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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, 2001
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 $338 million, as of March 15, 2002. 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 15, 2002 there were 27,879,625 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENTS FORM 10-K REFERENCE
Proxy Statement for the 2002 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 18
ITEM 3 - LEGAL PROCEEDINGS 18
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 19
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS 19
ITEM 6 - SELECTED FINANCIAL DATA 20
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 20
ITEM 7A - QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 28
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 28
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 29
ITEM 11 - EXECUTIVE COMPENSATION 29
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 29
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 29
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
NYFIX, INC. (the "Company" or "NYFIX"), a New York corporation formed in 1991,
is a leading provider of electronic trading infrastructure and technologies to
the professional trading segment of the brokerage community. At a special
meeting of NYFIX shareholders held on March 14, 2002, the shareholders voted to
authorize the transfer of substantially all of the Company's assets to a newly
created, wholly-owned subsidiary of the Company, named NYFIX USA, LLC. NYFIX,
Inc. will now operate as a holding company, providing overall strategy,
financial planning and evaluation of potential acquisitions for the Company.
NYFIX currently has four subsidiaries:
1. NYFIX USA, LLC, a wholly owned subsidiary, operates the Company's core
business and develops real-time order management trader workstations,
exchange automation systems, trade order and execution routing and
straight-through processing solutions for brokerage firms and other
financial institutions. NYFIX USA operates the NYFIX Network, the
industry's largest Financial Information Exchange (FIX) order-routing
network. NYFIX USA is a pioneer in the adoption of the FIX protocol
and all its products are FIX-compliant. NYFIX USA sells our equity
systems primarily on a subscription basis, with customers paying a
monthly fee for software and services.
2. NYFIX TRANSACTION SERVICES, INC. will operate as a broker-dealer upon
approval of its membership application by the National Association of
Securities Dealers (NASD). In December 2001, NYFIX acquired an
existing broker-dealer that will serve as the basis of this unit.
NYFIX Transaction Services will be a wholly owned subsidiary which
plans to provide execution and smart order routing solutions primarily
to domestic and international broker-dealers and specialized trading
firms for a single per share fee.
3. NYFIX OVERSEAS, INC., our London-based wholly owned subsidiary,
specializes in electronic trading solutions for the derivatives
markets and develops order management workstations and exchange
interface systems, supporting trading on more than 20 of the world's
leading international derivatives exchanges. NYFIX Overseas offers its
products on both a sales and subscription basis and is focusing on
developing a transaction-based offering.
4. NYFIX MILLENNIUM, L.L.C., an 80% owned subsidiary, is an NASD
broker-dealer and operates an Alternative Trading System (ATS). The
NYFIX Millennium ATS provides a real-time, anonymous matching system
for equity trading. NYFIX Millennium leverages the NYFIX Network's
large order routing shares volume to provide a more efficient
liquidity source for the financial community. On February 1, 2002,
NYFIX increased its ownership percentage in NYFIX Millennium L.L.C.
from 50% to 80%. The remaining 20% is owned by a consortium of ten
brokerage firms. NYFIX Millennium charges for its services on a
transaction-fee basis.
ACQUISITIONS & INVESTMENTS
During the fourth quarter of 2001, NYFIX completed the acquisition of a NASD
broker-dealer and former member of the Chicago Stock Exchange, which will become
the basis for its transaction-based business. This unit, which will be renamed
NYFIX Transaction Services, has submitted a membership application to the NASD
in order to operate as a broker-dealer. Once its broker-dealer status is
approved, NYFIX Transaction Services will commence sales of a bundled order
management and routing technology combined with an
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execution service. This service will be sold on a transaction-fee basis.
On March 6, 2002, NYFIX entered into an equity partnership with a Madrid,
Spain-based company, EuroLink Network, Inc. ("EuroLink"). NYFIX owns a 40%
interest in EuroLink and holds the option to purchase an additional 40%
ownership interest at a later date. EuroLink will distribute the Company's
equity products and services to the European marketplace, primarily on a
transaction-fee basis. The Company invested $4 million in EuroLink.
On March 12, 2002, NYFIX announced that it had signed a definitive agreement to
acquire Javelin Technologies, Inc. ("Javelin"). Javelin, a leading supplier of
electronic trade communication technology and the leading provider of FIX
technology, has over 1,000 installations at more than 300 major buy and
sell-side institutions, securities clearing houses, hedge fund managers,
exchanges and ECNs worldwide, including over 50 clients in Europe and 20 in
Asia. Javelin's products are sold primarily on a one-time sales basis, with
recurring fees charged for ongoing service and support. NYFIX is financing the
transaction with a combination of approximately $11,000,000 cash and NYFIX
common stock with a value of approximately $44,000,000. In addition, NYFIX has
negotiated an earn-out based on Javelin's 2002 revenues. The transaction is
scheduled to close by March 31, 2002.
COMPANY OVERVIEW - BRINGING EFFICIENCY TO THE TRADING PROCESS
We are a leading provider of electronic trading systems, industry-wide trade
routing connectivity, straight-through processing ("STP") and execution services
and systems to the global equities and derivatives financial markets. With our
desktop solutions, stationary and wireless exchange floor systems, electronic
automation systems and STP, we streamline data entry, routing and execution and
eliminate many processing inefficiencies. Our infrastructure, which consists of
an extensive network of electronic circuits and redundant data centers, links
industry participants across equities and derivatives markets. Our technology is
being used by over 200 customers, many of which are the largest and most
respected firms in the industry, and we have gained prominent market share with
New York Stock Exchange ("NYSE") member firms. We processed an average NYSE
daily volume of 212 million shares in the first quarter of 2000, a number which
has grown to approximately 500 million shares in 2001, with daily volumes
reaching as high as 1.2 billion shares.
Our products and services are broadly categorized into electronic trading
infrastructure and applications and provide our customers a complete solution to
enter, manage and route trade data and execute orders electronically. The NYFIX
Network is a proprietary centralized electronic infrastructure linking various
market participants to provide efficient, secure and reliable order routing.
Through the NYFIX Network, we provide the infrastructure for trade communication
and global order routing between buyside and sellside institutions, numerous
exchange floors, as well as other electronic trade execution venues, such as
ECNs and ATSs. The NYFIX Network currently includes more than 1,500 high-speed
frame-relay circuits, alternative routes, fiber optics and sonnet-network
infrastructure, providing an efficient, secure and reliable method for
electronic trade communication. We have built and operate large scale, redundant
data-centers to support communications through the NYFIX Network. We also have
developed and offer an integrated portfolio of modular desktop trading
applications, exchange floor automation and exchange access applications for
trading in domestic and international equities, futures and options. All of our
applications reside on our centralized system and are delivered through the
NYFIX Network. By seamlessly integrating our proprietary infrastructure and
software applications, we provide our customers with a complete electronic order
management and execution solution. Our systems are based upon the industry
standard FIX protocol and our core systems are currently offered on a
subscription basis, with infrastructure, software and maintenance provided for a
monthly fee. As noted earlier, the Company is planning to develop
transaction-based revenue streams through NYFIX Millennium, NYFIX Transaction
Services and EuroLink. The introduction of trade execution to the NYFIX product
and service offering commenced with the launch of the NYFIX Millennium ATS in
September 2001.
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The large quantity of orderflow processed by the NYFIX Network has uniquely
positioned us to develop, together with NYFIX Millennium, an ATS that functions
similarly to an ECN in that it matches buy and sell orders. NYFIX Millennium can
match either buy and sell orders or pass them through to the exchange or
execution venue of the trader's choice, in real-time, which we believe is a
unique feature and key differential from other ATSs and ECNs that rely on
captive order liquidity. NYFIX Millennium augments traditional auction markets
by combining the electronic execution technology of an ECN with the liquidity of
traditional primary markets. Institutional traders benefit from the order
invisibility and anonymity provided by NYFIX Millennium, which eliminates the
negative price impact associated with displaying large blocks of shares. The
NYFIX Millennium ATS went into full production on September 5, 2001 and we are
currently focusing on expanding NYFIX Millennium's user base and execution
volumes.
We have been profitable since the first quarter of 1999 and have had twelve
quarters of consecutive profitability. Our net income has increased to
$8,136,000 in 2001 from $5,676,000 in 2000 and $960,000 in 1999. Our total
revenues have increased to $41,397,000 in 2001 from $23,980,000 in 2000 and
$12,209,000 in 1999, representing a compound annual growth rate of 84%. To date,
we have principally derived our revenues from long-term subscriptions, product
sales and services. In addition to developing our subscription revenues, we have
begun to develop transaction-based revenues. Rather than a monthly per terminal
fee, transaction-based revenues will be derived by charging a per share fee for
trades executed by NYFIX, either within the NYFIX Millennium ATS or through the
NYFIX Transaction Services unit. We are well positioned to distribute order
routing terminals in certain domestic and international market segments seeking
more direct exchange and execution access and trade processing services in
return for per share based transaction fees. We believe there is a substantial
market for these types of transaction revenue streams. Our order routing
connectivity capabilities and technology platform also enable us to support
transaction revenue generation in our subsidiaries, NYFIX Millennium, NYFIX
Transaction Services and in our affiliate, EuroLink.
Our goal is to become the leading provider of real-time electronic trade entry,
routing and execution solutions to the global financial services industry. To
achieve this, we plan to:
o increase the number of participants in the NYFIX Network and continue
to expand the suite of products and services available to our
customers;
o develop transaction revenue streams in NYFIX Millennium;
o develop transaction revenue streams from our electronic trading
infrastructure and technologies through NYFIX Transaction Services and
EuroLink;
o establish and expand orderflow through NYFIX Millennium and leverage
strategic partnerships;
o expand the universe of securities being traded through our network;
and
o continue to protect our customers' roles in the distribution market.
Our headquarters are located at Stamford Harbor Park, 333 Ludlow Street,
Stamford, Connecticut, 06902, telephone number (203) 425-8000 and we also
maintain offices in New York, Chicago, San Francisco and London. Our
international operations are conducted through our subsidiary, NYFIX Overseas.
Information about the Company's business segment and sales to unaffiliated
customers, gross profit and identifiable assets, by geographic area, is
contained in "Note 16 - Business Segment Information" appearing in the
consolidated financial statements as noted in the Index appearing under Item 14
(a) (1).
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INDUSTRY OVERVIEW
INEFFICIENCIES IN THE TRADITIONAL MARKET
Historically, stock markets operated physical trading floors with trades being
executed by open outcry. Prior to 1995, the trading industry, in both equities
and derivatives, relied substantially upon intra-day handwritten trading tickets
and manually recorded trading blotters. Voice communication by telephone was the
primary method of communicating orders and executions between institutional
customers, traders at brokerage firms and brokers operating on the exchange
floors. The NYSE continues to operate a physical trading floor where member firm
floor brokers deliver orders to a specialist, an intermediary that makes a
market in the stocks listed on the exchange.
In addition to processing inefficiencies, the presence of an intermediary
results in pricing that does not always represent the true value of a security
at any given point in time. A specialist or market maker can generate mark up or
mark down profits through sales or purchases of that intermediary's own
inventory, which creates an inherent conflict with its duty to establish and
maintain a truly efficient and liquid market. Further concerns of price
distortion arise from the intermediary being the sole keeper of customer buy and
sell intentions and the potential leakage of trading intentions to other
brokers. By compromising the anonymity and intent of an investor, further
distortion of security valuations can result as other third party market
participants could profit from information about their counterpart's intent and
purchase or sell before them, many times even when such third party had no prior
interest in the security.
GROWTH IN TRADING VOLUME
Trading volume in equities and derivatives has grown significantly in major
markets around the world. In the U.S., the average daily share volume on the
NYSE increased to 1.2 billion in 2001, from 674 million in 1998, while the
average daily share volume on Nasdaq increased to 1.9 billion in 2001, from 787
million in 1998.
International equity and derivative markets have also experienced significant
growth. As an example, average daily trading volume on the London Stock Exchange
increased 46% in 2001.
DEVELOPMENT OF ELECTRONIC TRADING TECHNOLOGIES
As trading volume and market volatility continue to increase in both the listed
and over-the-counter (OTC) markets, brokerage firms are increasingly seeking to
utilize technology solutions to route, track and manage orderflow, while at the
same time reducing errors and maintaining controls on their operations. While
technology offering the benefits of trade automation has been available since
the early 1990s, the departure from handwritten trade tickets did not gain
acceptance until the mid-1990s. The lack of order routing and connectivity
standards, as well as the entrenched role of the trader in the brokerage
industry, was partially the cause for the delayed acceptance of electronic
systems. A series of major trading scandals during the 1990s, however, prompted
investment firms, brokerage firms and regulators to accept that the pace, volume
and volatility in the markets had reached a level where real-time computerized
electronic tracking of trading activities was necessary.
As a major step toward industry standardization for electronic order routing,
the financial services industry began to adopt the FIX protocol as the industry
standard by the mid 1990's. The FIX protocol provides the brokerage industry
with a common underlying language to enable electronic trading and
communications and is now considered the globally adopted standard for
electronic order routing.
Today, many firms and regulators in the securities trading industry recognize
the necessity of implementing straight-through processing solutions, which
integrate all aspects of trading from the front office, middle office and back
office, in order to reduce settlement cycles, costly errors and the cost to
process transactions. Prolonged growth in the market is expected as the industry
replaces legacy systems and in-house proprietary systems with more modern
industry and FIX compliant systems. Many firms will also need to continually
upgrade their systems because of the general evolution in computer operating
systems, networking and storage systems technologies.
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New regulations governing the recording and transmission of orders to and on the
NYSE floor were adopted in early 2001. These regulations are known as Rule 123.
The first phase of Rule 123 requires 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 of Rule 123 requires all orders sent to the
NYSE to be sent electronically. Rule 123 required that all NYSE member firms
adopt electronic order management systems by September 10, 2001.
DEVELOPMENT OF THE EQUITY MARKET STRUCTURE
The advent of high-speed electronic data communication networks and computerized
trading has highlighted the potential for more efficient interaction between
buyers and sellers in the financial markets. The U.S. equities markets have seen
the introduction of new regulations paving the way for ECNs and ATSs to compete
with traditional exchanges such as the NYSE and the American Stock Exchange
(Amex) in the listed market and Nasdaq in the OTC market. These ECNs and ATSs
seek to provide more efficient trading mechanisms while bringing buyers and
sellers directly together without an intermediary.
As almost every traditional exchange floor in Europe and Asia has been replaced
by electronic systems, much debate continues in the U.S. relating to the role of
the specialist and the efficiency of the NYSE, the world's largest exchange
floor in terms of its listed companies' market capitalization. The debate has
increased with the recent introduction of decimal trading. While decimalization
was designed and recently implemented to make price quotes more understandable
for consumers, an unexpected side effect of decimalization has been an increase
in the trading activity of the specialists competing with the buyers and
sellers, resulting in the reluctance of institutional investors to expose block
orders on the books of the specialists.
The marketplace saw a number of ECNs and ATSs emerge during the late 1990s. The
challenge for these new trading venues is to attract sufficient trading
liquidity, also known as orderflow, which is transaction volume being entered
into these trading venues. ECNs have captured approximately 46% of the OTC
market-share in executed volume in a relatively short period of time. Due in
large part to a lack of access to the electronic infrastructure carrying listed
orderflow, ECNs have only captured approximately 6% of the executed daily volume
in the listed equity market.
The goal of ATSs and ECNs is to bring buyers and sellers together directly in
more efficient electronic execution venues. However, the introduction of
multiple venues in addition to the traditional exchanges has created a new
problem of market fragmentation. Each market or execution venue represents a
separate liquidity pool and the available liquidity and pricing among the
different pools is not synchronized. In addition to the technological problem of
establishing connectivity between the multiple liquidity pools, the trading
community is faced with the constant problem of trading in one liquidity pool
while a better price may be available in another venue.
NEED FOR OUTSOURCED SOLUTIONS
While trading volume has increased and the need for direct access trading
technologies has become evident, investors themselves have become more
sophisticated and focused on the overall quality of execution and transaction
cost of trades. Sophisticated trading strategies, particularly those involving
multiple securities or types of financial instruments, are difficult to execute
without both direct and rapid market access and a system that provides easy to
use order entry, management and execution. Many companies are realizing that
they cannot continue to internally develop systems to keep pace with current
technological developments, nor can they afford adequate investment to
independently maintain connectivity infrastructure and redundant systems to
participants in the evolving trading market, and have therefore been driven to
outsource these functions.
Institutional traders are seeking solutions that offer direct access, speed of
delivery, quality of execution and full integration between traditional
exchanges and modern ECNs and ATSs.
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OUR SOLUTION
We are a leading provider of electronic trading infrastructure and technologies
to the professional trading segment of the brokerage industry. We provide
electronic trading desktop solutions, stationary and wireless exchange floor
systems, electronic access automation and straight-through processing to
brokerage firms and international banks trading in equities, futures and
options. Our product portfolio is well positioned to meet the current and
developing needs of our customers, providing:
o HIGH-SPEED, REDUNDANT FIX CONNECTIVITY TO MAJOR GLOBAL MARKET
PARTICIPANTS. The NYFIX Network is designed to provide the financial
community with a central electronic infrastructure. Through over 1,500
circuits and alternative routes, we currently connect buyside and
sellside institutions, domestic and international exchanges and
various ATSs, ECNs and third markets. Communications are processed
through our NYFIX Super FIX engine, which is one of the industry's
largest and most advanced FIX processing engines. As a result, this
broad connectivity has enabled us to process a significant portion of
listed equity volume each trading day. Due to our reach and access to
the global marketplace, we are increasingly being regarded as the
common industry electronic meeting point, which encourages new
participants or those evaluating changing their existing solutions to
seek connectivity to our network.
o EASY-TO-USE, INTEGRATED ELECTRONIC TRADING PRODUCTS. We offer an
integrated suite of desktop trading, exchange floor automation and
exchange access applications, as well as straight-through processing
for trading in domestic and international equities, futures and
options. All of our products are available as modules that can be
delivered as either complete systems or as components to complement
our customers' existing solutions and needs. We continually focus on
speed of applications, intuitive, easy-to-use designs and close and
immediate integration with the NYFIX network. By seamlessly
integrating our proprietary infrastructure and software applications,
we provide our customers a complete solution to enter, manage and
route orders and execution data electronically.
o FULLY OUTSOURCED FLEXIBLE SOLUTION. As an alternative to developing
technology in-house, customers can outsource to NYFIX to serve as a
common and neutral meeting place for financial information exchange.
Our offerings consist of a widely deployed network, managed data
center and telecommunications services, and a modular suite of
applications, which enable our major brokerage customers to achieve
both strategic advantages and cost savings.
Our NASD registered broker-dealer subsidiary, NYFIX Millennium, operates a
highly automated execution venue designed to reduce overall transaction costs
and maximize execution quality for institutional brokerage firms. NYFIX
Millennium is referred to as a hybrid market system because it works to augment
traditional auction markets and combines the electronic execution technology of
an ECN with the liquidity of traditional primary markets. NYFIX Millennium aims
to provide increased liquidity and price improvement, while eliminating negative
price impact for institutional size trades. It is designed to mitigate the
current problems caused by market fragmentation and the inter-positioning of
specialists and market makers in the transaction process. The key advantages of
NYFIX Millennium are:
o INVISIBLE AND ANONYMOUS MATCHING. Institutions are highly motivated to
conceal their trading intentions and to protect their anonymity. In
the primary market for listed equities, when institutions enter large
orders or disclose their trading intent, such actions cause others to
react, which impacts the stock price before the institutions complete
their purchases or sales. A key feature of NYFIX Millennium is its
capability to invisibly expose and anonymously match orders, enabling
institutions to trade in and out of block positions in real-time,
without causing counterproductive price swings.
o INTEGRATED ACCESS TO LIQUIDITY. Most ECNs lack access to liquidity in
the listed market and fragment
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the market by creating separate pools of liquidity. By integrating
NYFIX Millennium directly into the NYFIX network, customers have
simultaneous access to liquidity in both NYFIX Millennium and the
traditional listed markets. While NYFIX Millennium has the capability
to instantly match orders entered in the system, a key attraction is
its ability to let unmatched orders travel in real-time through the
NYFIX network to the exchange or market center of the traders' choice.
o EASE OF USE AND SEAMLESS INTEGRATION. NYFIX Millennium is accessible
from the trader's existing order management system or trading station,
and automatically integrates the flow between customer orders, NYFIX
Millennium and execution reports. While competitors generally need to
install a dedicated terminal or application and establish a
distribution network, NYFIX Millennium can leverage the operational
NYFIX distribution network without the need for additional dedicated
or specialized screen installations. Traders do not have to change the
way they enter orders, which we believe eliminates a significant
barrier to entry and further contributes to the efficiency of
straight-through processing.
OUR STRATEGY
Our goal is to become the leading provider of real-time electronic trade entry,
routing and execution solutions to the global financial services industry. We
consistently monitor the industry to analyze and determine an efficient and
effective schedule for new product introductions, marketing and organizational
growth initiatives in order to meet the needs of the changing markets. We plan
to:
o INCREASE THE NUMBER OF PARTICIPANTS IN THE NYFIX NETWORK AND CONTINUE
TO EXPAND THE SUITE OF PRODUCTS AND SERVICES AVAILABLE TO NYFIX
Customers. To further increase our subscription based revenues and our
orderflow base, we plan to focus our sales and marketing efforts on
connecting not only sellside broker-dealers but also buyside and
international exchanges to the NYFIX network. We will continue to
address the requirements of the trading community by introducing new
core and complimentary applications, including advanced analytical and
risk management applications, OTC services, multi-currency facilities
across our product line, stock allocation and clearing services. The
enhancement of our current product line, along with the addition of
new products, will help us increase our presence in the institutional
marketplace and allow us to sell higher margin products to existing
customers. We plan to continue to develop and own all of the
underlying intellectual property rights associated with our existing
and future products.
o DEVELOP TRANSACTION REVENUE STREAMS IN NYFIX MILLENNIUM. The large
quantity of orderflow processed through the NYFIX network has uniquely
positioned NYFIX Millennium to develop transaction-based revenue. We
are developing transaction revenue streams in NYFIX Millennium by
focusing on generating a critical mass of orderflow from the NYFIX
network to NYFIX Millennium.
o DEVELOP TRANSACTION REVENUE STREAMS FROM OUR ELECTRONIC TRADING
INFRASTRUCTURE AND TECHNOLOGIES. As the markets converge, the
formation of NYFIX Transaction Services enables us to introduce a
number of offerings competing effectively with and replacing the role
of certain brokers in certain target segments. In some areas of
international and to some degree domestic correspondent brokerage
business, we can effectively compete for business with little or no
conflict with our existing client base. In the correspondent brokerage
business, one brokerage firm generally services a much smaller or
specialized brokerage firm and charges a transaction based per share
fee for providing access to exchange executions. As the markets are
becoming completely automated, providing customers with effective
desktop order capturing and electronic access technology is emerging
as the most important marketing parameter. In December 2001, NYFIX
acquired an existing NASD broker-dealer and former member of the
Chicago Stock Exchange to expedite NYFIX Transaction Services becoming
a broker-dealer. With its membership application currently pending
with the NASD, NYFIX Transaction Services will be able to commence
charging transaction fees once it obtains its broker-dealer status. In
addition, in March 2002, NYFIX announced it had entered
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into an equity partnership with a Madrid, Spain-based company,
EuroLink Network, Inc. EuroLink will distribute the Company's equity
products and services to the European marketplace, primarily on a
transaction fee basis.
o ESTABLISH AND EXPAND ORDERFLOW THROUGH NYFIX MILLENNIUM AND LEVERAGE
STRATEGIC PARTNERSHIPS. We plan to further leverage the cooperation of
our equity and strategic partners to increase transaction revenues in
NYFIX Millennium. This cooperation includes automatic and manual
submission of orderflow to NYFIX Millennium, leveraging their trading
expertise in explaining and developing electronic methods to address
inefficiencies in the current market and developing and supporting
suitable marketing strategies. The equity partners in NYFIX Millennium
include ABN Amro, Deutsche Bank, Lehman Brothers, Morgan Stanley,
Alliance Capital Management (formerly Sanford C. Bernstein & Co.),
Societe Generale, UBS Warburg, Wachovia Securities (formerly First
Union Investors), Lab Morgan Corporation (formerly J.P. Morgan &
Co. and Chase H&Q) and Bank of America.
o EXPAND THE UNIVERSE OF SECURITIES BEING TRADED THROUGH OUR NETWORK.
The NYFIX network and NYFIX Millennium matching engine can be used to
trade and match basically any financial instrument, from equities to
futures, commodities or other derivative instruments. We plan to
expand our presence in OTC, futures and options trading. We plan to
increase our market share in international markets by expanding our
direct connectivity to more international exchanges in both equities
and derivatives.
o CONTINUE TO PROTECT OUR CUSTOMERS' ROLES IN THE DISTRIBUTION MARKET.
Many market observers believe that equity markets will become
completely electronic. The fear of a diminishing role and loss of
revenues has caused the broker-dealer community to largely withhold
support for any market modernization system that can be accessed
directly by buyside institutions and other investors. It is an
important element of our strategy to introduce our business model in a
manner that does not ultimately threaten our customers' role in the
distribution channel. We believe this strategy provides us with a
significant advantage over our competitors whose initiatives may
ultimately eliminate the broker from the trading process.
PRODUCTS AND SERVICES
THE NYFIX NETWORK
The NYFIX Network provides a central electronic infrastructure that links
buyside institutions and sellside brokers with various execution venues
utilizing the FIX protocol. Built in late 1997, the NYFIX Network provides our
customers with global connectivity for trade order routing through a single
dedicated circuit into the NYFIX Network. Access to the NYFIX Network private
order routing and financial information communications infrastructure is offered
to our customers on both a subscription and a transaction basis and is supported
by large-scale redundant data centers. All of the Company's subsidiaries and
affiliates utilize the NYFIX Network as their central communications
infrastructure.
The NYFIX Network currently includes over 1,500 circuits and alternative routes
to connect sellside and buyside institutions, as well as a number of domestic
and international exchanges, buyside networks, ATSs and ECNs specified in the
table which follows.
8
Domestic Exchanges NYSE Pacific Stock Exchange
Amex Nasdaq
Boston Stock Exchange CME (Chicago Mercantile
Chicago Stock Exchange Exchange)
Philadelphia Stock Exchange CBOT (Chicago Board of
Trade)
International Exchanges* Liffe (London International HKFE (Hong Kong Futures
Financial Futures and Exchange)
Options Exchange) SFE (Sydney Futures
Deutsche Bourse Xetra/Eurex Exchange)
Matif (Marche A Terme TIFFE (Tokyo International
d'Instruments Financial Futures Exchange)
Financiers)/Monep OSE (Osaka Securities
SIMEX (Singapore Exchange)
International Monetary TSE (Toronto Stock Exchange)
Exchange) KSE (Korea Stock Exchange)
Euronext
OM
Buyside Networks Macgregor Reuters
Thompson TradeRoute Royalblue
MFN (Merrin Financial Autex
Network) Versus Technologies
Bridge Information Systems Bloomberg
The Longview Group Triad
Transaction Network Services
ATSs/ECNs NYFIX Millennium REDIBook ECN
Archipelago Instinet
Bloomberg Tradebook POSIT
Island ECN
Allocation Delivery Systems ADP FIX Allocation
Pershing Wexford
OASYS Rolfe & Nolan
Sungard Phase III GL Net
Beta Systems
* While we have not yet deployed our own circuits in all of the international
exchanges, we, at a minimum, offer interface systems to each international
exchange.
NYFIX TRADING PRODUCTS
We provide an integrated portfolio of modular desktop trading applications and
exchange floor automation and exchange access applications for trading in
domestic and international equities, futures and options. We offer both trader
workstation products and exchange system products as outlined in the tables
which follow.
9
TRADER WORKSTATIONS: PRODUCT DESCRIPTION: TARGET CUSTOMER:
FIXTrader Workstation Complete order management and routing Institutional brokerage
system equity traders
Order Book Management System Real-time order management system for Institutional brokerage
(broker module) derivative instruments including derivatives traders
futures and options
Nasdaq Agency Workstation Nasdaq Level II workstation electronic Institutional brokerage
order entry and routing to Nasdaq equity traders
liquidity sources
TradeWatch Integrates data from individual Institutional brokerage
FIXTraders and provides monitoring of traders and risk managers
the entire trading desk's positions in
real-time
E-Blotter Real-time equity order management system Smaller brokerage buyside
and money management traders
International Universal Enables browser-based order entry International brokerage
Browser Front-end and routing service for both buyside and money
equities and derivatives on a management traders
global basis
Market Looks System Enables digital transmission of Institutional brokerage
(ImageViewer Module) real-time "looks" from an exchange equity traders
floor to upstairs traders
Market Data Server: P&L Profit and loss tracking and volume Institutional brokerage
Module, VWAP weighted average price execution equity traders
capability
Strong Box Online Data Retention & Trade Institutional brokerage
Research Tool. A browser-based trade firms and trading and
history research tool that enables compliance departments
customers to migrate from paper to
electronic storage according to SEC
Rule 17a requirements
10
EXCHANGE SYSTEMS: PRODUCT DESCRIPTION: TARGET CUSTOMER:
Market Looks System Enables digital transmission of Exchange floor
(floor look module) real-time looks from an exchange brokers and clerks
floor to upstairs traders
MobileBroker Wireless handheld that enables Exchange floor
order management and digital brokers
transmission of real-time looks
from the specialist post or
crowd to upstairs traders
FloorReport Exchange floor booth order Exchange floor
management and routing system brokers and clerks
BreakWatch Online trade comparison system Exchange floor
for identifying intra-day trade clerks/data entry staff
errors and breaks
Exchange Access Products Translation to and from various Brokerage firms
exchange protocols to FIX protocol
TRADER WORKSTATION PRODUCTS
Our trader workstations provide order routing to a variety of liquidity sources,
including major regional exchanges, ECNs and ATSs. The workstations enable
traders to monitor and manage the flow and execution of equity orders. Next to
each product, indicated in parentheses, is the company(s) that primarily markets
each particular product or service.
FIXTRADER WORKSTATION (NYFIX USA, NYFIX MILLENNIUM, NYFIX TRANSACTION SERVICES,
EUROLINK)
Our FIXTrader system provides a complete order management solution for upstairs
traders that allows the electronic entry and routing of orders and executions
between buyside 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, which are then routed to the appropriate order
execution venue in seconds, with completed executions routed back in the same
efficient manner. With the financial industry's adoption of FIX as the standard
protocol for communicating electronically, FIXTrader offers an easy way for
firms to gain FIX compliance. FIXTrader enables firms to receive orders
electronically from the buyside, as well as connect to back office systems
helping firms achieve straight-through processing.
FUTURES AND OPTIONS OBMS (NYFIX OVERSEAS)
Our Futures and Options OBMS offers traders the ability to enter, route and
manage orders and executions in real-time. Global order routing between
different international branches of the same firm and the major global
exchanges, both open outcry and electronic, is supported by this comprehensive
system. OBMS provides real-time ticketless order capture, global order routing
with interfaces to exchange supported systems and user-friendly 24-hour order
management in one complete open system.
NASDAQ AGENCY WORKSTATION (NYFIX USA, NYFIX TRANSACTION SERVICE, EUROLINK)
Our Nasdaq Agency Workstation enables electronic order entry and routing to all
Nasdaq liquidity sources. This system integrates with our customers' FIXTrader
workstation, giving users the ability to trade listed and OTC securities from a
single terminal. The functionality of our Nasdaq Agency Workstation includes a
central order blotter for managing and tracking order status, complete recapping
functionality, average price calculation, filters for easy viewing, convenient
allocation and archiving capability. Users can access buyside institutions,
market makers, exchange brokers, major and regional exchange systems and a
variety of ATSs for streamlined order and execution routing. Our Nasdaq Agency
Workstation is fully FIX compliant.
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TRADEWATCH (NYFIX USA)
Our TradeWatch product equips head traders and risk managers with an application
to keep appraised of all trading desk positions at the trader's or manager's
firm. TradeWatch consolidates and integrates information from FIXTrader
workstations in real-time and allows a head trader or risk manager to obtain an
essential overview of all trading activities.
E-BLOTTER (NYFIX USA, NYFIX TRANSACTION SERVICES, NYFIX MILLENNIUM, EUROLINK)
Our E-Blotter system is a browser driven, real-time U.S. equity order management
system designed for the broker-dealer community. E-Blotter uses a central screen
to track all initiated and executed orders, enabling users to view all positions
at a glance. E-Blotter's functionality includes a central order blotter for
managing and tracking order status, recapping functionality, average price
calculation, filters for easy viewing, convenient allocation and archiving
capability. E-Blotter is Order Audit Trail System (OATS), Automated Confirmation
Transaction (ACT) and FIX compliant.
INTERNATIONAL UNIVERSAL BROWSER FRONT-END (NYFIX OVERSEAS)
Our International Browser front-end facilitates all aspects of global equities
and derivatives trading, including multi-currency capability for price marking
of international trades. While we already sold this front-end to several large
global brokerage operations for their internal deployment, we commenced the
distribution of this product through the NYFIX network during 2001.
MARKET LOOKS SYSTEM (IMAGEVIEWER MODULE) (NYFIX USA)
Our Market Looks System is comprised of two complementary software modules:
ImageViewer for the upstairs trader workstations and FloorLook for the exchange
floor booths. ImageViewer enables traders to electronically receive real-time
quotes on stocks directly from the exchange floor. Our Market Looks System is
operated by a floor clerk located at the member's booth or through a NYFIX
Handheld wireless computer scanning handwritten quote slips, called looks, into
a scanner. 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
upstairs traders and floor staff. Our Market Looks System helps firms reduce
errors and disseminate information more efficiently.
MARKET DATA SERVER: P&L MODULE, VWAP CAPABILITY (NYFIX USA, NYFIX
TRANSACTION SERVICES)
We are in the process of building a market data server process, which will
enable the distribution of real-time market data to customers. This
functionality will be leveraged to deliver on-demand updates of profit and loss
information to FIXTrader blotters, as well as live updates of volume-weighted
average price (VWAP) information, for selected securities. In addition, handheld
devices on the floor of the NYSE will be able to request recent time and sales
information, as well as volume-weighted average price data. As part of the
market data server initiative, we have applied to the NYSE for market data
vendor privileges.
STRONG BOX (NYFIX USA)
The Strong Box Online Data Retention and Trade Research Tool is an optical disc
storage solution that meets SEC Rule 17a storage, access and retention
requirements for trade data. Strong Box is supported by a user-friendly,
browser-based, trade history research tool. We anticipate that this application
will remove a significant burden from our customers, as they will be able to
migrate from paper to electronic storage.
EXCHANGE SYSTEMS
Our exchange systems are comprised of stationary floor booth applications and
wireless handheld systems for order management and routing of looks and
real-time market information. Our exchange systems also provide access services
to exchange provided execution facilities. We streamline customer access by
providing real-time conversion from the FIX protocol to exchange proprietary
access protocols.
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MARKET LOOKS SYSTEM (NYFIX USA)
Our Market Looks System enables member firms to get real-time quotes, or looks,
on stocks directly from the exchange floor to the firms' upstairs trading desk.
Our Market Looks System helps firms reduce errors and disseminate information
more efficiently. Our NYFIX FloorLook product transmits real-time images
directly to the trading community from the stationary floor booth systems and
wireless handheld systems.
MOBILEBROKER (NYFIX USA)
Our MobileBroker wireless handheld allows floor brokers to effectively
communicate with floor exchange booths and upstairs trading desks regardless of
their physical location on the floor of a stock exchange. The handheld computer
transmits looks from the floor broker positioned near a specialist post to
upstairs traders, thereby greatly improving communications and flow of
information from the market to the trading desk. The NYFIX Handheld product
conforms to Rule 123 and is designed to be compatible with the NYSE's reporting
systems.
FLOORREPORT (NYFIX USA)
Our FloorReport system provides brokerage firms with a complete electronic order
management system for exchange trading and floor operations. Complete trade and
execution information is available at a glance. The system allows firms to track
the status of orders and time-stamped printed tickets, reduce paperwork and
enable booth staff to manage orders more effectively, increasing floor
productivity. FloorReport reduces errors and simplifies floor operations through
such features as real-time average price calculation and automatic tracking of
trade execution status. FloorReport is both Rule 123 and FIX compliant.
BREAKWATCH (NYFIX USA)
Our BreakWatch product is post-trade product that identifies internal trade
breaks, or errors, on an intra-day basis, thus protecting firms from the
exposure of costly trading errors. BreakWatch provides important functionality
in the trade reporting process, enabling firms to electronically transmit
written execution report information to Online Comparison System (OCS) as well
as comparing verbal execution reports from FloorReport with written reports
transmitted to OCS.
EXCHANGE ACCESS PRODUCTS (NYFIX USA)
We developed and offer software to enable our customers to communicate with
various exchange provided execution facilities. Many firms use systems that are
based on legacy technology, as well as protocols used by other exchanges. To
simplify access to all trading venues, we developed translation applications
that enable our customers to access FIX protocol from legacy systems, including
DOT, which is used by the NYSE and Amex.
NYFIX MILLENNIUM (NYFIX MILLENNIUM, NYFIX USA, NYFIX TRANSACTION SERVICES,
EUROLINK)
NYFIX Millennium is designed to offer users access to multiple liquidity points
through a single terminal, complete anonymity and invisibility, intelligent
order routing and the opportunity for price improvement and liquidity
enhancement. NYFIX Millennium provides an efficient way for major financial
institutions and traders to obtain the best match available for their
transactions in the listed equities marketplace. NYFIX Millennium resides in the
NYFIX network and offers matching of the following two categories of orders:
o Pass-through orders are those orders that pass through NYFIX
Millennium in route to another execution venue, typically the NYSE.
The pass-through feature provides the trader with real-time exposure
to orders that reside in NYFIX Millennium, which can lead to potential
price improvement and liquidity enhancement.
o Conditional orders are anonymous and invisible orders that reside in
the NYFIX Millennium
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matching engine. Orders are electronically pegged to the price of the
underlying market center of the trader's choice, such as NYSE
bid/offer or national best bid price or offer (NBBO). To attract
matches, the trader can offer a small price improvement while still
trading between the bid and offer offered in the underlying market. In
addition, to optimize on the trading outcome, the trader can put a
number of restrictions on an order to temporarily suspend such order
automatically when unfavorable conditions occur and add conditions
designed to improve trading results. Examples of such conditions are
size of execution per price increment, maximum tolerable spread,
maximum price tolerance from last execution in the market, high or low
price limits and other trade restrictions.
The scope of most ECNs and ATSs is limited to matching conditional orders
against one another. A significant advantage the NYFIX Millennium model has over
these competing ECNs and ATSs is its ability to also execute against the
pass-through orders being routed through the NYFIX network. This increases the
access to liquidity and the likelihood of successful trade matches.
NYFIX Millennium is currently implementing the second phase of its marketing
strategy. The first phase focused converting the large existing NYFIX network
orderflow to liquidity available for executions in NYFIX Millennium. The second
phase focuses on increasing the usage of NYFIX Millennium conditional orders.
NYFIX Millennium is aggressively marketing the ATS to a variety of firms,
including traditional broker dealers, market makers and statistical
arbitrageurs. Through the interaction of the system's various order types, such
as conditional and pass-through, and continued growth of the NYFIX network share
volume, we believe that NYFIX Millennium is able to provide superior results in
trade execution quality for existing NYFIX customers, as well as new NYFIX
Millennium participants.
SALES AND MARKETING
Our sales operation employs 52 people and is structured in four teams, including
customer sales, account management, project management and central help desk
operations. The manager and senior members of each team have been with us for
three years or more and have a track-record of team-building, successful sales
delivery and on-going customer operations support.
We have been experiencing a shortening of sales cycles as the industry
increasingly employs electronic trading technology and new regulations require
intra-day electronic compliance reporting. For new accounts, the sales cycle is
generally one to six months with add-on sales of additional services to existing
clients being shorter. We generally provide our products and services on
three-year subscription agreements with automatic annual renewals at the end of
the initial term.
We focus on developing customer acceptance of our product lines with access to
general upgrades rather than individual client customization. Our sales team
works closely with our product development team and several of our products and
enhancements have been developed based on user-group consensus.
We maintain an in-house marketing department covering all aspects of exhibition,
collateral marketing materials planning and production. We focus primarily on
direct marketing efforts designed to reach our target segment of customers
rather than mass marketing, which we believe results in a significantly more
effective return on our marketing investment. In connection with the broadening
of industry awareness of NYFIX Millennium, we may support certain mass marketing
initiatives in conjunction with promoting the benefits of the ATS to a greater
audience.
TECHNOLOGY
Our technology is designed to meet our customers' business needs for
consistently available, expandable, and cost efficient infrastructure and
software. We apply what we believe to be industry best practices in areas such
as strategic planning, implementation partnerships, operating procedures,
documentation and application development methodology. Our infrastructure
technologies provide market participants with highly reliable connectivity and
liquidity pools, while our software applications provide an easy to use
integrated suite of desktop applications and exchange floor systems.
14
Throughout our operating history, we have experienced excellent retention of our
technical employees. We believe that this has enabled us to attract and develop
staff, managers and project leaders with extensive technical and brokerage
industry experience.
INFRASTRUCTURE TECHNOLOGIES
Our underlying infrastructure is implemented to a modular or building block
standard. A building block standard consists of the amount of storage,
processing and network capacity necessary to support a set of customers. As we
add customers to our system, building blocks can be easily inserted into our
architecture to accommodate continued network growth and we expect the average
cost per customer to decline. Our building block architecture relies upon
advanced technology standards, including storage area networking, high
availability code and metropolitan area networking using fiber optic cable. We
believe that we are a technology leader in our industry in that we maintain two
fully active production data centers, either of which can support all of our
current production requirements, providing 100% real-time redundancy. Later this
year, we expect to implement a storage side area network using dense wavelength
division multiplexing. Dense wavelength division multiplexing allows multiple
channels and protocols of data to run over a single pair of fiber optic cables
and will enable us to increase capacity between our data centers without a
significant increase in cost. Our systems and data centers are continuously
monitored by an automated system that logs the performance of communication
lines, equipment and systems.
To achieve the highest level of availability, we rely on multiple
telecommunication carriers for data transport between core data centers and
customers, including AT&T, Sprint, Worldcom, Metromedia Fiber Networks and
Verizon. Our data volume is sufficient to allow us to diversify across carriers,
decreasing our reliance on any single telecommunication service provider,
without losing the benefit of economies of scale.
Our equipment and systems are co-located in two independent Comdisco, Inc. data
center facilities in Carlstadt and North Bergen, New Jersey. By co-locating
equipment, we derive operating economies while obtaining the highest quality of
service available in a physical plant. Comdisco's around-the-clock facilities
are protected by state-of-the-art fire suppression and heating ventilation air
conditioning (HVAC) systems and have multiple, uninterruptible sources of power,
including backup generators and fully redundant power distribution units.
Security personnel, procedures and video surveillance protect against
unauthorized physical access to our equipment.
APPLICATION DEVELOPMENT
We work closely with our customers and business partners to develop managed
software services that will address unfulfilled market needs. We establish a
business case for each potential new offering and major software update to
ensure that any new initiative meets strategic, operational, technical and
economic criteria. We have implemented methodology tools and procedures that
have enhanced our ability to author quality products and applications. Our
development team uses Rational software tools to formalize work plans and
coordinate highly complex development tasks.
Our software is authored to take advantage of the FIX protocol and has been
written in object oriented ANSI C++ language, which can run on various operating
system platforms, including UNIX and Microsoft Windows. We maintain a library of
reusable program code and use naming conventions, which facilitates rapid
application development and provides a homogenous and familiar look and feel to
our customers. Our standardized approach greatly enhances the quality of our
programs and products. Our quality control department has a dedicated
laboratory, which simulates the NYFIX system. All of our new product releases
are tested under load and stress conditions using automated tools for
reliability, interoperability and defects. Our sales support, customer training
and technical engineering group provide ongoing feedback from our customer base
to our product development team and quality control department. This allows us
to continuously refine and enhance our products to better serve our customers'
needs.
15
COMPETITION
The electronic order management and delivery industry is highly competitive and
constantly evolving through technological and regulatory change. Our competition
varies widely and we encounter different categories of competitors to each of
our product and service offerings. We also face competition from potential
customers who choose to maintain their own infrastructure and develop their own
in-house proprietary order management software systems.
Competition within our industry is based on a variety of factors, including
product features, product functionality and performance; product quality and
reliability; price; and technical support and customer service. Based on our
experience, we believe that we compete effectively in each of these categories.
We face competition in the following three areas:
o NETWORK SERVICES. Transaction Network Services and Global Crossing
Ltd. (who recently filed for bankruptcy under Chapter 11 and is
undergoing a restructuring) are large fiber optic networks capable of
carrying multiple types of financial information. Both of these
companies provide basic connectivity offerings for order routing,
however, we believe the NYFIX network provides more value added
connectivity, with its embedded FIX protocol communication and its
sophisticated execution provider links.
o EXCHANGE FLOORS. We are a leading provider of exchange floor
automation technology, including stationary and wireless trading
technologies. While we have technology deployed and offer access to
numerous exchanges, our most significant presence is in the U.S.
listed equity market. Member firms operate approximately 1500 booths
on the NYSE. Most of these firms are in the process of automating
their floor operations and to date our systems automate a leading
percentage of the member firms and installed more than 500 stationary
systems and deployed over 250 handheld devices on the NYSE exchange
floor. The NYSE itself also offers floor technology to member firms
and there are several other smaller competitors in this area,
including Tradeware.
o DESKTOP PRODUCTS. We face competition from vendors who produce desktop
solutions for traders who are not on the floor, including several
vendors in listed equities such as Brass, Royalblue Group and
Bloomberg. These competitors either have or are building data centers
for a service bureau offering and have the ability to pass listed
orderflow through their systems to the exchange floors, including the
NYSE. We believe that we compete effectively with these vendors by
offering easy-to-use, seamless integration with our exchange floor
products and extensive electronic market connectivity.
NYFIX Millennium faces competition from traditional stock exchanges, other ATSs
and ECNs offering a variety of execution services and methods, some focusing on
retail orderflow rather than institutional orderflow.
INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS
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.
Despite the precautions we take to protect our intellectual property rights, it
is possible that third parties may copy or otherwise obtain and use our
proprietary technology without authorization or otherwise infringe upon our
proprietary rights. It is also possible that third parties may independently
develop technologies similar to ours. It may be difficult for us to prevent
unauthorized use of our intellectual property and we cannot assure you that the
steps we take will prevent misappropriation of our technology. In addition,
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the
16
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Litigation, whether or not successful,
could result in substantial costs and diversions of resources.
We may in the future receive notices of claims of infringement of other parties'
proprietary rights. We cannot assure you that claims of infringement or
invalidity, or claims for indemnification resulting from infringement claims,
will not be asserted or prosecuted against us. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources or require us to enter into royalty or
licensing agreements. We cannot assure you that these royalties or licenses
would be available on reasonable terms, if at all.
GOVERNMENT REGULATION
The U.S. securities industry is subject to extensive regulation under both
federal and state laws. In addition, the Securities and Exchange Commission
("SEC"), the NASD, other self-regulatory organizations, commonly known as SROs,
such as the various stock exchanges, and other regulatory bodies, such as state
securities commissions, require strict compliance with their rules and
regulations. As a matter of public policy, regulatory bodies are charged with
safeguarding the integrity of the securities and other financial markets and
with protecting the interests of investors participating in those markets, not
protecting creditors or stockholders of broker-dealers. Companies that operate
in the securities industry are subject to regulation concerning many aspects of
their business, including trade practices, capital structure, record retention
and the conduct of directors, officers and employees. Failure to comply with any
of these laws, rules or regulations could result in censure, fine, the issuance
of cease-and-desist orders or the suspension or disqualification of our
directors, officers or employees. Neither we nor any of our directors, officers
or employees are currently subject to any cease-and-desist orders, suspensions
or disqualifications under the rules of any of these regulatory organizations.
An adverse ruling in the future against us or our directors, officers or
employees, including censure or suspension, could result in us, our directors,
officers and other employees being required to pay a substantial fine or
settlement, and could result in their suspension or expulsion.
The regulatory environment in which we operate is subject to change. Our
profitability may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other U.S. or foreign
governmental regulatory authorities or the NASD. We may also be adversely
affected by changes in the interpretation or enforcement of existing laws and
rules by these governmental authorities and the NASD. Additional regulation,
changes in existing laws and rules, or changes in interpretations or enforcement
of existing laws and rules often directly affect the method of operation and
profitability of securities firms. We cannot predict what effect any such
changes might have.
Our business, both directly and indirectly, relies on the Internet and other
electronic communications gateways. We intend to expand our use of these
gateways. To date, the use of the Internet has been relatively free from
regulatory restraints. However, the SEC, SROs and states are beginning to
address regulatory issues that may arise in connection with the use of the
Internet. Accordingly, new regulations or interpretations may be adopted that
constrain our own and our customers abilities to transact business through the
Internet or other electronic communications gateways.
New regulations governing the recording and transmission of orders to and on the
NYSE floor were adopted in early 2001. These regulations are known as Rule 123.
The first phase of Rule 123 requires 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 of Rule 123 requires all orders sent to the
NYSE to be sent electronically. Rule 123 required that all NYSE member firms
adopt electronic order management systems by September 10, 2001. We believe that
Rule 123 regulations will have a positive impact on our business because we
already produce systems capable of meeting and exceeding the regulatory
requirements, with many additional features designed to reduce error and
maximize customer efficiency.
17
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.
MAJOR CUSTOMERS
Information about the Company's dependence on major customers relating to sales
and accounts receivable is contained in "Note 10 - Major Customers" appearing in
the consolidated financial statements as noted in the Index appearing under Item
14 (a) (1).
EMPLOYEES
As of March 15, 2002 the Company had 178 full-time employees, including NYFIX
Millennium, which became an 80% owned subsidiary effective February 1, 2002. Our
employees are not represented by any collective bargaining organization or
covered by a collective bargaining agreement. We believe that our relationships
with our employees are good.
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
13,800 square feet at a current annual rental of $352,000, expiring on February
28, 2005, and approximately 7,100 square feet at a current annual rental of
$271,000, expiring on May 31, 2005. The Company's London office lease, expiring
on June 6, 2009, is for approximately 5,500 square feet at a yearly rental of
$120,000, excluding local taxes. The Company sublets a portion of the space for
an annual rental income of $33,000, excluding local taxes. The Company also
rents office space at 100 Wall Street, New York, NY 10005 of approximately
17,000 square feet for an annual rental of $599,000, expiring on November 29,
2005, and 4,800 square feet for an annual rental of $145,000, expiring on July
23, 2005. The Company subleases half of its space at 100 Wall Street to NYFIX
Millennium on a month-to-month basis. The Company leases office space of
approximately 2,900 square feet at 20 North Wacker Drive, Chicago, IL 60606 for
an annual rental of $83,000. The Company leases office space of approximately
2,700 square feet at 595 Market Street, San Francisco, CA 94105 for an annual
rental of $78,000, expiring on December 31, 2004. We believe that the facilities
described above are adequate for our current needs.
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.
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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. The following table sets forth the high and low sales prices for the
common stock, for the periods presented, as reported by the Nasdaq.
PRICES OF COMMON STOCK
High Low
2001
First Quarter $ 34.88 $ 19.88
Second Quarter $ 32.00 $ 16.75
Third Quarter $ 26.28 $ 12.10
Fourth Quarter $ 23.49 $ 11.33
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
* Restated for 3 for 2 stock split in the form of a stock dividend effective
4/4/2000
(B) HOLDERS
At March 19, 2002 the records of the Company's transfer agent indicated that
there were 410 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.
19
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
---------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total revenues $ 41,397,417 $ 23,980,167 $ 12,209,451 $ 6,235,393 $ 5,006,017
Gross profit $ 32,066,145 $ 17,602,815 $ 8,443,864 $ 3,702,684 $ 2,325,879
Earnings (loss) from operations $ 13,140,160 $ 6,474,494 $ 1,194,166 $ (2,226,337) $ (2,712,109)
Net earnings (loss) $ 8,135,924 $ 5,676,427 $ 960,419 $ (2,233,809) $ (2,594,040)
Net earnings (loss) per common share:
Basic $ 0.30 $ 0.23 $ .04 $ (0.11) $ (0.14)
Diluted $ 0.29 $ 0.21 $ .04 $ (0.11) $ (0.14)
At year end:
Cash and cash equivalents $ 4,967,537 $ 4,866,629 $ 1,565,649 $ 3,948,004 $ 2,141,307
Short-term investments $ 28,973,685 -- -- -- --
Working capital $ 47,512,603 $ 9,158,936 $ 4,512,985 $ 5,970,449 $ 3,803,403
Property and equipment, net $ 14,366,097 $ 11,472,473 $ 5,873,037 $ 2,854,131 $ 1,361,707
Total assets $108,571,648 $ 57,558,350 $ 38,828,025 $ 12,997,519 $ 7,547,263
Long-term debt, including current portion $ 1,500,784 $ 3,822,919 $ 2,500,000 $ 1,800,000 $ 93,564
Shareholders' equity $ 99,241,696 $ 42,227,734 $ 29,885,280 $ 8,118,749 $ 5,901,733
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgments, including those related to accounts receivable
reserves, investments, long-lived assets, revenue recognition, product
enhancement costs, income taxes and contingencies. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements. For a detailed discussion on the
application of these and other accounting policies, see Note 2 in the Notes to
the Consolidated Financial Statements in Item 14 of this Annual Report on Form
10-K.
ACCOUNTS RECEIVABLE RESERVES
The Company continuously monitors collections and payments from our customers
and maintains a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within the provisions
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
20
INVESTMENTS
The Company holds an ownership interest in NYFIX Millennium, 50% at December 31,
2001, and 80% effective February 1, 2002. The Company's policy is to record an
investment impairment charge when it believes an investment has experienced a
decline in value that is other than temporary. Future adverse changes in market
conditions, poor operating results or a failure of the business model of NYFIX
Millennium could result in losses or an inability to recover the carrying value
of the investments, thereby possibly requiring an impairment charge in the
future.
LONG-LIVED ASSETS
The Company periodically reviews the carrying value of our long-lived assets and
investments for continued appropriateness. This review is based upon our
projections of anticipated future cash flows. While we believe that our
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations.
REVENUE RECOGNITION
The Company's revenues comprise subscription, sales and service contract
revenue. Sales are generally recorded upon shipment of the product to and
acceptance by customers. 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. 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 revenue is recognized
ratably over the life of the subscription agreements with customers and begins
once installation is complete. Revenue from service contracts is comprised of
maintenance contracts for capital sales equipment and subscription equipment and
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.
PRODUCT ENHANCEMENT COSTS
The Company's policy on product enhancements costs determines the timing of our
recognition of certain development costs. In addition, this policy determines
whether the cost is classified as deferred product enhancements costs on our
balance sheet or research and development expense. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization, as well as the determination of which
enhancements significantly enhance the functionality or significantly extend the
life of our products. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software development costs
require judgment by management with respect to certain external factors,
including but not limited to, anticipated future gross revenue, estimated
economic life, customer requirements and changes in software and hardware
technologies.
INCOME TAXES
The Company's income tax policy is to record the estimated future tax effects of
temporary differences between the tax bases of assets and liabilities and
amounts reported in the accompanying consolidated balance sheets. The Company
evaluates the recoverability of tax assets recorded on the balance sheets and
provides allowances as required.
CONTINGENCIES
Contingencies are recorded as liabilities when it is probable that a liability
has been incurred and the amount of the loss is reasonably estimable. Disclosure
is required when there is a reasonable possibility that the ultimate loss will
exceed the recorded provision. The Company uses outside counsel to assist it in
various
21
matters including securities and Securities and Exchange Commission ("SEC")
regulations, acquisitions, trademark, patent and personnel matters. Management
relies on the professional judgment of outside counsel and well as its own
assessment in determining whether contingencies should be recorded.
OVERVIEW
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 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 and
programming personnel.
Depreciation and amortization expense consists of depreciation and amortization
of equipment and software used to operate the Company's systems.
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.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES
Subscription revenue increased 81% to $28,955,000 in 2001, from $15,955,000 in
2000, principally due to increased demand 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
70% in 2001 from 67% in 2000.
Sales revenue increased 60% to $8,123,000 in 2001, from $5,089,000 in 2000. The
increase in sales revenue is principally due to customer demand for the
Company's Order Book Management System ("OBMS") derivatives trading software
products and the sale of equity technology fees, offset in part by a decrease in
hardware sales. As a percentage of total revenue, sales revenue decreased to 20%
in 2001, from 21% in 2000, with software sales comprising the majority of sales
revenue.
Service contracts revenue increased 47% to $4,319,000 in 2001, from $2,936,000
in 2000, principally due to an
22
increase in subscription contract revenue. As a percentage of total revenue,
service contract revenue comprised 10% of total revenue, as compared to 12% in
2000.
COST OF REVENUES AND GROSS PROFIT
Gross profit as a percentage of total revenues increased to 77% in 2001 from 73%
in 2000, as gross profit on a percentage basis improved for both subscription
and sales revenues. The increase in gross profit percentage principally resulted
from an increase in the amount of higher margin software installations. On a
dollar basis, gross profit improved for all three revenue categories, which was
offset somewhat by increased communication charges relating to increased desktop
connections, higher labor costs due to increased service contract revenues,
increased depreciation expense for subscription-based equipment due to
additional units being placed into service and higher amortization expense of
product enhancement costs. Included in cost of revenues was amortization expense
of product enhancement costs of $1,773,000 and $1,185,000 for 2001 and 2000,
respectively. Also included in cost of revenues was depreciation expense for
subscription-based equipment of $2,060,000 and $1,257,000 for 2001 and 2000,
respectively. The Company obtains its materials and supplies from a variety of
vendors in the U.S. and Asia and did not experience any significant price
increases in its component parts purchased during 2001.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 68% to $15,841,000 in
2001, from $9,419,000 in 2000, but decreased slightly as a percentage of total
revenues to 38% in 2001 from 39% in 2000. The dollar increase reflects increased
salaries and commissions, related personnel costs, rent expense and various
office expenses due to an increase in personnel of 24% in 2001 from 2000 to
support the Company's growth. Also increasing were non-recoverable communication
fees, and software support and maintenance contract fees due to the continued
investment in the Company's infrastructure.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $452,000 in 2001, from $454,000
in 2000, primarily as a result of the Company's focus on enhancing its existing
product lines to allow current and prospective customers to be more efficient
and productive in their businesses. As stated above, amortization of product
enhancement costs is reflected in cost of revenues.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 110% to $2,633,000 in 2001,
from $1,255,000 in 2000, reflecting principally the continued investment in the
Company's infrastructure, in addition to administrative support equipment and
leasehold improvements to support the Company's growth.
INTEREST EXPENSE
Interest expense increased 3% to $343,000 in 2001, from $333,000 in 2000,
principally as a result of increased interest on capital lease obligations of
$126,000, offset by a $116,000 decrease in other interest expense due to the
payoff of the Company's line of credit during July 2001.
INVESTMENT INCOME
Investment income increased 400% to $780,000 in 2001, from $156,000 in 2000,
principally due to interest and dividends earned on the Company's investments in
cash equivalents and marketable securities.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $5,427,000 in 2001, from $601,000 in
2000. Commencing in 2001, the Company is subject to full statutory income tax
rates as compared to the prior periods in which the Company utilized the
benefits of available net operating loss carryforwards. The Company's effective
tax rate of 40% in the current year exceeds the Federal statutory rate primarily
due to state income taxes.
EVENTS OF SEPTEMBER 11TH
The events of September 11, 2001, did not have a material effect on the
Company's financial position, results of operations, or cash flows. Management
believes that these events have not impacted our overall growth outlook.
23
The Company credits the ongoing investment in state-of-the-art redundant
data-centers and network infrastructure for our ability to maintain 100%
effective operations across all products and services throughout the month of
September. While the Company worked around the clock to assist many clients in
recovery testing, and in some cases establishing temporary emergency operations,
the Company opted not to charge any customers one-time fees in connection with
these efforts. The Company also did not incur any material incremental expenses
in connection with the events of September 11, 2001.
Although the events of September 11, 2001 did not have a direct material effect
on the Company's results of operations, they did have an effect on the NYFIX
Millennium Alternative Trading System (ATS), which the Company had a 50%
ownership interest at December 31, 2001. After roll-out efforts were stalled by
the tragic events of September 11th, NYFIX Millennium usage increased later in
the fourth quarter, bringing the system back to initial execution levels.
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 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 contracts 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 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,
24
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.
INVESTMENT INCOME
Investment 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.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, the Company raised $57,284,000 from a follow-on public offering of
3,000,000 shares of its common stock, net of expenses. The Company is using the
net proceeds for working capital, to purchase shares of its common stock and for
other general corporate purposes. The Company is also using a portion of the net
proceeds for acquisitions of businesses, products and technologies or the
establishment of joint ventures that are complementary to our business. As
described in Note 21 to the Consolidated Financial Statements, Subsequent
Events, the Company is committed to expend funds of $15,000,000 on certain
acquisitions subsequent to year-end. The funds have come or will come primarily
from liquidating available-for-sale marketable securities. At December 31, 2001,
the cash and cash equivalents balance increased to $4,968,000 from $4,867,000 at
December 31, 2000 primarily as a result of net proceeds from the public
offering, the exercise of stock options and cash provided by operating
activities, offset by purchases of available-for-sale marketable securities and
treasury stock, capital expenditures, a subordinated loan to NYFIX Millennium,
the acquisition of other assets to support the Company's infrastructure and
repayments under loan and capital lease obligations.
On March 6, 2002, the Company announced that it had acquired a 40% ownership
interest in EuroLink Network, Inc. ("EuroLink"), a privately held company based
in Madrid, Spain, which offers direct electronic access to the U.S. equity
markets from Europe. The Company acquired its interest in return for granting
licensing and distribution rights and $4,000,000. Under the terms of the
agreement, EuroLink will offer the Company's equity terminals, market access and
services to the European marketplace, primarily on a transaction fee basis. The
terms of the agreement give the Company the option to increase its ownership
interest in EuroLink to 80% at a later date.
On March 12, 2002, the Company announced that it had signed a definitive
agreement to acquire Javelin Technologies, Inc. ("Javelin"). Javelin, widely
known as one of the pioneers in FIX (Financial Information exchange Protocol)
technology, has over 1,000 installations at more than 300 leading buy and
sell-side institutions, exchanges and ECNs, including over 50 clients in Europe
and 20 in Asia. Javelin possesses the leading market-share in the buy-side
institutional market for electronic order routing enabling technology. The
Company will finance the transaction with a combination of approximately
$11,000,000 cash and the issuance of common stock with a value of approximately
$44,000,000. The cash portion will be financed through available funds. In
addition, the Company has negotiated an earn-out based on Javelin's 2002
revenues. The transaction is scheduled to close on March 31, 2002.
25
Some of the Company's key considerations for the acquisition of Javelin include:
increased connectivity to the buy-side institutional market; consolidated
product offering; cross-selling of core products and transaction services; and a
single point of electronic exchange access across all major domestic and
international equity and derivatives exchanges. The plan is to embed NYFIX
Millennium capabilities in Javelin products, which should reduce implementation
time of the NYFIX Millennium ATS throughout the financial industry.
As a result of the Company's acquisition of an inactive broker-dealer in
December 2001, subsequently named NYFIX Transaction Services, Inc., and the
agreement with EuroLink noted above, the Company expects to record transactional
revenue beginning in 2002. NYFIX Transaction Services is ready to move into full
operational status immediately upon NASD approval of its pending membership
application. If NASD broker-dealer status is granted by early in the second
quarter of 2002, NYFIX Transaction Services is expected to make a contribution
to earnings in the second quarter and beyond. In addition, as a result of the
Company's increase in ownership interest in NYFIX Millennium to 80% on February
1, 2002 (see Note 21 to the Consolidated Financial Statements), the Company will
begin consolidating NYFIX Millennium's financial results effective on that date.
Although NYFIX Millennium is experiencing increasing volumes and increasing its
revenues, it is not expected to have a significant impact on first quarter 2002
results. The Company expects NYFIX Millennium to make solid contributions to
earnings in the second quarter and beyond.
At December 31, 2001, the Company had invested $28,974,000 in current marketable
security instruments, having interest rates ranging from 1.30% to 5.05%,
$2,214,000 in a tax-free money fund with an average yield of 0.96% and $552,000
in money market funds with a 30 day yield of 1.73%.
At December 31, 2001, the Company had total debt of $1,501,000, which represents
amounts outstanding under capital lease obligations. At December 31, 2001, 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. Outstanding indebtedness under
the credit agreement bore 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. 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
Company repaid the remaining balance of $1,500,000 in full on July 17, 2001. The
debt was personally secured by a non-employee shareholder of 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 was recognized
over the three-year term of the Agreement.
The Company believes it has sufficient liquidity, including cash generated from
operations and issuances of common stock, to support its cash needs for at least
the next twelve months.
The following summarizes the Company's contractual obligations at December 31,
2001, and the effect such obligations are expected to have on its liquidity and
cash flows in future periods (in 000's):
Payments Due In
--------------------------------------------------------------
After
2002 2003 2004 2005 2005
---- ---- ---- ---- ----
Capital leases $1,058 $ 559 $ 11 $ -- $ --
Non-cancelable
operating leases 2,405 2,043 1,893 1,095 312
------ ------ ------ ------ ------
Total obligations $3,463 $2,602 $1,904 $1,095 $ 312
====== ====== ====== ====== ======
26
As mentioned above, the Company is also obligated to expend approximately
$15,000,000 in cash on acquisitions made in 2002.
WORKING CAPITAL
At December 31, 2001 and 2000, the Company had working capital of $47,513,000
and $9,159,000, respectively, representing a 419% improvement. The Company's
present capital resources include proceeds from internal operations and from
issuances of common stock.
CASH PROVIDED BY OPERATING ACTIVITIES
During 2001, net cash provided by operations was $10,625,000 as compared to net
cash provided by operations of $9,432,000 in 2000. The increase is primarily due
to the 43% increase in net earnings, to $8,136,000 in 2001, from $5,676,000 in
2000. The increase is also due to an increase in accounts payable and accrued
expenses of $2,286,000, offset by a decrease in advance billings of $5,697,000,
an increase in accounts receivable of $1,124,000, and an increase in prepaid and
other current assets of $1,292,000. The increase in accrued expenses reflects
increased tax liabilities due to increased sales and profitability. The decrease
in advance billings reflects a change in the Company's procedure for advance
billings on subscription contracts, from issuing the invoices at the end of the
prior quarter to issuing the invoices at the beginning of the current quarter.
The increase in accounts receivable is due primarily to increased sales offset
by the advance billing method change described above. The increase in prepaid
and other current assets is due in part to an increase in certain receivables
from telecommunication providers.
CASH USED IN INVESTING ACTIVITIES
During 2001 and 2000, net cash used in investing activities was $48,135,000 and
$9,387,000, respectively. The increase is primarily due to the $28,974,000
invested in current marketable securities, payments for purchases of equipment
related to the Company's data center and subscription equipment of $7,121,000,
payments related to product enhancement costs for the Company's product
portfolio of $2,806,000, along with a subordinated loan of $6,000,000 and
advances of $3,237,000 made to NYFIX Millennium.
CASH PROVIDED BY FINANCING ACTIVITIES
During 2001 and 2000, net proceeds from financing activities were $37,612,000
and $3,256,000, respectively. During 2001, net proceeds of $57,264,000 from the
follow-on public offering and $2,293,000 from the exercise of stock options were
partially offset by purchases of treasury shares of $19,100,000, repayments
under the revolving line of credit of $2,000,000 and principal payments under
capital lease obligations of $846,000.
SEASONALITY
The Company believes that its operations are not significantly effected by
seasonality.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141 ("SFAS 141"),
"Business Combinations," and SFAS No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 141 prohibits the use of the pooling-of-interest method
for business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were accounted for by the
purchase method. SFAS 142 is effective for fiscal years beginning after December
15, 2001, to all goodwill and other intangible assets recognized in an entity's
balance sheet at that date, regardless of when those assets were originally
recognized. The Company has adopted SFAS 141 and SFAS 142. As of December 31,
2001, the Company did not have any goodwill recorded on its consolidated
financial statements, but will have goodwill as a result of the acquisitions
made subsequent to year-end (see Note 21). The Company is currently evaluating
the impact of SFAS 142 on its consolidated financial statements.
27
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for the
Impairment of Long-Lived Assets," which supercedes SFAS No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operation - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. SFAS 144
retains many of the provisions of SFAS 121, but addresses certain implementation
issues associated with that Statement. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 144 effective
January 1, 2002. The adoption of SFAS 144 did not have an impact on the
financial position, results of operations, or cash flows of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may be expected to result
from the potential change in value of a financial instrument as a result of
fluctuations in credit ratings of the issuer, equity prices, interest rates or
foreign currency exchange rates. The Company is exposed to market risk
principally through changes in interest rates, equity prices and foreign
currency exchange rates. Interest rate exposure is principally limited to the
$29.0 million of current marketable securities and $5.0 million of cash and cash
equivalents invested at December 31, 2001. Risk is limited on $9.0 million of
the marketable securities due to the fact that it is invested in an insured
municipal bond portfolio and no more than 5% of the Company's portfolio can be
invested in any one security issue.
The remaining $20.0 million of current marketable securities is invested in a
quoted fund that is managed by an institution (the "Fund") which primarily
invests in investment grade securities, with up to a maximum of 10% invested in
high yield securities rated B or higher.
The fair value of the Company's investment portfolio at December 31, 2001,
approximated carrying value due to its short-term duration. The potential
decrease in fair value resulting from a hypothetical 10% change in interest
rates for the marketable securities contained in the investment portfolio and
cash funds would not be material to earnings, cash flows or fair value. Current
marketable securities at December 31, 2001, are recorded at a fair value of
$29.0 million, net of an unrealized loss of $60,000. $20.0 million of the
securities has exposure to price risk. The estimated potential loss in fair
value resulting from a hypothetical 10% decrease in the quoted price is $2.0
million.
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.
The Company does not use derivative financial instruments for any purpose.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Financial Statements on Page 32.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
As previously reported by the Company in its Current Report on Form 8-K filed on
April 28, 2000.
28
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 10, 2002 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
no later than April 30, 2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
Section entitled "Executive Compensation" in the Company's Proxy Statement for
the June 10, 2002 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission no later than April 30, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
Section entitled "Security Ownership" of the Company's Proxy Statement for the
June 10, 2002 Annual Meeting of Stockholders, to be filed with the Securities
and Exchange Commission no later than April 30, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
Section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the June 10, 2002 Annual Meeting of Stockholders,
to be filed with the Securities and Exchange Commission no later than April 30,
2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
- ------------------------------------------
(1) Financial Statements
See index to Financial Statements on Page 32.
(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 Composite Certificate of Incorporation of NYFIX,
Inc. (Exhibit 3.1 to Registrant's Form S-3 filed
June 1, 2001).
3.2 By-Laws of NYFIX, Inc. (Exhibit 3.2 to Registrant's
Form 10 filed March 5, 1993).
29
4.1 Rights Agreement between Chase Mellon Shareholder
Services, L.L.C. (now known as Mellon Investor
Services) and the Registrant dated September 1,
1997 (Exhibit 2 to Registrant's registration
statement on Form 8-A12B filed September 10, 1997).
4.2 First Amendment to Rights Agreement between Chase
Mellon Shareholder Services, L.L.C. (now known as
Mellon Investor Services) and the Registrant dated
October 25, 1999 (Exhibit 3 to Registrant's
registration statement on Form 8-A12B/A filed
November 3, 1999).
10.1 Employment Agreement between Peter K. Hansen and the
Registrant dated June 24, 1991 (Exhibit 3.2 to
Registrant's Form 10 filed March 5, 1993).
10.2 Limited Liability Company Operating Agreement of
NYFIX Millennium, L.L.C. (Exhibit 10.4 to Company's
Annual Report on Form 10-K for the year ended
December 31, 1999).
10.3 NYFIX, Inc. 2001 Stock Option Plan (Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001).
10.4 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).
10.5 Amendment No. 1 to Amended and Restated 1991
Incentive and Nonqualified Stock Option Plan
(Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.6 Amendment No. 2 to Amended and Restated 1991
Incentive and Nonqualified Stock Option Plan
(Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.7 Subordinated Loan Agreement for Equity Capital,
dated October 30, 2001, between the Registrant and
NYFIX Millennium, L.L.C. (Exhibit 10.1 to the
Company's Form 8-K filed February 14, 2002).
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 Consent of Deloitte & Touche LLP **
24.1 Power of Attorney (see signature page) **
-----------------
* - Except as noted, all exhibits have been previously filed. ** - Filed
herewith.
(B) REPORTS ON FORM 8-K
- -----------------------
None
30
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 28th day of March 2002 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 28, 2002
- -------------------------- (Principal Executive Officer)
Peter Kilbinger Hansen
/s/ Richard A. Castillo Chief Financial Officer & Secretary March 28, 2002
- ----------------------- (Principal Financial Officer and Principal
Richard A. Castillo Accounting Officer)
/s/ George O. Deehan Director March 28, 2002
- --------------------
George O. Deehan
/s/ William J. Lynch Director March 28, 2002
- --------------------
William J. Lynch
/s/ Carl E. Warden Director March 28, 2002
- ------------------
Carl E. Warden
31
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report.................................................33
Financial Statements:
Consolidated Balance Sheets at December 31, 2001 and 2000.................34
Consolidated Statements of Earnings for the Years Ended
December 31, 2001, 2000 and 1999.....................................35
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999.....................................36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.....................................37
Notes to Consolidated Financial Statements...................................38
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
NYFIX, Inc.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of NYFIX, Inc. and
subsidiary as of December 31, 2001 and 2000, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. 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 audits.
We conducted our audits 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 audits provide 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, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 8, 2002
(March 14, 2002 as to Note 21)
33
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 4,967,537 $ 4,866,629
Short-term investments in marketable securities 28,973,685 --
Accounts receivable - less allowance of $511,000 and $421,000 12,949,485 12,058,370
Inventory, net 1,599,592 1,742,823
Prepaid expenses and other current assets 2,138,912 847,255
Due from NYFIX Millennium 5,221,736 1,985,081
Deferred income taxes 443,000 1,859,000
------------- -------------
Total Current Assets 56,293,947 23,359,158
PROPERTY AND EQUIPMENT, net 14,366,097 11,472,473
INVESTMENT IN NYFIX MILLENNIUM 27,500,000 19,500,000
NOTE RECEIVABLE FROM NYFIX MILLENNIUM 6,043,151 --
DEFERRED INCOME TAXES 348,000 237,000
OTHER ASSETS 4,020,453 2,989,719
------------- -------------
TOTAL ASSETS $ 108,571,648 $ 57,558,350
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,847,546 $ 2,915,167
Accrued expenses 3,530,427 2,444,825
Current portion of capital lease obligations 952,176 692,525
Current portion of long-term debt -- 2,000,000
Advance billings 451,195 6,147,705
------------- -------------
Total Current Liabilities 8,781,344 14,200,222
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 548,608 1,130,394
------------- -------------
Total Liabilities 9,329,952 15,330,616
------------- -------------
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; 28,869,800 and 25,109,550 shares issued 28,870 25,110
Additional paid-in capital 110,497,679 42,558,040
Retained earnings 8,442,406 306,482
Due from officers and directors (591,732) (661,898)
Accumulated other comprehensive loss (35,675) --
Treasury stock, at cost (1,301,300 shares) (19,099,852) --
------------- -------------
Total Shareholders' Equity 99,241,696 42,227,734
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 108,571,648 $ 57,558,350
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
34
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
REVENUES:
Subscriptions $ 28,955,085 $ 15,954,989 $ 6,732,928
Sales 8,122,766 5,089,412 3,715,479
Service contracts 4,319,566 2,935,766 1,761,044
------------ ------------ ------------
TOTAL REVENUES 41,397,417 23,980,167 12,209,451
------------ ------------ ------------
COST OF REVENUES:
Cost of subscriptions 7,198,153 5,032,064 2,664,077
Cost of sales 894,443 669,878 545,963
Cost of service contracts 1,238,676 675,410 555,547
------------ ------------ ------------
Total Cost of Revenues 9,331,272 6,377,352 3,765,587
------------ ------------ ------------
GROSS PROFIT 32,066,145 17,602,815 8,443,864
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 15,841,397 9,419,182 6,289,686
Research and development 452,024 454,362 297,475
Depreciation and amortization 2,632,564 1,254,777 662,537
------------ ------------ ------------
Total Operating Expenses 18,925,985 11,128,321 7,249,698
------------ ------------ ------------
EARNINGS FROM OPERATIONS 13,140,160 6,474,494 1,194,166
Interest expense (342,788) (332,750) (221,711)
Investment income 779,648 155,947 112,807
Other (expense) income (14,456) (20,009) 11,166
------------ ------------ ------------
EARNINGS BEFORE PROVISION FOR INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 13,562,564 6,277,682 1,096,428
PROVISION FOR INCOME TAXES 5,426,640 601,255 94,400
------------ ------------ ------------
8,135,924 5,676,427 1,002,028
EARNINGS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- -- (41,609)
------------ ------------ ------------
NET EARNINGS $ 8,135,924 $ 5,676,427 $ 960,419
============ ============ ============
BASIC EARNINGS PER COMMON SHARE BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.30 $ 0.23 $ 0.05
============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.30 $ 0.23 $ 0.04
============ ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 26,784,054 24,480,356 21,752,583
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE BEFORE AND AFTER CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.29 $ 0.21 $ 0.04
============ ============ ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 28,542,184 26,425,130 23,306,912
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
35
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Common Stock Issued Retained Due from Accumulated
-------------------- Additional Earnings Oficers Other Total
Paid-in (Accumulated) and Comprehensive Treasury Shareholders'
Shares Amount Capital Deficit Directors Loss Stock Equity
---------- --------- ----------- ------------- ---------- ------------- -------- ------------
Balance January 1, 1999 21,169,193 $21,169 $14,880,869 $(6,330,364) $(452,925) $ - $ - $8,118,749
Common stock issued from
exercise of
options & 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)
Common 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
Common stock issued from
exercise of options 384,250 384 2,222,636 - - - - 2,223,020
Common stock, net of
issuance costs 3,376,000 3,376 65,260,933 - - - - 65,264,309
Warrants issued 44,070 - - - - 44,070
Due from officers and
directors - - - - 70,166 - - 70,166
Net unrealized loss on
available-for-sale
securities - - - - - (35,675) - (35,675)
Treasury stock purchased - - - - - - (19,099,852) (19,099,852)
Tax benefit from exercise
of stock options - - 412,000 - - - - 412,000
Net earnings - - - 8,135,924 - - - 8,135,924
---------- ------- ------------ ---------- ---------- ---------- ------------ -----------
Balance December 31, 2001 28,869,800 $28,870 $110,497,679 $8,442,406 $(591,732) $(35,675) $(19,099,852) $99,241,696
========== ======= ============ ========== ========== ========== ============ ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
36
NYFIX, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 8,135,924 $ 5,676,427 $ 960,419
Adjustments to reconcile net earnings
to net cash provided
by operating activities:
Depreciation and amortization 6,465,000 3,696,639 1,983,399
Deferred income taxes 1,473,000 (585,300) -
Provision for bad debts 232,638 415,802 44,758
Non-cash financing charges 44,070 75,548 63,996
Non-cash investment income (43,151) - -
Changes in assets and liabilities:
Accounts receivable (1,123,753) (5,385,352) (3,716,160)
Inventory 143,231 (439,165) (24,356)
Prepaid expenses and other
current assets (1,291,657) (211,622) (231,138)
Accounts payable and accrued
expenses 2,285,981 3,220,183 1,674,396
Advance billings (5,696,510) 2,969,069 1,689,579
------------ ---------- -----------
Net cash provided by operating
activities 10,624,773 9,432,229 2,444,893
------------ ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (91,183,360) - -
Proceeds from sales of marketable
securities 62,150,000 - -
Capital expenditures (7,121,238) (6,084,180) (4,263,724)
Loan to NYFIX Millennium (6,000,000) - -
Investment in NYFIX Millennium - - (2,000,000)
Advances to NYFIX Millennium (3,236,655) (1,123,111) (861,970)
Payments for product enhancement
costs and other assets (2,744,170) (2,179,464) (1,643,670)
------------ ---------- -----------
Net cash used in investing
activities (48,135,423) (9,386,755) (8,769,364)
------------ ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease
obligations (846,085) (199,973) -
Proceeds from borrowings - - 700,000
Repayment of borrowings (2,000,000) (500,000) -
Purchases of treasury stock (19,099,852) - -
Issuance of common stock, net of
issuance costs 59,557,495 3,955,479 3,242,116
------------ ---------- -----------
Net cash provided by
financing activities 37,611,558 3,255,506 3,942,116
------------ ---------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 100,908 3,300,980 (2,382,355)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 4,866,629 1,565,649 3,948,004
------------ ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,967,537 $ 4,866,629 $ 1,565,649
============ ========== ============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for
interest $ 300,541 $ 274,490 $ 149,777
Cash paid during the year for
income taxes 2,985,397 286,634 39,150
Capital lease obligations incurred 523,950 2,022,892 -
Common stock issued for investment
in NYFIX Millennium 8,000,000 - 17,500,000
The accompanying notes to consolidated financial statements are an integral part
of these statements.
37
NYFIX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. ORGANIZATION AND PRESENTATION
NYFIX, Inc. and subsidiary (the "Company") is a leading provider of
electronic trading infrastructure and technologies to the professional
trading segment of the brokerage community. With our desktop solutions,
stationary and wireless exchange floor systems, electronic automation
systems and straight-through processing, we streamline data entry, routing
and execution and eliminate many processing inefficiencies. The Company's
infrastructure, which consists of an extensive network of electronic
circuits, links industry participants across equities and derivatives
markets.
The Company's products and services are broadly categorized into electronic
trading infrastructure and applications and provide the Company's customers
a complete solution to enter, manage and route orders and execution data
electronically. The NYFIX network is a proprietary centralized electronic
infrastructure linking various market participants to provide efficient,
secure and reliable order routing. A single dedicated circuit between the
Company's customers and the NYFIX network enables connectivity to buyside
and sellside institutions and major international exchanges and alternative
execution venues such as electronic communication networks (ECNs) and
alternative trading systems (ATSs). We also have developed and offer an
integrated portfolio of modular desktop trading applications, exchange
floor automation and exchange access applications for trading domestic and
international equities, futures and options. The Company's outsourced
application solutions reside upon our centralized system and are delivered
through the NYFIX network. The Company's products and services operate
using the industry standard Financial Information Exchange (FIX) protocol.
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 2000 and 1999 balances have been reclassified to conform to the
2001 presentation.
38
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
Short-term Investments in Marketable Securities
-----------------------------------------------
The Company's investments in marketable securities are in instruments that
are short-term in nature, consisting of money market instruments and short
maturity fixed income securities. Investments in marketable securities are
stated at market value as determined by the most recently traded price of
each security at the balance sheet date. The Company's marketable
securities are defined as available-for-sale securities under the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such determinations
at each balance sheet date. Available-for-sale securities are carried at
fair value, with the unrealized gains or losses, net of tax, reported as a
separate component of shareholders' equity. Sales of securities are
recorded by the specific identification method.
The cost basis of short-term investments in marketable securities at
December 31, 2001 was $29,033,000.
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.
Other Assets
------------
Other assets consist principally of deferred product enhancements costs,
patents, trademarks and deposits. Product enhancements costs consist of
labor costs to develop software internally and costs to purchase software
to be used within the Company's products. The Company's policy on product
enhancements costs is to defer those costs that significantly enhance the
feasibility or significantly extend the life of the Company's products.
Management is required to use professional judgment in determining whether
development costs meet the criteria for immediate expense or
capitalization, in accordance with SFAS No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed." Product
enhancement costs are being amortized using the straight-line method over
three years. Patent costs are being amortized using the straight-line
method over seventeen years. Trademark costs are being amortized using the
straight-line method over ten years.
Long-Lived Assets
-----------------
Long-lived assets, primarily equipment and the note receivable from and
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, 2001.
39
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.
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.
Revenue Recognition
-------------------
The Company's revenues comprise subscription, sales and service contract
revenue. Sales are generally recorded upon shipment of the product to and
acceptance by customers. 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.
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 revenue is recognized ratably over the
life of the subscription agreements with customers and begins once
installation is complete. Revenue from service contracts is comprised of
maintenance contracts for capital sales equipment and subscription
equipment and 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
------------------------
Research and development expenses relate to developing new products and
technologies to meet the current and future needs of the Company's
customers, and are expensed as incurred. These costs consist primarily of
salaries and related costs for technical and programming personnel.
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising expense was
$229,000, $170,000 and $159,000 for the years ended December 31, 2001, 2000
and 1999, 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.
40
Comprehensive Income
--------------------
For the year ended December 31, 2001, comprehensive income was $8,100,000,
or net earnings less the unrealized loss on available-for-sale securities.
For the years ended December 31, 2000 and 1999, comprehensive income was
equal to net earnings.
Impact of Recently Issued Accounting Pronouncements
---------------------------------------------------
In June 2001, the FASB issued two new pronouncements: SFAS No. 141 ("SFAS
141"), "Business Combinations," and SFAS No. 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets." SFAS 141 prohibits the use of the
pooling-of-interest method for business combinations initiated after June
30, 2001, and also applies to all business combinations accounted for by
the purchase method that are completed after June 30, 2001. There are also
transition provisions that apply to business combinations completed before
July 1, 2001, that were accounted for by the purchase method. SFAS 142 is
effective for fiscal years beginning after December 15, 2001, to all
goodwill and other intangible assets recognized in an entity's balance
sheet at that date, regardless of when those assets were originally
recognized. The Company has adopted SFAS 141 and SFAS 142. As of December
31, 2001, the Company did not have any goodwill recorded on its
consolidated financial statements, but will have goodwill as a result of
the acquisitions made subsequent to year-end (see Note 21). The Company is
currently evaluating the impact of SFAS 142 on its consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"), "Accounting for
the Impairment of Long-Lived Assets," which supercedes SFAS No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," and the accounting and reporting
provisions of APB No. 30, "Reporting the Results of Operation - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the
disposal of a segment of a business. SFAS 144 retains many of the
provisions of SFAS 121, but addresses certain implementation issues
associated with that Statement. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 144 effective
January 1, 2002. The adoption of SFAS 144 did not have an impact on the
financial position, results of operations, or cash flows of the Company.
3. INVENTORY
Inventory consists of the following:
December 31,
--------------------------
2001 2000
---------- -----------
Parts and materials $1,120,329 $1,174,727
Work in process 151,702 39,629
Finished goods 409,561 620,467
---------- ----------
1,681,592 1,834,823
Less: Allowance for obsolescence 82,000 92,000
---------- ----------
Total $1,599,592 $1,742,823
========== ==========
41
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
--------------------------
2001 2000
------------ ------------
Computer software $ 1,124,341 $ 458,939
Leasehold improvements 1,312,417 558,356
Furniture and equipment 3,252,658 2,428,962
Subscription and service bureau equipment 15,880,883 11,161,438
Service bureau equipment under capital leases 2,546,842 2,022,892
------------ -----------
24,117,141 16,630,587
Less: Accumulated depreciation 9,751,044 5,158,114
------------ -----------
Total $14,366,097 $11,472,473
============ ===========
Included in accumulated depreciation at December 31, 2001 and 2000 is
accumulated depreciation on leased service bureau equipment of $629,000 and
$123,000, respectively. Included in cost of revenues is depreciation
expense of $2,060,000, $1,257,000 and $586,000 for 2001, 2000 and 1999,
respectively.
5. OTHER ASSETS
Included in other assets are deferred product enhancement costs of
$3,411,000 and $2,378,000 as of December 31, 2001 and 2000, respectively,
net of accumulated amortization of $5,038,000 and $3,265,000 as of December
31, 2001 and 2000, respectively. Included in cost of revenues is
amortization expense of deferred product enhancement costs of $1,773,000,
$1,185,000 and $719,000 for 2001, 2000 and 1999, respectively. Included in
depreciation and amortization expense is amortization expense for other
assets of $4,000, $4,000 and $20,000 for 2001, 2000 and 1999, respectively.
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
December 31,
--------------------------
2001 2000
------------ ------------
Income taxes payable $ 535,562 $ -
Taxes, other than income taxes 1,728,856 1,621,810
Commissions payable 560,474 322,645
Payroll-related accruals 334,323 228,131
Other current liabilities 371,212 272,239
------------ ------------
Total $3,530,427 $2,444,825
============ ============
7. TREASURY STOCK
On August 23, 2001, the Company announced that its Board of Directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding
common stock. Through September 30, 2001, the Company had repurchased the
full 1,000,000 shares in the open market at prevailing market prices at an
aggregate cost of $15.2 million.
On October 2, 2001, the Company announced that its Board of Directors had
authorized the repurchase of up to an additional 500,000 shares of its
outstanding common stock. Through December 31, 2001,
42
the Company had repurchased an additional 301,300 shares in the open market
at prevailing market prices at an aggregate cost of $3.9 million.
8. EARNINGS PER SHARE
The Company's basic earnings per common share ("EPS") is calculated based
on net earnings 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,
------------------------------------------
2001 2000 1999
----------- ------------ -----------
Net earnings $ 8,135,924 $ 5,676,427 $ 960,419
------------ ------------ -----------
Basic weighted average shares outstanding 26,784,054 24,480,356 21,752,583
------------ ------------ -----------
Basic earnings per common share $ 0.30 $ 0.23 $ 0.04
============ =========== ===========
Dilutive options 1,758,130 1,911,485 1,306,029
Dilutive warrants - 33,289 248,300
------------ ------------ -----------
Diluted weighted average shares outstanding 28,542,184 26,425,130 23,306,912
------------ ------------ -----------
Diluted earnings per common share $ 0.29 $ 0.21 $ 0.04
============ =========== ===========
9. CAPITAL STOCK
On June 22, 2001, the Company completed a follow-on public offering as
authorized by its Board of Directors, issuing 3,000,000 shares of its
common stock at a price of $21.00 per share, generating net proceeds of
$57.3 million, after deducting the underwriting discounts and commissions
and offering expenses paid by the Company.
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, share data and common stock equivalents 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 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
43
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.
10. MAJOR CUSTOMERS
For the year ended December 31, 2001, one customer accounted for 12% of
total revenues and 16% of accounts receivable, another customer accounted
for 10% of total revenues and a third customer accounted for 15% of
accounts receivable. 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.
11. DEBT AND CAPITAL LEASE OBLIGATIONS
On July 13, 1998, the Company entered into a three-year $3 million line of
credit agreement with a financial institution. Outstanding indebtedness
under the credit agreement bore 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 weighted average outstanding borrowings were
approximately $1,777,000, $2,398,000 and $2,059,000 at weighted average
interest rates of 6.49%, 7.48% and 7.43% for 2001, 2000 and 1999,
respectively. 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 Company repaid the remaining balance of $1,500,000 in full on
July 17, 2001.
At December 31, 2001, the Company was committed under capital lease
obligations with interest rates ranging from 6.56% to 13.04% for maturities
ranging from January 2, 2003 to January 1, 2004. At December 31, 2001, the
amount of the obligation was $1,501,000, with $952,000 classified as
current.
Capital lease obligations at December 31, 2001 are payable as follows:
Year Ending
December 31, Amount
------------ ------
2002 $ 1,058,000
2003 559,000
2004 11,000
-----------
Total 1,628,000
Less portion of lease
payments representing 127,000
interest -----------
Present value of minimum
lease payments $ 1,501,000
===========
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 20.
12. COMMITMENTS AND CONTINGENCIES
At December 31, 2001, 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:
44
Year Ending
December 31, Amount
------------ ------
2002 $2,405,000
2003 2,043,000
2004 1,893,000
2005 1,095,000
2006 109,000
Thereafter 203,000
Aggregate rental expense amounted to $1,505,000, $959,000 and $780,000 for
the years ended December 31, 2001, 2000 and 1999, respectively. See Note 20
for sublease income from NYFIX Millennium.
The Company has an employment agreement with its Chief Executive Officer,
which renews on an annual basis and calls for a base salary of $400,000 per
year, with such base salary to be reviewed on an annual basis by the
Compensation Committee of the Board of Directors.
13. 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 5.5% to 7.5%, for maturities ranging from
June 30, 2002 to December 30, 2004. Such amounts aggregated $591,732 and
$661,898 as of December 31, 2001 and 2000, respectively, and have been
shown as a reduction of shareholders' equity.
At December 31, 2001 and 2000, the Company had amounts receivable from
officers for travel and payroll advances of $225,000 and $200,000,
respectively.
The partners in NYFIX Millennium (see Note 20) are all customers of the
Company.
14. 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 $11,000
in 2001. 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 $264,000, $143,000 and $80,000 in 2001, 2000 and 1999,
respectively.
15. STOCK WARRANTS AND STOCK OPTION PLAN
In July 1998, the Company entered into a three-year $3 million line of
credit agreement (the "Agreement") with a financial institution, which
expired on July 30, 2001. The debt was personally secured by a non-employee
shareholder of 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 was recognized over the
three-year term of the Agreement. The remaining unexercised warrants
expired on July 30, 2001.
On March 13, 2001, the Board of Directors adopted the Company's 2001 Stock
Option Plan (the "Plan"). The number of shares available under the Plan was
fixed at 2,000,000. The Plan was approved at the
45
Company's Annual Meeting of Shareholders held on June 4, 2001. All stock
options granted are at fair market value at the date of grant, and expire
ten years from the date of grant. The Plan was effective on May 1, 2001 and
expires on April 30, 2011.
On March 30, 1999, the Board of Directors adopted the first 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 adopted 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 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 expired on June 23, 2001.
At December 31, 2001, 2000, and 1999, 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, 1999 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
Granted 2,025,926 15.58 -- --
Exercised (384,250) 5.79 (56,250) 2.83
Forfeited (417,123) 16.58 -- --
----------- ----------
Outstanding at
December 31, 2001 5,753,940 12.95 -- --
=========== ==========
The weighted average fair value of stock options granted during the years
ended December 31, 2001, 2000 and 1999 was $12.47, $16.02 and $13.25,
respectively.
The following table summarizes the options and warrants exercisable at
December 31, 2001, 2000 and 1999 and the weighted average fair value of
warrants and options granted during the years then ended:
46
Exercisable Options Exercisable Warrants
------------------- --------------------
Weighted Weighted
Average Average
Options Exercise Price Warrants Exercise Price
------- -------------- -------- --------------
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
Shares exercisable at
December 31, 2001 2,835,723 $ 9.03 -- --
The following table summarizes information about stock options outstanding at
December 31, 2001:
Granted Exercisable
-------------------------------------------------------- ----------------------------------------
Number Weighted Number
Outstanding at Average Weighted Exercisable at Weighted
Range of December 31, Remaining Life Average December 31, Average
Exercise Prices 2001 (Years) Exercise Price 2001 Exercise Price
--------------- ---------------- ---------------- ----------------- --------------- -------------------
$1.14 - $2.00 512,375 4.54 $1.83 458,375 $1.81
2.20 - 2.53 587,000 5.16 2.21 474,500 2.22
2.64 - 3.89 560,577 6.75 3.01 499,090 2.99
5.28 - 11.39 452,562 7.58 7.72 202,208 7.91
12.02 - 12.80 1,369,000 7.50 12.21 448,650 12.02
12.93 - 19.00 998,200 8.12 15.03 430,000 15.00
19.93 - 22.95 587,426 8.98 22.13 158,450 21.67
23.01 - 32.43 305,300 8.75 27.94 75,700 28.73
33.00 - 44.00 381,500 8.54 34.56 88,750 35.84
---------------- ---------------
5,753,940 2,835,723
================ ===============
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 2001, 2000 and 1999:
o Risk free interest rates range from 3.73% to 7.69%
o Expected dividend yields of 0%
o Expected lives of 1 to 5 years and
o Expected volatility of 71%, 70% and 65%, 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 costs related to certain warrants granted to non-employees during 1998, no
compensation cost has been recognized for any option grants in the accompanying
consolidated statements of earnings. 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:
47
Year Ended December 31,
------------------------------------------------
2001 2000 1999
---------- ----------- -----------
Net earnings (loss):
As reported $8,135,924 $ 5,676,427 $ 960,419
========== =========== ===========
Pro forma $ 188,000 $(1,650,000) $ (831,791)
========== =========== ===========
Basic earnings (loss) per common share:
As reported $ 0.30 $ 0.23 $ 0.04
========== =========== ===========
Pro forma $ 0.01 $ (0.07) $ (0.04)
========== =========== ===========
Diluted earnings (loss) per common share:
As reported $ 0.29 $ 0.21 $ 0.04
========== =========== ===========
Pro forma $ 0.01 $ (0.07) $ (0.04)
========== =========== ===========
16. 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 provider of
electronic trading infrastructure and technologies to the professional
trading segment of the brokerage community. With the Company's desktop
solutions, stationary and wireless exchange floor systems, electronic
automation systems and straight-through processing, data entry,
routing and execution is streamlined and many processing
inefficiencies are eliminated. The Company's infrastructure, which
consists of an extensive network of electronic circuits, links
industry participants across equities and derivatives markets.
Our headquarters are located in Stamford, Connecticut. We also
maintain operations in New York, Chicago and London. Our international
operations are conducted through our subsidiary, NYFIX Overseas, Inc.
Each office has the opportunity to sell or enter into subscriptions
for any of the Company's products and services. However, the operating
results of the Company's products and services 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 location or products and
services.
Identifiable assets by geographic location include assets directly
identifiable with those locations. Corporate assets consist primarily
of cash and cash equivalents, investment activities, and amounts due
from NYFIX Millennium associated with non-operating activities.
48
Summarized financial information by geographic location for 2001, 2000 and 1999 is as follows (in 000's):
2001 2000 1999
------------------ ------------------ ------------------
Revenues:
Stamford and New York $32,102 $18,111 $9,287
London 6,263 2,678 2,636
Chicago 3,032 3,191 286
Inter-location sales - 5 78
Inter-location elimination - (5) (78)
------------------ ------------------ ------------------
Total revenues $41,397 $23,980 $12,209
================== ================== ==================
Gross profit:
Stamford and New York $23,775 $12,263 $5,897
London 5,400 2,236 2,288
Chicago 2,891 3,104 259
------------------ ------------------ ------------------
Total gross profit $32,066 $17,603 $8,444
================== ================== ==================
Identifiable assets at December 31:
Stamford and New York $25,810 $23,832 $13,951
London 6,731 2,857 2,411
Chicago 1,512 2,122 346
Corporate 74,519 28,747 22,120
------------------ ------------------ ------------------
Total identifiable assets $108,572 $57,558 $38,828
================== ================== ==================
Capital expenditures:
Stamford and New York $6,910 $ 5,925 $4,184
London 143 26 31
Chicago 68 133 49
------------------ ------------------ ------------------
Total capital expenditures $7,121 $ 6,084 $4,264
================== ================== ==================
Depreciation and amortization:
Stamford and New York $5,664 $ 3,244 $ 1,749
London 657 366 209
Chicago 144 87 25
------------------ ------------------ ------------------
Total depreciation $6,465 $ 3,697 $ 1,983
================== ================== ==================
17. 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, 2001 and 2000 are presented
below:
49
December 31,
-----------------------------------
2001 2000
-------------- ---------------
Deferred tax assets:
Bad debt expense $ 243,000 $ 181,500
Inventory obsolescence 34,000 39,600
Product development costs 611,000 375,500
Operating loss carryforward 108,000 1,511,000
AMT credit carryforward - 78,000
Other 77,000 69,000
-------------- ---------------
Total deferred tax assets 1,073,000 2,254,600
Less deferred tax liability:
Depreciation and amortization 282,000 158,600
-------------- ---------------
Net deferred tax amount $791,000 $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
and reversed the $2,010,000 valuation allowance.
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
$412,000 and $2,635,000 during the years ended December 31, 2001 and
2000, respectively.
The reconciliation between the federal statutory income tax rate and
the Company's income tax provision is as follows:
Year Ended December 31,
--------------------------------------------------
2001 2000 1999
------------ ------------- ------------
Statutory tax rate 35% 34% 34%
State and local taxes, net of federal
benefit 5 2 6
Alternative minimum tax and other -- 1 3
Valuation allowance -- (27) (34)
------------ ------------- ------------
40% 10% 9%
============ ============= ============
50
Significant components of the provision for income taxes are as follows:
Year Ended December 31,
----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Current:
Federal $ 2,100,640 $ 1,020,555 $ --
State and Foreign 1,853,000 166,000 94,400
----------- ----------- -----------
Total current 3,953,640 1,186,555 94,400
----------- ----------- -----------
Deferred:
Federal 1,255,000 1,200,000 321,800
State and Foreign 218,000 225,000 68,300
Decrease in valuation
allowance -- (2,010,300) (390,100)
----------- ----------- -----------
Total deferred 1,473,000 (585,300) --
----------- ----------- -----------
Total provision for income taxes $ 5,426,640 $ 601,255 $ 94,400
=========== =========== ===========
18. 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, 2001 $421,000 $ 232,638 $142,638 $511,000
======== ========= ======== ========
December 31, 2000 $125,000 $ 415,802 $119,802 $421,000
======== ========= ======== ========
December 31, 1999 $ 92,986 $ 44,758 $ 12,744 $125,000
======== ========= ======== ========
Inventory reserve:
December 31, 2001 $ 92,000 $ (10,000) $ -- $ 82,000
======== ========= ======== ========
December 31, 2000 $ 82,000 $ 10,000 $ -- $ 92,000
======== ========= ======== ========
December 31, 1999 $ 82,000 $ -- $ -- $ 82,000
======== ========= ======== ========
19. EXPORT SALES
Revenue from export sales, principally software sales revenue, was
$3,963,000, $2,419,000 and $733,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
20. INVESTMENT IN NYFIX MILLENNIUM
In September 1999, NYFIX Millennium, L.L.C. ("NYFIX Millennium") was
formed by NYFIX, Inc. (the "Company") and seven international
investment banks and brokerage firms, consisting of Deutsche Bank,
ABN Amro Securities (formerly ING Barings), Lehman Brothers, Morgan
Stanley, Alliance Capital (formerly Sanford C. Bernstein & Co.),
SG Cowen Securities Corp. and UBS Warburg (the "Initial Partners").
Each partner, including the Company, invested $2.0 million in NYFIX
Millennium. Each of the Initial Partners
51
received 25,000 units of NYFIX Millennium, collectively owning a 50%
membership interest in NYFIX Millennium, with the Company owning the
remaining 50%. In addition, the Company purchased an option to buy
from the Initial Partners an additional 30% membership interest in
NYFIX Millennium (the "Option"), for which the Company paid each of
the Initial Partners 281,250 shares of its common stock, for an
aggregate of 1,968,750 shares. The Option allowed the Company to
increase its membership interest in NYFIX Millennium up to 80% of
the total membership interests through the exchange of one share of
its common stock for each unit of NYFIX Millennium purchased,
subject to adjustment in the event of any split, combination,
reclassification or other adjustments to the capital structure of
the Company.
In March 2001, NYFIX Millennium added four more partners, consisting
of Bank of America, Wachovia Securities (formerly First Union
Securities) and LabMorgan Corporation (as the successor to J.P.
Morgan & Co. and Chase H&Q) (the "New Partners"). Pursuant
to the terms of the operating agreement of NYFIX Millennium, each
New Partner invested $2.0 million in NYFIX Millennium and received
25,000 units of NYFIX Millennium. The Company maintained its 50%
membership 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 noted above,
with LabMorgan Corporation (as the successor to two partners)
receiving 188,000 shares.
The Company's Investment in NYFIX Millennium of $27,500,000 at
December 31, 2001, consisted of $25,500,000 (1,968,750 shares in
1999 of Company stock x $8.89 and 376,000 shares in 2001 of Company
stock x $21.28) and a capital cash contribution of $2,000,000. NYFIX
Millennium is a development stage company and was accounted for
under the equity method of accounting prior to February 1, 2002.
(See Note 21.) Pursuant to the Operating Agreement, as amended, the
first $14,000,000 in losses will be allocated to the Initial
Partners, which equals the extent of their capital investment in
NYFIX Millennium. Losses in excess of $14,000,000, if any, will be
allocated to the New Partners up to an additional $8,000,000, which
equals the extent of their capital investment in NYFIX Millennium.
No portion of these losses will be borne by the Company. The Company
has temporarily funded certain operating costs and capital
expenditures on behalf of NYFIX Millennium. Such costs, aggregating
$5,222,000 and $1,985,000 at December 31, 2001 and 2000,
respectively, are reflected as Due from NYFIX Millennium on the
Company's consolidated balance sheets.
On October 30, 2001, the Company entered into a Subordinated Loan
Agreement for Equity Capital (the "Loan Agreement") with NYFIX
Millennium, effective November 30, 2001, pursuant to which the
Company loaned $6 million to NYFIX Millennium. The loan, plus
accrued interest, is due on November 30, 2004 and earns interest at
a rate of 7.5% per annum. The Loan Agreement was found by the
National Association of Securities Dealers, Inc. (the "NASD") to be
acceptable as a satisfactory subordination agreement, effective as
of November 30, 2001. Interest on the loan aggregated $43,000 at
December 31, 2001.
Summarized financial information for NYFIX Millennium follows:
Year Ended December 31,
--------------------------------------------------------
2001 2000 1999 *
------------ ------------- ------------
Net sales $ 142,000 $ -- $ --
============ ============ ============
Net loss $(11,594,000) $ (7,370,000) $ (1,157,000)
============ ============ ============
At period end:
Total assets $ 16,347,000 $ 9,996,000
============ ============
Total liabilities $ 12,468,000 $ 2,524,000
============ ============
Total members' capital $ 3,879,000 $ 7,472,000
============ ============
52
* Since inception in the third quarter of 1999.
The Company leases computer and office equipment 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 as follows:
Year Ending
December 31, Amount
------------ ------
2002 $509,000
2003 452,000
2004 448,000
2005 300,000
2006 2,000
21. SUBSEQUENT EVENTS
In a letter dated January 23, 2002, the Company notified the Initial
Partners and New Partners of NYFIX Millennium that the Company was
exercising the Option, effective February 1, 2002 (see Note 20). In
exchange for the increased membership interest in NYFIX Millennium,
the Company paid the Initial Partners and New Partners an aggregate
of 296,250 shares of its common stock, with each Initial Partner
receiving 33,750 shares of common stock and each New Partner
receiving 15,000 shares of common stock. As a result, the Company
has an 80% membership interest in NYFIX Millennium. The acquisition
will be accounted for as a purchase. The Company has not completed
the final allocation of the purchase price to the tangible and
intangible assets of NYFIX Millennium. Asset valuations will be
performed by an independent third-party and are on-going as of the
date of this filing.
On March 6, 2002, the Company announced that it had acquired a 40%
ownership interest in EuroLink, a privately held company based in
Madrid, Spain, which offers direct electronic access to the U.S.
equity markets from Europe. The Company acquired its interest in
return for granting licensing and distribution rights and
$4,000,000. The purchase was financed through available funds. Under
the terms of the agreement, EuroLink will offer the Company's equity
terminals, market access and services to the European marketplace,
primarily on a transaction fee basis. The terms of the agreement
give the Company the option to increase its ownership interest in
EuroLink to 80% at a later date. The acquisition will be accounted
for under the equity method.
On March 12, 2002, the Company announced that it had signed a
definitive agreement to acquire Javelin Technologies, Inc. Javelin,
widely known as one of the pioneers in FIX (Financial Information
exchange Protocol) technology, has over 1,000 installations at more
than 300 leading buy and sell-side institutions, exchanges and ECNs,
including over 50 clients in Europe and 20 in Asia. Javelin
possesses the leading market-share in the buy-side institutional
market for electronic order routing enabling technology. The Company
will finance the transaction with a combination of approximately
$11,000,000 cash and the issuance of common stock with a value of
approximately $44,000,000. The cash portion will be financed through
available funds. In addition, the Company has negotiated an earn-out
based on Javelin's 2002 revenues. The transaction is scheduled to
close on March 31, 2002.
On March 14, 2002, at a Special Meeting of Shareholders, the
shareholders voted to authorize the transfer of substantially all of
the Company's assets to a newly created, wholly-owned subsidiary of
the Company, as recommended by the Company's Board of Directors. The
Company believes that the new structure will permit greater
flexibility in the management and financing of existing and future
business operations. The holding company structure will also
facilitate the Company's entry into new businesses and the formation
of joint ventures or other business ventures with third parties.
Finally, the transfer will further the objective of operating the
Company's businesses, and any additional businesses acquired in the
future, on a more self-
53
sufficient, independent economic basis while decreasing the risk
that liabilities attributable to any one of the Company's businesses
could be imposed upon one or more of the Company's unrelated
businesses
54
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
-----------------------------------------------------------------
March June September December
31, 30, 30, 31,
----------- ---------- ------------ ------------
2001:
Total revenues $8,422,151 $9,511,359 $ 11,403,640 $12,060,267
========== ========== ============ ===========
Gross profit $6,481,735 $7,255,404 $ 8,958,914 $ 9,370,092
========== ========== ============ ===========
Net earnings $1,463,542 $1,601,995 $ 2,757,943 $ 2,312,444
========== ========== ============ ===========
Basic earnings per common
share
$ 0.06 $ 0.06 $ 0.10 $ 0.08
========== ========== ============ ===========
Diluted earnings per common
share
$ 0.05 $ 0.06 $ 0.10 $ 0.08
========== ========== ============ ===========
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
========== ========== ============ ===========
55