<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
000-30527
(Commission file number)
OPTIMARK HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 22-3730995
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10 EXCHANGE PLACE CENTRE, 24TH FLOOR, JERSEY CITY, NJ 07302
(Address of Principal Executive Offices) (Zip Code)
(201) 536-7112
(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 | |
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
At August 10, 2000, the number of shares outstanding of the registrant's common
stock was 35,872,057.
<PAGE> 2
INDEX
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999. Page 4
Consolidated Statements of Operations for the Six Months and
Three Months Ended June 30, 2000 and June 30, 1999. Page 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and June 30, 1999. Page 6
Consolidated Statement of Stockholders' Equity for the Six
Months Ended June 30, 2000. Page 7-8
Notes to Consolidated Financial Statements. Page 9-13
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations. Page 14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk Page 21
Item 5. Other Information Page 22
PART II - OTHER INFORMATION
Item 6 (a). Exhibits
Exhibit 27.1 Financial Data Schedule.
</TABLE>
<PAGE> 3
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
These statements are based on our beliefs and assumptions, and on information
currently available to us. Forward-looking statements include the information
concerning our possible or assumed future results of operations set forth in
Part I, Item 2 - "Financial Information Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also
include statements in which words such as "expect", "anticipate", "contemplate",
"intend", "plan", "believe", "estimate", "consider" or similar expressions are
used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions, including the risks discussed
under the heading, "Business - Risk Factors" in the Company's Report for Form
10/A-2 as filed with the SEC and elsewhere in this Quarterly Report. Our future
results and stockholder values may differ materially from those expressed in
these forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Investors are
cautioned not to put undue reliance on any forward-looking statements. In
addition, we do not have any intention or obligation to update forward-looking
statements after the filing of this Quarterly Report, even if new information,
future events or other circumstances have made them incorrect or misleading. For
these statements, we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Exchange Act.
<PAGE> 4
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-----------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,505,711 $ 62,637,410
Receivable from affiliate 1,805,309 -
Receivables 92,494 672,882
Other current assets 4,127,640 5,140,562
------------ -------------
Total current assets 28,531,154 68,450,854
PROPERTY AND EQUIPMENT - Net 16,180,364 19,967,364
CAPITALIZED SOFTWARE COSTS - Net 8,766,699 10,816,389
INTANGIBLE ASSETS - Net 26,840,003 27,849,752
OTHER ASSETS 2,243,195 2,595,748
------------ -------------
TOTAL $ 82,561,415 $ 129,680,107
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable and accrued liabilities $ 7,429,601 $ 10,453,825
Accrued compensation 3,071,642 1,613,613
Current portion of capital leases payable 4,456,111 4,186,624
Accrued restructuring - 1,360,761
Other current liabilities 266,957 601,937
------------ ------------
Total current liabilities 15,224,311 18,216,760
CAPITAL LEASES PAYABLE, LESS CURRENT
PORTION 2,517,157 4,814,696
OTHER LIABILITIES 178,896 123,891
------------ ------------
Total liabilities 17,920,364 23,155,347
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, authorized and unissued 17,277,932 and 16,952,932 at June 30,
2000 and December 31, 1999, respectively.
Series A preferred stock, convertible and participating, $0.01 par value;
3,222,068 and 3,547,068 shares authorized; 3,222,068 and 3,472,068 shares
issued and outstanding at June 30, 2000 and December
31, 1999, respectively . 32,221 34,721
Series B preferred stock, convertible, $0.01 par value;
11,000,000 shares authorized, issued and outstanding
at June 30, 2000 and December 31, 1999. 110,000 110,000
Series C preferred stock, convertible, $0.01 par value;
8,250,000 shares authorized, issued and outstanding
at June 30, 2000 and December 31, 1999. 82,500 82,500
Series D preferred stock, convertible, $0.01 par value;
250,000 shares authorized, issued and outstanding
at June 30, 2000 and December 31, 1999 . 2,500 2,500
Common stock, $0.01 par value; 150,000,000 shares
authorized; 36,612,057 and 36,496,057 shares issued
and outstanding at June 30, 2000 and December 31, 1999,
respectively 366,121 364,961
Warrants, common stock 35,686,523 35,686,523
Additional paid-in capital 301,662,055 309,564,789
Accumulated deficit (273,292,793) (229,284,323)
Accumulated other comprehensive loss (8,076) (36,911)
Treasury stock, Series A preferred; 250,000 shares,
at cost - (10,000,000)
------------ -------------
Total stockholders' equity 64,641,051 106,524,760
------------ -------------
TOTAL $ 82,561,415 $ 129,680,107
============ =============
</TABLE>
<PAGE> 5
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------------- -----------------------------
2000 1999 2000 1999
---------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
REVENUE:
Revenue from affiliate $ 2,878,833 - $ 5,784,022 -
Revenue, other 147,857 $ 291,054 321,440 $ 631,472
----------- ----------- ----------- -----------
Total revenue 3,026,690 291,054 6,105,462 631,472
----------- ----------- ----------- -----------
EXPENSES:
Research and development 8,753,325 7,452,995 17,531,734 12,861,590
Communications and data center 7,500,867 7,527,854 14,946,725 12,811,836
Business development 2,242,335 3,282,311 4,518,875 6,267,786
General and administrative 2,083,519 3,043,490 4,183,841 5,565,459
Depreciation and amortization 3,753,204 2,034,008 7,517,698 2,998,893
Restructuring expense 83,035 - 2,107,420 -
Warrant compensation expense 7,271 6,799,856 14,542 6,802,280
----------- ----------- ----------- -----------
Total expenses 24,423,556 30,140,514 50,820,835 47,307,844
----------- ----------- ----------- -----------
OTHER (INCOME)/EXPENSES:
Interest income (463,907) (527,552) (1,220,835) (1,179,019)
Interest expense 240,835 265,341 513,932 457,312
Equity in income of investee - 69,112 - 69,112
Gain on recovery of bad debt - (90,760) - (90,760)
----------- ------------ ----------- -----------
(223,072) (283,859) (706,903) (743,355)
----------- ------------ ----------- -----------
NET LOSS (21,173,794) (29,565,601) (44,008,470) (45,933,017)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments 37,717 (6,688) (8,076) (10,204)
------------- ------------- -------------- --------------
COMPREHENSIVE LOSS $ (21,136,077) $ (29,572,289) $ (44,016,546) $ (45,943,221)
============= ============= ============== ==============
EARNINGS PER SHARE:
Basic and diluted $ (0.58) $ (0.83) $ (1.20) $ (1.35)
============= ============= ============== ==============
Weighted average number of common
shares outstanding - basic and diluted 36,606,954 35,748,193 36,612,057 33,930,186
</TABLE>
<PAGE> 6
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------------------------------
2000 1999
--------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (44,008,470) $ (45,933,017)
Adjustments to reconcile net loss to net cash used in
operating activities:
Interest on note receivable - (21,472)
Value assigned to warrants issued as compensation 14,542 6,802,278
Value assigned to options in connection with
restructuring 1,890,315 -
Depreciation and amortization 7,517,698 2,959,717
Loss from investment in joint venture - 69,112
Loss on disposal of assets 155,126 -
Changes in operating assets and liabilities:
Receivables (1,224,921) (193,019)
Other assets 1,350,933 (3,848,604)
Accounts payable and accrued liabilities (2,898,122) 2,367,200
Other liabilities (240,801) 99,666
------------- -------------
Net cash used in operating activities (37,443,700) (37,698,139)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (590,570) (4,645,600)
Purchases of software licenses (293,331) (784,826)
Payments on capitalized software costs - (7,201,037)
Proceeds from disposal of assets 18,343 -
------------- -------------
Net cash used in investing activities (865,558) (12,631,463)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants for common stock - 5,934,484
Proceeds from exercise of options for common stock 205,611 691,000
Proceeds from term loan - 999,653
Payments on capital leases (2,028,052) (1,275,325)
------------- -------------
Net cash (used in) provided by financing activities (1,822,441) 6,349,812
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (40,131,699) (43,979,790)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 62,637,410 63,839,270
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,505,711 $ 19,859,480
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for interest $ 513,932 $ 457,312
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Increase in capital leases $ - $ 5,586,568
Acquisition of license $ - $ 28,000,000
</TABLE>
<PAGE> 7
OPTIMARK HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 3,472,068 $34,721 11,000,000 $110,000 8,250,000 $82,500
Options exercised
Warrants forfeited
Retirement of treasury stock (250,000) (2,500)
Restructuring option charge
Net loss
Other comprehensive loss
-----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 3,222,068 $32,221 11,000,000 $110,000 8,250,000 $82,500
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Series D
Convertible Common Stock
--------------------------------------------------------------------------
Preferred Stock Voting Non-Voting Total
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 250,000 $2,500 35,756,057 $357,561 740,000 $7,400 36,496,057 364,961
Options exercised 116,000 1,160 116,000 1,160
Warrants forfeited
Retirement of treasury stock
Restructuring option charge
Net loss
Other comprehensive loss
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 250,000 $2,500 35,872,057 $358,721 740,000 $7,400 36,612,057 $366,121
====================================================================================================================================
</TABLE>
<PAGE> 8
OPTIMARK HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Common Stock
Warrants Additional
---------------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 2000 46,389,819 $35,686,523 $309,564,789 ($229,284,323)
Options exercised 204,451
Warrants forfeited (124,000)
Retirement of treasury stock (9,997,500)
Restructuring option charge 1,890,315
Net loss (44,008,470)
Other comprehensive loss
--------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 46,265,819 $35,686,523 $301,662,055 ($273,292,793)
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
----------------------------- Accumulated
Series A Series A Other Total
Preferred Preferred Comprehensive Stockholders'
Shares Amount Loss Equity
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 2000 (250,000) ($10,000,000) ($36,911) $106,524,760
Options exercised 205,611
Warrants forfeited -
Retirement of treasury stock 250,000 10,000,000 -
Restructuring option charge 1,890,315
Net loss (44,008,470)
Other comprehensive loss 28,835 28,835
--------------------------------------------------------------------------------------------------
Balance, June 30, 2000 0 $0 ($8,076) $ 64,641,051
===================================================================================================
</TABLE>
<PAGE> 9
OPTIMARK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
1. GENERAL INFORMATION
OptiMark was founded in 1996 as the successor to a company that had begun
developing the OptiMark equities trading system in 1994. On June 12, 2000,
OptiMark established a holding company and placed the exchange solutions
business (formerly referred to as the electronic markets business) and US
equities business into two separate operating subsidiaries, OptiMark, Inc. and
OptiMark US Equities, Inc., respectively. A detailed description of this
business restructuring was previously filed with the SEC as Exhibit 2.1
("Agreement and Plan of Merger") to the Company's Form 10/A-2 which became
effective on June 30, 2000.
In the exchange solutions business, OptiMark licenses matching engines and
systems to exchanges, markets and managers of communities where buyers and
sellers exchange information about a particular topic or product. Revenue is
generated from consulting fees related to the customization of the matching
engine and systems to each market entered into and from royalties from the
licensing of the matching engine technology. Additionally, the Company also
seeks an equity position in the markets and communities with whom the Company
consults with and licenses its technology.
The US equities business, operated through two wholly owned subsidiaries,
OptiMark Services, Inc. and OptiMark OTC Services, Inc., has created, developed
and implemented matching engines for the buying and selling of equities for the
Pacific Exchange and the Nasdaq, respectively. The OptiMark equities trading
system uses a computer implemented matching algorithm designed to allow traders
to preserve their anonymity and maintain the confidentiality of their positions
and trading strategies, permitting them to avoid the market impact that might
otherwise result from the disclosure of that information. Unlike the exchange
solutions business, where the Company licenses the matching technology to third
parties, in the US Equities business, the Company has so far chosen to maintain
full management and ownership of the business.
CONTINUATION AS A GOING CONCERN - The Company's December 31, 1999 audited
financial statements disclosed that while the financial statements have been
prepared assuming it will continue to operate as a going concern, there is
substantial doubt as to its ability to do so. To date, the Company has generated
insufficient revenue to meet its operating expenses and has met its cash needs
through equity financing and equipment leasing.
At June 30, 2000 the Company had approximately $22,500,000 of cash. At current
rates of expenditure, the Company believes this cash would suffice to allow it
to continue operations through the middle of October 2000. In order to be able
to continue operations beyond that point, the Company is pursuing the following
initiatives:
<PAGE> 10
Reduce expenses. The major focus of our plan is to reduce expenses, chiefly in
our US equities business. In June 2000 we renegotiated the terms of a contract
between the Company and our network services provider. The amended terms call
for a total savings of approximately $1.5 million over a six-month period
beginning June 2000, in addition to the deferral of a maximum of $1.5 million
over a three-month period beginning September 2000. The Company believes it can
achieve substantial further savings in the near term through renegotiations of
data equipment contracts. In addition, through efforts currently underway to
consolidate, or possibly sell, the US equities business, the Company believes it
can substantially reduce operating expenses. With these measures the Company
expects to be able to reduce operating costs enough to allow it to continue
operations with existing cash into the first quarter of 2001.
Additional capital. We have commenced discussions with several parties,
including major existing stockholders, with a view to raising additional equity
capital, and believe that we could obtain significant funds in this manner.
However, we believe that the terms on which such financing would be available
will improve substantially as we make progress in reducing expenses and pursuing
our current business strategy. Accordingly, at this point we do not plan to seek
firm financing commitments before late in the third quarter of 2000.
Pursue business strategy. We are actively pursuing applications of our
technology through strategic alliances in electronic business-to-business
markets, and have recently announced several such alliances. In addition, we
expect that our system will be operational as a facility of the Osaka Stock
Exchange by the end of the third quarter. While any short-term revenue impact of
these initiatives is likely to be modest, we believe they are nonetheless
important in the near term in convincing potential sources of additional
financing to invest on the most favorable terms.
2. PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
PRESENTATION - The accompanying unaudited condensed consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries
and, in the opinion of management, reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim periods. Companies in which OptiMark has equity investments of 50%
or less and has the ability to exercise significant influence are accounted for
using the equity method. All significant intercompany transactions and balances
have been eliminated. Certain footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. The nature of the Company's business is
such that the results of an interim period are not necessarily indicative of the
results for the full year. These consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's
<PAGE> 11
audited financial statements as of December 31, 1999 included in the Company's
Report on Form-10/A-2 as filed with the SEC.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - During 2000, the Financial Accounting
Standards Board issued Interpretation 44, Accounting for Certain Transactions
Involving Stock Compensation. This interpretation will be applicable to the
Company's third quarter consolidated financial statements. Management of the
Company does not expect the adoption of such interpretation to have a material
effect on the Company's consolidated financial statements.
3. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is presented
under the requirements of FASB Statement 128, "Earnings per Share". Basic
earnings per share has been computed using the weighted-average number of shares
of common stock outstanding during the period and excludes any dilutive effects
of options, warrants, convertible securities and potentially dilutive issuances
as their inclusion would be antidilutive.
4. ACCRUED RESTRUCTURING
The Company recorded approximately $2,024,000 of restructuring charges in the
first quarter of 2000 associated with a workforce reduction of seven employees.
Included in this amount is approximately $1,835,000 representing the charge
associated with the revaluation of options associated with these terminated
employees, the remaining balance of approximately $189,000 includes notice
period salaries of approximately $121,000, severance of approximately $41,000
and vacation pay and other employee related costs of approximately $27,000.
The Company recorded approximately $80,000 of restructuring charges in the
second quarter of 2000 associated with a workforce reduction of one employee.
Included in this amount is approximately $56,000 representing the charge
associated with the revaluation of the terminated employee's options, the
remaining balance of approximately $24,000 includes notice period salary of
approximately $17,000, severance of approximately $4,000 and vacation pay and
other employee related costs of approximately $3,000.
As of June 30, 2000 all payments associated with the employee layoffs in the
fourth quarter of 1999 and the first and second quarters of 2000, have been
paid. Of the approximately $1,882,000 accrued for in 1999 and the approximately
$213,000 accrued for in 2000, (for an
<PAGE> 12
aggregate restructuring accrual of approximately $2,095,000), the actual costs
incurred were approximately $2,098,000. This under accrual of approximately
$3000 was included in the restructuring expense in the second quarter of 2000.
5. SEGMENTS
At June 30, 2000, the Company operates in two industry segments, the U.S.
Equity Business and the Exchange Solutions Business. At June 30, 1999 the
company operated in one industry segment, the U.S. Equity Business. As of June
30, 2000, costs incurred and revenues earned in connection with the Pacific
Exchange and Nasdaq comprised the US Equity Business and costs incurred and
revenue earned with the Japan Joint Venture and costs incurred in new business
development comprised the Exchange Solutions Business. Assets of the segment
groups are not relevant for management of the business nor for disclosure.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
--------------------------------
US EQUITY EXCHANGE SOLUTIONS
BUSINESS BUSINESS CONSOLIDATED
-------------- ----------------------- ----------------
<S> <C> <C> <C>
Revenue $ 147,857 $ 2,878,833 $ 3,026,690
Operating Expenses excluding
depreciation and amortization (16,929,660) (3,740,692) (20,670,352)
Depreciation and amortization (3,265,331) (487,873) (3,753,204)
Total expenses (20,194,991) (4,228,565) (24,423,556)
Net non-operating income 223,072 - 223,072
Net Loss (19,824,062) (1,349,732) (21,173,794)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
------------------------------
US EQUITY EXCHANGE SOLUTIONS
BUSINESS BUSINESS CONSOLIDATED
------------- ------------------ ------------
<S> <C> <C> <C>
Revenue $ 321,440 $ 5,784,022 $ 6,105,462
Operating Expenses excluding
depreciation and amortization (36,243,856) (7,059,281) (43,303,137)
Depreciation and amortization (6,538,401) (979,297) (7,517,698)
Total expenses (42,782,257) (8,038,578) (50,820,835)
Net non-operating income 706,903 - 706,903
Net Loss (41,753,914) (2,254,556) (44,008,470)
</TABLE>
<PAGE> 13
6. INCOME TAXES
The Company has not generated any taxable income to date and therefore has not
paid any federal income taxes since inception. Utilization of the Company's net
operating loss carryforwards, which begin to expire in 2004, may be subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. Due to uncertainties regarding realizability of the deferred tax
assets, the Company has provided a valuation allowance on the deferred tax asset
in an amount necessary to reduce the net deferred tax asset to zero.
7. STOCKHOLDERS' EQUITY
In January 2000, the Company retired 250,000 shares of Series A Participating
Preferred Stock that was held in treasury. Such shares were returned to
authorized, but unissued preferred stock.
In March 2000, in connection with a workforce reduction of seven employees,
approximately $1,835,000 was recorded in additional paid-in capital,
representing the charge associated with the revaluation of these employee
stock options.
In April 2000, in connection with a workforce reduction of one employee,
approximately $56,000 was recorded in additional paid-in capital,
representing the charge associated with the revaluation of the
employee's stock options.
8. STOCK OPTIONS
<TABLE>
<CAPTION>
<S> <C>
Options outstanding at January 1, 2000 6,946,060
Options granted during six months ended June 30, 2000 8,762,100
Options exercised during six months ended June 30, 2000 (116,000)
Options canceled during six months ended June 30, 2000 (1,702,650)
--------------
Options outstanding at June 30, 2000 13,889,510
==============
</TABLE>
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
History of Losses
We have experienced losses each quarter since our inception, and losses
are expected to continue for the foreseeable future. As of June 30, 2000, our
accumulated deficit was approximately $273,293,000.
Limited Operating History and Changing Business Model
We have a limited operating history that makes it difficult to forecast
future operating results. Prior to late 1998, our main business focus was the US
equities business. We have spent most of our capital to develop and implement
the OptiMark equities trading system for use on the Pacific Exchange and Nasdaq.
During late 1998, we began to expand our focus to include financial and other
markets other than US equities through our exchange solutions business. As of
June 30, 2000, we entered into four ventures through this business segment of
which only one, Japan OptiMark Systems, has generated revenue. It is anticipated
that the Company will begin to recognize revenue in the other ventures in the
fourth quarter of 2000.
In our US equities business we incur all traditional operating expenses
including research and development, business development including sales and
marketing and operations expense including data center, customer network and
customer support. In this business model, we have so far chosen to maintain full
management and ownership of the business.
In our exchange solutions business we intend to enter additional new
markets through joint venture relationships with partners who have relevant
market expertise in the market being entered. We anticipate that the capital for
these ventures will be contributed mainly by our joint venture partner or by
outside investors, not by us. We will license our matching engine technology and
intend to charge royalties. We will support the joint ventures through
development and service agreements and intend to charge for these services. This
may allow us to enter many markets simultaneously. We have limited experience
with this new business model and there is a risk that it will not be successful.
The exchange solutions business is viewed by the management of the Company
as being essential to the possible continuation of the Company as a going
concern due to the lack of success in the US Equities business. In that sense,
the exchange solutions business represents more than a logical diversification
or extension of the applications of the Company's technology, but rather a
potentially successful change from the prior business model which may be
essential to the Company's ability to attract additional equity financing.
Results of Operations
<PAGE> 15
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30,
1999.
Revenue. We began to recognize revenue in January 1999 when the OptiMark
equities trading system was launched on the Pacific Exchange. In July 1999, we
began to recognize revenue for consulting services to Japan OptiMark Systems for
development of the OptiMark equities trading system for the Osaka Securities
Exchange. In October 1999, the OptiMark equities trading system was launched on
the Nasdaq. All of the $291,054 of revenue for the second quarter of 1999 was
earned from the Pacific Exchange. Of the $3,026,690 earned in the second quarter
of 2000, $2,878,833 was earned from consulting services to Japan OptiMark
Systems and $147,857 was earned from transaction fees for use of the system on
both the Pacific Exchange and Nasdaq.
Operating Expense. Total operating expenses for the quarter ended June 30,
2000 totaled $24,423,556 as compared to $30,140,514 for the quarter ended June
30, 1999. The following is an explanation of the increase or decrease in the
components of each operating expense:
Research and Development Expense. We incurred research and development
expense for the second quarter of 2000 of $8,753,325 as compared to $7,452,995
for the second quarter of 1999. This increase of $1,300,330 is primarily
attributable to $3,182,000 of research and development costs being capitalized
in the second quarter of 1999 in accordance with SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, in connection
with the development of the Pacific Exchange and Nasdaq application. There were
no such costs capitalized in the three month period ended June 30, 2000. Had
such costs been expensed in 1999 the difference between the current period and
prior period would have been a decrease of approximately $1,882,000. This
decrease is primarily attributable to a decrease in salary and employee related
expenses as a result of a reduction in the research and development work force.
Costs expensed and incurred in the three month period ended were primarily
related to equipment leasing, support and enhancement for the Pacific Exchange
and Nasdaq systems of approximately $6,438,000, consulting services associated
with the development of the Osaka Securities application of approximately
$1,770,000 and research of new business ventures of approximately $545,000.
Communications and Data Center Expense. We incurred communications and
data center expense for the second quarter of 2000 of $7,500,867 as compared to
$7,527,854 for the second quarter of 1999. This decrease of $26,987 is
attributable primarily to the decrease in the number of employees associated
with the OptiMark Information Center that provides customer support for the
Pacific Exchange system and the Nasdaq system, offset by the implementation of
the Nasdaq production data center in the third and fourth quarter of 1999,
resulting in an increase in equipment leasing and maintenance costs, as well as
an increase in the number of users who were given network access to the system.
<PAGE> 16
Business Development. We incurred business development expense for the
second quarter of 2000 of $2,242,335 as compared to $3,282,311 for the second
quarter of 1999. This decrease of $1,039,976 is primarily attributable to the
Company incurring greater costs associated with obtaining third party
attestation over certain capacity, integrity and security objectives of the
OptiMark equities trading system in the prior period as compared with the
current period. Additionally, the Company realized salary and employee related
expense reductions as a result of a decrease in the number of employees in the
business development work force from the prior period to the current period.
General and Administrative Expense. We incurred general and administrative
expense for the second quarter of 2000 of $2,083,519 as compared to $3,043,490
for the second quarter in 1999. This decrease of $959,971 is attributable
primarily to a decrease in the number of employees and a decrease in
professional fees, corporate travel and entertainment and general office
expenses.
Depreciation and Amortization Expense. We incurred depreciation and
amortization expense in the second quarter of 2000 of $3,753,204 as compared to
$2,034,008 in the second quarter of 1999. The increase of $1,719,196 is
primarily attributable to the depreciation of computer equipment and software
purchased in the second, third and fourth quarters of 1999 for the integration
of the Nasdaq application and the amortization of certain intangible assets.
These intangible assets include software licenses used for development and
production, capitalized internal software development costs and production
software licenses from a third party software developer for the Pacific Exchange
and Nasdaq systems in which amortization began in February and October 1999,
respectively. Additionally, an intangible asset of $28,000,000 was recorded in
May 1999 from the issuance of 2,000,000 shares of our common stock in
consideration for the termination of a license previously granted to High
Performance Markets, Ltd. to use our matching engine technology in non-financial
markets. This intangible asset is being amortized over a 15-year period.
Restructuring Expense. We recorded a restructuring charge in the second
quarter of 2000 of $83,035 associated with a workforce reduction of one
employee. Included in this amount is approximately $56,000 representing the
charge associated with the revaluation of the terminated employee's options, the
remaining balance of approximately $27,000 includes notice period salary of
approximately $17,000, severance of approximately $4,000, vacation pay and other
employee related costs of approximately $3,000 and approximately $3,000 from an
under accrual of 1999 restructuring charges.
Warrant Compensation Expense. We incurred non-cash warrant compensation
expense for the second quarter of 2000 of $7,271 as compared to $6,799,856 for
the second quarter of 1999. This decrease of $6,792,585 is attributable to
certain warrants being charged to expense in the second quarter of 1999 in
accordance with the Emerging Issues Task Force 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. In May 1999, we issued to five
holders of series B convertible participating preferred stock warrants to
acquire 1,666,667 shares of our common stock at $10 per share. In connection
with this
<PAGE> 17
issuance, we recorded a non-cash expense of approximately $6,786,000 (the value
using the Black-Scholes model). All of these warrants expired unexercised in
June 1999.
Other Income and Expense. Other income and expense includes interest
income, interest expense, loss in investee and gain on recovery of bad debt.
Other income, net, was $223,072 for the second quarter of 2000 compared to
$283,859 for the second quarter of 1999. This decrease of $60,787 is primarily
attributable to a decrease in interest income attributable to different
investment decisions made during the current period versus the prior period.
Additionally, approximately $91,000 of income associated with the partial
repayment of a bad debt previously written off, was recognized in 1999,
partially offset by the recognition of a loss in investee of approximately
$69,000.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
Revenue. All of the $631,472 of revenue for the six months ended June 30,
1999 was earned from the Pacific Exchange. Of the $6,105,462 earned in the six
months ended June 30, 2000, $5,784,022 was earned from consulting services to
Japan OptiMark Systems and $321,440 was earned from transaction fees for use of
the system on both the Pacific Exchange and Nasdaq.
Operating Expense. Total operating expenses for the six months ended June
30, 2000 totaled $50,820,835 as compared to $47,307,844 for the six months ended
June 30, 1999. The following is an explanation of the increase or decrease in
the components of each operating expense:
Research and Development Expense. We incurred research and development
expense for the six months ended June 30, 2000 of $17,531,734 as compared to
$12,861,590 for the six months ended June 30, 1999. This increase of $4,670,144
is primarily attributable to $6,825,000 of research and development costs being
capitalized in the first six months of 1999 in accordance with SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, in connection with the development of the Nasdaq and Pacific Exchange
application. There were no such costs capitalized in the six month period ended
June 30, 2000. Had these costs been expensed in 1999, the difference between the
current period and the prior period would have been a decrease of approximately
$2,155,000. This decrease is primarily attributable to a decrease in salary and
employee related expenses as a result of a reduction in the research and
development work force of approximately 35 employees. Costs expensed and
incurred in the six months ended June 30, 2000 were primarily related to
hardware leasing, support and enhancement for the Pacific Exchange and Nasdaq
systems of approximately $12,984,000, consulting services associated with the
development of the Osaka Securities application of approximately $3,510,000 and
research and development of new business ventures of approximately $1,038,000.
Communications and Data Center Expense. We incurred communications and
data center expense for the six months ended June 30, 2000 of $14,946,725 as
compared to
<PAGE> 18
$12,811,836 for the six months ended June 30, 1999. This increase of $2,134,889
is attributable primarily to the implementation of the Nasdaq production data
center resulting in an increase in equipment leasing and maintenance costs, as
well as an increase in the number of users who were given network access to the
system. These increases were partially offset by a decrease in the number of
employees associated with the OptiMark Information Center to provide customer
support for the Pacific Exchange system and the Nasdaq system.
Business Development. We incurred business development expense for the six
months ended June 30, 2000 of $4,518,875 as compared to $6,267,786 for the six
months ended June 30, 1999. This decrease of $1,748,911 is primarily
attributable to the Company incurring approximately $840,000 in costs associated
with obtaining third party attestation over certain capacity, integrity and
security objectives of the OptiMark equities trading system during the first six
months of 1999 as compared to $90,000 during the first six months of 2000. It is
anticipated that additional costs associated with such attestation will be
incurred in the third quarter of 2000. The remaining difference of $999,000 is
attributable to a decrease in salary and employee related expenses of
approximately $781,000 as a result of a reduction in the business development
work force of approximately 30 employees and a reduction in marketing related
expenses of approximately $218,000.
General and Administrative Expense. We incurred general and administrative
expense for the six months ended June 30, 2000 of $4,183,841 as compared to
$5,565,459 for the six months ended June 30, 1999. This decrease of $1,381,618
is attributable primarily to a decrease in professional fees, corporate travel
and entertainment and general office expenses.
Depreciation and Amortization Expense. We incurred depreciation and
amortization expense in the first six months of 2000 of $7,517,698 as compared
to $2,998,893 in the first six months of 1999. The increase of $4,518,805 is
primarily attributable to the depreciation of computer equipment and software
purchased in the second, third and fourth quarters of 1999 for the integration
of the Nasdaq application and the amortization of certain intangible assets.
These intangible assets include software licenses used for development and
production, capitalized internal software development costs and production
software licenses from a third party software developer for the Pacific Exchange
and Nasdaq systems in which amortization began in February and October 1999,
respectively. Additionally, an intangible asset of $28,000,000 was recorded in
May 1999 from the issuance of 2,000,000 shares of our common stock in
consideration for the termination of a license previously granted to High
Performance Markets, Ltd. to use our matching engine technology in non-financial
markets. This intangible asset is being amortized over a 15-year period.
Restructuring Expense. We recorded a restructuring charge in the first six
months of 2000 of $2,107,420 associated with a workforce reduction of eight
employees. Included in this amount is approximately $1,890,315 representing the
charge associated with the revaluation of terminated employee options, the
remaining balance of approximately
<PAGE> 19
$217,000 includes notice period salaries of approximately $138,000, severance of
approximately $46,000, vacation pay and other employee related costs of
approximately $30,000 and approximately $3,000 from an under accrual of 1999
restructuring charges.
Warrant Compensation Expense. We incurred non-cash warrant compensation
expense for the six months ended June 30, 2000 of $14,542 as compared to
$6,802,280 for the six months ended June 30, 1999. This decrease of $6,787,738
is attributable to certain warrants being charged to expense in accordance with
the Emerging Issues Task Force 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. In May 1999, we issued to five holders of series B
convertible participating preferred stock warrants to acquire 1,666,667 shares
of our common stock at $10 per share. In connection with this issuance, we
recorded a non-cash expense of approximately $6,786,000 (the value using the
Black-Scholes model) in May 1999. All of these warrants expired unexercised in
June 1999.
Other Income and Expense. Other income and expense includes interest
income, interest expense, loss in investee and gain on recovery of bad debt.
Other income, net, was $706,903 for the first six months of 2000 compared to
$743,355 for the first six months of 1999. This decrease of $36,452 is primarily
attributable to additional interest expense associated with capital leases
entered into during the third quarter of 1999 partially offset by an increase in
interest income attributable to higher interest rates in 2000. Additionally,
approximately $91,000 of income associated with the partial repayment of amounts
previously written off was recognized in 1999, partially offset by the
recognition of a loss in investee of approximately $69,000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000 the Company's principal sources of liquidity consisted
of $22,505,711 of cash compared to $62,637,410 of cash as of December 31, 1999.
Net cash used in operating activities was $37,443,700 and $37,698,139 for
the six-month periods ended June 30, 2000 and 1999, respectively. Net operating
cash flows were primarily attributable to net losses partially offset by
non-cash charges for depreciation and amortization in both periods, the value
assigned to options in connection with the restructuring in the current period
and the value assigned to warrants issued as compensation in the prior period.
Net cash used in investing activities was $865,558 and $12,631,463 for the
six-month periods ended June 30, 2000 and 1999, respectively. The uses in the
current period consisted of purchases of fixed assets and software licenses
predominately for the Pacific Exchange and Nasdaq. The uses in the prior period
resulted primarily from the acquisition of capital assets to build the Nasdaq
data center and payments for personnel related expenses associated with the
development of the Pacific Exchange and Nasdaq applications.
<PAGE> 20
Net cash used in financing activities of $1,822,441 and provided by
financing activities of $6,349,812 for the six-month periods ended June 30, 2000
and 1999, respectively, resulted from proceeds relating to the exercise of
employee options, offset by payments on capital leases in both periods. The
prior period also included the exercise of warrants and the receipt of
approximately $1,000,000 from a term loan from a leasing company.
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is related to changes in interest rates,
foreign currency exchange rates and equity prices. The Company does not consider
these risks to be material as of June 30, 2000.
Interest Rate Risk. As of June 30, 2000, we had cash and cash equivalents
of $22,505,711 that consisted of cash and highly liquid short-term investments.
These investments may be subject to interest rate risk and would decrease in
value if the market interest rate increased. A hypothetical increase or decrease
in market interest rates at June 30, 2000 of 10 percent would have caused the
fair value of these short-term investments to change by an immaterial amount.
Declines in interest rates over time will, however, reduce our interest income.
Foreign Currency Exchange Rate Risk. Substantially all of our revenues
recognized to date have been denominated in U.S. dollars from our U.S. customers
as well as our international customers. Although revenues from international
customers to date have been U.S. dollar denominated, we cannot be certain that
future international customers or future business ventures will result in U.S.
dollar denominated revenue, royalties or dividends. As a result, our operating
results could become subject to significant fluctuations based upon changes in
the exchange rates of certain currencies in relation to the U.S. dollar.
Equity Price Risk. As of June 30, 2000, the Company is not subject to
equity price risk.
<PAGE> 22
ITEM 5. OTHER INFORMATION
In the course of preparing this report, the Company became aware that the
audited financial statements for the periods ending December 31, 1997, 1998 and
1999 contained an error in the determination of the number of shares included in
the calculation of loss per share. While the overall operating results for the
Company were calculated correctly, the number of shares was overstated due to
the inclusion of preferred stock on an "as converted" basis with the common
stock. The preferred stock (Series A, Series B, Series C and Series D) has
certain liquidation preferences and other features which cause it to be
materially different from the common stock and therefore ineligible for
inclusion in a loss per share calculation. The result of excluding the preferred
stock from the loss per share calculation is to decrease the total number of
shares and therefore increase the loss per share. The loss per share, as
previously reported and as correctly restated are as follows:
<TABLE>
<CAPTION>
Years Ending December 31st Quarters Ending
March 31st
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Previously Reported: ($0.54) ($1.13) ($2.12) ($0.29) ($0.33)
As Restated: ($0.75) ($1.84) ($3.84) ($0.51) ($0.62)
</TABLE>
The Company is currently in the course of reviewing this matter with its
auditors, Deloitte & Touche, and is in the process of restating its audited
financial statements for the periods ending December 31, 1997, 1998 and 1999 to
take account of the matter described above. These revised financial statements
will be filed, in toto, as an amendment to Form 10 as soon as the revisions are
completed and reviewed by the auditors which is expected to be on or before
August 18, 2000.
<PAGE> 23
\
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 hereunto duly authorized.
OPTIMARK HOLDINGS, INC.
Dated: AUGUST 14, 2000 By: /s/ PHILLIP J. RIESE
--------------- --------------------------------
Name: Phillip J. Riese
Title: Chief Executive Officer
