEC close its
inquiry into this matter without any action being taken against the Company or
any individual. The Staff’s recommendation is subject to a formal
approval process within the SEC. Such formal approval is still
pending as of September 30, 2009.
Other
During
the normal course of business, the Company becomes involved in various routine
legal proceedings. The Company believes that it is not presently a
party to any material litigation other than as described above, the outcome of
which could reasonably be expected to have a material adverse effect on its
consolidated financial statements.
During
the three and nine months ended September 30, 2008, the Company incurred costs
of $0.2 million and $0.4 million, respectively, relating to the stock option
investigation and subpoenas, the grand jury subpoena, related shareholder
derivative litigation that has been settled and the pursuit of insurance
recoveries. These costs included outside counsel and forensic
accountants. These costs do not include any portion of time that the
Company’s employees dedicated to these matters. For the nine months
ended September 30, 2009, the Company recorded a net benefit related to these
matters of $0.6 million, reflecting the receipt of insurance proceeds of $0.7
million for claims submitted under the Company’s prior Director and Officers
insurance policies to recover these costs, partially offset by additional costs
of $0.1 million.
With
respect to the SEC investigation of stock option grants and the grand jury
subpoena, the Company could be subject to penalties, fines or regulatory
sanctions or claims by current and former officers, directors or employees for
indemnification of costs or losses they may incur and such amounts, individually
or collectively, could have a material impact on the Company’s financial
condition. In addition, other actions may be brought against the
Company related to the matters described above.
12.
Stockholders’ Equity
Preferred
Stock
The
Company is authorized to issue 5 million shares of preferred
stock. In connection with the private placement of convertible
preferred stock discussed below, 1.5 million shares were designated as Series B
Voting Convertible Preferred Stock and 0.5 million as Series C Non-Voting
Convertible Preferred Stock.
At September 30, 2009 and December 31,
2008, the Company had outstanding 1.5 million shares of Series B Preferred
Stock. Dividends on the Series B Preferred Stock are payable
semiannually in shares of the Company’s common stock. The number of
shares issuable in payment of dividends is determined at an annual rate of 7% of
the $75 million purchase price (or $50 per share), divided by the conversion
price in effect (currently $5.00). Dividends on the Series B
Preferred Stock are cumulative and all accumulated but unpaid dividends on the
Series B Preferred Stock must be paid before any cash dividends may be paid to
holders of common stock.
The next
dividend on the Series B Preferred Stock is scheduled to be paid December 31,
2009. An estimate of the impact of the unpaid preferred dividends
since July 1, 2009 of $0.4 million has been included in the condensed
consolidated statement of operations for the three and nine months ended
September 30, 2009, based upon the closing price of the Company’s common stock
of $1.65 at September 30, 2009. Pursuant to a letter agreement
between Warburg Pincus Private Equity IX, L.P., NYSE Technologies and the
Company, upon the completion of the merger with NYSE Technologies (see Note 2),
the consideration paid for the Series B Preferred Stock will include $0.2
million for unpaid dividends since July 1, 2009.
Page
17
Notes
to Condensed Consolidated Financial Statements – continued
(Unaudited)
Common
Stock and Treasury Stock
At
December 31, 2008, the Company had outstanding 38,587,809 shares of common
stock, with 923,108 shares held in treasury.
During
the nine months ended September 30, 2009, restricted stock units totaling
213,948 shares vested and were settled in shares.
On June
15, 2009, the Board of Directors declared a dividend, payable June 30, 2009, to
holders of Series B Preferred Stock in payment of dividends accumulated from
January 1, 2009 through June 30, 2009; as a result, the Company issued 525,000
shares of common stock, with a fair value of approximately $457,000 based on the
market price of its common stock on the declaration date.
As a
result of the foregoing activity, at September 30, 2009, the Company had
outstanding 39,326,757 shares of common stock, with 923,108 held in
treasury.
13.
Supplemental Cash Flow Information
Information
about other cash flow activities during the nine months ended September 30, 2009
and 2008 follows:
Nine Months Ended September 30,
|
||||||||
(in
thousands)
|
2009
|
2008
|
||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 729 | $ | 547 | ||||
Cash
paid for income taxes
|
$ | 589 | $ | 438 | ||||
Supplemental
schedule of noncash investing and financing information:
|
||||||||
Capital
lease obligations incurred for the purchase of property and equipment and
prepaid maintenance
|
$ | 421 | $ | 2,522 | ||||
Vendor
financing on the purchase of property and equipment and prepaid
maintenance
|
$ | - | $ | 297 | ||||
Common
stock issued for preferred stock dividends
|
$ | 457 | $ | 4,410 | ||||
Common
stock issued from treasury pursuant to employment
agreement
|
$ | - | $ | 300 |
Page
18
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read together with the accompanying Condensed
Consolidated Financial Statements and notes thereto.
Overview
We are a
pioneer in electronic trading solutions. The NYFIX Marketplace is a
global community of trading counterparties utilizing innovative services that
optimize the business of trading, including trade messaging services, trade
messaging software and trading workstations. NYFIX Millennium provides the
NYFIX Marketplace with enhanced methods of accessing liquidity. We
also provide value-added informational and analytic services and tools for
measuring execution quality. As a trusted business partner and
service provider to investment managers, mutual fund, pension fund and hedge
fund managers (the “Buy-Side”) and brokerage firms and banks (the “Sell-Side”),
NYFIX enables low touch, low impact market access and transaction
processing.
We
operate businesses that design, produce and sell technology-based products and
services to professional financial services organizations that are engaged in
trading activities including traditional asset management (including the trading
of those assets), proprietary trading, and/or the handling of client orders in
the U.S. and international securities markets.
Many of
our products and services utilize the FIX Protocol which is a messaging standard
developed specifically for real-time electronic exchange of securities trading
information.
We
believe our innovative NYFIX products and services deliver value-added
improvements in speed, quality of execution and cost efficiency by automating
both the work flows at the user work station level and the interactive process
of transmitting and executing orders between the Buy-Side and the Sell-Side, and
through exchanges (e.g., NYSE, NYSE Amex, NASDAQ and other exchanges), the
over-the-counter market (“OTC”), alternate trading systems (“ATSs”) and
electronic communication networks (“ECNs”).
Sources
of Revenue
Our
revenues consist of subscription and maintenance fees, transaction fees, and
product sales and services revenues. As a percentage of our total
revenues during the nine months ended September 30, 2009, subscription and
maintenance revenues accounted for 70%, transaction revenue accounted for 28%,
and product sales and services revenue accounted for 2%.
Our
subscription and maintenance revenues principally consist of revenues from
contracts that provide for the use of our systems and our messaging channels,
together with managed services. Subscription and maintenance revenue
rates are fixed based on a contractual period of time. Additional
services, provided under schedules, or addenda to the contracts, have provisions
similar to the original contract. Under the terms of the subscription
contracts and addenda, clients are typically invoiced a flat periodic charge
after initial installation and acceptance. Subscription and
maintenance also includes maintenance contracts for software under separate,
renewable maintenance contracts. Software related maintenance
contracts are generally for a term of one year. Revenue related to
these contracts and addenda is recognized over the term of the contract,
addendum, or service period, on a straight-line basis. We include
within our subscription and maintenance revenue amounts we charge for
connectivity to the NYFIX Marketplace Platform, including telecommunications,
installation and maintenance of routers, network management software, support
staff, and other costs related to the management of connectivity. The
connectivity charges are recognized as the services are provided.
Our
subscription and maintenance revenues are not directly affected by trading
volumes; however, trading volumes do affect the revenues of our clients and this
could affect their future purchases of our technology and
services. Pricing pressures due to competition, failure to maintain
revenues with existing clients and to sign agreements with new clients because
of reductions in their technology spending, consolidation of brokerages and
hedge fund closures could affect our revenues and profitability. Our
costs associated with supporting the subscription and maintenance agreements are
generally fixed and thus a loss of revenue would disproportionately impact
profitability.
Transaction
revenue primarily consists of per-share commissions charged to clients who send
and receive a match and execution in our NYFIX Millennium ATS and clients to
whom we provide execution and smart order routing technology, gateways to access
markets and algorithmic trading ability in: (i) their own name, (ii) a
third-party name, or (iii) our name. Revenue for these services is
generally invoiced monthly in arrears or is obtained through the clearing
process within three days of the trade date, and is recognized on a trade date
basis, in the period in which it is earned. Transaction revenue also
includes the net interest spread on our matched book of securities
borrowed/loaned.
Page
19
Because
commission revenues are earned on a per-transaction basis, such revenues
fluctuate from period to period depending on (i) the volume of securities
traded through our services in the U.S. and the U.K. and (ii) our
commission rates. Commission revenues are primarily generated by
orders delivered to us from direct computer-to-computer links driven by our
clients’ routing technology, our FIXTrader order management system and other
vendors’ products, as well as third-party order routing networks and phone
orders from our customers.
We
believe that the factors that most influence our transaction volumes are the
following:
·
|
macro
trends in the global equities markets that affect overall institutional
equity trading activity;
|
·
|
competitive
pressure, including pricing, created by a proliferation of electronic
execution competitors;
|
·
|
potential
changes in the U.S. market
structure;
|
·
|
new
regulatory requirements or a failure to comply with existing regulatory
requirements;
|
·
|
service
quality and availability;
|
·
|
consolidation
of broker-dealers or a decline in the number of hedge funds;
and
|
·
|
increased
client demands for bandwidth and speed, requiring reinvestment in hardware
and software.
|
Product
sales and services are primarily comprised of FIX software licenses and
professional services fees. This revenue is recognized when the
software is delivered and accepted by the client and when other contractual
obligations, including installation, if applicable, have been satisfied and
collection of the resulting receivable is reasonably assured.
Cost
of Revenue
Cost of
revenue includes the following:
|
·
|
Data
center operating costs, including salaries, related to equipment,
infrastructure and software supporting operations and the NYFIX
Marketplace;
|
|
·
|
Managed
connectivity costs, including telecommunication and other costs incurred
on behalf of clients, and costs to maintain the data centers, including
depreciation and amortization of assets utilized by the data centers,
which are recognized as either a cost of subscription and maintenance or
cost of transaction revenue, as
appropriate;
|
|
·
|
Fees
paid to third-party technology providers to access and provide services to
their client base;
|
|
·
|
Amortization
expense of acquired intangible assets and capitalized software costs
relating to the applicable revenue
category;
|
|
·
|
Developer
and quality assurance personnel labor for client and product support of
software products;
|
|
·
|
The
cost of leased subscription and service bureau equipment, which is
depreciated over the estimated useful life of the equipment;
and
|
|
·
|
Execution
and clearing costs to access various markets and exchanges and to process
and settle transactions.
|
Recent
Developments
Agreement
and Plan of Merger
On August
26, 2009, we entered into an agreement and plan of merger (the “Merger
Agreement”) with NYSE Technologies, Inc. (“NYSE Technologies”), a wholly-owned
subsidiary of NYSE Euronext, which was approved by our stockholders at a special
meeting of stockholders on November 3, 2009. The completion of the merger is
subject to the satisfaction of certain customary conditions. We
currently expect the transaction to close during the fourth quarter of
2009. Following completion of the merger, NYFIX will become a
wholly-owned subsidiary of NYSE Technologies, and our common stock will no
longer be quoted on Nasdaq or publicly held.
Pursuant
to the terms of the Merger Agreement, upon completion of the merger the
holders of our common stock will be entitled to receive $1.675 per common share
in cash, without interest, and holders of the Series B Preferred Stock will
receive $50.134 per preferred share in cash, without interest. The
total value of the all cash deal, including payments for employee restricted
stock units and the value of in-the-money option awards, is approximately $144
million.
Page
20
The
Merger Agreement was the result of a process that we launched in December 2008.
In connection with this process, we incurred strategic initiative costs
consisting of advisory fees, legal fees, accounting and tax advisory fees, as
well as meeting fees for a special committee of our Board of Directors of $3.3
million and $3.8 million for the three and nine months ended September 30, 2009,
respectively. These costs do not include any amounts that are contingent on the
consummation of the proposed merger transaction.
For
additional background and information about the Merger Agreement and the
proposed merger, please see our Definitive Proxy Statement on Schedule 14A filed
with the Securities and Exchange Commission on September 28, 2009.
Shareholder
Litigation
Following
the announcement of the Merger Agreement on August 27, 2009, several class
action lawsuits purporting to challenge the merger were filed. On October 23,
2009, we entered into a memorandum of understanding to settle these
lawsuits. For further information, please see Part II. Item 1, “Legal
Proceedings” below.
Euro
Millennium
Due to
the growth in matched volumes at the end of 2008, we determined that effective
January 1, 2009, Euro Millennium is no longer in its introductory
phase. Based on this determination, the results for Euro Millennium
are being presented as part of the Transaction Services Division with specific
costs included in transaction cost of revenue and the various SG&A
categories.
Page
21
Results
of Operations for the Three and Nine Month Periods Ended September 30, 2009 and
2008
The
following table presents our consolidated results of operations for the periods
indicated. These consolidated results of operations are not
necessarily indicative of the consolidated results of operations that will be
achieved in any future period.
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||
(in thousands, except percentages)
|
2009
|
% of
revenue
|
2008
|
% of
revenue
|
2009
|
% of
revenue
|
2008
|
% of
revenue
|
||||||||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||||||||||
Subscription
and maintenance
|
$ | 18,725 |
72%
|
$ | 17,747 |
61%
|
$ | 54,893 |
70%
|
$ | 52,772 |
59%
|
||||||||||||||||||||
Transaction
|
6,903 |
27%
|
10,842 |
37%
|
22,108 |
28%
|
34,941 |
39%
|
||||||||||||||||||||||||
Product
sales and services
|
280 |
1%
|
586 |
2%
|
|
1,382 |
2%
|
1,491 |
2%
|
|||||||||||||||||||||||
Total
revenue
|
25,908 |
100%
|
29,175 |
100%
|
78,383 |
100%
|
89,204 |
100%
|
||||||||||||||||||||||||
Cost
of revenue:
|
||||||||||||||||||||||||||||||||
Subscription
and maintenance (1)
|
6,916 |
27%
|
7,985 |
27%
|
21,389 |
27%
|
23,457 |
26%
|
||||||||||||||||||||||||
Transaction
(1)
|
7,739 |
30%
|
5,595 |
19%
|
21,819 |
28%
|
17,649 |
20%
|
||||||||||||||||||||||||
Product
sales and services (1)
|
22 |
0%
|
86 |
0%
|
79 |
0%
|
254 |
0%
|
||||||||||||||||||||||||
Total
cost of revenue
|
14,677 |
57%
|
13,666 |
47%
|
43,287 |
55%
|
41,360 |
46%
|
||||||||||||||||||||||||
Gross
profit
|
11,231 |
43%
|
15,509 |
53%
|
35,096 |
45%
|
47,844 |
54%
|
||||||||||||||||||||||||
Operating
expense:
|
||||||||||||||||||||||||||||||||
Selling,
general and administrative (1)
|
13,402 |
52%
|
18,251 |
63%
|
41,659 |
53%
|
58,871 |
66%
|
||||||||||||||||||||||||
Strategic
initiative costs
|
3,317 |
13%
|
- |
0%
|
|
3,754 |
5%
|
- |
0%
|
|||||||||||||||||||||||
Depreciation
and amortization
|
391 |
2%
|
471 |
2%
|
|
1,188 |
2%
|
1,412 |
|
2%
|
||||||||||||||||||||||
Restructuring
charge
|
- |
0%
|
- |
|
0%
|
|
748 |
1%
|
216 |
0%
|
||||||||||||||||||||||
Integration
charges
|
- |
0%
|
139 |
0%
|
|
- |
0%
|
735 |
1%
|
|||||||||||||||||||||||
SEC
investigation, restatement and related expenses
|
- |
0%
|
170 |
1%
|
|
(634 | ) |
-1%
|
438 |
0%
|
||||||||||||||||||||||
Loss
from operations
|
(5,879 | ) |
-23%
|
(3,522 | ) |
-12%
|
|
(11,619 | ) |
-15%
|
(13,828 | ) |
-16%
|
|||||||||||||||||||
Interest
expense
|
(197 | ) |
-1%
|
(123 | ) |
0%
|
|
(623 | ) |
-1%
|
(489 | ) |
-1%
|
|||||||||||||||||||
Investment
income
|
15 |
0%
|
251 |
1%
|
|
143 |
0%
|
1,027 |
|
1%
|
||||||||||||||||||||||
Loss
before income tax provision
|
(6,061 | ) |
-23%
|
(3,394 | ) |
-12%
|
(12,099 | ) |
-15%
|
(13,290 | ) |
-15%
|
|
|||||||||||||||||||
Income
tax provision
|
- |
0%
|
128 |
0%
|
|
- |
0%
|
383 |
0%
|
|||||||||||||||||||||||
Net
loss
|
(6,061 | ) |
-23%
|
(3,522 | ) |
-12%
|
(12,099 | ) |
-15%
|
(13,673 | ) |
-15%
|
||||||||||||||||||||
Accumulated
preferred dividends
|
(433 | ) |
-2%
|
(827 | ) |
-3%
|
(890 | ) |
-1%
|
(2,796 | ) |
-3%
|
||||||||||||||||||||
Loss
applicable to common stockholders
|
$ | (6,494 | ) |
-25%
|
$ | (4,349 | ) |
-15%
|
$ | (12,989 | ) |
-17%
|
$ | (16,469 | ) |
-18%
|
||||||||||||||||
|
||||||||||||||||||||||||||||||||
Percentage
sub-totals may not add due to rounding.
|
||||||||||||||||||||||||||||||||
(1)
Stock-based compensation included in the respective line items above
follows:
|
||||||||||||||||||||||||||||||||
Cost
of revenue:
|
||||||||||||||||||||||||||||||||
Subscription
and maintenance
|
$ | 101 | $ | 56 | $ | 285 | $ | 278 | ||||||||||||||||||||||||
Transaction
|
61 | 31 | 172 | 122 | ||||||||||||||||||||||||||||
Product
sales and services
|
2 | 1 | 6 | 5 | ||||||||||||||||||||||||||||
Selling,
general and administrative
|
1,437 | 1,530 | 4,073 | 6,001 | ||||||||||||||||||||||||||||
$ | 1,601 | $ | 1,618 | $ | 4,536 | $ | 6,406 |
Page
22
Revenue
The
following table presents our components of revenue:
Three Months Ended
September 30,
|
Increase (Decrease)
|
Nine Months Ended
September 30,
|
Increase (Decrease)
|
|||||||||||||||||||||||||||||
(in thousands, except percentages)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Subscription
and maintenance
|
$ | 18,725 | $ | 17,747 | $ | 978 |
6%
|
$ | 54,893 | $ | 52,772 | $ | 2,121 |
4%
|
||||||||||||||||||
Transaction
|
6,903 | 10,842 | (3,939 | ) |
-36%
|
22,108 | 34,941 | (12,833 | ) |
-37%
|
||||||||||||||||||||||
Product
sales and services
|
280 | 586 | (306 | ) |
-52%
|
1,382 | 1,491 | (109 | ) |
-7%
|
||||||||||||||||||||||
Total
revenue
|
$ | 25,908 | $ | 29,175 | $ | (3,267 | ) |
-11%
|
$ | 78,383 | $ | 89,204 | $ | (10,821 | ) |
-12%
|
Subscription and
Maintenance
The
increase in subscription and maintenance revenue for the three months ended
September 30, 2009, as compared to the three months ended September 30, 2008,
reflected the offsetting effects of an increase in subscriptions (and related
managed services) of messaging channels offered by our FIX Division, and a
decrease in subscriptions (and related managed services) of our OMS Division
products. The growth in messaging channels offered by our FIX
Division was attributable to an increase in the number of Buy-Side to Sell-Side
messaging channels, primarily for order routing, as we continued our efforts to
increase the level of business with Buy-Side institutions. As of
September 30, 2009, we had 10,114 billable order routing channels in service, an
increase of 6% over the 9,569 billable order routing channels in service at
September 30, 2008. The decline in subscriptions (and related managed
services) of our OMS Division products of $0.2 million, to $0.6 million for the
three months ended September 30, 2009 compared to $0.8 million during the three
months ended September 30, 2008, was due primarily to cancellations from certain
clients. Subscription
and maintenance revenue related to software licenses increased $0.2 million to
$1.7 million for the three months ended September 30, 2009 as compared to $1.5
million for the same period in 2008.
The
increase in subscription and maintenance revenue for the nine months ended
September 30, 2009, as compared to the nine months ended September 30, 2008,
reflected an increase in subscriptions (and related managed services) of
messaging channels offered by our FIX Division and the impact of the FIXCITY
acquisition, partially offset by a decrease in subscriptions (and related
managed services) of our OMS Division products. The growth in
messaging channels offered by our FIX Division was attributable to an increase
in the number of Buy-Side to Sell-Side messaging channels, primarily for order
routing, as we continued our efforts to increase the level of business with
Buy-Side institutions. The decline in subscriptions (and related
managed services) of our OMS Division products of $1.7 million, to $2.2 million
for the nine months ended September 30, 2009 compared to $3.9 million during the
nine months ended September 30, 2008, was due primarily to the discontinuation
of our Fusion OMS products, as well as cancellations from other
clients. Subscription and maintenance revenue related to software
licenses increased $0.6 million to $5.0 million for the nine months ended
September 30, 2009 as compared to $4.4 million for the same period in
2008.
Transaction
The
decrease in transaction revenue for the three months ended September 30, 2009
was attributable to a decrease in commissions on trade
executions. Commissions decreased $3.9 million to $6.7 million during
the three months ended September 30, 2009 compared to $10.6 million during three
months ended September 30, 2008 due primarily to a $2.9 million and a $1.0
million decrease in commissions from Sell-Side and Buy-Side clients,
respectively. The decrease from Sell-Side clients was due to a
decrease in matched volumes in NYFIX Millennium and a decrease in direct market
access services, offset in part by an increase in the use of the NIX algorithmic
and smart routing trading products and $0.8 million of revenue from Euro
Millennium, which included $0.6 million of settlement fee revenue. We
expect this settlement fee revenue to decline in the fourth quarter of 2009 now
that we have migrated certain clients to the SIX X-Clear central counterparty
(CCP) clearing solution. The average daily matched volume in NYFIX
Millennium during the three months ended September 30, 2009 was 31.4 million
shares, a 40% decrease over the average of 52.6 million shares matched during
the three months ended September 30, 2008, due primarily to a
market-wide decrease in traditional Buy-Side institutional trading volumes that
access Millennium through Sell-Side algorithms and due to the increase in
competition from the launch of several new dark pools. This increased
competition is also expected to put additional pressure on our commission
rates. The average daily matched value in Euro Millennium was €61.4
million ($87.7 million). The additional decline in
revenue from NYSE DOT direct market access services (including associated
pass-through charges) of $0.4 million was primarily attributable to the decline
in listed order flow being directed to the NYSE DOT execution system as a result
of increased competition from other venues such as Direct Edge, NASDAQ and
BATS. The increase in commission from NIX algorithmic and smart
routing trading products was due to the integration of our products into other
third party order management systems giving us the ability to offer our products
to a broader client base.
Page
23
The
decrease from Buy-Side clients was due in part to the disintermediation of our
direct Buy-Side client base by third-party algorithmic trading solution
providers who offer enhanced technology solutions for certain clients and to a
market-wide decrease in traditional Buy-Side institutional trading
volumes. Our securities lending business generated net interest
spread on its matched book stock borrow/stock loan portfolio of $0.2 million
during the three months ended September 30, 2009 compared to $0.3 million during
the three months ended September 30, 2008.
The
decrease in transaction revenue for the nine months ended September 30, 2009 was
attributable to a decrease in commissions on trade
executions. Commissions decreased $12.7 million to $21.5 million
during the nine months ended September 30, 2009 compared to $34.2 million during
nine months ended September 30, 2008 due primarily to a $9.7 million and a $3.0
million decrease in commissions from Sell-Side and Buy-Side clients,
respectively. The decrease from Sell-Side clients was due to a
decrease in matched volumes in NYFIX Millennium, a decrease in the use of the
NIX smart routing trading products and a decrease in direct market access
service, offset in part by an increase in the use of the NIX algorithmic trading
products and $2.6 million of revenue from Euro Millennium, which included $2.0
million of settlement fee revenue. The decline in revenue from our
smart routing trading products and from OTC direct market access was primarily
attributable to lower volumes from former Fusion OMS
clients. Transaction revenue from former Fusion OMS clients decreased
by $2.3 million during the nine months ended September 30, 2009 as compared to
the nine months ended September 30, 2008. The average daily matched
volume in NYFIX Millennium during the nine months ended September 30, 2009 was
32.5 million shares, a 35% decrease over the average of 50.1 million shares
matched during the nine months ended September 30, 2008, due primarily to a
market-wide decrease in traditional Buy-Side institutional trading volumes that
access Millennium through Sell-Side algorithms and due to the increase in
competition from the launch of several new dark pools. The additional
decline in revenue from NYSE DOT direct market access services (including
associated pass-through charges) of $1.5 million was primarily attributable to
our decision to improve our margins by eliminating discounts for these services
below cost for clients who do not generate valuable pass-through matches in
NYFIX Millennium and the decline in listed order flow being directed to the NYSE
DOT execution system as a result of increased competition from other venues such
as Direct Edge, NASDAQ and BATS. The increase in commission from the
NIX algorithmic products was due to the integration of our products into other
third-party order management systems, giving us the ability to offer our
products to a broader client base.
The
decrease from Buy-Side clients was due in part to the disintermediation of our
direct Buy-Side client base by third-party algorithmic trading solution
providers who offer enhanced technology solutions for certain clients and to a
market-wide decrease in traditional Buy-Side institutional trading
volumes. Our securities lending business generated net interest
spread on its matched book stock borrow/stock loan portfolio of $0.6 million
during the nine months ended September 30, 2009 and compared to $0.8 million
during the nine months ended September 30, 2008.
Product
Sales and Services
The
decrease in product sales and services for the three months ended September 30,
2009 compared to the same period in 2008 was primarily due to decreases in
software license fee and professional services revenues. Software
license fees for our FIX software products decreased $0.2 million to $0.2
million during the three months ended September 30, 2009 compared to $0.4
million for the same period in 2008. Professional services revenue
decreased $0.1 million to $0.1 million during the three months ended September
30, 2009 as compared to $0.2 million for the same period in 2008.
The
decrease in product sales and services for the nine months ended September 30,
2009 compared to the same period in 2008 was primarily due to a decrease in
professional services revenue, partly offset by an increase in software license
fee revenue. Professional services revenue decreased $0.3 million to
$0.3 million during the nine months ended September 30, 2009 as compared to $0.6
million for the same period in 2008. Software license fees for our
FIX software products increased $0.2 million to $1.1 million during the nine
months ended September 30, 2009 compared to $0.9 million for the same period in
2008.
Page
24
Costs
and Expenses
Cost
of Revenue
The
following table presents our cost of revenue:
Three Months Ended
September 30,
|
Increase (Decrease)
|
Nine Months Ended
September 30,
|
Increase
(Decrease)
|
|||||||||||||||||||||||||||||
(in thousands, except percentages)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Subscription
and maintenance
|
$ | 6,916 | $ | 7,985 | $ | (1,069 | ) |
-13%
|
$ | 21,389 | $ | 23,457 | $ | (2,068 | ) |
-9%
|
||||||||||||||||
Transaction
|
7,739 | 5,595 | 2,144 |
38%
|
21,819 | 17,649 | 4,170 |
24%
|
||||||||||||||||||||||||
Product
sales and services
|
22 | 86 | (64 | ) |
-74%
|
79 | 254 | (175 | ) |
-69%
|
||||||||||||||||||||||
Total
cost of revenue
|
$ | 14,677 | $ | 13,666 | $ | 1,011 |
7%
|
$ | 43,287 | $ | 41,360 | $ | 1,927 |
5%
|
Subscription
and Maintenance
The
decrease in subscription and maintenance cost of revenue for the three months
ended September 30, 2009 compared to the same period in 2008 was primarily
attributable to a decrease in telecommunication costs of $0.7 million and a
decrease in recurring fees paid to third-party order management system providers
for messaging channels with their clients of $0.6 million. The
decrease in telecommunications costs was primarily attributable to the
consolidation to two major third-party providers for client
circuits. These decreases were slightly offset by an increase in
allocated labor costs of $0.3 million. As a percentage of related
revenue, these costs decreased to 37% for the three months ended September 30,
2009 as compared to 45% for the three months ended September 30,
2008.
The
decrease in subscription and maintenance cost of revenue for the nine months
ended September 30, 2009 compared to the same period in 2008 was primarily
attributable to a decrease in telecommunication costs of $2.0 million, a
decrease in recurring fees paid to third-party order management system providers
for messaging channels with their clients of $0.6 million and lower market data
fees of $0.4 million. The decrease in telecommunications costs was
primarily attributable to the consolidation to two major third-party providers
for client circuits. These decreases were partially offset by an
increase in allocated labor and datacenter costs of $0.7 million and increases
in various other expenses. As a percentage of related revenue, these
costs decreased to 39% for the nine months ended September 30, 2009 as compared
to 44% for the nine months ended September 30, 2008.
Transaction
The
increase in transaction cost of revenue for the three months ended September 30,
2009 was primarily attributable to the inclusion of $2.1 million of Euro
Millennium cost of revenue items, an increase in depreciation and amortization
costs in the U.S. of $0.3 million associated with the release of Millennium HPX,
an increase in market data costs of $0.2 million and an increase in hardware and
software maintenance costs of $0.1 million, partially offset by a decrease in
allocated data center costs of $0.3 million, a decrease in execution and
clearing costs in the U.S. of $0.1 million and decrease in allocated labor costs
in the U.S. of $0.1 million. Included in the $2.1 million of Euro
Millennium cost of revenue items was $1.0 million of clearing
costs. We expect Euro Millennium clearing costs to decline in the
fourth quarter of 2009 now that we have migrated certain clients to the SIX
X-Clear CCP clearing solution. As a percentage of related revenue,
these costs increased to 112% for the three months ended September 30, 2009, as
compared to 52% for the three months ended September 30, 2008.
The
increase in transaction cost of revenue for the nine months ended September 30,
2009 was primarily attributable to the inclusion of $5.6 million of Euro
Millennium cost of revenue items, an increase in depreciation costs and
allocated labor costs in the U.S. of $0.6 million and $0.2 million,
respectively, associated with the release of Millennium HPX, an increase in
market data costs of $0.4 million, an increase in communication costs of $0.1
million, and an increase in hardware and software maintenance costs of $0.2
million. These increases were partially offset by a decrease in
execution and clearing costs in the U.S. of $2.2 million and a decrease in
allocated data center costs of $0.7 million. Included in the $5.6
million of Euro Millennium cost of revenue items was $2.5 million of clearing
costs. During the nine months ended September 30, 2008, transaction
cost of revenue was reduced by a clearing fee rebate received of $0.5
million. As a percentage of related revenue, these costs increased to
99% for the nine months ended September 30, 2009, as compared to 51% for the
nine months ended September 30, 2008.
Page
25
Product
Sales and Services
The $0.1
million and $0.2 million decrease in product sales and services cost of revenue
for the three and nine months ended September 30, 2009, respectively compared to
the same periods in 2008 was attributable to lower amortization of capitalized
software costs.
Selling,
General and Administrative Expenses (SG&A)
The
following table presents the components of our selling, general and
administrative expense:
Three Months Ended
September 30,
|
(Decrease)
|
Nine Months Ended
September 30,
|
Increase
(Decrease)
|
|||||||||||||||||||||||||||||
(in thousands, except percentages)
|
2009
|
2008
|
$
|
%
|
2009
|
2008
|
$
|
%
|
||||||||||||||||||||||||
Compensation
and related
|
$ | 8,121 | $ | 9,048 | $ | (927 | ) |
-10%
|
$ | 24,236 | $ | 28,292 | $ | (4,056 | ) |
-14%
|
||||||||||||||||
Stock-based
compensation
|
1,438 | 1,538 | (100 | ) |
-7%
|
4,073 | 6,009 | (1,936 | ) |
-32%
|
||||||||||||||||||||||
Professional
fees (including consulting)
|
1,224 | 2,005 | (781 | ) |
-39%
|
4,014 | 6,088 | (2,074 | ) |
-34%
|
||||||||||||||||||||||
Occupancy
and related
|
942 | 949 | (7 | ) |
-1%
|
2,922 | 3,280 | (358 | ) |
-11%
|
||||||||||||||||||||||
Marketing,
travel and entertainment
|
413 | 1,063 | (650 | ) |
-61%
|
1,882 | 3,514 | (1,632 | ) |
-46%
|
||||||||||||||||||||||
General
and other
|
1,264 | 1,633 | (369 | ) |
-23%
|
4,532 | 4,498 | 34 |
1%
|
|||||||||||||||||||||||
Transitional
rebuilding and remediation
|
- | - | - |
-
|
- | 212 | (212 | ) |
-100%
|
|||||||||||||||||||||||
Transitional
employment costs
|
- | - | - |
-
|
- | 243 | (243 | ) |
-100%
|
|||||||||||||||||||||||
Euro
Millennium costs
|
- | 2,015 | (2,015 | ) |
-100%
|
- | 6,735 | (6,735 | ) |
-100%
|
||||||||||||||||||||||
Total
SG&A
|
$ | 13,402 | $ | 18,251 | $ | (4,849 | ) |
-27%
|
$ | 41,659 | $ | 58,871 | $ | (17,212 | ) |
-29%
|
||||||||||||||||
Percent
of total revenue
|
52 | % | 63 | % | 53 | % | 66 | % |
Compensation
and Related
The
decrease in compensation and related costs included in SG&A for the three
months ended September 30, 2009 compared to the same
period in 2008 was primarily due to cost savings related to staff
reductions of $0.4 million, lower incentive compensation expense of $0.4 million
as a result of lower revenue amounts, a $0.2 million reduction in employee
termination costs and various other decreases. These decreases were
partially offset by new compensation costs of $0.4 million related to the
inclusion of Euro Millennium costs in operations.
The
decrease in compensation and related costs included in SG&A for the nine
months ended September 30, 2009 compared to the same
period in 2008 was primarily due to cost savings related to staff
reductions of $3.0 million and the discontinuation of the Fusion OMS product of
$0.8 million. Other decreases relate to a decline in incentive
compensation expense of $1.4 million as a result of lower revenue amounts and a
$0.8 million reduction in employee termination costs. These decreases
were partially offset by new compensation costs of $1.4 million related to the
inclusion of Euro Millennium costs in operations, $0.1 million associated with
our FIXCITY subsidiary and various other increases.
Stock-based
Compensation
Stock-based compensation included in
SG&A was comparable during the three months ended September 30, 2009 and
2008. Stock-based compensation included in SG&A decreased during
the nine months ended September 30, 2009 compared to the same period in 2008
primarily due to the normalization of the vesting periods related to stock
options and restricted stock units. During the fourth quarter of 2007
significant share-based awards were granted following the adoption of the 2007
Omnibus Equity Compensation Plan. Under the plan, awards normally vest
over four years. However, the first vesting period for the initial awards
was approximately five months, resulting in greater than normal expense during
the fourth quarter of 2007 and first quarter of 2008. In addition,
stock-based compensation decreased as a result of staff reductions.
Professional
Fees (including consulting)
The
decrease in professional fees incurred for the three and nine months ended
September 30, 2009 compared to the same periods in 2008 was primarily
attributable to a decrease in consulting costs. Consulting costs
decreased $0.6 million and $2.3 million for the three and nine months ended
September 30, 2009, respectively, compared to the same periods in
2008. Legal and accounting fees decreased $0.2 million to $0.6
million for the three months ended September 30, 2009 as compared to $0.8
million for the same period of 2008. Legal and accounting fees increased $0.3
million to $1.9 million for the nine months ended September 30, 2009 as compared
to $1.6 million for the nine months ended September 30,
2008. The 2009 amounts included legal costs incurred in
connection with ensuring ongoing compliance of Euro Millennium with FSA
regulations and in supporting our Asian expansion efforts.
Page
26
Occupancy
and Related
Occupancy
and related costs were comparable at $0.9 million for the three months ended
September 30, 2009 and 2008. Occupancy and related costs decreased
$0.4 million to $2.9 million for the nine months ended September 30, 2009 as
compared to $3.3 million for the same period in 2008 as a result of the
consolidation of our office space in our New York headquarters and the closing
of an office in Connecticut, as well as a decrease in utility
costs.
Marketing,
Travel and Entertainment
The
decrease in marketing, travel and entertainment expenses for the three and nine
months ended September 30, 2009 compared to the same period in 2008 was
primarily due to a decrease in general corporate travel. Corporate
travel related expenses decreased $0.5 million to $0.2 million for the three
months ended September 30, 2009 compared to $0.7 million for the same period in
2008. Marketing costs decreased $0.2 million to $0.2 million for the
three months ended September 30, 2009 compared to $0.4 million for the same
period in 2008. For the nine months ended September 30, 2009,
corporate travel related expenses decreased $1.5 million to $0.9 million as
compared to the same period in 2008, while marketing costs were comparable at
$1.0 million.
General
and Other
The
decrease in general and other expenses for the three months ended September 30,
2009 was primarily attributable to a decrease in foreign currency transaction
losses, a decrease in employees recruiting fees of $0.1 million and a $0.1
million decrease in software maintenance for our internal computer
systems. Foreign currency transactions losses decreased $0.2 million
to a $0.1 million gain as compared to a $0.1 million loss in the same period of
2008.
General
and other expenses was comparable for the nine months ended September 30, 2009
as a result of increases in foreign currency transaction losses, foreign tax
expense and bad debt expense related to our accounts receivable, offset by
decreases in recruiting, charitable contributions and corporate
insurance.
Euro Millennium
Costs
During
the three and nine months ended September 30, 2008, we incurred costs of $2.0
million and $6.7 million, respectively, related to Euro
Millennium. These costs include compensation and related costs,
consulting, marketing and travel related costs. Due to the growth in
matched volumes and revenues at the end of 2008, we determined that, effective
January 1, 2009, Euro Millennium was no longer in its introductory phase and we
now report the results of this initiative within the Transaction Services
Division, with specific costs included in transaction cost of revenue and the
various SG&A categories detailed above.
Other
Operating Expenses
Other
operating expenses consist of the following:
Three Months Ended
September 30,
|
Increase
(Decrease)
|
Nine Months Ended
September 30,
|
Increase
(Decrease)
|
|||||||||||||||||||||
(in thousands)
|
2009
|
2008
|
$
|
2009
|
2008
|
$
|
||||||||||||||||||
Strategic
initiative costs
|
$ | 3,317 | $ | - | $ | 3,317 | $ | 3,754 | $ | - | $ | 3,754 | ||||||||||||
Depreciation
and amortization
|
391 | 471 | (80 | ) | 1,188 | 1,412 | (224 | ) | ||||||||||||||||
Restructuring
charge
|
- | - | - | 748 | 216 | 532 | ||||||||||||||||||
Integration
charges
|
- | 139 | (139 | ) | - | 735 | (735 | ) | ||||||||||||||||
SEC
investigation, restatement and related expenses
|
- | 170 | (170 | ) | (634 | ) | 438 | (1,072 | ) |
Page
27
Strategic
Initiative Costs
The
Merger Agreement we entered into with NYSE Technologies in August 2009 was the
result of a process we launched in December 2008 to explore strategic
alternatives. In connection with this process, we incurred advisory fees, legal
fees, accounting and tax advisory fees, as well as meeting fees for a special
committee of our Board of Directors. These costs do not include any amounts that
are contingent on the consummation of the proposed merger
transaction.
Restructuring
Charge
The
restructuring charge for the nine months ended September 30, 2009 was a result
of the consolidation of office space in our New York
headquarters. This charge reflects the fair value of the remaining
rent payments for the office space we ceased using, net of expected sublease
income under a signed sublease agreement, plus real estate commissions, and
write-offs of property and equipment.
The
restructuring charge for the nine months ended September 30, 2008 reflects
employment costs of $0.7 million related to the discontinuance of our Fusion OMS
product, offset by a $0.5 million reversal of amounts previously recorded as
restructuring costs as a result of the termination of our lease and
corresponding sublease of office space previously occupied in Stamford,
Connecticut.
Depreciation
and Amortization
The
decrease in the portion of depreciation and amortization included in SG&A
for the three and nine months ended September 30, 2009 was due to an increase in
the amount of general overhead capital expenditures that have become fully
depreciated.
Integration
Charges
During
the three and nine months ended September 30, 2008, we incurred integration
charges related to the acquisition of FIXCITY in April 2008. These
costs included third-party consulting costs to integrate the acquired technology
platform and a $0.5 million non cash valuation adjustment in April 2008 to
capitalized software replaced by acquired technology.
SEC
Investigation, Restatement and Other Related Expenses
Since
2005, we have incurred costs relating to the stock option investigation and
subpoenas, a grand jury subpoena related to our stock option grants, related
shareholder derivative litigation which has been settled, related financial
restatements and expenses to resolve related matters, together with the NYFIX
Millennium SEC inquiry, related class action litigation and related financial
restatement. These costs include expenses for outside counsel,
contract attorneys and forensic accountants, other consultants and the cost of
re-auditing previously issued financial statements following the resignation of
our prior independent registered public accounting firm. These costs
do not include any portion of time that our employees have dedicated to these
matters.
In March
2009, we received $0.7 million reimbursement proceeds from one of our insurance
carriers under our previous Directors and Officers insurance policy for fees
incurred in defense of the SEC investigation into our historical stock option
activity, as well as related litigation. These proceeds were in
addition to the $10.1 million received in 2008. The reimbursement
proceeds are reflected as a reduction to SEC investigation, restatement and
other related expenses as the amount recovered was previously expensed in this
line item.
Page
28
Other
Income (Expense)
Other
income (expense) items are as follows:
Three Months Ended
September 30,
|
Increase
(Decrease)
|
Nine Months Ended
June 30,
|
Increase
(Decrease)
|
|||||||||||||||||||||
(in thousands)
|
2009
|
2008
|
$
|
2009
|
2008
|
$
|
||||||||||||||||||
Interest
expense
|
$ | (197 | ) | $ | (123 | ) | $ | 74 | $ | (623 | ) | $ | (489 | ) | $ | 134 | ||||||||
Investment
income
|
15 | 251 | (236 | ) | 143 | 1,027 | (884 | ) |
Interest
Expense
Interest
expense increased $0.1 million to $0.2 million and $0.6 million for the three
and nine months ended September 30, 2009, respectively, as a result of
increased capital lease obligations as compared to the same periods in
2008.
Investment
Income
The
decrease in investment income for the three and nine months ended September 30,
2009 compared to the same period in 2008 reflects lower average cash balances
invested and lower interest rates during the period.
Income
Tax Provision
The
income tax provisions for the three and nine months ended September 30, 2008
were solely attributable to the impact of deducting goodwill related to the
NYFIX Millennium acquisition in our tax filings prior to the impairment of this
asset in the fourth quarter of 2008. All other tax effects during the
three and nine months ended September 30, 2009 and 2008 have been netted out in
our deferred tax asset valuation reflecting our view that historical pre-tax
book income and historical income for tax purposes are not sufficient to support
a conclusion that the value of our net deferred tax assets are more likely than
not to be realized. Until we achieve and sustain an appropriate level
of profitability, we plan to maintain a valuation allowance on our net deferred
tax assets.
Liquidity
and Capital Resources
We derive
our liquidity and capital resources primarily from operations, issuances of
stock and from long-term borrowings. At September 30, 2009, we had
cash and cash equivalents of $50.2 million, a reduction from our balance at
December 31, 2008, principally due to the payment of accrued balances, including
compensation. We believe that resources available at September 30,
2009 will be sufficient to finance our current investing and operational needs,
as well as the net capital requirements of our broker-dealer subsidiaries for at
least the next twelve months, including with respect to repayment of our
convertible notes aggregating $10.0 million due on December 30,
2009. In light of current credit market conditions, however, there
can be no assurance that, should we need to obtain additional financing for any
reason, such financing will be available to us on commercially acceptable terms
or at all.
At
September 30, 2009, $35.5 million of our total cash and cash equivalents were
held in our U.S. and U.K. registered broker dealer subsidiaries.
As of
|
||||||||
September 30,
|
December 31,
|
|||||||
(in thousands)
|
2009
|
2008
|
||||||
Cash
and cash equivalents
|
$ | 50,204 | $ | 55,966 |
Nine Months Ended September 30,
|
||||||||
(in thousands)
|
2009
|
2008
|
||||||
Net
cash provided by (used in) operating activities
|
$ | 702 | $ | (1,154 | ) | |||
Net
cash used in investing activities
|
(5,428 | ) | (20,406 | ) | ||||
Net
cash used in financing activities
|
(1,207 | ) | (1,102 | ) | ||||
Effect
of exchange rate changes on cash
|
171 | (493 | ) | |||||
Net
decrease in cash and cash equivalents
|
$ | (5,762 | ) | $ | (23,155 | ) |
Page
29
Operating
Activities
The
following table sets forth our net loss adjusted for non-cash items, such as
depreciation, amortization, deferred taxes, and stock-based compensation; and
the effect on cash used in operating activities of changes in working capital
and other operating accounts between periods.
Nine Months Ended September 30,
|
||||||||
(in thousands)
|
2009
|
2008
|
||||||
Net
loss adjusted for non-cash items
|
$ | 2,045 | $ | 1,278 | ||||
Effect
of changes in working capital and other operating accounts
|
(1,343 | ) | (2,432 | ) | ||||
Net
cash provided by (used in) operating activities
|
$ | 702 | $ | (1,154 | ) |
Changes
in working capital and other operating accounts affected cash flows during the
periods primarily as a result of a decrease in the level of accounts payable and
accrued expenses between periods, primarily from the net effect of the payment
of accrued balances at December 31, 2008, including compensation, as well as
increases in net clearing assets.
Broker-Dealer
Operations
Clearing
assets reflect amounts on hand to support our ability to settle the transactions
of NYFIX Millennium, NYFIX Securities and NYFIX International, such as
receivables from clearing organizations and firms and deposits with clearing
organizations and firms, as well as balances to support our matched-book stock
borrow/stock loan business. Our matched-book balances include
offsetting stock borrowed and stock loaned and offsetting securities
failed-to-deliver and securities failed-to-receive. At September 30,
2009, the net balance for clearing assets and clearing liabilities was a
receivable of $1.4 million.
Securities
borrowed and securities loaned are recorded at the amount of cash collateral
provided for securities borrowed transactions and received for securities loaned
transactions, plus accrued interest. We monitor the market value of
securities borrowed and loaned on a daily basis with additional collateral
obtained or refunded as necessary. At September 30, 2009, clearing
assets include stock borrows of $513.6 million and clearing liabilities include
stock loans of $513.4 million.
NYFIX
Millennium and NYFIX Securities are U.S. registered broker-dealers required to
maintain levels of regulatory net capital under Rule 15c3-1 of the Exchange
Act. NYFIX Securities’ DTCC membership, used to self-clear securities
transactions, requires it to maintain $10 million in excess of its required net
capital. NYFIX International and FIXCITY are registered firms with
the FSA, required to maintain the greater of the base capital resources
requirement of €730,000 and €50,000, respectively, or the variable capital
resources requirement, which is made up of credit risk, market risk and fixed
overhead (equal to three months average expenditures)
requirements. At September 30, 2009, the aggregate regulatory net
capital/resources of our regulated subsidiaries in the U.S. and U.K. were $31.3
million, $18.0 million in excess of our aggregate requirement of $13.3 million
(including the $10 million excess required by DTCC).
When Euro
Millennium initiated trading activities in March 2008, the minimum financial
resources requirement for NYFIX International increased to approximately
€730,000. To satisfy this requirement, $1.5 million of subordinated
debt issued to NYFIX, Inc. by NYFIX International was converted into equity
capital in March 2008. In addition, in March and October 2008,
February 2009 and September 2009 we infused an additional $1.5 million, $1.5
million, $3.0 million and $0.5 million, respectively, of equity capital into
NYFIX International to provide further regulatory capital resources to meet
daily regulatory requirements and to allow for further business
expansion.
In May
2009, we infused an additional $2.5 million and $0.3 million of equity capital
into NYFIX Millennium and FIXCITY, respectively. In September 2009,
we infused an additional $2.5 million of equity capital into NYFIX
Millennium. These capital infusions were to provide further
regulatory capital resources in order for these entities to meet daily
regulatory requirements.
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30
Investing
Activities
Investments
in current technology to maintain our infrastructure and to enhance our products
remain an important requirement for our available cash resources.
Net cash
used in investing activities for the nine months ended September 30, 2009 was
$5.4 million. This consisted of capital expenditures for property and
equipment, principally for data center equipment and software, of $1.7 million,
and capitalized software costs of $3.7 million.
Net cash
used in investing activities for the nine months ended September 30, 2008 was
$20.4 million. This consisted of capital expenditures for property
and equipment, principally for data center equipment and software, of $4.3
million, capitalized software development costs of $4.2 million, $7.2 million in
payments to the former minority owners of NYFIX Millennium to acquire their
interests and $6.9 million for the acquisition of FIXCITY, net of cash
acquired. These payments were partially offset by $2.1 million
received from GL in payment of an earn out related to the sale of NYFIX Overseas
in August 2006, net of amounts paid to the NYFIX Overseas management
team.
Financing
Activities
Our
financing activities primarily consist of long-term debt issued for working
capital purposes, capital lease obligations used for datacenter equipment and
software purchases, and issuances of capital stock for general corporate
purposes and business development activities. At September 30, 2009,
we had short-term debt and capital lease obligations outstanding aggregating
$12.2 million (including long-term portions).
At
September 30, 2009, we had outstanding two convertible notes aggregating $10.0
million with substantially similar terms to the same lender. The
convertible notes incur interest at a rate of 5% per year and are due in
December 2009. At September 30, 2009, the price at which the lender
could convert the convertible notes into shares of our common stock was $5.61
per share.
Net cash
used in financing activities for the nine months ended September 30, 2009 and
2008 was $1.2 million and $1.1 million, respectively, consisting primarily
of principal payments under capital lease obligations.
Commitments
and Contingencies
There are
ongoing SEC and United States Attorney’s Office investigations into our
accounting for stock option grants and an SEC investigation into our accounting
for the losses incurred by NYFIX Millennium. In addition, there is
shareholder litigation pending with respect to our proposed merger with NYSE
Technologies, which we have reached an agreement in principle to
settle. With respect to certain of these matters, we could be subject
to penalties, fines or regulatory sanctions or claims by current and former
officers, directors or employees for indemnification of costs or losses they may
incur and such amounts, individually or collectively, could have a material
impact on our financial condition. In addition, other actions may be brought
against us related to these matters.
See Note
11 to the Condensed Consolidated Financial Statements included in this Quarterly
Report on Form 10-Q and Note 9 to our Consolidated Financial Statements in our
2008 Form 10-K for a description of our commitments and
contingencies.
Seasonality
and Inflation
We
believe that our operations have not been significantly affected by seasonality
or inflation.
Off-balance
Sheet Arrangements
We have
no material off-balance sheet arrangements, as defined under SEC rules, other
than those related to the contingent obligations under the convertible notes as
described above and under the terms of our Series B Preferred Stock as described
in our 2008 Form 10-K.
Page
31
Critical Accounting Policies and
Estimates
The
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate
our estimates, including our allowance for doubtful accounts, long-lived
tangible and intangible assets, income taxes, and contingencies and
litigation. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. In our 2008 10-K, we identified
and disclosed critical accounting policies, which included revenue recognition,
allowance for doubtful accounts, property and equipment, acquisitions and
goodwill, capitalized software costs, long-lived assets, income taxes,
contingencies and stock-based compensation. These critical accounting
policies affect significant judgments and estimates used in the preparation of
our financial statements. We reviewed our policies in conjunction
with the preparation of this report and have determined that those critical
policies remain and have not changed since December 31, 2008.
Page
32
Item
3. Quantitative and Qualitative Disclosures About Market Risk
There
have been no material changes in our exposure to market risk during the three
months ended September 30, 2009, from those described in Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, included in our
2008 Form 10-K.
Item
4. Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as of September 30, 2009. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures were effective at the reasonable assurance
level as of September 30, 2009.
There
were no changes in our internal control over financial reporting during the
three months ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Page
33
PART
II — OTHER INFORMATION
Item
1. Legal Proceedings
Except as
described below, there have been no material changes during the three months
ended September 30, 2009, with respect to the legal proceedings described in
Part I, Item 3, Legal Proceedings, included in our 2008 Form 10-K.
Following
the announcement of the Merger Agreement on August 27, 2009, an action,
styled Wissinger, et al. v.
NYFIX, Inc., et al., purporting to challenge the merger, was filed in the
Supreme Court of the State of New York (County of New York, Commercial Division)
on September 2, 2009 (Index No. 650541/09). This case asserts claims
on behalf of a purported class of NYFIX stockholders against NYFIX, each of our
directors, NYSE Euronext and Warburg Pincus LLC, related to an alleged breach of
fiduciary duty in connection with the merger. The complaint alleges, among other
things, that our directors, aided and abetted by NYSE Euronext and Warburg
Pincus LLC, breached their fiduciary duties by failing to maximize stockholder
value. Among other things, the complaint seeks to enjoin NYFIX and our directors
from completing the merger. The complaint also seeks unspecified monetary
damages.
On
September 14, 2009, a second action purporting to challenge the merger,
styled Minard,
et al. v. Warburg Pincus Private Equity IX, LP, et al.,
was filed in the Delaware Court of Chancery (Case No. 4894-VCS). This case
also asserts claims on behalf of a purported class of NYFIX stockholders, and
names as defendants NYFIX, each of our directors, NYSE Euronext, NYSE, CBR
Acquisition Corp., Warburg Pincus Private Equity IX, LP, Warburg Pincus &
Co. and Warburg Pincus LLC. The Minard complaint alleges,
among other things, that our directors, aided and abetted by the NYSE and
Warburg Pincus defendants, breached their fiduciary duties by failing to
maximize stockholder value. Among other things, the complaint seeks to enjoin
NYFIX and our directors from completing the merger. The complaint also seeks
unspecified monetary damages.
On
September 23, 2009, a third action purporting to challenge the merger,
styled Winspear, et al. v.
Edelstein, et al., was filed in the Supreme Court of the State of New
York (County of New York, Commercial Division) (Index No. 602937/09). This case
also asserts claims on behalf of a purported class of NYFIX stockholders, and
names NYFIX, each of our directors, NYSE, CBR Acquisition Corp. and Warburg
Pincus LLC as defendants. Like the Wissinger and Minard complaints, the Winspear complaint alleges
that our directors breached their fiduciary duties by failing to maximize
stockholder value. The
Winspear complaint also asserts, among other things, that our directors
breached their fiduciary duty of disclosure by making purportedly misleading and
incomplete disclosures in the preliminary proxy statement (dated September 10,
2009) concerning the merger. The complaint alleges that NYFIX, Warburg Pincus
LLC and the NYSE defendants aided and abetted these purported breaches of
fiduciary duties by our directors. Among other things, the complaint seeks to
enjoin NYFIX and our directors from completing the merger, and unspecified
monetary damages.
NYFIX,
the other defendants and the plaintiffs entered into a memorandum of
understanding dated as of October 23, 2009 regarding the settlement-in-principle
of the lawsuits described above. In connection with the settlement, the
parties agreed that the Company would make certain additional disclosures to its
stockholders beyond the information provided in the definitive proxy statement.
Those additional disclosures were made through a Current Report on Form 8-K
filed by us with the SEC on October 23, 2009. The
settlement-in-principle is subject to certain customary conditions, including
confirmatory discovery, consummation of the transaction, and court approval, and
is conditioned upon on the closing of the merger
transaction. The settlement will not change any of the terms of
the merger or the Merger Agreement.
We
and the other defendants have vigorously denied, and continue to vigorously
deny, any wrongdoing or liability with respect to the facts and claims asserted,
or which could have been asserted, in the lawsuits described above, including
that we or they have committed any violations of law or breach of fiduciary
duty, that we or they have acted improperly in any way, or that we or they have
any liability or owe any damages of any kind to the plaintiffs or to the
purported class. The settlement is not, and should not be construed as, an
admission of wrongdoing or liability by any defendant. However, to avoid
the risk and cost of continuing litigation, we and our directors agreed to the
settlement described above. The parties considered it desirable that the
action be settled to avoid the substantial burden, expense, risk, inconvenience
and distraction of continued litigation and to fully and finally resolve the
matter.
Item
1A. Risk Factors
Except as
described below, there have been no material changes during the three months
ended September 30, 2009 with respect to the Risk Factors described in Part I,
Item 1A, Risk Factors, included in our 2008 Form 10-K.
Page
34
Our
pending merger transaction with NYSE Technologies, Inc. is subject to obtaining
certain regulatory approvals.
On August 26, 2009, we entered into an
agreement and plan of merger with NYSE Technologies, Inc., a wholly-owned
subsidiary of NYSE Euronext. This agreement was approved by our
stockholders at a special meeting of stockholders on November 3,
2009. In addition, the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 has
terminated. The completion of the merger, however,
is subject to the satisfaction of certain other customary
conditions. Although we currently expect the transaction to close
during the fourth quarter of 2009, such closing could be delayed or jeopardized
if either NYFIX or NYSE Technologies is delayed in obtaining or fails to obtain
the requisite regulatory approvals or the conditions are not
satisfied.
Regulatory
developments could have a negative impact on our businesses.
Dark
pools, such as our Millennium ATS, have been the subject of increasing political
and public scrutiny in recent months in response to a number of developments and
inquiries. On October 21, 2009, the SEC proposed three proposals that
would significantly tighten the Commission's regulation of dark
pools. Specifically, the proposals are focused on "actionable
indications of interest" ("IOIs"), a proposed modification of the average daily
trading volume threshold for the display of orders under Regulation ATS from 5%
to 0.25% and increased transparency around trade reporting.
We
cannot predict whether, or in what form, any regulatory changes will occur, or
their impact on our business. Changes in the rules and regulations affecting
dark pools could require us to alter the manner in which we conduct our business
and may make it more difficult or more costly for us to operate our ATS.
Moreover, given the importance of regulation in the financial services industry,
it is possible that any regulatory developments could have a material adverse
effect on our business.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3. Defaults Upon Senior Securities
Not
applicable.
Page
35
Item
4. Submission of Matters to a Vote of Security Holders
We
held a special meeting of the stockholders on November 3, 2009. At the meeting,
our stockholders voted on the proposed merger agreement between NYSE
Technologies, Inc., CBR Acquisition Corp. and NYFIX, Inc. and cast their
votes as follows:
Nominee
|
For
|
Against
|
Abstain
|
||||
Proposed
Merger Agreement
|
39,591,663
|
624,230
|
48,303
|
Please
see our definitive Proxy Statement filed with the SEC on September 28, 2009 in
connection with the special meeting of stockholders for a complete description
of the matters voted upon.
Item
5. Other Information
Not
applicable.
Page
36
Item
6. Exhibits
a.) Exhibits
Exhibit
No.
|
Description of Exhibit
|
|
10.1
|
Agreement
and Plan of Merger dated August 26, 2009 by and among NYSE Technologies,
Inc., CBR Acquisition Corp. and NYFIX, Inc. (incorporated by
reference from Exhibit 2.1 to Current Report on Form 8-K filed August 27,
2009
|
|
*31.1
|
Certification
of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
*31.2
|
|
Certification
of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
*32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Page
37
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.
|
||
November
6, 2009
|
/s/ P. Howard
Edelstein
|
|
P.
Howard Edelstein
|
||
President
and
Chief Executive
Officer
|
November
6, 2009
|
/s/ Steven R.
Vigliotti
|
|
Steven
R. Vigliotti
|
||
Chief
Financial Officer
|
Page
38