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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended December 31, 2000
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: 0-21324
NYFIX, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 06-1344888
(State of incorporation) (I.R.S. Employer identification number)
333 LUDLOW STREET, STAMFORD, CT 06902
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 425-8000
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE NASDAQ STOCK MARKET
(Title of each class) (Name of each exchange on
which registered)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $501 million, as of March 16, 2001. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination by the Registrant that such individuals are, in fact, "affiliates"
of the Registrant.
As of March 16, 2001 there were 25,340,788 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Documents Form 10-K Reference
--------- -------------------
Proxy Statement for the 2001 Annual Meeting
of Stockholders Part III, Items 10 - 13
NYFIX, INC.
TABLE OF CONTENTS TO FORM 10-K
Item Number Page
- ----------- ----
PART I
ITEM 1 - BUSINESS 1
ITEM 2 - PROPERTIES 6
ITEM 3 - LEGAL PROCEEDINGS 6
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 6
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS 6
ITEM 6 - SELECTED FINANCIAL DATA 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 8
ITEM 7A - QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 13
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 13
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 13
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 13
ITEM 11 - EXECUTIVE COMPENSATION 13
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 14
PART I
ITEM 1. BUSINESS
Description of Business
NYFIX, Inc. (the "Company" or "NYFIX") develops and markets advanced electronic
trading systems to brokerage firms, international banks and global exchanges
trading in equities and derivative instruments. The Company's NYFIX Network, a
combined Financial Information Exchange protocol ("FIX") and Exchange Access
Network, enables users to electronically communicate trade data among the
buy-side, sell-side and exchange floor environments. NYFIX is headquartered in
Stamford, Connecticut and maintains operations in New York, Chicago and London.
The Company was incorporated in New York in 1991 and is listed on the Nasdaq
Stock Market under the symbol NYFX. Prior to March 6, 2000, the Company's common
stock was traded on the American Stock Exchange under the ticker symbol NYF.
Prior to October 25, 1999, the Company's common stock was traded on the American
Stock Exchange under the ticker symbol TSI.
The Company's goal is to become the leading provider of real-time electronic
trade entry and routing systems and connectivity services to the global
financial services industry. The Company offers its customers the ability to
enter and route orders and executions electronically from "end-to-end," from the
buy-side/retail institution or remote branch office through to the exchange
floors and electronic exchanges. The Company's technology is used by such major
firms as Lehman Brothers, Deutsche Bank, UBS Warburg, ING Barings and Merrill
Lynch, among others.
The Company's systems provide electronic order entry, order routing, tracking
and risk monitoring capabilities, replacing existing paper and telephone based
trading and eliminating a number of redundant steps in the order flow and
execution reporting process. As the financial industry continues to move from a
paper and voice driven tracking environment to real-time electronic-based
trading, management believes NYFIX is well positioned to take advantage of this
growing trend. Wall Street firms are recognizing the ability of electronic
trading systems to enhance order and information flow and improve trading
performance by eliminating trading errors and providing on-line risk management,
in addition to the cost efficiencies associated with electronic trading.
Numerous trading scandals have provided further impetus for the implementation
of electronic trading systems with risk monitoring and audit tracking
capabilities by financial risk managers.
In September 1997, the Company launched its NYFIX Network, a FIX and Exchange
Access Network designed to provide the financial community with a central
electronic meeting place for routing real-time orders and other FIX messages.
NYFIX provides the Company's equities customers access to its subscription-based
quote, order and execution routing systems as well as providing connectivity
between the buy-side, sell-side and exchange floor environments through the
industry standard trade communication protocol, FIX. NYFIX offers financial
firms the ability to utilize the Company's systems without having to invest in a
communications infrastructure. Furthermore, the Company's NYFIX Data Centers
offer the potential for an "any to any" relationship for routing orders and
executions between and among firms, various exchanges and alternative sources of
liquidity including Electronic Communications Networks (ECNs). The Company has
made considerable progress implementing its subscription-based NYFIX business
model throughout 2000 and management believes the Company is well positioned for
further growth in 2001. NYFIX continues to provide the financial industry with
complete systems, including the raw terminals (hardware manufactured by NYFIX),
the software and the infrastructure (through its NYFIX Data Centers) to tie the
trading industry together for the electronic entry and routing of orders and
executions.
All of the Company's products are available in flexible building blocks that can
be sold as complete systems or separately to complement existing customer
components. This has given the Company the ability to collect revenue from each
"link" of the trading process. The Company also continues to expand and enhance
its product portfolio with new and complementary software modules and
connectivity services that allow the Company to collect revenue from multiple
levels. The Company offers its trading systems on a subscription basis, with
hardware, software and maintenance provided for a monthly fee. For the Company's
customers, this pricing model offers minimal up-front investment in technology
as well as an alternative to costly in-house development. For the Company, it
offers a simplification of the sales cycle as well as significant recurring
revenue. From time to time, the Company does offer certain products (such as a
custom enhancement) for a one-time fee. The Company as a whole is moving away
from its previous capital sales model and now offers its systems, including the
entire NYFIX product line, on a subscription basis.
1
Information about the Company's business segment and sales to unaffiliated
customers, gross profit and identifiable assets, by geographic area, is
contained in "Note 14 - Business Segment Information" appearing in the
consolidated financial statements as noted in the Index appearing under Item 14
(a) (1).
NYFIX Millennium, L.L.C.
- ------------------------
In October of 1999, the Company announced the formation of NYFIX Millennium,
L.L.C. ("NYFIX Millennium"), with Deutsche Bank, ING Barings, Lehman Brothers,
Morgan Stanley Dean Witter, Sanford C. Bernstein & Co., Inc., SG Cowen
Securities and UBS Warburg (the "Consortium"). NYFIX owns 50% of NYFIX
Millennium and the Consortium owns the remaining 50%.
In 2000, NYFIX Millennium became a Broker/Dealer and member of the National
Association of Securities Dealers (NASD). NYFIX Millennium is an Alternative
Trading System ("ATS"), an electronic execution facility for equities trading
transactions. The System matches buyers and sellers of securities through an
electronic matching facility. The system is designed to provide investors with a
valuable tool for achieving "best execution," by aiming to help investors
achieve price improvement, ensure anonymity and reduce market fragmentation
through the electronic linkage of various liquidity sources, including exchanges
and electronic communication networks (ECNs). NYFIX Millennium leverages the
NYFIX network's large order routing share volume to provide a more efficient
liquidity source for the financial community. NYFIX Millennium is referred to as
a Hybrid Market System because it combines the electronic execution technology
of an ECN with the liquidity of traditional primary markets. Through real-time
matching and automatic forwarding of unexecuted orders to the primary exchange
markets, NYFIX Millennium plans to provide traders unparalleled access to
liquidity. NYFIX Millennium plans to generate transaction-oriented revenue by
providing high quality executions, providing price improvement and/or liquidity
enhancements, reducing execution costs and providing superior execution
services. The NYFIX Millennium ATS went into a test phase with a limited number
of customers in late 2000.
On March 14, 2001, NYFIX Millennium added Bank of America and First Union
Securities as new partners, with additional partners and funding expected in the
near term. Pursuant to the terms of the Operating Agreement of NYFIX Millennium,
each new partner contributed $2,000,000 to NYFIX Millennium, and the Company
maintained its 50% ownership interest in NYFIX Millennium in exchange for
reducing certain of its rights to share in future dividend distributions of
NYFIX Millennium. The Company issued 94,000 shares of its common stock to each
new partner in return for the same option rights noted above.
Products
Portfolio of Complete Electronic Trading Systems
- ------------------------------------------------
NYFIX supplies complete, standardized trading solutions that consist of
hardware, proprietary software packages and network technology for the trading
of equities and derivative instruments. In addition, the Company supports its
customers in all aspects of planning and implementing these systems as well as
providing on-going technical support.
The Company has two principal product lines: Equities and Future & Options. Each
product line maintains technical management staff with expert knowledge so that
the individual product lines are efficiently targeted to their respective
customers. The Equities product line operates primarily out of the Company's
Stamford and New York offices and the Future & Options product line operates
primarily out of the Company's London and Chicago offices. The London and
Chicago offices are included in a wholly-owned subsidiary of the Company known
as Trinitech Systems International, Inc. Each location has the opportunity to
sell, or enter into subscriptions for, each of the Company's product lines.
2
Equities Product Line
- ---------------------
The Company has developed eight systems for equities trading:
1. Market Looks System
2. FloorReport(R)
3. FIXTrader(R)
4. NYFIX(R)Network Services
5. Breakwatch(TM)
6. TradeWatch
7. NYFIX HandHeld
8. Nasdaq Agency Interface
The NYFIX Market Looks System consists of the Trinitech Touchpad(R), a scanner,
server and proprietary software. The touchpad was designed by the Company to
simplify and expedite the entry of orders and information related to the trading
of financial instruments. The Trinitech Touchpad(R), with its patented flat
panel design, was developed to optimize critical trader/broker desktop real
estate. Its proprietary open architecture offers seamless integration with all
major industry operating systems, thereby allowing customers to freely choose
between the most popular operating systems. The Market Looks Systems is
comprised of two complementary software modules: FloorLook(R) for the exchange
floor booth and FloorLook ImageViewer(R) for the upstairs trader workstation.
The Market Looks System solves the challenge faced by member firms in getting
real-time quotes or "looks" on stocks directly from the exchange floor to firms'
upstairs trading operations. The Market Looks System operates by scanning
handwritten quote slips called "looks" into a scanner by a floor clerk located
at the member's booth. These scanned looks are instantly transmitted to upstairs
traders at their workstations in multiple sites and remote offices.
Implementation of the system results in the elimination of repetitive telephone
traffic between clerks and traders. The Market Looks System helps firms reduce
errors and disseminate information more efficiently.
The NYFIX FloorReport(R) System is a complete electronic order management system
designed for exchange member firms' exchange floor operations. Orders are
received electronically from upstairs traders (via the FIX Protocol), with
execution information routed back in the same efficient manner. FloorReport(R)
enables floor clerks to route execution information to sales and block traders
in real time, enabling them to better service their customers. FloorReport
organizes orders in a central blotter, helping clerks by tracking status and
calculating average price in real-time.
The NYFIX FIXTrader System is a complete order management system for upstairs
traders, which allows the electronic entry and routing of orders and executions
between buy-side institutions, sales and block desks and exchange floor booths.
Traders enter orders quickly and efficiently through a Touchpad(R) (or a mouse
and keyboard configuration) and which are then routed to the appropriate venue
in seconds, with executions routed back in the same efficient manner. With the
financial industry's adoption of FIX as the standard protocol for communicating
electronically, FIXTrader(R) offers an easy way for firms to gain FIX
compliance. FIXTrader(R) enables firms to receive orders electronically from the
buy-side as well as connect to back office systems helping firms achieve
straight-through processing.
The NYFIX Network is a Combined FIX and Exchange Access Network that link
various companies throughout the financial industry for the electronic
communication of trade information. Connecting buy-side, brokerage, exchange
floor booths and various exchange systems, NYFIX is a private, secure network
designed to provide firms with secure and reliable transmission of their
electronic trade information. NYFIX provides a number of benefits to clients
including reduced cost compared to maintaining one's own network, increased
routing options and network management ensuring connectivity between parties.
Breakwatch(TM) is NYFIX's application for identifying intra-day trade errors.
This program helps firms identify potential trading errors, giving firms a
chance to rectify mistakes on the day the trade takes place. Breakwatch(TM) also
provides a link into the OCS system, simplifying reporting as per exchange trade
reporting requirements.
TradeWatch is NYFIX's application for monitoring an entire trading desk's
positions. This application, used by head traders and/or risk managers, enables
management to keep apprised of all the trading desk's positions
3
by integrating data from all of the firm's FIXTrader workstations.
The NYFIX HandHeld is the Company's Market Looks System, which runs on a
handheld computer. This wireless, lightweight computer is used by exchange floor
brokers to transmit looks from the specialist to their booth and directly to
traders' workstations. Battery-powered, the NYFIX HandHeld enables the
simultaneous transmission of looks to multiple traders as well as enabling
traders to receive looks directly from "the crowd" on the trading floor. The
Handheld units were rolled out during the first quarter of 2000.
NYFIX's Nasdaq Agency Interface is an application designed to accommodate order
management and routing for the Nasdaq marketplace. Level II compliant, the
Nasdaq Agency Interface enables traders to communicate electronically with the
Nasdaq market.
During 2000, the Company enhanced its product line by adding a number of
auxiliary services, such as increased connectivity options and linkages as well
as increased functionality. Product development continues to be focused on
adding more features to the Company's existing product line, accommodating
customer requests. The Company is also developing additional products and
services to be offered in 2001.
Product Pricing - Equities
All of NYFIX's products for equities trading are sold on a subscription basis,
with hardware, software and maintenance provided for a monthly subscription fee.
Subscription agreements usually run from one to three years, with automatic
multiple year renewal provisions included. Products are priced on a monthly
basis per terminal.
Product Penetration - Equities
Building upon the Data Center established in late 1996, the Company launched
NYFIX(R), its combined FIX and Exchange Access Network, in September 1997. The
Network and data center, strategically located several blocks from the New York
Stock Exchange, offers easy monthly subscription-based access to all of the
Company's quote, order and execution routing systems. The NYFIX Network also
allows smaller "two-dollar" and independent brokers access to the Company's
systems. Firms no longer need a communications infrastructure to utilize the
Company's systems, as they can simply subscribe to the service. During 2000, the
Company has continued to invest in the NYFIX data center infrastructure to
accommodate customer needs and growth of the service.
Futures & Options Product Line
- ------------------------------
For the futures & options trading market, the Company markets its Futures &
Options Order Book Management System ("OBMS"), which enables futures and options
traders to enter, route and manage orders and executions in real-time. Global
order routing between different international branches of the same firm and all
the major global exchanges, both open outcry and electronic is supported by this
comprehensive system. OBMS is offered utilizing the Company's patented Trinitech
Touchpad(R) or in stand-alone software versions.
Product Pricing - Futures & Options
The Company offers OBMS on a subscription or transaction basis, with hardware,
software and maintenance provided for a monthly fee. Subscription agreements
usually run from one to three years with automatic multiple year renewal
provisions included. When OBMS is sold on a transaction basis, the Company will
receive a fee per futures contract traded through the system with a guaranteed
monthly minimum payment.
Product Penetration - Futures & Options
OBMS has been utilized by a number of leading firms in the futures & options
industry, including CS First Boston, Dresdner Kleinwort Benson, and Merrill
Lynch, among others.
Marketing
Electronic Trading Systems
- --------------------------
The Company believes that the financial trading industry represents an ideal
example of a uniform niche market. The characteristics of this market,
particularly its low level of automation at the trade-entry or deal-making
level, provide an excellent opportunity for the marketing of cost-effective and
innovative technical solutions. The Company believes that this market is clearly
defined, readily accessible, and accustomed to technological adjustment. As a
single, coherent
4
community, the trading industry allows the Company to market standardized
products in a uniform manner for Equities and Futures & Options trading on a
global basis. Management believes the Company's offering of products on a
subscription or transaction basis through a data center solution will
significantly aid in the roll-out of its products on an industry-wide basis,
opening up new markets for the Company's products.
The Company continued its aggressive marketing efforts in 2000 and increased its
global presence by exhibiting its products at numerous domestic and
international technology and financial industry conferences. The Company also
generated significant press coverage with respect to its FIX trading solutions
and industry wide FIX and exchange connectivity network, NYFIX(R). The Company
intends to continue its marketing initiatives in 2001.
Competition
Electronic Trading Systems
- --------------------------
Competition exists in the Company's primary market. The Company believes that it
competes favorably with its trading systems, gaining additional leverage through
optimized integration of NYFIX's advanced systems and its large number of
connectivity options. To further enhance the marketability of its systems, the
Company is implementing its solutions on the most popular and well-established
client server architectures.
The Company believes that its technology offers unique advantages compared to
alternative technologies utilized by competitors. The Company believes, based
upon customer feedback, that its systems successfully fulfill their promise of
immediate entry, routing and reporting of trading positions, operational
savings, reduction of input error and improvement in reporting for compliance
purposes.
The Company also believes that its management and staff have an in-depth
knowledge of the inner-workings of trading rooms, exchange floors, and the
overall marketplace, thus facilitating its ability to serve client needs with
technological hardware and software adaptations.
Product Production
The Company designs, develops and produces its proprietary software and hardware
products at its facility in Stamford, Connecticut. The Company is not dependent
upon any one supplier, vendor or subcontractor for any of its manufacturing
components.
Patents and Trademarks
The Company maintains a program of obtaining and protecting U.S. and
international patents and trademarks. The Company believes that the success of
its business is not materially dependent on the existence or duration of any
patent, group of patents or trademarks. The Company's trademarks should be
available for the Company's use as long as it desires.
Major Customers
Information about the Company's dependence on major customers relating to sales
and accounts receivable is contained in "Note 8 - Major Customers" appearing in
the financial statements as noted in the Index appearing under Item 14 (a) (1).
Rule 123 Amendments
NYFIX is aware of amendments on file with the SEC to change certain regulations
governing the recording and transmission of orders to and on the NYSE floor. The
first phase of such regulations calls for all orders received on the NYSE floor
to be input into an electronic order management system for better monitoring and
tracking of trades. The second phase calls for all orders to the exchange to be
sent electronically. The Company believes this regulation is positively
impacting NYFIX's business. The Company already produces systems capable of
meeting and exceeding regulatory requirements with many additional features
designed to reduce errors and maximize customer
5
efficiency. Management believes that as the Rule 123 amendments wind their way
through the SEC's notice and comment period NYFIX will be provided an even
greater opportunity to capture market share both on the exchange floor and on
the upstairs trading desks.
Employees
As of March 16, 2001 the Company had 124 full-time employees.
Risk Factors: Forward Looking Statements
The management discussion and analysis and the information provided elsewhere in
this Form 10-K contain forward looking statements regarding the Company's future
plans, objectives and expected performance. Those statements are based on
assumptions that the Company believes are reasonable, but are subject to a wide
range of risks and uncertainties, and a number of factors could cause the
Company's actual results to differ materially from those expressed in the
forward looking statements referred to above. These factors include, among
others, the Company's ability to further penetrate the financial services market
with a full range of the Company's products and the highly competitive market in
which the Company operates.
ITEM 2. PROPERTIES
The Company maintains its executive offices and production facilities in leased
premises at 333 Ludlow Street, Stamford, CT 06902 and its European Sales Office
in London, England. The Company's U.S. headquarters consists of approximately
12,900 square feet at a current annual rental of $348,000, expiring on May 31,
2002. The Company's London office lease, expiring on June 6, 2009, is for
approximately 5,490 square feet at a yearly rental of $137,000, excluding local
taxes. The Company sublets a portion of the space for an annual rental income of
$37,000, excluding local taxes. The Company also rents office space at 100 Wall
Street, New York, NY 10005 and at 20 North Wacker Drive, Chicago, IL 60606 for
an annual rental of $145,000 and $19,000, respectively, and approximately 4,800
square feet and 1,000 square feet, respectively. The Company leases office space
of approximately 3,700 square feet at 33 Union Square, New York, NY 10003 for an
annual rental of $162,000, expiring on December 1, 2001, which it subleases to
NYFIX Millennium on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings that are currently pending or, to the
Company's knowledge, contemplated against the Company or to which it is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock is traded on the Nasdaq Stock Market under the symbol
NYFX. Prior to March 6, 2000, the Company's common stock was traded on the
American Stock Exchange under the ticker symbol NYF. Prior to October 25, 1999,
the Company's common stock was traded on the American Stock Exchange under the
ticker symbol TSI. The following table sets forth the high and low sales prices
for the common stock, for the periods presented, as reported by the Nasdaq or
AMEX, as applicable.
6
Prices of Common Stock
High Low
---- ---
2000
- ----
First Quarter * $43.67 $14.17
Second Quarter $44.38 $20.69
Third Quarter $46.31 $29.63
Fourth Quarter $45.81 $18.00
1999 ** High Low
- ---- ---- ---
First Quarter $ 4.22 $ 3.06
Second Quarter $ 8.17 $ 2.83
Third Quarter $13.33 $ 6.39
Fourth Quarter $21.17 $11.11
* Restated for 3 for 2 stock split in the form of a stock dividend effective
4/4/2000
** Restated for 3 for 2 stock splits in the form of stock dividends effective
11/15/1999 and 4/4/2000
(b) Holders
At March 16, 2001 the records of the Company's transfer agent indicated that
there were 403 holders of record of the Company's common stock.
(c) Dividends
Shareholders of the Company's common stock are entitled to dividends if and when
declared by the Board of Directors out of funds legally available. The Company
has not paid or declared any dividends on any class of its capital stock since
its organization and has no present intention of paying cash dividends on its
common stock. The Company intends to utilize any earnings it may achieve for the
development of its business and for working capital purposes.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total revenues $23,980,167 $12,209,451 $ 6,235,393 $ 5,006,017 $7,013,605
Gross profit $17,602,815 $ 8,443,864 $ 3,702,684 $ 2,325,879 $2,867,115
Earnings (loss) from operations $ 6,474,494 $ 1,194,166 $(2,226,337) $(2,712,109) $ (518,781)
Net earnings (loss) $ 5,676,427 $ 960,419 $(2,233,809) $(2,594,040) $ (445,285)
Net earnings (loss) per common share:
Basic $ 0.23 $ 0.04 $ (0.11) $ (0.14) $ (0.03)
Diluted $ 0.21 $ 0.04 $ (0.11) $ (0.14) $ (0.03)
At year end:
Cash and cash equivalents $ 4,866,629 $ 1,565,649 $ 3,948,004 $ 2,141,307 $1,198,730
Working capital $ 9,158,936 $ 4,512,985 $ 5,970,449 $ 3,803,403 $3,522,756
Property and equipment, net $11,472,473 $ 5,873,037 $ 2,854,131 $ 1,361,707 $ 434,638
Total assets $57,558,350 $38,828,025 $12,997,519 $ 7,547,263 $7,473,336
Long-term debt, including current
portion $ 3,822,919 $ 2,500,000 $ 1,800,000 $ 93,564 $ 802,059
Shareholders' equity $42,227,734 $29,885,280 $ 8,118,749 $ 5,901,733 $4,543,835
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto. Historical results are not
necessarily indicative of the operating results for any future period.
The Company commenced operations in January 1991, initially focusing on
order-capturing of trading information via its Guided-Input(R) Touchpad system,
and since then has transitioned from a hardware vendor to a provider of complete
infrastructure, systems, software and wireless trading technologies to the
brokerage industry. The Company provides electronic trading and straight-through
trade processing solutions to various participants in the brokerage industry
such as brokerage firms, international banks and global exchanges trading in
equities, futures, options and currencies. The Company's deployment of products
and services via the Company's NYFIX network has resulted in its customer base
processing a daily volume ranging from as low as 200 million shares in the
beginning of the year to single trading days exceeding more than 500 million
shares towards the end of year 2000.
By 1996, the financial services industry had adopted the Financial Information
Exchange Protocol, commonly referred to as the FIX protocol, which provides the
brokerage industry with a common underlying language to enable electronic
trading and communications. In late 1997, the Company built a communication
infrastructure known as the "NYFIX network" utilizing the FIX protocol through
an individual dedicated circuit into the NYFIX network which provides NYFIX
customers with global electronic connectivity for trade order routing. The
Company currently offers its NYFIX services, consisting of integrated systems
including hardware and software, together with linkage through its NYFIX data
center. Customers subscribe to NYFIX services by paying a monthly fee per
terminal for use of the Company's integrated infrastructure and software
systems. Beginning in late 1997, the Company focused primarily on selling its
products and services on a subscription basis with ongoing monthly subscription
fees rather than a software and capital equipment sales model with one-time,
upfront fees. Since making this transition, total revenues have increased to
$23,980,000 in 2000 from $5,006,000 in 1997, representing a compound annual
growth rate of 69%. The Company has been profitable since the first quarter of
1999 and has had eight consecutive quarters of increasing profitability.
The Company's revenues comprise subscription, sales and service contract
revenue. Consistent with the Company's transition to a subscription sales model,
subscription fees represent a majority and increasing share of total revenues.
Subscription revenue contracts are primarily with brokerage firms, international
banks and global exchanges trading in equities, and are generally for an initial
period of one to three years with one to three year renewal periods.
Subscription revenues are recognized ratably over the lives of the subscription
agreements with customers and begin once installation is complete. Sales
revenue, which is comprised of software sales and capital equipment sales, is
generated primarily by sales to customers in the futures, options and currencies
trading market, and is expected to decrease as a percentage of total revenues as
the Company continues to shift its focus to servicing those markets using a
subscription fee model. Sales revenue is recognized upon shipment of the product
and acceptance by the customer. Service contract revenue is comprised of
maintenance contracts for capital sales equipment and subscription equipment and
is recognized ratably over the period that the service is provided. Service
contract revenue on subscription contracts is charged to customers as a fixed
percentage of such contracts.
Cost of revenues principally consists of subscription communication lines,
amortization of capitalized product enhancement costs and depreciation of
subscription-based equipment, labor, materials and overhead.
Selling, general and administrative expenses account for the majority of the
Company's operating expenses and consist of salaries and benefits, rent and
office expenses, non-customer specific communication fees, provisions for
doubtful accounts and marketing expenses. During the past several years, the
Company has expanded its efforts to support an increasing number of services and
to increase the number of exchanges, brokerage firms and "buy-side" institutions
connecting to the NYFIX network. Management believes that its continued
investment in the development of the NYFIX system and its associated
applications and services has increased order flow, which in turn should
facilitate both revenue growth and further distribution of its products.
Research and development expenses relate to developing new products and
technologies to meet the current and future needs of the Company's customers.
These costs consist primarily of salaries and related costs for technical
8
and programming personnel.
Depreciation and amortization expense consists of depreciation and amortization
of equipment and software used to operate the Company's systems.
On October 27, 1999, the Company announced the formation of NYFIX Millennium
L.L.C., a consortium of the Company and seven international investment banks and
brokerage firms, consisting of Deutsche Bank, ING Barings, Lehman Brothers,
Morgan Stanley Dean Witter, Sanford C. Bernstein & Co., SG Cowen Securities and
UBS Warburg. NYFIX Millennium is registered as a Broker/Dealer and is operating
in compliance with Regulation ATS. In October 2000, NYFIX Millennium commenced
the roll-out of its ATS on a limited basis to the Company's existing clients and
is allowing them to use the system without charging for orders executed.
Although the number of users and orders passing through NYFIX Millennium has
been increasing, the Company currently does not anticipate that NYFIX Millennium
will generate revenue until sufficient liquidity has been established within the
system. Once sufficient liquidity is established in the system, NYFIX Millennium
intends to generate revenue by charging for each transaction on a fee per share
basis.
On March 14, 2001, NYFIX Millennium added Bank of America and First Union
Securities as new partners, with additional partners and funding expected in the
near term. Pursuant to the terms of the Operating Agreement of NYFIX Millennium,
each new partner contributed $2,000,000 to NYFIX Millennium, and the Company
maintained its 50% ownership interest in NYFIX Millennium in exchange for
reducing certain of its rights to share in future dividend distributions of
NYFIX Millennium. The Company issued 94,000 shares of its common stock to each
new partner in return for the same option rights noted above.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Subscription revenue increased 137% to $15,955,000 in 2000, from $6,733,000 in
1999, principally due to increased desktop placements among existing customers,
and also the addition of new customers and new product offerings sold to
existing and new customers. As a percentage of total revenues, subscription
revenue increased to 67% in 2000 from 55% in 1999.
Sales revenue increased 37% to $5,089,000 in 2000, from $3,715,000 in 1999. The
increase in sales revenue is principally due to customer demand for the
Company's Order Book Management System ("OBMS") derivatives trading software
products. As a percentage of total revenue, sales revenue decreased to 21% in
2000, from 30% in 1999, which is consistent with the Company's transition to a
subscription-based model, with software sales comprising the majority of sales
revenue.
Service contract revenue increased 67% to $2,936,000 in 2000, from $1,761,000 in
1999, principally due to an increase in subscription contract revenue. In 2000,
service contract revenue comprised 12% of total revenue, as compared to 14% in
1999.
Cost of Revenues and Gross Profit
Gross profit as a percentage of total revenues increased to 73% in 2000 from 69%
in 1999. The increase in gross profit percentage principally resulted from an
increase in the amount of higher margin software installations and improved
pricing on communication charges relating to subscription agreements. The
Company obtains its materials and supplies from a variety of vendors in the U.S.
and Far East and did not experience any significant price increases in its
component parts purchased during 2000. Included in cost of revenues was
amortization expense of product enhancement costs of $1,185,000 and $719,000 for
2000 and 1999, respectively. Also included in cost of revenues was depreciation
expense for subscription-based equipment of $1,257,000 and $586,000 for 2000 and
1999, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 50% to $9,419,000 in
2000, from $6,290,000 in 1999, but decreased as a percentage of total revenues
to 39% in 2000 from 52% in 1999. The dollar increase reflects increased
salaries, related personnel costs, rent expense and various office expenses due
to personnel increases to support the
9
Company's growth. Also increasing were non-recoverable communication fees, and
bad debt expense primarily due to certain independent brokers going out of
business during 2000.
Research and Development
Research and development expenses increased 53% to $454,000 in 2000, from
$297,000 in 1999, as the Company continued to research ways to expand its
product portfolio.
Depreciation and Amortization
Depreciation and amortization expenses increased 89% to $1,255,000 in 2000 from
$663,000 in 1999, reflecting principally the continued investment in the
Company's infrastructure.
Interest Expense
Interest expense increased 50% to $333,000 in 2000, from $222,000 in 1999,
principally as a result of capital lease obligations entered into during the
period and higher average balances outstanding on the Company's line of credit
due to the draw down of an additional $700,000 in August 1999, offset in part by
repayment of the principal of $83,000 a month commencing in July 2000.
Interest Income
Interest income increased 38% to $156,000 in 2000, from $113,000 in 1999,
principally due to higher average cash balances maintained by the Company during
the year ended December 31, 2000 versus the comparable period in 1999.
Provision for Income Taxes
The provision for income taxes increased to $601,000 in 2000, from $94,000 in
1999. As of December 31, 1999, the Company established a full valuation
allowance of $2,010,000 for its deferred tax assets based upon management's
determination of the amount that would ultimately be realized. Based upon the
continued profitability of the Company during 2000 as well as expected future
profitability, management determined as of December 31, 2000, that a valuation
allowance was no longer required.
At December 31, 2000, the Company had a net operating loss carryforward balance
for federal income tax purposes of $3,776,000, expiring in 2014 through 2019.
This carryforward balance may be significantly limited under the Internal
Revenue Code as a result of ownership changes resulting from the Company's
equity offerings. In the event that the Company continues to be profitable, as
it has been since the first quarter of 1999, the Company will have income taxes
on its earnings. These taxes will have an effect on the Company's future
reported net earnings and cash flows.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Subscription revenue increased 196% to $6,733,000 in 1999, from $2,278,000 in
1998. The increase in subscription revenue is principally due to the Company's
transition from offering its products and services on a capital sales basis to a
subscription basis. The increase in subscription revenue is also partly due to a
number of new product enhancements and order routing services introduced during
the year as well as the Company's continued increase in new orders.
Sales revenue increased 40% to $3,715,000 in 1999, from $2,653,000 in 1998. The
increase in sales revenue was principally due to increased demand for the
Company's OBMS derivatives trading software.
Service contract revenue increased 35% to $1,761,000 in 1999, from $1,304,000 in
1998, primarily due to the increase in subscription contract revenue. In 1999,
service contract revenue comprised 14% of total revenues, as compared to 21% in
1998.
Cost of Revenues and Gross Profit
Gross profit as a percentage of total revenues increased to 69% in 1999, from
59% in 1998, principally due to an increase in the amount of higher margin
software installations and subscription agreements. During 1999, the Company did
not experience any significant price increases in component parts purchased.
Included in cost of sales was
10
amortization expense for product enhancement costs of $719,000 and $479,000 for
1999 and 1998, respectively. Also included in cost of sales was depreciation
expense for subscription-based equipment of $586,000 and $291,000 for 1999 and
1998, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 27% to $6,290,000 in
1999, from $4,957,000 in 1998. This increase reflected increases in salaries and
related personnel costs, travel expenses and various office expenses resulting
from continued expansion both in the U.S. and in London.
Research and Development
Research and development expenses decreased 45% to $297,000 in 1999, from
$537,000 in 1998, primarily as a result of the Company focusing on enhancing its
existing product line in 1999 as opposed to developing new products in 1998.
Depreciation and Amortization
Depreciation and amortization expenses increased 40% to $663,000 in 1999, from
$475,000 in 1998, reflecting principally the continued investment in the
Company's infrastructure in its NYFIX data center.
Interest Expense
Interest expense increased 106% to $222,000 in 1999, from $108,000 in 1998. This
increase was principally a result of higher balances outstanding on the
Company's new line of credit and the cost of warrants issued for the guarantee
of the amounts outstanding under the line of credit.
Interest Income
Interest income increased 23% to $113,000 in 1999, from $92,000 in 1998,
principally as a result of higher cash balances maintained by the Company.
Liquidity and Capital Resources
Prior to achieving the Company's present levels of profitability, the Company's
primary source of liquidity had been equity capital and drawdowns from the
Company's line of credit agreement. In November 1998 and in September 1999, the
Company raised $3,450,000 and $2,547,000, respectively, from private placements
of securities. At December 31, 2000, the cash and cash equivalents balance
increased to $4,867,000 from $1,566,000 at December 31, 1999 as a result of the
increase in net earnings and the exercise of stock options and warrants,
partially offset by capital expenditures and the acquisition of other assets to
support the Company's infrastructure and repayments under the line of credit.
At December 31, 2000, the Company had total debt of $3,823,000, which represents
amounts outstanding under the line of credit and capital lease obligations.
Subsequent to year-end, the Company has entered into capital lease obligations
for service bureau equipment valued at $524,000. The leases are for a three-year
period, with annual payments of $193,000. Except for these capital lease
obligations, at December 31, 2000, the Company had no material commitments for
capital expenditures or inventory purchases.
On July 13, 1998, the Company entered into a three-year $3 million line of
credit agreement with a financial institution with advances on such agreement
available to the Company during the first 18 months. The credit agreement was
primarily intended to finance equipment expenditures. The credit agreement bears
interest at either LIBOR plus 1.25% or the bank's prime rate, at the Company's
discretion. The Company drew down an aggregate of $1,800,000 under the agreement
during 1998 and an additional $700,000 during 1999. The credit agreement
prohibited the Company from making principal repayments prior to February 1,
2000. Repayment of principal commenced on July 30, 2000 with twelve monthly
installments of $83,333 with the remaining balance due on July 30, 2001. A
non-employee shareholder of the Company and the Company's president personally
secured the debt. In consideration for securing the credit agreement, the
non-employee shareholder and the Company's president received 337,500 and 56,250
warrants, respectively, to purchase the Company's common stock at $2.8333 per
share, which was the market value of the Company's common stock on the date such
warrants were issued. Expense related to the warrants is being recognized over
the three-year term of the credit agreement.
11
The Company believes it has sufficient liquidity, including cash generated from
operations and issuances of common stock, to support its cash needs in the year
2001.
Working Capital
At December 31, 2000 and 1999, the Company had working capital of $9,159,000 and
$4,513,000, respectively, representing an 82% improvement. The Company's present
capital resources include proceeds from internal operations and from issuances
of common stock.
Cash Provided by Operating Activities
During 2000, net cash provided by operations was $9,432,000, as compared to net
cash provided by operations of $2,445,000 in 1999. This increase is primarily
attributable to the 491% increase in net earnings, to $5,676,000 in 2000 from
$960,000 in 1999.
Cash Used in Investing Activities
During 2000 and 1999, net cash used in investing activities was $9,387,000 and
$8,769,000, respectively. The increase principally represents payments for
purchases of equipment related to the Company's data center and subscription
equipment and payments related to product enhancement costs for the Company's
product portfolio, along with advances made to NYFIX Millennium.
Cash Provided By Financing Activities
During 2000 and 1999, net proceeds from financing activities were $3,256,000 and
$3,942,000, respectively. During 2000 proceeds of $3,955,000 from the exercise
of warrants and stock options were partially offset by repayments under the
credit line of $500,000 and principal payments under capital lease obligations
of $200,000. During 1999, proceeds were $2,547,000 from a private placement of
common stock, the exercise of warrants and stock options generated funds of
$695,000, and borrowings under our line of credit were $700,000.
Seasonality
The Company believes that its operations are not significantly effected by
seasonality.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 is effective for all fiscal years beginning after June 15,
2000. SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The Company adopted SFAS 133 effective January 1, 2001. Management
believes that the adoption of SFAS 133 will not have a significant impact on the
financial position, results of operations, or cash flows of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The adoption of SAB 101 did not have an effect on the Company's consolidated
financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN 44"). FIN 44, an interpretation
of APB 25, provides guidance on the application of APB 25 for stock compensation
involving employees. The adoption of FIN 44 did not have an effect on the
Company's consolidated financial statements.
12
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. The Company does not use derivative
financial instruments for any purpose. Interest rate exposure is principally
limited to the $2 million current portion of long-term debt outstanding at
December 31, 2000, under the Company's line of credit agreement. Borrowings
under the line of credit agreement bear interest at rates that float with the
market. The impact of a 100 basis point change in the interest rate on the line
of credit agreement would not be material to earnings, cash flows or fair value.
As discussed in Note 2 to the consolidated financial statements, the financial
statements of the Company's London sales office are remeasured into U.S. dollars
using the U.S. dollar as the functional currency. The market risk associated
with foreign currency exchange rates is not material in relation to the
Company's consolidated financial position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Financial Statements on Page 16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On April 27, 2000, Deloitte & Touche LLP was appointed as independent auditors
for the Company, replacing Arthur Andersen LLP. The decision to change
accountants was approved by the Company's Board of Directors. The Company had no
disagreements with Arthur Andersen LLP in the year ended December 31, 1999. The
Company filed a Form 8-K reporting the change in independent accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
Section entitled "Proposal No. 1. -Election of Directors" and "Executive
Compensation" in the Company's Proxy Statement for the June 4, 2001 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
no later than April 30, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Section entitled "Executive Compensation and Transactions with Management" in
the Company's Proxy Statement for the June 4, 2001 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission no later
than April 30, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Sections entitled "Principal Holders of Voting Securities" and "Security
Ownership of Officers and Directors" of the Company's Proxy Statement for the
June 4, 2001 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission no later than April 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Section entitled "Executive Compensation and Transactions with Management" in
the Company's Proxy Statement for the June 4, 2001 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission no later
than April 30, 2001.
13
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Information
See index to Financial Statements on Page 16.
(2) Financial Statement Schedules
Supplemental schedules are omitted because they are not
required, inapplicable or the required information is shown in the
consolidated financial statements or notes thereto.
(3) Exhibits *
3.1 Articles of Incorporation of NYFIX, Inc. (Exhibit 3.1 to
Registrant's Form 10 filed March 5, 1993).
3.2 Certificate of Amendment to Articles of Incorporation of
NYFIX, Inc. (Exhibit 3.3 to Registrant's form S-3 Filed
December 30, 1999).
3.3 By-Laws of NYFIX, Inc. (Exhibit 3.2 to Registrant's Form
10 filed March 5, 1993).
4.1 Certificate of Designation of Series A Preferred Stock
(Exhibit 4.1 to Registrant's Form 10 filed March 5,
1993).
4.2 Specimen - Common Stock Certificate (Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
4.3 Rights Agreement between Chase Mellon Shareholder
Services, L.L.C. and the Registrant dated September 1,
1997 (Exhibits 1 and 2 to Registrant's 8-A12B filed
September 10, 1997).
4.4 First Amendment to Rights Agreement between Chase Mellon
Shareholder Services, L.L.C. and the Registrant dated
October 25, 1999 (Exhibits 3 to Registrant's 8-A12B/A
filed November 3, 1999).
10.1 Employment Agreement with Peter Kilbinger Hansen dated
January 1, 1991 (Exhibit 3.2 to Registrant's Form 10
filed March 5, 1993).
10.2 Revolving Credit Agreement, dated July 13, 1998, between
Chase Manhattan Bank and NYFIX, Inc. (Exhibit 10.4 to the
Company Form 8-K dated July 13, 1998.)
10.3 Amended and Restated 1991 Incentive Stock Option Plan of
NYFIX, Inc. (Exhibit 10.3 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996)
10.4 Amendment No. 1 to Amended and Restated 1991 Incentive
and Nonqualified Stock Option Plan. **
10.5 Amendment No. 2 to Amended and Restated 1991 Incentive
and Nonqualified Stock Option Plan. **
10.6 Limited Liability Company Operating Agreement of NYFIX
Millennium, L.L.C. (Exhibit 10.3 to Company's Annual
Report on Form 10-K for the year ended December 31,
1999).
21.1 Subsidiaries of the Registrant (Exhibit 21.1 to Company's
Annual Report on Form 10-KSB for the year ended December
31, 1994).
23.1 Independent Auditors' Consent.**
23.2 Consent of Independent Public Accountants.**
- ----------------------------------
* - Except as noted, all exhibits have been previously filed.
** - Filed herewith.
(b) Reports on Form 8-K
- -----------------------
None
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed this
30th day of March 2001 on its behalf by the undersigned, thereunto duly
authorized.
NYFIX, INC.
By: /s/ Peter Kilbinger Hansen
------------------------------
Peter Kilbinger Hansen
Chairman of the Board
and President
(Chief Executive Officer)
POWER OF ATTORNEY
NYFIX, Inc. and each of the undersigned do hereby appoint Peter Kilbinger Hansen
and Richard A. Castillo, and each of them severally, its or his true and lawful
attorney to execute on behalf of NYFIX, Inc. and the undersigned any and all
amendments to this Annual Report on Form 10-K and to file the same with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission; each of such attorneys shall have the power
to act hereunder with or without the other.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Peter Kilbinger Hansen Chairman of the Board March 30, 2001
- -------------------------- (Principal Executive Officer)
Peter Kilbinger Hansen
/s/ Richard A. Castillo Chief Financial Officer & March 30, 2001
- ----------------------- Secretary (Principal Financial
Richard A. Castillo Officer and Principal
Accounting Officer)
/s/ Dean G. Stamos Executive Vice President March 30, 2001
- ------------------ & Director
Dean G. Stamos
/s/ George O. Deehan Director March 30, 2001
- --------------------
George O. Deehan
/s/ William J. Lynch Director March 30, 2001
- --------------------
William Lynch
/s/ Carl E. Warden Director March 30, 2001
- ------------------
Carl E. Warden
15
Index to Financial Statements
Page
----
Independent Auditors' Report..................................................17
Report of Independent Public Accountants......................................18
Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and 1999..................19
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.........................................20
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998.........................................21
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.........................................22
Notes to Consolidated Financial Statements....................................23
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
NYFIX, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheet of NYFIX, Inc. and
subsidiary as of December 31, 2000, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of NYFIX, Inc. and subsidiary as of
December 31, 2000, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 2, 2001
(March 14, 2001 as to Note 18)
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of NYFIX, Inc.:
We have audited the accompanying consolidated balance sheet of NYFIX, Inc. (a
New York corporation) and subsidiary as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NYFIX, Inc. and subsidiary as
of December 31, 1999, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 29, 2000
18
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 4,866,629 $ 1,565,649
Accounts receivable - less allowance of $421,000 and $125,000, respectively 12,058,370 7,088,820
Inventory, net 1,742,823 1,303,658
Prepaid expenses and other current assets 646,814 478,641
Due from NYFIX Millennium 1,985,081 861,970
Receivable from officers 200,441 156,992
Deferred income taxes 1,859,000 -
------------ ------------
Total Current Assets 23,359,158 11,455,730
PROPERTY AND EQUIPMENT, net 11,472,473 5,873,037
INVESTMENT IN NYFIX MILLENNIUM 19,500,000 19,500,000
DEFERRED INCOME TAXES 237,000 -
OTHER ASSETS 2,989,719 1,999,258
------------ ------------
TOTAL ASSETS $ 57,558,350 $ 38,828,025
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,915,167 $ 1,845,996
Accrued expenses 2,444,825 1,418,113
Current portion of capital lease obligations 692,525 -
Current portion of long-term debt 2,000,000 500,000
Advance billings 6,147,705 3,178,636
------------ ------------
Total Current Liabilities 14,200,222 6,942,745
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 1,130,394 -
LONG-TERM DEBT - 2,000,000
------------ ------------
Total Liabilities 15,330,616 8,942,745
------------ ------------
COMMITMENTS AND CONTINGENCIES (See Notes)
SHAREHOLDERS' EQUITY
Preferred stock - par value $1; 5,000,000 shares authorized; none issued - -
Common stock - par value $.001; 60,000,000 authorized; 25,109,550 and
23,854,953 shares issued and outstanding 25,110 23,855
Additional paid-in capital 42,558,040 35,862,994
Retained earnings (accumulated deficit) 306,482 (5,369,945)
Due from officers and directors (661,898) (631,624)
------------ ------------
Total Shareholders' Equity 42,227,734 29,885,280
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,558,350 $ 38,828,025
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
19
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
REVENUES:
Sales $ 5,089,412 $ 3,715,479 $ 2,653,100
Subscription revenue 15,954,989 6,732,928 2,278,447
Service contracts 2,935,766 1,761,044 1,303,846
------------ ------------ ------------
Total Revenues 23,980,167 12,209,451 6,235,393
------------ ------------ ------------
COST OF REVENUES:
Cost of sales 669,878 545,963 726,927
Cost of subscription revenue 5,032,064 2,664,077 1,373,466
Cost of service contracts 675,410 555,547 432,316
------------ ------------ ------------
Total Cost of Revenues 6,377,352 3,765,587 2,532,709
------------ ------------ ------------
GROSS PROFIT 17,602,815 8,443,864 3,702,684
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 9,419,182 6,289,686 4,956,679
Research and development 454,362 297,475 537,346
Depreciation and amortization 1,254,777 662,537 474,996
------------ ------------ ------------
Total Operating Expenses 11,128,321 7,249,698 5,969,021
------------ ------------ ------------
EARNINGS (LOSS) FROM OPERATIONS 6,474,494 1,194,166 (2,266,337)
Interest expense (332,750) (221,711) (108,465)
Interest income 155,947 112,807 91,715
Other (expense) income (20,009) 11,166 61,744
------------ ------------ ------------
EARNINGS (LOSS) BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 6,277,682 1,096,428 (2,221,343)
PROVISION FOR INCOME TAXES 601,255 94,400 12,466
------------ ------------ ------------
EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING 5,676,427 1,002,028 (2,233,809)
PRINCIPLE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - (41,609) -
------------ ------------ ------------
NET EARNINGS (LOSS) $ 5,676,427 $ 960,419 $ (2,233,809)
============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.23 $ 0.05 $ (0.11)
============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.23 $ 0.04 $ (0.11)
============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 24,480,356 21,752,583 19,862,843
============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE BEFORE AND
AFTER CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE $ 0.21 $ 0.04 $ (0.11)
============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,425,130 23,306,912 19,862,843
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
20
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Retained
Common Stock Additional Earnings Due from Total
--------------------- Paid-in (Accumulated Officers Shareholders'
Description Shares Amount Capital Deficit) and Directors Equity
----------- ------ ------ ------- -------- ------------- ------
BALANCE,
JANUARY 1, 1998 19,180,193 $ 19,180 $ 10,409,108 $ (4,096,555) $ (430,000) $ 5,901,733
Stock issued from exercise of
options and warrants 639,000 639 983,111 - - 983,750
Common stock, net of
issuance costs 1,350,000 1,350 3,448,650 - - 3,450,000
Warrants issued - - 40,000 - - 40,000
Due from officers and directors - - - - (22,925) (22,925)
Net loss - - - (2,233,809) - (2,233,809)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1998 21,169,193 21,169 14,880,869 (6,330,364) (452,925) 8,118,749
Stock issued from exercise of
options and warrants 435,760 436 873,504 - - 873,940
Common stock, net of
issuance costs 2,250,000 2,250 20,044,625 - - 20,046,875
Warrants issued - - 63,996 - - 63,996
Due from officers and directors - - - - (178,699) (178,699)
Net earnings - - - 960,419 - 960,419
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1999 23,854,953 23,855 35,862,994 (5,369,945) (631,624) 29,885,280
Payment for fractional shares - - (3,770) - - (3,770)
Stock issued from exercise of
options and warrants 1,254,597 1,255 3,988,268 - - 3,989,523
Warrants issued - - 75,548 - - 75,548
Due from officers and directors - - - - (30,274) (30,274)
Tax benefit from exercise of
stock options - - 2,635,000 - - 2,635,000
Net earnings - - - 5,676,427 - 5,676,427
------------ ------------ ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 2000 25,109,550 $ 25,110 $ 42,558,040 $ 306,482 $ (661,898) $ 42,227,734
============ ============ ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
21
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 5,676,427 $ 960,419 $ (2,233,809)
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation 2,507,636 1,244,818 747,664
Amortization 1,189,003 738,581 497,552
Deferred income taxes (585,300) - -
Provision for bad debts 415,802 44,758 50,922
Noncash financing charges 75,548 63,996 40,000
Changes in assets and liabilities:
Accounts receivable (5,385,352) (3,716,160) (1,609,039)
Inventory (439,165) (24,356) 31,681
Prepaid expenses and other current assets (168,173) (194,729) (181,412)
Receivable from officers (43,449) (36,409) (28,986)
Accounts payable 1,069,171 972,179 (53,855)
Accrued expenses 2,151,012 702,217 263,016
Advance billings 2,969,069 1,689,579 1,317,643
----------- ----------- ------------
Net cash provided by (used in) operating activities 9,432,229 2,444,893 (1,158,623)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,084,180) (4,263,724) (2,342,698)
Investment in NYFIX Millennium - (2,000,000) -
Advances to NYFIX Millennium (1,123,111) (861,970) -
Payments for product enhancement costs and other assets (2,179,464) (1,643,670) (809,243)
----------- ----------- ------------
Net cash used in investing activities (9,386,755) (8,769,364) (3,151,941)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (199,973) - -
Proceeds from borrowings - 700,000 2,300,000
Repayment of borrowings (500,000) - (593,564)
Issuance of common stock, net of issuance costs 3,955,479 3,242,116 4,410,825
----------- ----------- ------------
Net cash provided by financing activities 3,255,506 3,942,116 6,117,261
----------- ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,300,980 (2,382,355) 1,806,697
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,565,649 3,948,004 2,141,307
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,866,629 $ 1,565,649 $ 3,948,004
=========== =========== ============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest $ 274,490 $ 149,777 $ 69,044
Cash paid during the year for income taxes 286,634 39,150 12,466
Capital lease obligations incurred 2,022,892 - -
Common stock issued for investment in NYFIX Millennium - 17,500,000 -
The accompanying notes to consolidated financial statements are an integral part
of these statements.
22
NYFIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND PRESENTATION
NYFIX, Inc. and subsidiary (the "Company") develops and markets
advanced electronic trading systems to brokerage firms,
international banks and global exchanges trading in equities and
derivative instruments. The Company's two product lines are Equities
and Futures & Options. The Company's NYFIX Network, a combined FIX
(Financial Information Exchange protocol) and Exchange Access
Network, enables users to electronically communicate trade data
among the buy-side, sell-side, and exchange floor environments. In
addition, the Company offers a range of related information
technology services, subscriptions and maintenance support. The
Company is headquartered in Stamford, Connecticut and maintains
operations in New York, Chicago and London.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of NYFIX,
Inc. and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Reclassifications
-----------------
Certain 1999 and 1998 balances have been reclassified to conform to
the 2000 presentation.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
Inventory
---------
Inventory consists of parts, finished goods and materials and is
stated at the lower of cost, determined on an average cost basis, or
market.
Property and Equipment
----------------------
Property and equipment is stated at cost less accumulated
depreciation. Included in equipment are certain costs related to the
development of the NYFIX network to support the Company's
subscription and service based businesses. Depreciation is provided
using the straight-line method over the estimated useful lives of
the assets ranging from two to eight years. The estimated useful
lives for subscription and service-based equipment are generally two
to three years.
23
Other Assets
------------
Other assets consist principally of patents, deferred product
enhancements costs (capitalized based on time incurred for
enhancements of products which have achieved technological
feasibility) and deposits. Product enhancement costs are being
amortized using the straight-line method over three years. Patent
costs are being amortized over seventeen years.
Long-Lived Assets
-----------------
Long-lived assets, primarily equipment and the investment in NYFIX
Millennium are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash
flows are not sufficient to recover its carrying amount. The Company
measures an impairment loss by comparing the fair value of the asset
to its carrying amount. The fair value of an asset is calculated
based upon the present value of expected future cash flows. There
has been no impairment in long-lived assets through December 31,
2000.
Revenue Recognition
-------------------
Sales are generally recorded upon shipment of the product to and
acceptance by customers. Subscription revenue is recognized ratably
over the life of the subscription agreements with customers. Revenue
from service contracts is recognized ratably over the period the
services are performed. Amounts billed in advance for service and
subscription contracts are deferred and reflected as advance
billings.
Research and Development
------------------------
The Company expenses research and development costs as incurred.
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising
expense was $170,000, $159,000 and $294,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Foreign Currency Translation
----------------------------
The Company's functional currency is the U.S. dollar. Accordingly,
the monetary assets and liabilities of the London sales office are
translated at year-end exchange rates while non-monetary assets and
liabilities are translated at historical rates. Revenues and
expenses are translated at average rates in effect during the year,
except for depreciation and cost of sales, which are translated at
historical rates. The resulting currency translation gain or loss is
included in the results of operations.
Cumulative Effect of a Change in Accounting Principle
-----------------------------------------------------
In 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP requires costs of start-up activities
and organization costs to be expensed as incurred. The Company
adopted the SOP in 1999 and recognized a charge for the cumulative
effect of accounting change of $42,000.
Income Taxes
------------
Deferred income taxes have been provided for temporary differences
between the Company's financial statement and income tax basis of
the Company's assets and liabilities using presently enacted tax
rates.
24
Financial Instruments
---------------------
The carrying value for all current assets and current liabilities
approximates fair value because of their short-term nature. The
carrying value of the Company's long-term debt also approximates its
fair value based on prevailing interest rates.
Accrued Expenses
----------------
Included in accrued expenses is sales tax payable of $1,542,000 and
$595,000 at December 31, 2000 and 1999, respectively.
Comprehensive Income
--------------------
For all years presented, comprehensive income was equal to net
earnings.
Impact of Recently Issued Accounting Pronouncements
---------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for all
fiscal years beginning after June 15, 2000. SFAS 133, as amended,
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS 133, certain
contracts that were not formerly considered derivatives may now meet
the definition of a derivative. The Company adopted SFAS 133
effective January 1, 2001. Management believes that the adoption of
SFAS 133 will not have a significant impact on the financial
position, results of operations, or cash flows of the Company.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 summarizes certain of
the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The adoption of SAB
101 did not have an effect on Company's consolidated financial
statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN 44").
FIN 44, an interpretation of APB 25, provides guidance on the
application of APB 25 for stock compensation involving employees.
The adoption of FIN 44 did not have an effect on the Company's
consolidated financial statements.
3. INVENTORY
Inventory consists of the following:
December 31,
-------------------------
2000 1999
---------- ----------
Parts and materials $1,174,727 $ 828,259
Work in process 39,629 -
Finished goods 620,467 557,399
---------- ---------
1,834,823 1,385,658
Less: Allowance for obsolescence 92,000 82,000
---------- ---------
Total $1,742,823 $1,303,658
========== ==========
25
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
---------------------------
2000 1999
----------- -----------
Computer software $ 458,939 $ 424,022
Leasehold improvements 558,356 169,755
Furniture and equipment 2,428,962 1,463,694
Subscription and service bureau equipment 11,161,438 6,514,267
Service bureau equipment under capital leases 2,022,892 -
----------- -----------
16,630,587 8,571,738
Less: Accumulated depreciation 5,158,114 2,698,701
----------- -----------
Total $11,472,473 $ 5,873,037
=========== ===========
Included in accumulated depreciation at December 31, 2000 is
depreciation on leased service bureau equipment of $123,000.
Included in cost of revenues is depreciation expense of $1,257,000,
$586,000 and $291,000 for 2000, 1999 and 1998, respectively.
5. OTHER ASSETS
Included in other assets are unamortized deferred product
enhancement costs of $2,378,000 and $1,811,000 as of December 31,
2000 and 1999, respectively. Amounts deferred are based upon an
analysis of payroll and other costs directly related to the
enhancement of existing products. Included in cost of revenues is
amortization expense for product enhancement costs of $1,185,000,
$719,000 and $479,000 for 2000, 1999 and 1998, respectively.
Included in depreciation and amortization expense is amortization
expense for other deferred assets of $4,000, $20,000 and $19,000 for
2000, 1999 and 1998, respectively.
6. EARNINGS PER SHARE
The Company's basic earnings per common share ("EPS") is calculated
based on net earnings (loss) available to common shareholders and
the weighted-average number of shares outstanding during the
reported period. Diluted EPS includes additional dilution from
common stock equivalents, such as stock issuable pursuant to the
exercise of outstanding stock options and warrants.
Year Ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Net earnings (loss) $ 5,676,427 $ 960,419 $ (2,233,809)
------------ ------------ ------------
Basic weighted average shares outstanding 24,480,356 21,752,583 19,862,843
------------ ------------ ------------
Basic earnings (loss) per common share $ 0.23 $ 0.04 $ (0.11)
============ ============ ============
Dilutive options 1,911,485 1,306,029 -
Dilutive warrants 33,289 248,300 -
------------ ------------ ------------
Diluted weighted average shares outstanding 26,425,130 23,306,912 19,862,843
------------ ------------ ------------
Diluted earnings (loss) per common share $ 0.21 $ 0.04 $ (0.11)
============ ============ ============
Stock options and warrants were excluded from the EPS calculation for 1998 since
their inclusion would be anti-dilutive.
26
7. CAPITAL STOCK
On October 21, 1999, shareholders approved an increase in the
authorized shares of the Company's common and preferred stock.
Common shares were increased to 60 million from 15 million shares
and preferred shares to 5 million from 1 million shares. Along with
this increase, the Board of Directors authorized a 3 for 2 stock
split in the form of a 50% stock dividend to all shareholders of
record on November 1, 1999, which was paid on November 15, 1999. On
March 13, 2000, the Board of Directors authorized a 3 for 2 stock
split in the form of a 50% stock dividend to all shareholders of
record on March 24, 2000, which was paid April 4, 2000. All per
share and share data in the consolidated financial statements and
notes thereto have been restated to reflect the stock splits.
On September 7, 1999, the Company completed a private placement of
281,250 shares of common stock to an institutional investment firm
at a price equal to the average closing price of the stock for the
30-day period prior to the closing date on September 1, 1999. This
approximated the fair market value of the stock at $9.0555 per share
for an aggregate value of $2,546,875.
On November 24, 1998, the Company completed a private placement of
1,350,000 shares of common stock, at a price of $2.6666 per share,
for an aggregate value of $3,600,000. Costs related to this offering
amounted to $150,000 resulting in net proceeds to the Company of
$3,450,000.
On September 1, 1997, the Board of Directors declared a dividend of
a preference share purchase right (a "Right") for each outstanding
share of common stock of the Company held by shareholders of record
on September 19, 1997. Each share of common stock issued by the
Company after such record date has the same Right attached thereto.
Each Right entitles the registered holder to purchase from the
Company, at any time after a shareholder acquires 20% or more of the
Company's outstanding common stock, as set forth in the Rights
Agreement, shares of the Company's Series A Preferred Stock
("Preference Stock"). The purchase price is $40 per one
one-hundredth of a share of Preference Stock, subject to adjustment
as set forth in the Rights Agreement.
During 2000, 495,000 warrants and 760,000 options were exercised for
1,255,000 shares of common stock. The Company received $1,337,000
from the warrant exercises and $2,652,000 from the option exercises.
8. MAJOR CUSTOMERS
For the year ended December 31, 2000, no customer accounted for more
than 10% of total revenues or accounts receivable. For the year
ended December 31, 1999, one customer accounted for 13% of total
revenues and another customer accounted for 11% of accounts
receivable. For the year ended December 31, 1998, one customer
accounted for 13% of total revenues and 26% of accounts receivable,
and another customer accounted for 13% of total revenues and 16% of
accounts receivable.
9. DEBT AND CAPITAL LEASE OBLIGATIONS
On July 13, 1998, the Company entered into a three-year $3 million
line of credit agreement (the "Agreement") with a financial
institution with advances on such agreement available to the Company
during the first eighteen months. The Agreement was primarily
intended to finance equipment expenditures. The Agreement bears
interest at either LIBOR plus 1.25% or the bank's prime rate. The
rate used is at the Company's discretion. The Company drew down an
aggregate of $1,800,000 under the Agreement during 1998 and an
additional $700,000 during 1999. The weighted average outstanding
borrowings during 2000 were approximately $2,398,000 at a weighted
average interest rate of 7.48%. The weighted average outstanding
borrowings during 1999 were $2,059,000 at a weighted average
interest rate of 7.43%. The Agreement prohibited the Company from
making principal repayments prior to February 1, 2000. Repayment of
principal commenced on July 30, 2000, with twelve monthly
installments of $83,333 with the remaining balance due on July 30,
2001. The debt is personally secured by a non-employee shareholder
of
27
the Company and the Company's president. In consideration for
securing the Agreement, the non-employee shareholder and president
received 337,500 and 56,250 warrants, respectively, to purchase the
Company's common stock at approximately $2.83 per share, which was
the market value of the Company's common stock on the date such
warrants were issued. The expense related to the warrants issued is
being recognized over the three-year term of the Agreement.
In association with obtaining the $3 million line of credit
facility, the Company terminated its previous $500,000 line of
credit agreement and repaid all outstanding term loans. The weighted
average outstanding borrowing under the previous credit line was
$74,000 during 1998 at a weighted average interest rate of 9.50%.
At December 31, 2000, the Company was committed under capital lease
obligations with interest rates ranging from 8.28% to 13.04% for
maturities ranging from January 2, 2003 to December 31, 2003. At
December 31, 2000, the amount of the obligation was $1,823,000, with
$693,000 classified as current.
Capital lease obligations at December 31, 2000 are payable as
follows:
Year Ending
December 31, Amount
------------ ------
2001 $ 865,000
2002 865,000
2003 366,000
----------
Total 2,096,000
Less portion of lease
payments representing
interest 273,000
----------
Present value of minimum
lease payments $1,823,000
==========
Capital leases generally provide that the Company pay property taxes
and operating costs. Certain service bureau equipment under capital
lease obligations is leased to NYFIX Millennium, L.L.C. See Note 18.
10. COMMITMENTS AND CONTINGENCIES
At December 31, 2000, the Company was committed under operating
leases for offices, production facilities and equipment for terms
expiring through March 25, 2009. Future minimum annual rental
payments are as follows:
Year Ending
December 31, Amount
------------ ------
2001 $1,856,000
2002 1,663,000
2003 1,580,000
2004 1,581,000
2005 1,357,000
Thereafter 1,641,000
Aggregate rental expense amounted to $959,000, $780,000 and $623,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company has an employment agreement with its President, which
calls for a base salary of $150,000, with such base salary to be
reviewed on an annual basis by the Compensation Committee of the
Board of Directors.
28
11. RELATED PARTY TRANSACTIONS
Certain executive officers and directors of the Company have amounts
due to the Company for the exercise of warrants and options for
common stock, with interest at rates ranging from 0% to 7.5%, for
maturities ranging from December 1, 2001 to December 30, 2003. Such
amounts aggregated $661,898 and $631,624 as of December 31, 2000 and
1999, respectively, and have been shown as a reduction of
shareholders' equity.
At December 31, 2000 and 1999, the Company had amounts receivable
from officers for travel and payroll advances of $200,441 and
$156,992, respectively.
12. DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) retirement plan (the "Plan") covering
substantially all of its U.S. employees who meet eligibility
requirements. The Plan permits participants to contribute up to a
maximum of 15% of their annual compensation, as defined, not to
exceed the federal limit of $10,500 in 2000. The Plan permits the
Company to match employees' tax deferred contributions up to a
maximum of 3% of employees' compensation provided the Company
employs the employee at the end of the year. Remaining contributions
under the Plan are discretionary. Total Company contributions under
the Plan were $143,000, $80,000 and $57,000 in 2000, 1999 and 1998,
respectively.
13. STOCK WARRANTS AND STOCK OPTION PLAN
On March 30, 1999, the Board of Directors approved the second
amendment to the Amended and Restated 1991 Incentive and
Nonqualified Stock Option Plan. Under this amendment, the number of
options reserved for issuance was increased from 3,375,000 shares to
5,625,000 shares of common stock. This amendment was approved at the
Company's Annual Meeting of Shareholders held on June 7, 1999. On
March 29, 2000, the Board of Directors approved the third amendment
to the Amended and Restated 1991 Incentive and Nonqualified Stock
Option Plan. Under this amendment, the number of options reserved
for issuance was increased from 5,625,000 shares to 6,625,000 shares
of common stock. This amendment was approved at the Company's Annual
Meeting of Shareholders held on June 5, 2000. All stock options
granted were at fair market value at the date of grant, and expire
ten years from the date of grant. The Plan expires on June 23, 2001.
29
At December 31, 2000, 1999 and 1998, the following options and
warrants had been granted and were outstanding:
Weighted Weighted
Stock Average Stock Average
Options Exercise Price Warrants Exercise Price
------- -------------- -------- --------------
Outstanding at
January 1, 1998 2,142,000 $2.01 593,633 $1.56
Granted 903,825 2.97 450,000 2.81
Exercised (452,250) 1.58 (186,750) 1.45
Forfeited (171,900) 2.90 (123,750) 1.25
------------------- -----------------
Outstanding at
December 31, 1998 2,421,675 2.37 733,133 2.41
Granted 1,446,638 6.59 - -
Exercised (253,953) 2.38 (181,883) 1.50
Forfeited (61,875) 2.69 - -
------------------- -----------------
Outstanding at
December 31, 1999
3,552,485 4.09 551,250 2.74
Granted 2,007,063 28.00 - -
Exercised (759,713) 3.75 (495,000) 2.70
Forfeited (270,448) 12.41 - -
------------------- -----------------
Outstanding at
December 31, 2000 4,529,387 11.50 56,250 2.83
=================== =================
The weighted average fair value of stock options granted during the
years ended December 31, 2000, 1999 and 1998 was $16.02, $13.25 and
$1.71, respectively. The weighted average fair value of warrants
granted during the year ended December 31, 1998 was $1.30.
The following table summarizes the options and warrants exercisable
at December 31, 2000, 1999 and 1998 and the weighted average fair
value of warrants and options granted during the years then ended:
Exercisable Options Exercisable Warrants
------------------- --------------------
Weighted
Average Weighted
Exercise Average
Options Price Warrants Exercise Price
------- ----- -------- --------------
Shares exercisable at
December 31, 1998 550,125 $1.98 165,008 $1.40
Shares exercisable at
December 31, 1999 1,017,557 $2.25 551,250 $2.74
Shares exercisable at
December 31, 2000 1,376,321 $3.16 56,250 $2.83
30
The following table summarizes information about stock options and warrants
outstanding at December 31, 2000:
Granted Exercisable
---------------------------------------------------- -------------------------------
Number Weighted Number
Outstanding at Average Weighted Exercisable at Weighted
Range of December 31, Remaining Life Average December 31, Average
Exercise Prices 2000 (Years) Exercise Price 2000 Exercise Price
- --------------- -------------- -------------- -------------- -------------- --------------
$1.14 - $1.61 147,500 4.37 $1.42 147,500 $1.42
2.00 - 2.20 928,374 6.01 2.12 604,375 2.11
2.50 - 3.61 831,662 7.61 2.93 497,208 2.90
3.89 - 6.94 620,188 8.55 6.72 117,750 6.60
10.11 - 18.75 1,211,213 9.03 14.50 65,738 12.25
21.33 - 33.00 456,200 9.38 25.76 - -
33.13 - 44.00 390,500 9.54 36.27 - -
------------- ---------
4,585,637 1,432,571
============= =========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998:
o Risk free interest rates range from 4.18% to 6.42%
o Expected dividend yields of 0%
o Expected lives of 3 to 5 years and
o Expected volatility of 70%, 65% and 63%, respectively
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations to account for its stock plans. Except
for certain warrants granted to non-employees during 1998, no compensation cost
has been recognized for any option grants in the accompanying consolidated
statements of operations. Had compensation costs been determined in accordance
with the fair value method as defined in SFAS No. 123, "Accounting for
Stock-Based Compensation", the net earnings (loss) and basic and diluted
earnings (loss) per share would have been reduced from the following as reported
amounts to the following pro forma amounts:
Year Ended December 31,
----------------------------------------
2000 1999 1998
---- ---- ----
Net earnings (loss):
As reported $ 5,676,427 $ 960,419 $ (2,233,809)
=========== ========= =============
Pro forma $(1,650,000) $(831,791) $ (3,215,042)
=========== ========= =============
Basic earnings (loss) per common share:
As reported $ 0.23 $ 0.04 $ (0.11)
=========== ========= =============
Pro forma $ (.07) $ (0.04) $ (0.16)
=========== ========= =============
Diluted earnings (loss) per common share:
As reported $ 0.21 $ 0.04 $ (0.11)
=========== ========= =============
Pro forma $ (.07) $ (0.04) $ (0.16)
=========== ========= =============
31
14. BUSINESS SEGMENT INFORMATION
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for additional disclosure
about operating segments for interim and annual financial
statements. This standard requires financial and descriptive
information be disclosed for segments whose operating results are
reviewed by the Company for decisions on resource allocation. It
also establishes standards for related disclosures about products
and services, geographic areas and major customers.
The Company operates in a single industry segment as a financial
technology company focusing on electronic trading and
straight-through processing solutions for the brokerage community.
The Company has two principal product lines: Equities and Futures &
Options. The Company's Equities product line is sold primarily by
the Stamford and New York locations, while the Company's Futures &
Options product line is sold primarily by the London and Chicago
locations. Each office has the opportunity to sell or enter into
subscriptions for either of the Company's product lines. However,
the operations of each product line are not individually reported
nor are they managed or evaluated individually by the Chief
Executive Officer, who is the Company's chief decision maker. As
such, the Company does not segment its business by product line.
Identifiable assets by geographic location include assets directly
identifiable with those locations. Corporate assets consist
primarily of cash and cash equivalents and fixed assets associated
with non-operating activities.
Summarized financial information by geographic location for 2000,
1999 and 1998 is as follows (in 000's):
2000 1999 1998
---- ---- ----
Revenues:
Stamford and New York $ 18,111 $ 9,287 $ 4,203
London 2,678 2,636 2,001
Chicago 3,191 286 31
Inter-location sales 5 78 95
Inter-location elimination (5) (78) (95)
-------- -------- --------
Total revenues $ 23,980 $ 12,209 $ 6,235
======== ======== ========
Gross profit:
Stamford and New York $ 12,263 $ 5,897 $ 1,936
London 2,236 2,288 1,745
Chicago 3,104 259 22
-------- -------- --------
Total gross profit $ 17,603 $ 8,444 $ 3,703
======== ======== ========
Identifiable assets at December 31:
Stamford and New York $ 45,554 $ 34,313 $ 7,284
London 2,857 2,411 1,472
Chicago 2,122 346 57
Corporate 7,025 1,758 4,184
-------- -------- --------
Total identifiable assets $ 57,558 $ 38,828 $ 12,997
======== ======== ========
Capital expenditures:
Stamford and New York $ 5,925 $ 4,184 $ 2,259
London 26 31 81
Chicago 133 49 3
-------- -------- --------
Total capital expenditures $ 6,084 $ 4,264 $ 2,343
======== ======== ========
32
2000 1999 1998
---- ---- ----
Depreciation:
Stamford and New York $ 2,436 $ 1,198 $ 676
London 29 39 69
Chicago 43 8 3
-------- -------- --------
Total depreciation $ 2,508 $ 1,245 $ 748
======== ======== ========
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amount used for income tax
purposes. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liability recognized as of December 31, 2000 and 1999 are presented
below:
December 31,
---------------------
2000 1999
---- ----
Deferred tax assets:
Bad debt expense $ 181,500 $ 50,000
Inventory obsolescence 39,600 32,800
Product development costs 375,500 218,700
Operating loss carryforward 1,511,000 1,721,000
AMT credit carryforward 78,000 -
Other 69,000 50,500
---------- ----------
Total deferred tax assets 2,254,600 2,073,000
Less valuation allowance - 2,010,300
---------- ----------
Net deferred tax assets 2,254,600 62,700
Less deferred tax liability
Depreciation and amortization 158,600 62,700
---------- ----------
Net deferred tax amount $2,096,000 $ -
========== ==========
As of December 31, 1999, the Company established a full valuation
allowance for its deferred tax assets based upon management's
determination of the amount that would ultimately be realized. Based
upon the continued profitability of the Company during 2000 as well
as expected future profitability, management determined as of
December 31, 2000, that a valuation allowance was no longer
required.
At December 31, 2000, the Company had net operating loss
carryforwards for federal income tax purposes of $3,776,000 expiring
in 2014 through 2019. In addition, the net operating loss
carryforwards may be significantly limited in the future under
Internal Revenue Code Section 382 as a result of ownership changes
resulting from the Company's equity offerings.
The exercise of non-qualified stock options and the disqualifying
dispositions of incentive stock options under the Company's stock
option plans gives rise to compensation which is includable in the
taxable income of the recipients and deductible by the Company for
federal and state income tax purposes. The tax benefit recognized
from the utilization of such deductions increased paid-in capital by
$2,635,000 during the year ended December 31, 2000.
33
The reconciliation between the federal statutory income tax rate and
the Company's income tax provision (benefit) is as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Statutory tax rate 34% 34% (34%)
State and local taxes, net of federal benefit 2 6 (6)
Alternative minimum tax and other 1 3 -
Valuation allowance (27) (34) 40
--- --- ---
10% 9% 0%
=== === ===
Significant components of the provision (benefit) for income taxes
are as follows:
Year Ended December 31,
----------------------------------------
2000 1999 1998
----------- ---------- ------------
Current:
Federal $ 1,020,555 $ - $ -
State and Foreign 166,000 94,400 12,466
----------- ----------- -----------
Total current 1,186,555 94,400 12,466
----------- ----------- -----------
Deferred:
Federal 1,200,000 321,800 (727,000)
State and Foreign 225,000 68,300 (128,000)
(Decrease) increase in valuation allowance (2,010,300) (390,100) 855,000
----------- ----------- -----------
Total deferred (585,300) - -
----------- ----------- -----------
Total provision for income taxes $ 601,255 $ 94,400 $ 12,466
=========== =========== ===========
16. VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning Costs and Deductions End of
of Year Expenses Write-offs Year
------- -------- ---------- ----
Allowance for doubtful accounts:
December 31, 2000 $125,000 $415,802 $119,802 $421,000
========== ========== ========== ==========
December 31, 1999 $92,986 $44,758 $ 12,744 $125,000
========== ========== ========== ==========
December 31, 1998 $144,000 $50,922 $101,936 $92,986
========== ========== ========== ==========
Inventory reserve:
December 31, 2000 $ 82,000 $10,000 $ - $ 92,000
========== ========== ========== ==========
December 31, 1999 $ 82,000 - $ - $ 82,000
========== ========== ========== ==========
December 31, 1998 $ 82,000 - $ - $ 82,000
========== ========== ========== ==========
34
17. EXPORT SALES
Revenue from export sales, principally software sales revenue, was
$2,419,000, $733,000 and $234,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
18. INVESTMENT IN NYFIX MILLENNIUM
On October 27, 1999, the Company announced the formation of NYFIX
Millennium, L.L.C. ("NYFIX Millennium") with seven international
investment banks and brokerage firms (the "Consortium"). The Company
owns 50% of NYFIX Millennium and the Consortium owns the remaining
50%. NYFIX Millennium intends to operate as an alternative trading
system. All of the partners of the Consortium, and the Company,
invested $2,000,000 each in NYFIX Millennium. Each Consortium
partner received 281,250 shares of common stock of the Company, for
an aggregate 1,968,750 shares, in return for granting the Company
the option to purchase up to an additional 30% of NYFIX Millennium.
The Company may exercise the option through the exchange of one
share of the Company's common stock for each NYFIX Millennium unit
to be purchased, subject to adjustments in the event of any split,
combination, reclassification or other adjustments to the capital
structure of the Company. The Company's total investment in NYFIX
Millennium of $19,500,000 consists of $17,500,000 (1,968,750 shares
of Company stock x $8.89) and a capital cash contribution of
$2,000,000. Pursuant to the Operating Agreement, the first
$14,000,000 in losses will be allocated to the Consortium investors,
which equals the extent of their capital investment in NYFIX
Millennium, and no portion of those losses will be borne by the
Company. The Company has temporarily funded certain operating costs
and capital expenditures on behalf of NYFIX Millennium until its
operations commence. Such costs are reflected as Due from NYFIX
Millennium on the Company's consolidated balance sheets.
On March 14, 2001, NYFIX Millennium added two new partners, with
additional partners and funding expected in the near term. Pursuant
to the terms of the Operating Agreement of NYFIX Millennium, each
new partner contributed $2,000,000 to NYFIX Millennium and the
Company maintained its 50% ownership interest in NYFIX Millennium in
exchange for reducing certain of its rights to share in future
dividend distributions of NYFIX Millennium. The Company issued
94,000 shares of its common stock to each new partner in return for
the same option rights noted above.
The Company leases computer and office space to NYFIX Millennium on
a month-to-month basis pursuant to a management agreement with NYFIX
Millennium. Future payments from NYFIX Millennium for such leases
are expected to be as follows:
Year Ending
December 31, Amount
------------ ------
2001 $849,000
2002 700,000
2003 227,000
2004 69,000
2005 34,000
35
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
-------------------------------------------------
March June September December
31, 30, 30, 31,
---------- --------- ---------- -----------
2000:
Total revenues $4,380,008 $5,534,328 $6,510,825 $7,555,006
========== ========== ========== ==========
Gross profit $3,229,960 $3,996,419 $4,760,880 $5,615,556
========== ========== ========== ==========
Net earnings $ 763,760 $1,077,059 $1,665,378 $2,170,230
========== ========== ========== ==========
Basic earnings per common
share $ 0.03 $ 0.04 $ 0.07 $ 0.09
========== ========== ========== ==========
Diluted earnings per common
share $ 0.03 $ 0.04 $ 0.06 $ 0.08
========== ========== ========== ==========
1999:
Total revenues $2,405,162 $3,041,566 $2,996,589 $3,766,134
========== ========== ========== ==========
Gross profit $1,742,271 $2,064,617 $2,093,979 $2,542,997
========== ========== ========== ==========
Net earnings $ 30,177 $ 150,165 $ 367,668 $ 412,409
========== ========== ========== ==========
Basic earnings per common
share $ 0.00 $ 0.01 $ 0.02 $ 0.02
========== ========== ========== ==========
Diluted earnings per common
share $ 0.00 $ 0.01 $ 0.02 $ 0.02
========== ========== ========== ==========
36