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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 0-21324
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NYFIX, INC.
(Exact name of registrant as specified in its charter)
New York 06-1344888
(State of other jurisdiction of (I.R.S. Employer identification number)
incorporation or organization)
333 Ludlow Street
Stamford, Connecticut 06902
(203) 425-8000
(Address of principal executive offices)
Securities Registered Pursuant to Section 12(g) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share The NASDAQ Stock Market
(Title of each class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $227 million as of June 28, 2002. Solely for the
purpose 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. The amount shown is based on the closing price of NYFIX
common stock as reported on the NASDAQ stock market.
Number of shares of NYFIX Common Stock, par value $.001, outstanding as of March
14, 2003: 31,133,155
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the NYFIX, Inc. Proxy Statement
for the 2003 Annual Meeting of Stockholders - Part III
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NYFIX, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2002
Table of Contents
Item Description Page
- ---- ----------- ----
PART I
Item 1. Business............................................................3
Item 2. Properties.........................................................20
Item 3. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................21
Executive Officers and Management of the Registrant................22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................24
Item 6. Selected Financial Data............................................27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... .........28
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.........52
Item 8. Financial Statements and Supplementary Data........................52
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................52
PART III
Item 10. Directors and Executive Officers of the Registrant.................53
Item 11. Executive Compensation.............................................53
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ..................53
Item 13. Certain Relationships and Related Transactions.....................53
Item 14. Controls and Procedures............................................53
PART IV
Item 15. Exhibits, Financial Statement Schedules and Report on Form 8-K.....54
Signatures.........................................................57
Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 .....................................................58
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NYFIX, INC.
Certain information contained or incorporated by reference in this
filing with the Securities and Exchange Commission on Form 10-K that is not
purely historical are forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, that are based on management's
beliefs, certain assumptions and current expectations. These statements may be
identified by their use of forward-looking terminology such as the words
"expects," "projects," "anticipates," "intends" and other similar words. Such
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, general economic, business and
market conditions, competitive pricing pressures, timely development and
acceptance of new products, ability to further penetrate the financial services
market with a full range of our products and the highly competitive market in
which we operate. Certain of these risks and uncertainties are discussed more
fully in Part II, Management's Discussion and Analysis of Financial Condition
and Results of Operations, Factors Affecting Operating Results and elsewhere in
this filing on Form 10-K. The forward-looking statements contained herein are
made as of the date hereof and we, except as may be required by law, do not
undertake any obligation to update any forward-looking statements, whether as a
result of future events, new information or otherwise.
PART I
ITEM 1. BUSINESS
General
NYFIX, Inc., a New York corporation founded in 1991, through our
subsidiaries and affiliates, provides electronic trading technology
infrastructure and execution services to the professional trading segment of the
brokerage industry. Our products and services automate institutional trading
workflows by streamlining data entry and seamlessly integrate electronic order
and execution handling. We offer a complete electronic desktop order management
solution, stationary and wireless handheld exchange floor technology, and a high
volume trade execution platform. Our products deliver straight through
processing ("STP") for front, middle and back office trade information handling.
We deliver our products mainly as a service bureau offering and maintain an
extensive data center with a network of electronic circuits that link industry
participants together and provide access to the domestic and international
equities and derivatives markets.
Our electronic trading systems, industry-wide trade routing
connectivity, STP and execution services and systems supported by our desktop
solutions, stationary and wireless exchange floor systems and electronic
automation systems provide a complete electronic solution to enter, manage and
route trade data and execute orders for brokerage firms and international banks
trading in equities, futures and options.
We operate a diverse electronic order routing and communication platform
(our "NYFIX Network"), based on the Financial Information eXchange ("FIX")
protocol. The FIX protocol is the messaging standard underlying language, which
was developed to enable real-time electronic trading and communications. Our
NYFIX Network is connected to redundant data centers enabling electronic
communications between our customers throughout the equities and derivatives
markets as well as offering long-term optical disk storage and compliance
retrieval of customer transactions. Through our NYFIX Network, we provide the
technology and infrastructure for trade communication and global order routing
between buy-side and sell-side institutions, numerous exchange floors, as well
as other electronic trade execution venues, such as electronic communication
networks ("ECN") and alternative trading systems ("ATS"). We sell an integrated
portfolio of modular desktop trading applications, exchange floor automation and
exchange access applications for trading in domestic and international equities,
and derivatives, including futures and options. Many of our applications reside
on our centralized system in our data center and are accessible through our
NYFIX Network. By seamlessly integrating our proprietary infrastructure and
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NYFIX, INC.
software applications, we provide our customers with a complete electronic order
management and execution solution.
Through NYFIX Millennium, L.L.C. ("NYFIX Millennium"), our 80% owned
broker-dealer subsidiary, we have developed 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 or
orders that need to reside in the system to be matched. 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. NYFIX Millennium ATS went into full
production on September 5, 2001 and we continue to focus on expanding NYFIX
Millennium's user base and execution volumes.
To date, we have principally derived our revenue from one to three
year term subscriptions, product sales and services. In addition to developing
our subscription revenue, we have developed transaction-based revenue. Rather
than a monthly per-terminal fee, transaction-based revenue is be derived by
charging a per share fee for trades executed. We are well positioned to
distribute order routing terminals in certain domestic and international market
segments seeking more exchange and execution access and trade processing
services in return for per share transaction-based fees. We believe there is a
substantial market for these types of transaction revenue streams.
Headquartered in Stamford, Connecticut, we have additional offices in
New York City, London, Chicago and San Francisco.
AVAILABLE INFORMATION
We are required to file certain documents with the Securities and
Exchange Commission (the "SEC"), as required under Sections 13(a), 13(c), 14, or
15(d) of the Securities Exchange Act of 1934, as amended. The SEC maintains a
website at http://www.sec.gov, which contains reports, proxy and information
statements, and other information regarding us. You may also read and copy any
document we file with the SEC at its Public Reference Room, 450 Fifth Street,
N.W., Washington, D.C. 20549. The SEC may be contacted at 1-800-SEC-0330 for
further information on the operation of the Public Reference Room.
Our website can be found at http://www.nyfix.com. Information contained
on our website is not a part of this document. We make available free of charge
on our website our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC.
We will provide you with a copy of these filings, including the exhibits
to such filings which we have specifically incorporated by reference in such
filings, at no cost, upon request to: NYFIX, Inc., Stamford Harbor Park, 333
Ludlow Street, Stamford, CT 06902, Attention: Chief Financial Officer, telephone
(203) 425-8000.
ACQUISITIONS AND INVESTMENTS
NYFIX TRANSACTION SERVICES
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NYFIX, INC.
In December 2001, we acquired an inactive broker-dealer, an Illinois
corporation, for $34,000 and filed a membership application with the National
Association of Securities Dealers ("NASD") to operate as a broker-dealer through
the wholly-owned subsidiary, which we renamed NYFIX Transaction Services, Inc.
("NYFIX Transaction Services"). The application was approved by the NASD in May
2002 and NYFIX Transaction Services began generating revenue on July 1, 2002.
NYFIX Transaction Services provides electronic execution services, primarily to
domestic and international broker-dealers and specialized trading firms.
NYFIX MILLENNIUM
NYFIX Millennium, a broker-dealer, developed an ATS, which is an
electronic system that matches buyers and sellers in a completely anonymous
environment. The system aims to provide high quality execution for clients
through computerized matching technologies. NYFIX Millennium offers 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.
In September 1999, NYFIX Millennium was formed as a Delaware limited
liability company, by us and seven international investment banks and brokerage
firms consisting of: Deutsche Bank US Financial Markets, ABN Amro Securities
(formerly ING Barings), Lehman Brothers, Morgan Stanley Dean Witter Equity
Investments Ltd., Alliance Capital Management (formerly Sanford C. Bernstein &
Co.), Societe Generale Investment Corporation (formerly SG Cowen) and UBS
Warburg (the "Initial Partners"). Each of the Initial Partners invested $2.0
million in NYFIX Millennium in exchange for 25,000 units of NYFIX Millennium,
collectively owning a 50% membership interest in NYFIX Millennium. We invested
$2.0 million and owned the remaining 50%. In addition, we purchased an option to
buy, from the Initial Partners, an additional 30% membership interest in NYFIX
Millennium (the "Option"), for which we paid each of the Initial Partners
281,250 shares of our common stock. The Option allowed us to increase our
membership interest in NYFIX Millennium up to 80% of the total membership
interest through the exchange of one share of our common stock for each unit of
NYFIX Millennium purchased, subject to certain adjustments.
In March 2001, NYFIX Millennium added four more partners, consisting of
Bank of America, Wachovia Securities (formerly First Union Securities) and
LabMorgan Corporation (formerly J.P. Morgan & Co. and Chase H&Q) (the "New
Partners"). Pursuant to the terms of the NYFIX Millennium Operating Agreement,
each New Partner invested $2.0 million in NYFIX Millennium in exchange for
25,000 units of NYFIX Millennium. We maintained our 50% membership interest in
NYFIX Millennium in exchange for reducing certain of our rights to share in 4%
of future dividend distributions of NYFIX Millennium. We issued 94,000 shares of
our 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.
At December 31, 2001, our investment in NYFIX Millennium of $27.5
million consisted of $25.5 million of our shares of common stock (1,968,750
shares in 1999 of our common stock at $8.89 per share and 376,000 shares in
March and April 2001 of our common stock at $21.28 per share) and our capital
cash contribution of $2.0 million. We funded certain operating costs and capital
expenditures on behalf of NYFIX Millennium. Such advances of $5.2 million were
reflected as "due from unconsolidated affiliates" on our consolidated balance
sheet at December 31, 2001. In addition, we loaned to NYFIX Millennium an
aggregate of $11.0 million, plus accrued interest, of which $5.0 million was
loaned in 2002. The $6.0 million loaned in 2001, plus accrued interest, is
reflected in "notes receivable from unconsolidated affiliates" on our
consolidated balance sheet at December 31, 2001.
On January 23, 2002, we notified the Initial Partners and New Partners
that we would exercise our Option, effective February 1, 2002. In exchange for
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NYFIX, INC.
the increased membership interest in NYFIX Millennium, we paid the Initial
Partners and New Partners an aggregate of 296,250 shares of our common stock
with a fair value of $4.5 million, 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, we increased our ownership of NYFIX Millennium to 80%. The
results of operations of NYFIX Millennium have been included in our 2002
consolidated statement of operations since the acquisition date. All advances
and loans, including accrued interest, have been eliminated in consolidation
commencing on February 1, 2002. The excess of the purchase price over the fair
value of the net assets acquired was $27.8 million and has been recorded as
goodwill. Some of our key considerations for the acquisition of NYFIX Millennium
included NYFIX Millennium's growth in revenue, the attractiveness of the
synergies we anticipated with our recently-acquired NYFIX Transaction Services
broker-dealer, and our ability to exercise significant control over NYFIX
Millennium's operations.
Pursuant to our NYFIX Millennium Operating Agreement, as amended, the
first $22.0 million in NYFIX Millennium operating losses since inception was
allocated to the Initial Partners and New Partners, which equaled the extent of
their capital contribution to NYFIX Millennium. The minority interest in NYFIX
Millennium disclosed in our accompanying consolidated statement of operations
for the year ended December 31, 2002 reflects the allocation of NYFIX Millennium
losses to the Initial Partners and New Partners post-acquisition to the extent
of their capital contribution, thereby reducing their minority interest to zero.
In addition, we recognized NYFIX Millennium operating losses of $6.0 million for
the year ended December 31, 2002, which were $4.0 million greater than our
capital contribution of $2.0 million. While we expect NYFIX Millennium to be
profitable in the future, there can be no assurances of such profitability. As a
result, we have not allocated to the Initial Partners and New Partners their pro
rata share of NYFIX Millennium losses in excess of our capital contribution,
aggregating $1.0 million, at December 31, 2002, since we cannot assure
recoverability of the asset that such an allocation would create. At such time
when NYFIX Millennium achieves profitability, 24% of its profits, net of us
recovering our over-allocated losses, will be allocated to the Initial Partners
and New Partners.
JAVELIN TECHNOLOGIES, INC.
On March 31, 2002, we acquired 100% of the outstanding capital stock of
Javelin Technologies, Inc., a Delaware corporation (together with its
subsidiaries, "Javelin"). We financed the transaction with a combination of (i)
$10.0 million in net cash; (ii) 2,784,896 shares of our common stock having a
fair value of $41.2 million; and (iii) 493,699 shares of our common stock having
a fair value of $3.5 million reserved for issuance upon exercise of Javelin
stock options assumed by us. The excess of the purchase price over the fair
value of the net assets acquired was $42.3 million and has been recorded as
goodwill. Javelin is a provider of electronic trade communication technology and
the FIX protocol technology. The FIX protocol is the messaging standard
underlying language, which was developed to enable real-time electronic trading
and communications. In utilizing the FIX protocol technology, companies can
eliminate the high costs and associated risks of developing their own
proprietary network links and implementing a non-standard protocol. Javelin has
over 1,000 installations at more than 350 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. Some of our key
considerations for the acquisition of Javelin included: 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.
EUROLINK NETWORK, INC.
On March 6, 2002, we acquired a convertible preferred stock interest in
EuroLink Network, Inc. ("EuroLink"), a Delaware corporation with its operations
based in Madrid, Spain, for $4.0 million in cash. EuroLink offers the European
securities industry direct electronic access to the U.S. equity markets from
Europe. EuroLink offers our equity terminals and market access services to the
European marketplace, primarily on a transaction fee basis. The preferred stock
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will automatically convert into a 40% common stock interest upon the earlier of
two years from the date of the agreement or a change of control, as defined, of
EuroLink. We also have an option to purchase up to an additional 40% common
stock interest in EuroLink, from certain of its stockholders, at a price to be
determined based upon a formula of EuroLink's earnings, as defined.
RENAISSANCE TRADING TECHNOLOGIES, LLC
On October 2, 2002, we acquired an 18% interest in Renaissance Trading
Technologies, LLC ("Renaissance"), a Delaware limited liability company.
Renaissance was formed to commercialize a NASDAQ trading platform (the
"Platform"). We acquired our interest in return for 300,000 shares of our common
stock with a fair value of $1.1 million. We have also loaned $1.5 million (the
"Note") to Renaissance, for which Renaissance issued a convertible secured
promissory note. The Note bears an interest rate of 5.5%, is due in October 2007
or earlier, as set forth therein, and is convertible into additional equity in
Renaissance, at our option, at certain times over the next five years. We also
have an option to purchase up to a controlling interest in Renaissance at a
price to be determined based upon a formula, as defined. In connection with our
investment of Renaissance, we acquired, for $1.0 million, the intellectual
property rights and source code to the Platform, which was developed over the
last several years by a major bank and brokerage firm and contributed such
intellectual property rights and source code to Renaissance.
INDUSTRY OVERVIEW
AUTOMATION REMAINS A PRIORITY
Historically, financial institutions have relied on voice communication
and paper-based trading and settlement practices, and stock markets have
traditionally operated physical trading floors, also relying primarily on paper
tickets in an open outcry model. In this model, 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 series of major trading scandals during the 1990s 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. The global securities
industry quickly began to experience a significant surge in the demand for
automated processes. The development of integrated networks, order management
systems, direct access technologies and fully electronic marketplaces was at a
high point during the Internet boom of the late 1990s.
Many firms and regulators in the securities trading industry recognized
the necessity of implementing STP solutions, which integrate and automate all
aspects of trading - front, middle and back office - reducing settlement cycles,
costly errors and processing costs.
While this drive toward automation has led to marked improvements in
efficiency throughout the industry, a large number of financial entities
continue to rely on manual processes even today. Due to the efficiency
improvements realized by firms who have implemented electronic processes and a
series of regulatory mandates, automation remains a priority for investment
banks, brokerage firms and exchanges worldwide despite the current economic
downturn. Although spending has been significantly reduced across several
segments of the global securities industry, these institutions realize the
importance of investing in infrastructure and automation technologies.
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Regulations governing the recording and transmission of orders to and
from the New York Stock Exchange ("NYSE") were adopted in 2001 ("Rule 123"),
requiring that all NYSE member firms adopt electronic order management systems.
The second phase of Rule 123 will require that all orders need to be sent
electronically. In addition, there has been consideration given to decreasing
the time between the trade and settlement of orders, from the previous standard
of three days to one day (known as "T+1").
THE IMPORTANCE OF STANDARDS
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-1990s. The FIX protocol is the messaging standard
underlying language, which was developed to enable real-time electronic trading
and communications and is now considered the globally accepted and predominant
standard for electronic order routing. In January 2003, the Group of Thirty
("G30"), a Washington-based think tank comprised of leaders from central
banking, private finance and academia, released a report identifying 20
recommendations to increase efficiency and interoperability within the global
securities industry. Among these recommendations was the importance of
developing and adopting standards, including the FIX protocol, to automate the
front, middle and back office.
ECN AND ATS EVOLUTION
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 the NASDAQ
over-the-counter ("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 introduction of decimal trading. While
decimalization was designed and 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.
A number of ECNs and ATSs emerged in the marketplace 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. While ECNs have apparently captured a
significant portion of the NASDAQ OTC market-share in executed volume, they have
not been effective capturing significant executed daily volume in the listed
equity market, due in large part to a lack of access to the electronic
infrastructure carrying listed orderflow.
Financial institutions have become increasingly 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.
BUSINESS CONTINUITY AND DISASTER RECOVERY PLANNING AND OUTSOURCING
In addition to automation and STP, business continuity and disaster
recovery technologies have become crucial to an institution's technological
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infrastructure. Business continuity is a part of the STP movement and yet its
importance has been significantly emphasized within the financial services
community following the tragedy of the September 11, 2001 terrorist attacks in
New York. The concern for repeated terrorism has fueled investment in business
continuity solutions, but factors such as globalization, STP, process automation
and disruption of power or technology errors are also important.
Data storage and recovery and wide-area network ("WAN") applications are
but some of the requirements needed to implement proper business continuity and
disaster recovery operations. While institutions are seeking solutions that
offer direct access, speed of delivery, quality of execution and full
integration between traditional exchanges and modern ECNs and ATSs, many are
realizing that they cannot continue to internally develop or maintain the
systems and connectivity infrastructures needed to keep pace with current
technological developments and regulatory mandates. As a result, a significant
number of these firms are looking to outside providers to solve their
automation, efficiency, and business continuity challenges.
OUR SOLUTION AND STRATEGY
Our goal is to become a 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
efforts and organizational growth initiatives in order to meet the needs of the
changing markets. The following points outline our top-level strategies
necessary to achieve success and bring greater efficiencies to the global
marketplace:
o MAXIMIZE THE SYNERGIES OF OUR RECENT ACQUISITIONS AND INVESTMENTS TO
INCREASE CUSTOMERS IN OUR NYFIX NETWORK. With the acquisitions of
NYFIX Millennium, NYFIX Transaction Services and Javelin, and our
investments in Renaissance and EuroLink, we have significantly
expanded our presence beyond our traditional customer base of
sell-side institutions trading on the NYSE. To further increase our
subscription and transaction-based revenue model we are focusing our
sales and marketing efforts on connecting not only sell-side
broker-dealers, but also buy-side institutions and international
exchanges to our NYFIX Network. With the integration of sales teams
from recent acquisitions we are maximizing synergistic opportunities
to introduce relevant products to both new and existing customers. We
will continue to address the evolving requirements of the trading
community by hopefully introducing new complementary solutions, such
as advanced analytical and risk management applications, OTC services,
multi-currency facilities, 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 more profitable 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 INCREASE TRANSACTION REVENUE STREAMS IN OUR ATS AND ELECTRONIC TRADING
INFRASTRUCTURE PRODUCTS. As the markets become increasingly more
automated, providing customers with effective desktop order capturing
and electronic access technology is emerging as the most important
marketing parameter. The large quantity of orderflow processed through
our NYFIX Network has uniquely positioned us to increase our
transaction-based revenue. In addition to developing transaction
revenue streams in NYFIX Millennium by generating a critical mass of
orderflow from our customers, the formation of NYFIX Transaction
Services enabled us to introduce a number of offerings to compete
effectively with and replace the role of certain brokers in specific
target segments. Specifically, we can effectively compete for business
with little or no conflict with our existing client base in some areas
of international, and to some degree domestic, correspondent brokerage
business. In the correspondent
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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. EuroLink
distributes our equity products and services to the European
marketplace, primarily focusing on increasing orderflow volume to and
from the U.S. This is a perfect example of how our various business
groups complement one another.
o EXPAND THE UNIVERSE OF SECURITIES TRADED THROUGH OUR NYFIX NETWORK.
Our NYFIX Network and NYFIX Millennium ATS can be used to trade and
match basically any financial instrument, from equities to futures,
commodities or other derivative instruments. We are focusing on
increasing the usage of NYFIX Millennium conditional orders, by
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
NYFIX Network share volume, we believe that NYFIX Millennium is able
to provide superior results in trade execution quality for our
customers. With the addition of Renaissance's Platform, we hope to
significantly expand the universe of equities traded through our NYFIX
Network to encompass the OTC markets. We also plan to expand our
presence in futures and options trading and grow our market share in
international markets through a significant increase in our direct
connectivity to international exchanges trading 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, thereby significantly altering the traditional
role of broker-dealers. The fear of a diminishing role and loss of
revenue has caused the broker-dealer community to largely withhold
support for any market modernization system that can be accessed
directly by buy-side 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 sell-side 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.
OUR 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.
OUR NYFIX NETWORK
Built in late 1997, our NYFIX Network provides our customers with global
connectivity for trade order routing through dedicated circuits. Access to our
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.
Through our NYFIX Network, we provide the technology and infrastructure for
trade communication and global order routing between buy-side and sell-side
institutions, numerous exchange floors, as well as other electronic trade
execution venues, such as ECNs and ATSs. Consisting of more than 1,500
high-speed frame-relay circuits, fiber optics and synchronous optical network
("SONET") infrastructure, our NYFIX Network provides an efficient, secure and
reliable method for electronic trade communication. Our NYFIX Network is
connected to redundant data centers to enable electronic communications between
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NYFIX, INC.
our customers throughout the equities and derivatives markets. Our NYFIX Network
and data center structure also offer long-term optical disk storage and
retrieval of customer transactions for compliance purposes. We sell an
integrated portfolio of modular desktop trading applications, exchange floor
automation and exchange access applications for trading in domestic and
international equities, and derivatives, including futures and options. Many of
our applications reside on our centralized system in our data center and are
accessible through our NYFIX Network. By seamlessly integrating our proprietary
infrastructure and software applications, we provide our customers with a
complete electronic order management and execution solution.
INFRASTRUCTURE TECHNOLOGIES
Our underlying infrastructure implementation procedures involve 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 NYFIX Network, building blocks can
be easily inserted into our architecture to accommodate continued network growth
and which can potentially reduce our average cost per customer. Our building
block architecture relies upon advanced technology standards, including storage
area network architecture, which is best suited for high-performance database
access and transaction processing. This technology is easily scalable. We
believe that we are a technology leader in our industry in that we maintain two
data centers, either of which can support all of our current production
requirements, providing fully active redundancy for our customers. We also
maintain our WAN, which we host for customer usage, giving us an advantage when
troubleshooting problems. Our NYFIX Network and data center infrastructure is
continuously monitored by an automated system that logs the performance of
communication lines, equipment and systems, ensuring continuous availability and
optimal performance for our customers. 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, Qwest
and Verizon. As our data volume is significant, we are able to diversify our
telecommunication needs across carriers, decreasing our reliance on any single
telecommunication service provider without losing the benefit of economies of
scale.
Our data centers are located in two independent data center facilities
in Carlstadt and North Bergen, New Jersey maintained by SunGard Recovery
Services LP, formerly owned by Comdisco Holding, Inc. By co-locating equipment,
we derive operating economies while obtaining the highest quality of service
available in a physical plant. Our data centers' around-the-clock facilities are
protected by state-of-the-art fire suppression and heating, ventilation, and air
conditioning 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 software is authored to take advantage of the FIX protocol and runs
on various operating system platforms, including UNIX, Linux 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
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NYFIX, INC.
control department has a dedicated laboratory, which simulates our NYFIX
Network. All of our new product releases are tested under load and stress
conditions using automated tools for reliability, interoperability and quality.
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.
PRODUCTS AND SERVICES
Our products and services provide a variety of financial service firms
with end-to-end solutions for their trading technology needs. The trading
process typically involves three main functions - front office, middle office
and back office. These terms correspond with a phase of the trade execution
process. Front office generally refers to order entry, routing and execution;
middle office typically refers to the process whereby trades are allocated to
the proper accounts; and back office refers to trade settlement and processing.
We specialize in front office solutions but have also developed solutions for
the middle office and interfaces to the most popular back office systems. Our
solutions facilitate STP, reducing transaction costs and reducing the potential
for trading errors due to manual re-entry of order and execution information.
We provide trading technology and execution services to a variety of
firm types in the financial industry. For our clients, we offer connectivity to
our NYFIX Network, which enables buy-side firms to electronically connect to
their trading counter-parties, typically sell-side firms, who in turn connect to
various execution venues such as exchanges, ECNs and ATSs. Our NYFIX Network
offers unparalleled electronic connectivity to hundreds of trading
counter-parties for a fraction of the cost it would take for a firm to maintain
their own proprietary network. As part of our NYFIX Network, we provide secure
and reliable electronic connectivity, certify all connections to each firm's
trading counter-parties and provide around-the-clock service and support. A key
component to our NYFIX Network is the maintenance of multiple data centers. Our
NYFIX Network's multiple data center configuration ensures all client data is
replicated at both data centers in real-time, providing security and integrity
of client data in the case of a disaster. We also offer customers an archive of
their past trading data, which can be accessed through a secure
Internet browser. This greatly simplifies our customers' compliance with SEC
trade data storage and retention requirements and makes retrieving past data
extremely easy and convenient.
BUY-SIDE SOLUTION SET
For buy-side institutions, including investment managers, mutual and
pension fund managers and hedge funds, we offer a suite of services for seamless
trading. We offer an integrated market data, order management and routing
application, which enables customers to monitor markets and enter and route
orders with a few mouse clicks. In addition to our subscription-based offering,
our transaction-based offering enables customers to gain technology and
execution services for a single fee per executed share. Our Javelin products
offer a variety of technology solutions for a firm's connectivity needs. Appia,
Javelin's flagship product, is a high performance, multi-protocol messaging
engine to enable electronic connectivity between firms. Javelin also offers a
simplified product, Instant Integrator, for firms with less software development
expertise.
SELL-SIDE SOLUTION SET
NYFIX USA, LLC ("NYFIX USA"), our core business has traditionally
focused on supplying technology solutions to sell-side, or brokerage, firms. For
the brokerage community, we offer a wide range of services, all available
through our NYFIX Network. Our NYFIX Network provides brokerage firms with
connectivity to their buy-side clients as well as to various exchanges, ECNs and
ATSs. Our NYFIX Network also provides connectivity to an extensive array of
independent brokers operating on the trading floor of the NYSE, commonly
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referred to as "$2 brokers." We offer a variety of trading workstation products
for the institutional trading desk and a series of order management system
options are available, enabling us to meet each customer's individual needs. We
also offer order management systems for exchange floor trading, which enables
our exchange clients to receive orders electronically from trading desks and
route execution information, all in real-time. Our NYFIX Overseas, Inc. ("NYFIX
Overseas") business offers order booking management systems ("OBMS") to the
derivatives market.
In 2002, we introduced a completely redesigned wireless handheld system
for exchange floor brokers. We also offer a number of auxiliary services with
our order management system ("OMS") products. These include interfaces to
various back office systems, data storage and retrieval, electronic submission
of trade data to NYSE systems and other services to facilitate STP.
TRADE EXECUTION SERVICES
We also offer brokerage firms various options for trade execution. The
first of these options is our NYFIX Millennium ATS, which is an electronic
system that matches buyers and sellers in a completely anonymous environment.
The system aims to provide high quality execution for clients through
computerized matching technologies. 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. Our
NYFIX Millennium ATS resides in our data centers, is integrated within our NYFIX
Network, and offers matching of both pass-through and conditional orders. Our
NYFIX Transaction Services business provides clients with electronic trading
technology and execution services on a transaction-based fee schedule.
In 2002, we established NYFIX Partners, Inc. ("NYFIX Partners"), our
wholly-owned subsidiary, which was granted its introducing broker-dealer license
from the National Futures Association. As a registered, independent introducing
broker, NYFIX Partners will enable smaller firms to utilize our technology
without undertaking major infrastructure costs associated with implementation on
a global scale. NYFIX Partners' customers will be able to route orderflow for
execution on global futures exchanges. NYFIX Partners expects to begin
operations in 2003.
CUSTOMERS
Our target customers include large institutional money management firms,
small to mid-sized institution and hedge funds, institutional brokerage traders
and risk managers; NASDAQ principal and agency traders; institutional brokerage
derivatives traders; exchange floor brokers and clerks; and independent brokers.
We serve a global customer base and seek to build long-term relationships with
industry-leading clients, serving as a comprehensive technology and
infrastructure provider to fulfill their electronic trading needs through an
integrated set of products, services and solutions.
Our revenue has increased to $55.8 million in 2002, an increase of 35%
from $41.4 million in 2001. To date, we have principally derived our revenue
from subscriptions, product sales and services. In 2002, we began to develop
transaction-based revenue. Rather than a flat fee as for our subscription-based
and service contract revenue, transaction-based revenue is derived by a per
share fee for trades executed through our systems. As previously mentioned, we
believe 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
transaction fees. We believe there is a substantial market for these types of
transaction revenue streams.
For the year ended December 31, 2002, no customer accounted for more
than 10% of our revenue. For the year ended December 31, 2001, ABN Amro
Securities and Deutsche Bank AG accounted for 12% and 10%, respectively, of our
revenue. For the year ended December 31, 2000, no customer accounted for more
than 10% of our revenue.
SALES AND MARKETING
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NYFIX, INC.
One of the goals of our sales and marketing activities is to create
awareness and sustained interest in our technology and infrastructure. Our sales
teams have been integrated to synergize our combined product offerings brought
about by acquisitions and investments made in 2002. We focus on developing
customer acceptance of our product lines and focus on developing general
upgrades rather than on individual client customization. Our sales teams work
closely with our product development team and several of our products and
enhancements have been developed based on user-group consensus.
Our sales cycle, for new clients, is generally one to six months, while
sales of additional products and services to existing clients is typically less
time. For our technology customers, we generally provide our products and
services on one to three-year subscription and service agreements with automatic
annual renewals at the end of the initial term. For our transaction services
customers, we generally provide one to two-year agreements.
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 to promote the benefits of the ATS to a
greater audience.
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 for 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 also believe that our presence throughout the STP chain provides
us with an added competitive advantage.
We face competition in the following five areas:
o NETWORK SERVICES. Transaction Network Services and Global Crossing
Ltd. (who is under Chapter 11 and has undergone 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 our
NYFIX Network provides value-added connectivity, through our embedded
FIX protocol communication and sophisticated links to global execution
providers and venues.
o EXCHANGE FLOOR TECHNOLOGY. We are a provider of exchange floor
automation technology, including stationary and wireless trading
technologies. While we offer access to numerous exchanges globally,
our most significant presence is in the U.S. listed equity market.
Member firms operate approximately 1,500 booths on the NYSE. Most of
these firms are in the process of automating their floor operations.
With more than 500 stationary systems and over 250 handheld devices
deployed on the NYSE exchange floor, our systems have contributed to
the automation efforts for many member firms. The NYSE offers
competitive floor technology to member firms and there are other
smaller competitors in this area, including Tradeware.
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NYFIX, INC.
o DESKTOP PRODUCTS. We face competition from vendors who produce desktop
solutions for traders who are not on the exchange floor, including
several vendors in listed equities such as Brass (a subsidiary of
SunGard, Inc.), 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.
o FIX ENGINES. We face competition from vendors who produce FIX protocol
engine solutions such as Financial Fusion, Cameron Systems and
Transact Tools. We believe that we compete effectively with these
vendors by providing FIX solutions to the world's leading buy and
sell-side institutions, clearing houses, hedge fund managers,
exchanges and ECNs.
o TRADE EXECUTION SERVICES. NYFIX Millennium faces competition from
traditional stock exchanges, the largest of which is the NYSE. In
addition, NYFIX Millennium faces competition from other ATSs and ECNs
offering a variety of execution services. Some of these competitors
include Instinet/Island, ITG Posit, Archipelago and Bloomberg
TradeBook. NYFIX Transaction Services also faces competition from a
variety of correspondent and electronic brokerage firms.
INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS
Our success and ability to compete are dependent to a significant degree
on our intellectual property, which includes our proprietary technology, trade
secrets and client base. However, no one patent, trademark or other form of
intellectual property is critical to our business.
The trademark NYFIX is the primary trademark used to identify our goods
and services. We are the registered exclusive owner of the trademark as well as
additional product brand trademarks globally. Each trademark is valid and
protected in perpetuity provided it is being used and renewed during the
appropriate renewal period designated by the trademark laws of the country where
registered. There are no known third party objections to NYFIX trademarks
globally.
We do not license any core technologies. The core technologies of our
business are proprietary software applications built around the FIX messaging
specifications, which is protected by copyright, patent, trade secret and
contract law. The FIX protocol technology is available for use by any party
indefinitely if used properly. The source and object code for our core
proprietary software applications are protected using various applicable modes
of intellectual property protection, including two pending patent applications
and one issued patent. The issued patent is valid through the year 2014 and the
applications, once issued, through 2022. There are no known third party
infringement claims against our software applications.
In addition, it is our policy to enter into confidentiality,
intellectual property ownership and/or non-competition agreements with our
customers, associates, independent contractors and business partners, and to
control access to and distribution of our intellectual property.
GOVERNMENT REGULATION
The U.S. securities industry is subject to extensive regulation under
both Federal and state laws. In addition, the 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. We have subsidiaries
that are registered with the SEC as broker-dealers. Much of the regulation of
broker-dealers has been delegated by the SEC to SROs, including the NASD, which
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NYFIX, INC.
has been designated by the SEC as our principal regulator. The NASD adopts rules
(subject to approval by the SEC) that regulate the broker-dealer industry. These
rules regulate the conduct of our U.S. broker-dealer subsidiaries. The NASD,
through its regulatory subsidiary, NASDR, also conducts periodic examinations of
the operations of those subsidiaries. Our U.S. broker-dealers also are
registered as broker-dealers in a number of states and are subject to regulation
by state securities administrators in states in which they conduct business.
In addition, our U.S. broker-dealer subsidiaries are members of the
Securities Investor Protection Corporation ("SIPC"). SIPC provides certain
protection for customers' accounts in the event of the liquidation of a
broker-dealer. SIPC is funded through assessments on registered broker-dealers.
The costs associated with compliance, i.e., fees, implementing and following
compliance procedures, filing reports, etc. are minimal and do not have a
material effect on our profitability.
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. We face the risk of
significant intervention by regulatory authorities, including extensive
examination and surveillance activity. 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. Any such penalty could materially
affect our profitability. If any of our employees are suspended or disqualified
it could harm our ability to successfully provide services to our clients. This
could, in turn, have an adverse effect on our reputation in the industry, which
could further harm our profitability.
The regulatory environment in which we operate is subject to change. Our
profitability may be adversely affected if, 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 are forced to incur more
costs in order to comply. 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.
Starting in 1994, the SEC and the U.S. Department of Justice conducted
anti-trust investigations of the NASD, addressing concerns of fraud, price
fixing and collusion. In December 1997, 30 major brokerage firms and the U.S.
Department of Justice entered into a settlement of these anti-trust proceedings.
In response to the findings of these investigations and consistent with the
recommendations in the SEC Market 2000 Report issued in 1994, the SEC adopted
the order handling rules. These rules cover how to display and execute a limit
order.
In December 1998, following the issuance of the order handling rules,
the SEC promulgated new rules relating to the regulation of certain ATSs, such
as NYFIX Millennium (known as "Regulation ATS"). The SEC expanded its
interpretation of the definition of "exchange" under the U.S. securities laws to
encompass a range of electronic brokerage activities. At the same time,
Regulation ATS permits systems to register as broker-dealers, rather than as
national securities exchanges with the SEC, if they comply with the regulation.
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NYFIX, INC.
We have modified and enhanced our trading systems to comply with Regulation ATS
and continue to review and monitor our systems and procedures for compliance.
The introduction of decimalization in April 2001 has also had an impact
on the U.S. securities markets and increased competition for ATSs.
Decimalization may assist investors in obtaining price improvement because
improvement in smaller increments is possible. Because decimalization narrows
the average trading spreads, it has also had a significant negative impact on
the profitability of traditional broker-dealers. Decimalization has also caused,
and may continue to cause, traditional broker-dealers to execute their
customers' orders internally rather than route them to external market centers
for execution, because the additional price risk they incur to fill orders
internally has decreased. Increased internal trading by traditional
broker-dealers has also reduced, and could continue to reduce, our orderflow.
We provide our customers with access to U.S. exchange-listed stocks,
including connectivity to the NYSE and its exchange specialists. NYSE Rule 390
was abolished in May 2000, which had required that all NYSE members and member
firms execute transactions in stocks listed or traded on or before April 26,
1979, during market hours only on the floor of the NYSE, subject to exceptions.
Rule 390 had prevented NYSE members from executing some transactions with their
customers completely in-house, but it also prevented them from exposing orders
in other market centers. As a result, we are able to execute trades involving
all NYSE-listed stocks on behalf of all of our customers. Because these stocks
accounted for approximately 50% of the average daily trading volume in 2001,
abolition of Rule 390 may eventually lead to increased competition in trading
NYSE-listed stocks that were previously subject to the rule.
On January 30, 2001, SEC rules became effective that require many market
participants to make detailed public disclosure in electronic form of certain
statistical measures of execution quality for orders in equity securities (known
as "Quality of Execution Data" rules). Market centers must disclose information,
categorized by security, size and type of order about the time frames in which
orders are executed and on the prices offered by participants relative to each
other and the marketplace. These rules also require securities brokers to
provide detailed disclosure in electronic form regarding their order routing
practices. In September 2001, the SEC issued an interpretation that provides an
exemption from this order routing disclosure as long as the average number of
customer non-directed orders routed by the security broker during the calendar
quarter is 500 or less. We cannot predict what impact these rules and the
consequent disclosures will have on the number and size of orders we receive
from customers.
The SEC and the NASD, as well as other regulatory agencies and
securities exchanges within and outside the U.S., have stringent rules with
respect to the maintenance of specific levels of net capital by regulated
broker-dealers. These rules include the SEC's net capital rule, to which our
U.S. broker-dealer subsidiaries are subject. The failure by one of these
subsidiaries to maintain its required net capital may lead to suspension or
revocation of its registration by the SEC and its suspension or expulsion by the
NASD and other U.S. or international regulatory bodies, and ultimately could
require its liquidation. In addition, a change in the net capital rules, the
imposition of new rules or any unusually large charge against the net capital of
one of our broker-dealer subsidiaries could limit its operation, particularly
those that are capital intensive. A large charge to the net capital of one of
these subsidiaries could result from an error or other operational failure or a
failure of a customer to complete one or more transactions, including as a
result of that customer's insolvency or other credit difficulties, and we cannot
assure you that we would be able to furnish the affected subsidiary with the
requisite additional capital to offset that charge. The net capital rules could
also restrict our ability to withdraw capital from our broker-dealer
subsidiaries, which could limit our ability to pay cash dividends, repay debt or
repurchase shares of our outstanding stock. A significant operating loss or any
unusually large charge against net capital could adversely affect our financial
condition, results of operations or cash flows.
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NYFIX, INC.
The SEC has also indicated that it is reviewing issues concerning the
Intermarket Trading System ("ITS"). The NYSE has advocated the redesign or
elimination of the ITS, which links market centers that trade listed equity
securities, allowing an order to trade a security that is listed on two or more
markets to be executed in the market displaying the best price. The NYSE has
also suggested that, if the ITS is maintained, access should be limited to
exchanges and self-regulatory organizations, such as the NYSE. The NYSE could
also seek to withdraw from the ITS. Changes in the ITS, such as restrictions on
our access to the system, the withdrawal of the NYSE from the system or the
elimination of the system in its entirety, could adversely affect our ability to
attract business in NYSE-listed stocks.
We are unable to predict the outcome of the various deliberations and
discussions on the evolution of the U.S. equities market structure and
regulatory framework, although these issues or other issues of market structure
may have a significant impact on our equities business.
In December 2000, Congress passed the Commodity Futures Modernization
Act, which allows single stock futures to be traded on the exchanges and adds
guidelines for the SEC's role in regulating some equity based derivative
securities. This act also streamlines the regulation of U.S. futures exchanges
and limits the jurisdiction of the Commodities Future Trade Commission.
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.
NYSE Rule 123 governs the recording and transmission of orders to and on
the NYSE floor. This Rule was amended in 2001. Currently, 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, and it also
requires that all orders and order details must be capable of being transmitted
to a designated NYSE data base within such time frame as the NYSE may prescribe.
Rule 123 requires that each order includes the symbol, clearing member
organization, order identifier, identification of member recording the order
details, number of shares, side of market, designation as market, limit, stop,
stop limit, any limit price or stock price, time in force, designation as held
or not held, special conditions, time of recording order details and
modification of terms of order or cancellation of order. We believe that Rule
123 regulations have had 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.
The financial services industry, including the securities brokerage
business, is also heavily regulated outside of the U.S. We are required to
comply with regulatory controls of each specific country in which our
subsidiaries or we conduct business, a well as the regulations of each exchange
of which our subsidiaries or we are members. As we expand our international
operations, we may be required to comply with requirements that are inconsistent
with our existing international activities. As a result, the varying cost of
compliance with these different regulatory jurisdictions and other factors may
affect our business or limit our ability to expand our international operations.
In many countries, the laws and regulations applicable to the securities
and financial services industries are uncertain and evolving. In these
countries, it may be difficult for us to determine the exact requirements of
local laws and regulations in every market, particularly because legal and
regulatory developments generally trail technological advances. Our inability to
remain in compliance with regulatory requirements in a particular jurisdiction
could have a materially adverse effect on our operations in that market and on
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our reputation generally.
Any of the non-U.S. regulatory agencies may conduct administrative
proceedings against us, which can result in censure, fine, the prevention of
activities or our suspension or expulsion from their country as an investment
services provider. The applicable regulations cover minimum financial resource
requirements and conduct of business rules for all authorized investment
businesses.
The costs associated with new regulations, changes in existing
regulations or changes in the interpretation or enforcement of existing
regulations outside the U.S. may adversely affect or limit our business
or operations and adversely affect our financial condition and operating
results.
PRODUCT DEVELOPMENT AND PRODUCTION
We design, develop and produce our proprietary software and hardware
products at our facilities in Stamford, Connecticut, New York, Chicago and
London. We obtain our materials, supplies and services from a variety of vendors
in the U.S. and Asia. We did not experience any significant price increases in
component parts purchased during 2002.
Our manufactured products are based on standard PC components readily
available in the consumer market place. All electronic, computer related
components utilized within our product are not manufacturer or supplier
specific. We can substitute components from a diverse group of manufacturers
with no assembly or delivery delays to our customers.
Electronic and computer components utilized within our manufactured
products are generally purchased from Tier 2 and Tier 3 resellers. Tier 2
suppliers are defined as manufacturer representatives for multiple product lines
and are generally regional or national distributors for those products. They
typically maintain an engineering or technical staff for design and
specification support. They primarily focus on resellers and manufacturers as a
customer base. Tier 3 suppliers are defined as component level resellers
specializing in various product lines procured from multiple Tier 2 distribution
sources. They generally do not maintain any engineering or technical staff, and
are geared primarily around consumer sales.
Generally we do not maintain any type of purchasing or governing
agreement with said vendors. In some cases when it is to our benefit to lock in
competitive pricing we would generate a blanket purchase order. The advantage of
this is that competitive pricing and product availability is locked in for the
term of the blanket order. Some of the Tier 2 resellers that we use are: CDW,
Dell, Arrow Electronics and MicroWarehouse. Each of these resellers stock
products from all the major computer manufactures, such as: IBM, Aaeon, Intel,
Sony, NEC, Samsung, Kingston, ELO and AMD. Tier 3 resellers for the most part
are generally smaller Internet accessible suppliers that deal in a variety of
electronic and computer components. These suppliers are only used when Tier 2
suppliers quote extended lead times or pricing not consistent with the current
market on preferred products.
Our manufactured products contain several custom parts specific to our
design. These parts are limited to sheet metal enclosures and internal wiring.
We own the designs for these components and can source them from multiple
vendors in our immediate area or throughout the U.S. Currently we maintain
relationships with a minimum of two alternate vendors for cabling and sheet
metal, either of which can deliver components within standard delivery cycles.
For both of these components we use vendors such as CTC, Advantage Sheet Metal
and Interface Technology.
We rely on a number of third parties to supply software and systems, as
well as equipment and related maintenance. Our systems are built using a number
of commonly used technologies. As an example we use systems from EMC, Sun
Microsystems, Oracle, Sybase, Veritas and Microsoft. Our products are subject to
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NYFIX, INC.
potential defects in these third party components. Although we (as well as the
individual vendors) exercise strict testing and verification of systems and
software, defects can cause disruptions of customer service. We have invested in
various test systems to make sure supplier's components work as well as our
developed software.
Since we depend on third parties to supply us with underlying software
and systems on a reliable, timely basis, we maintain service and maintenance
agreements with all our main vendors. We have standard service agreements at
different levels depending on how critical the vendor's system is to the
operation of our business. For most systems we have a high level of redundancy,
which gives us less time critical dependency on a particular vendor. We have
service and maintenance agreements with our vendors. Because of the diversity in
vendors, there is no dependence on a single vendor.
BUSINESS SEGMENTS
We operate in two reportable segments based on type of services offered:
Technology Services and Transaction Services. Financial information by segment
and geographic area is set forth in Note 16, "Business Segment Information" of
our Notes to Consolidated Financial Statements as noted in the Index appearing
under Item 15 (a) (1).
BACKLOG AND SEASONALITY
We believe that sales backlog is not a meaningful indication of our future
revenue as a substantial portion of our revenue is derived from contracts, for
which our equipment or software is already installed and we are currently
recognizing revenue. Our operations, to date, have not been significantly
affected by seasonality.
EMPLOYEES
As of February 28, 2003 we had 230 full-time employees, including 75 in
product development, 66 in operations and support, 52 in sales and marketing and
37 in general and administrative functions. None of our employees is covered by
a collective bargaining agreement. We believe that our relationships with our
employees are good. 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.
ITEM 2. PROPERTIES
Our headquarters, executive offices and production facilities are in
Stamford, Connecticut, consisting of 20,900 square feet of leased space,
expiring in 2005. We currently maintain three offices on Wall Street in New
York, New York, comprising 45,600 square feet, with 21,800 square feet expiring
in 2005 and 23,800 square feet expiring in 2010, of which 8,000 square feet are
sublet to an affiliate. We also have an office in London, England, where we
lease 5,500 square feet expiring in 2009, of which 1,250 square feet are sublet.
In addition, we maintain sales offices in Chicago and San Francisco, consisting
of 2,900 square feet expiring in 2005 and 4,200 square feet expiring in 2004, of
which 2,500 square feet are sublet, respectively. We also maintain two data
center facilities in Carlstadt and North Bergen, New Jersey, consisting of a
total of 850 square feet with leases expiring in 2005. Although we may consider
consolidating certain offices in New York, we believe that the facilities are
adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
During the course of normal business, we become involved in various
routine legal proceedings. We maintain insurance coverage of types and in
amounts, which we believe to be adequate. We believe that we are not presently a
party to any material litigation the outcome of which could reasonably be
20
NYFIX, INC.
expected to have a material adverse effect on our financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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NYFIX, INC.
SUPPLEMENTAL ITEM: EXECUTIVE OFFICERS AND MANAGEMENT
Information concerning our executive officers and management as of March
14, 2003 is set forth below:
Name Age Position
- ---- --- --------
Peter Kilbinger Hansen 42 President, Chief Executive Officer and
Chairman of the Board
Robert C. Gasser 38 Chief Executive Officer, NYFIX Millennium
and President, NYFIX Transaction Services
Mark R. Hahn 45 Chief Financial Officer and Secretary
Lars Kragh 42 Chief Information Officer
Paolo Aloe 39 Senior Vice President, Software Development,
NYFIX USA
John J. Coulter 36 President and Chief Operating Officer,
Javelin
Keith R. Jamaitis 32 Chief Operating Officer, NYFIX USA
Jon Steward 43 President, NYFIX Overseas
PETER KILBINGER HANSEN, our founder, has served as our President, Chief
Executive Officer and Chairman of the Board of Directors since June 1991. Mr.
Hansen also serves as a member of the Compensation Committee of the Board of
Directors. Prior to our founding, Mr. Hansen served from 1988 to 1991 as
Director of Banking Systems of Business Line A/S, a Danish company. Mr. Hansen
holds a degree in Economics from Neil's Brock Business School of Copenhagen and
an associated degree in economics from the Copenhagen University of Language and
Economics.
ROBERT C. GASSER has served as Chief Executive Officer, NYFIX Millennium, our
80%-owned broker-dealer subsidiary, since October 2001. Mr. Gasser is also
President of NYFIX Transaction Services, since its formation and the NASD
approval in May 2002. Prior to joining us, from 1987 to 2001, Mr. Gasser was
Head of U.S. Equity Trading for JP Morgan, an investment bank. During his tenure
at JP Morgan, Mr. Gasser served on various industry committees, including the
NASDAQ Quality of Markets Committee and the NYSE Upstairs Traders Advisory
Committee. In addition, he directed the firm's investment in NYFIX Millennium
and Archipelago, where he actively served on the Board of Managers. Mr. Gasser
holds a Bachelor of Science degree in Foreign Service from Georgetown
University, School of Foreign Service.
MARK R. HAHN joined us in September 2002 as Chief Financial Officer and
Secretary. Prior to that, from April 2002 through September 2002, Mr. Hahn was
Vice President and Controller for Modem Media, Inc., an interactive marketing
and technology company. He joined that firm in January 2002 as a consultant.
From 1998 to 2001, Mr. Hahn was with Metromedia Fiber Network Services, Inc., a
technology infrastructure company, as Vice President Finance, Network Planning &
Analysis from December 1999 through November 2001 and before that as Corporate
Controller from April 1998. Prior to that, Mr. Hahn was with V Band Corporation,
a technology infrastructure company as Vice President, Chief Financial Officer
and Secretary from August 1995 to April 1998 and before that as Controller from
November 1994. Mr. Hahn began his career with Price Waterhouse & Co. (now,
PricewaterhouseCoopers LLP), as a certified public accountant.
LARS KRAGH has served as Chief Information Officer since July 1999. Prior to
that, Mr. Kragh was our Executive Vice President of Research and Development and
held other technology positions since our inception in 1991. Prior to joining
us, Mr. Kragh developed network systems for the banking industry involving
numerous system integrations with global market data providers. Mr. Kragh earned
a Masters of Science degree in Electrical Engineering from the Danish University
of Technology.
PAOLO ALOE has served as our Senior Vice President, Software Development, NYFIX
USA, our wholly-owned subsidiary, since December 2001. From May 2000 to December
2001, Mr. Aloe was with NYFIX Millennium, our affiliate. Most recently,
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NYFIX, INC.
he was Vice President, Software Development from August 2000. Prior to that, he
was Senior Systems Architect. From February 1999 to May 2000, Mr. Aloe was
Senior Technical Consultant at Solomon Smith Barney, an investment bank. From
April 1997 to February 1999, Mr. Aloe was IT Architect at IBM Global Services,
Inc. From February 1995 to April 1997, Mr. Aloe was Project Engineer for us when
we were known as Trinitech Systems, Inc. Mr. Aloe holds a degree in Engineering
of Electronics from the University of Pisa, Italy.
JOHN J. COULTER has served as President and Chief Operating Officer, Javelin,
our wholly-owned subsidiary, since June 2001 and from October 1999 as Senior
Vice President of Javelin's west coast operations. From April 1998 to September
1999, Mr. Coulter was Global Account Manager for Reuters America, Inc., an
information and technology company. From May 1997 to April 1998, Mr. Coulter was
Vice President Sales for Vie Systems, Inc., a middleware provider. Prior to
that, Mr. Coulter was co-founder of TRIAD in 1995 as part of Ease Technologies,
Inc, a systems integration company. Mr. Coulter holds a Bachelor of Arts degree
in Journalism from Fairfield University.
KEITH R. JAMAITIS has served as Chief Operating Officer, NYFIX USA, our
wholly-owned subsidiary, since January 2002. Prior to that, Mr. Jamaitis was our
Senior Vice President of Operations, Vice President of Product Management and
other positions since 1997. Prior to that, Mr. Jamaitis was a product line
manager with Executone Information Systems, a technology company and held
various positions in hardware and software systems development and technical
management in the telecommunications industry. Mr. Jamaitis holds a Bachelors of
Science degree in Electrical Engineering from the University of Connecticut.
JON STEWARD has served as President, NYFIX Overseas, our wholly-owned
subsidiary, since June 1993. Prior to that, he held various sales positions at
Cable & Wireless, Telerate and ADP, all technology companies. Mr. Steward was
educated in London and went to Middlesex University where he studied business
management.
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NYFIX, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
Our 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 stock market.
Prices of Common Stock High Low
----------- -----------
2002
First Quarter $ 20.06 $ 9.90
Second Quarter $ 15.65 $ 7.55
Third Quarter $ 8.95 $ 3.10
Fourth Quarter $ 5.46 $ 3.23
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
(B) HOLDERS
At March 14, 2003 the records of our transfer agent indicated that there
were 417 holders of record of our common stock.
(C) DIVIDENDS
Stockholders of our common stock are entitled to dividends if and when
declared by the Board of Directors out of funds legally available. We have not
paid or declared any dividends on any class of our capital stock since our
organization and have no present intention of paying cash dividends on our
common stock. We intend to utilize any income we may achieve for the development
of our business and for working capital purposes.
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NYFIX, INC.
(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information regarding our equity
compensation plans at December 31, 2002:
Number of securities Number of securities
to be issued upon Weighted-average remaining available for
exercise of exercise price of future issuance under equity
Plan Category outstanding options outstanding options compensation plans
- ------------------------------- ------------------- -------------------- ----------------------------
Equity compensation plans
approved by security holders 6,676,119 $10.64 633,700
Equity compensation plans not
approved by security holders (1) 348,680 7.80 119,650
------------------- -------------------- ----------------------------
Total 7,024,799 $10.50 753,350
=================== ==================== ============================
(1) As a result of our acquisition of Javelin on March 31, 2002, we assumed the
outstanding stock options of Javelin that were granted pursuant to the
Javelin 1999 Stock Option Plan (the "Javelin Plan"). The Javelin Plan
authorized grants of stock options of Javelin. At the acquisition date, the
Javelin options where converted into our options at a conversion rate of
0.51 to one. The options granted under the Javelin Plan were fully vested
at the time of our acquisition of Javelin pursuant to a change of control
clause within the Javelin Plan. A total of 511,167 shares of our common
stock have been reserved for issuance upon exercise of such options.
Pursuant to the Javelin Plan, as amended, we may grant stock options and
stock purchase rights to our employees, officers, directors and
consultants. The maximum term of an incentive stock option grant under the
Javelin Plan is limited to ten years. The exercise price of incentive stock
options granted under the Javelin Plan must be at least equal to the fair
market value of our stock at the date of grant, as defined. The Javelin
Plan was effective on July 1, 1999 and expires on June 30, 2009. At
December 31, 2002, stock options to purchase 348,680 shares of our common
stock were outstanding under the Javelin Plan.
(E) RECENT SALES OF UNREGISTERED SECURITIES
On October 2, 2002, we acquired an 18% interest in Renaissance by
issuing 100,000 shares of our common stock to each of the three principals of
Renaissance: Edward Brandman, Daniel Ryan and Ken DeGiglio, with a fair value of
$1.1 million. Pursuant to the purchase agreement, Messrs. Brandman, Ryan and
DeGiglio agreed to contribute an aggregate of 150,000 of such shares of our
common stock to Renaissance for distribution to the other employees of
Renaissance. Renaissance was formed to commercialize the NASDAQ Platform.
We have an option to purchase a minimum of 20% to a maximum of 40% of
the total outstanding membership units of Renaissance at a price to be
determined based upon a formula between October 2004 and October 2006. We also
loaned $1.5 million to Renaissance, for which Renaissance issued a convertible
secured promissory note. The note bears an interest rate of 5.5%, is due in
October 2007, and is convertible into 6,400,000 units (or 32% of total
outstanding membership units, subject to dilution) of Renaissance, at our
option, anytime after October 2003.
In connection with our investment in Renaissance, we acquired for $1.0
million, the intellectual property rights and source code to the Platform, which
was developed over the last several years by a major bank and brokerage firm and
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NYFIX, INC.
contributed such intellectual property and source code to Renaissance. In
addition, we advanced to Renaissance $1.0 million to fund certain operating
costs and capital expenditures, through December 31, 2002. In consideration for
the intellectual property rights contributed and the advanced funding of the
operating costs and capital expenditures, we will share in 50% of Renaissance's
revenue for, at minimum, 3 years.
In connection with the issuance of shares of our common stock to Messrs.
Brandman, Ryan and DeGiglio, we relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. Since all of the
recipients of our shares are "accredited investors" as defined in Rule 501
promulgated under the Securities Act, we believe that the transaction falls
within the safe harbor provided by Regulation D, thereunder.
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NYFIX, INC.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data. The
information set forth below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and notes thereto included
herein.
Year Ended December 31,
------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- -------- ------- ---------
Consolidated statement of
operations data:
Revenue $ 55,812 $ 41,397 $ 23,980 $ 12,209 $ 6,235
Gross profit 29,102 27,237 15,078 5,271 3,265
Operating expense 36,140 14,097 8,603 5,744 3,789
(Loss) income from operations (7,038) 13,140 6,475 1,194 (2,226)
Net (loss) income (3,166) 8,136 5,677 960 (2,234)
Net (loss) income per
common share:
Basic $ (0.11) $ 0.30 $ 0.23 $ 0.04 $ (0.11)
Diluted $ (0.11) $ 0.29 $ 0.21 $ 0.04 $ (0.11)
At December 31,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Consolidated balance sheet
data:
Cash and cash equivalents $ 11,213 $ 4,968 $ 4,867 $ 1,566 $ 3,948
Short-term investments 10,727 28,974 -- -- --
Working capital 30,823 47,513 9,159 4,513 5,970
Property and equipment, net 18,186 14,366 11,472 5,873 2,854
Total assets 160,817 108,572 57,558 38,828 12,998
Long-term debt, including 1,753 1,501 3,823 2,500 1,800
current portion
Stockholders' equity 147,065 99,242 42,228 29,885 8,119
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the current year's presentation.
In connection therewith, we reclassified certain operating expenses during the
years ended December 31, 2001, 2000, 1999 and 1998, to cost of revenue.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
NYFIX, Inc., a New York corporation founded in 1991, through our
subsidiaries and affiliates, provides electronic trading technology
infrastructure and execution services to the professional trading segment of the
brokerage industry. Our products and services automate institutional trading
workflows by streamlining data entry and seamlessly integrate electronic order
and execution handling. We offer a complete electronic desktop order management
solution, stationary and wireless handheld exchange floor technology, and a high
volume trade execution platform. Our products deliver STP for front, middle and
back office trade information handling. We deliver our products mainly as a
service bureau offering and maintain an extensive data center with a network of
electronic circuits that link industry participants together and provide access
to the domestic and international equities and derivatives markets.
Headquartered in Stamford, Connecticut, we have additional offices in
New York City, London, Chicago and San Francisco.
Our electronic trading systems, industry-wide trade routing
connectivity, STP and execution services and systems supported by our desktop
solutions, stationary and wireless exchange floor systems and electronic
automation systems provide a complete electronic solution to enter, manage and
route trade data and execute orders for brokerage firms and international banks
trading in equities, futures and options.
We operate a diverse electronic order routing and communication
platform, our NYFIX Network, based on the FIX protocol. The FIX protocol is the
messaging standard underlying language, which was developed to enable real-time
electronic trading and communications. Our NYFIX Network is connected to
redundant data centers enabling electronic communications between our customers
throughout the equities and derivatives markets as well as offering long-term
optical disk storage and compliance retrieval of customer transactions. Through
our NYFIX Network, we provide the technology and infrastructure for trade
communication and global order routing between buy-side and sell-side
institutions, numerous exchange floors, as well as other electronic trade
execution venues, such as ECNs and ATSs. We sell an integrated portfolio of
modular desktop trading applications, exchange floor automation and exchange
access applications for trading in domestic and international equities, and
derivatives, including futures and options. Many of our applications reside on
our centralized system in our data center and are accessible through our NYFIX
Network. By seamlessly integrating our proprietary infrastructure and software
applications, we provide our customers with a complete electronic order
management and execution solution.
Through NYFIX Millennium, our 80% owned broker-dealer subsidiary, we
have developed 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. NYFIX Millennium's ATS went into full production on September
5, 2001 and we continue to focus on expanding NYFIX Millennium's user base and
execution volumes.
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NYFIX, INC.
ACQUISITIONS AND INVESTMENTS
NYFIX TRANSACTION SERVICES
In December 2001, we acquired an inactive broker-dealer for $34,000 and
filed a membership application with the NASD to operate as a broker-dealer
through the wholly owned subsidiary, which we renamed NYFIX Transaction
Services. The application was approved by NASD in May 2002 and NYFIX Transaction
Services started generating revenue as of July 1, 2002. NYFIX Transaction
Services provides electronic execution services, primarily to domestic and
international broker-dealers and specialized trading firms.
NYFIX MILLENNIUM
NYFIX Millennium, a broker-dealer, developed an ATS, which is an
electronic system that matches buyers and sellers in a completely anonymous
environment. The system aims to provide high quality execution for clients
through computerized matching technologies. NYFIX Millennium offers 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.
In September 1999, NYFIX Millennium was formed as a limited liability
company, by us and seven international investment banks and brokerage firms,
consisting of Deutsche Bank, ABN Amro Securities (formerly ING Barings), Lehman
Brothers, Morgan Stanley Dean Witter Equity Investments Ltd., Alliance Capital
Management (formerly Sanford C. Bernstein & Co.), Societe Generale Investment
Corporation (formerly SG Cowen) and UBS Warburg (the "Initial Partners"). Each
of the Initial Partners invested $2.0 million in NYFIX Millennium in exchange
for 25,000 units of NYFIX Millennium, collectively owning a 50% membership
interest in NYFIX Millennium. We invested $2.0 million and owned the remaining
50%. In addition, we purchased an option to buy, from the Initial Partners, an
additional 30% membership interest in NYFIX Millennium (the "Option"), for which
we paid each of the Initial Partners 281,250 shares of our common stock. The
Option allowed us to increase our membership interest in NYFIX Millennium up to
80% of the total membership interest through the exchange of one share of our
common stock for each unit of NYFIX Millennium purchased, subject to certain
adjustments.
In March 2001, NYFIX Millennium added four more partners, consisting of
Bank of America, Wachovia Securities (formerly First Union Securities) and
LabMorgan Corporation (formerly J.P. Morgan & Co. and Chase H&Q) (the "New
Partners"). Pursuant to the terms of the NYFIX Millennium Operating Agreement,
each New Partner invested $2.0 million in NYFIX Millennium in exchange for
25,000 units of NYFIX Millennium. We maintained our 50% membership interest in
NYFIX Millennium in exchange for reducing certain of our rights to share in
future dividend distributions of NYFIX Millennium. We issued 94,000 shares of
our 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.
At December 31, 2001, our investment in NYFIX Millennium of $27.5
million consisted of $25.5 million of our shares of common stock (1,968,750
shares in 1999 of our common stock at $8.89 per share and 376,000 shares in
March and April 2001 of our common stock at $21.28 per share) and our capital
cash contribution of $2.0 million. We funded certain operating costs and capital
expenditures on behalf of NYFIX Millennium. Such advances of $5.2 million were
reflected as "Due from unconsolidated affiliates" on our consolidated balance
sheet at December 31, 2001. In addition, we loaned to NYFIX Millennium an
aggregate of $11.0 million, plus accrued interest, of which $5.0 million was
loaned in 2002. The $6.0 million loaned in 2001, plus accrued interest, is
reflected in "notes receivable from unconsolidated affiliates" on our
consolidated balance sheet at December 31, 2001.
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NYFIX, INC.
On January 23, 2002, we notified the Initial Partners and New Partners
that we would exercise our Option, effective February 1, 2002. In exchange for
the increased membership interest in NYFIX Millennium, we paid the Initial
Partners and New Partners an aggregate of 296,250 shares of our common stock
with a fair value of $4.5 million, 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, we increased our ownership of NYFIX Millennium to 80%. The
results of operations of NYFIX Millennium have been included in our 2002
consolidated statement of operations since the acquisition date. All advances
and loans, including accrued interest, have been eliminated in consolidation
commencing on February 1, 2002. The excess of the purchase price over the fair
value of the net assets acquired was $27.8 million and has been recorded as
goodwill. Some of our key considerations for the acquisition of NYFIX Millennium
included NYFIX Millennium's growth in revenue, the attractiveness of the
synergies we anticipated with our recently-acquired NYFIX Transaction Services
broker-dealer, and our ability to exercise significant control over NYFIX
Millennium's operations.
Pursuant to our NYFIX Millennium Operating Agreement, as amended, the
first $22.0 million in NYFIX Millennium operating losses since inception was
allocated to the Initial Partners and New Partners, which equaled the extent of
their capital contribution to NYFIX Millennium. The minority interest in NYFIX
Millennium disclosed in our accompanying consolidated statement of operations
for the year ended December 31, 2002 reflects the allocation of NYFIX Millennium
losses to the Initial Partners and New Partners post acquisition to the extent
of their capital contribution, thereby reducing their minority interest to zero.
In addition, we recognized NYFIX Millennium operating losses of $6.0 million for
the year ended December 31, 2002, which were $4.0 million greater than our
capital contribution of $2.0 million. While we expect NYFIX Millennium to be
profitable in the future, there can be no assurances of such profitability. As a
result, we have not allocated to the Initial Partners and New Partners their pro
rata share of NYFIX Millennium losses in excess of our capital contribution,
aggregating $1.0 million, at December 31, 2002, since we cannot assure
recoverability of the asset that such an allocation would create. At such time
when NYFIX Millennium achieves profitability, 24% of its profits, net of us
recovering our over-allocated losses, will be allocated to the Initial Partners
and New Partners.
JAVELIN
On March 31, 2002, we acquired 100% of the outstanding capital stock of
Javelin. We financed the transaction with a combination of (i) $10.0 million in
net cash; (ii) 2,784,896 shares of our common stock having a fair value of $41.2
million; and (iii) 493,699 shares of our common stock having a fair value of
$3.5 million reserved for issuance upon exercise of Javelin stock options
assumed by us. The excess of the purchase price over the fair value of net
assets acquired was $42.3 million and has been recorded as goodwill. Javelin is
a provider of electronic trade communication technology and FIX protocol
technology. The FIX protocol is the messaging standard underlying language,
which was developed to enable real-time electronic trading and communications.
In utilizing the FIX protocol technology, companies can eliminate the high costs
and associated risks of developing their own proprietary network links and
implementing a non-standard protocol. Javelin has over 1,000 installations at
more than 350 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. Some of our key considerations for the acquisition of
Javelin included: 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.
EUROLINK
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NYFIX, INC.
On March 6, 2002, we acquired a convertible preferred stock interest in
EuroLink with its operations based in Madrid, Spain, for $4.0 million in cash.
EuroLink offers the European securities industry direct electronic access to the
U.S. equity markets from Europe. EuroLink offers our equity terminals and market
access services to the European marketplace, primarily on a transaction fee
basis. The preferred stock will automatically convert into a 40% common stock
interest upon the earlier of two years from the date of the agreement or a
change of control, as defined, of EuroLink. We also have an option to purchase
up to an additional 40% common stock interest in EuroLink from certain of its
stockholders at a price to be determined based upon a formula of EuroLink's
earnings, as defined.
RENAISSANCE
On October 2, 2002, we acquired an 18% interest in Renaissance, a
limited liability company. Renaissance was formed to commercialize the NASDAQ
Platform. We acquired our interest in return for 300,000 shares of our common
stock with a fair value of $1.1 million. We have also loaned $1.5 million to
Renaissance, for which Renaissance issued a convertible secured promissory note.
The Note bears an interest rate of 5.5%, is due in October 2007 or earlier, as
set forth therein, and is convertible into additional equity in Renaissance, at
our option, at certain times over the next five years. We also have an option to
purchase up to a controlling interest in Renaissance at a price to be determined
based upon a formula, as defined. In connection with our investment, we
acquired, for $1.0 million, the intellectual property rights and source code to
the Platform, which was developed over the last several years by a major bank
and brokerage firm and contributed such intellectual property rights and source
code to Renaissance.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require us to make estimates and
assumptions which could materially 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 revenue and expense
during the reporting period. On an on-going basis, we evaluate our estimates and
assumptions, including those related to accounts receivable reserves,
investments, goodwill, long-lived assets, revenue recognition, product
enhancement costs, income taxes and contingencies. We base our estimates and
assumptions 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 assumptions 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.
We believe the following accounting policies, among others, are critical
to the understanding of our results of operations due to the assumptions we must
make in their application. Senior management has discussed the development and
selection of these accounting policies, and estimates, and the related
disclosures with the Audit Committee of the Board of Directors ("Audit
Committee"). See Note 1 in the Notes to the Consolidated Financial Statements in
Item 15 of this Annual Report on Form 10-K for our significant accounting
policies.
REVENUE RECOGNITION
Our revenue is comprised of subscription, sale, service contract and
transaction components.
Subscription revenue contracts are generally for leasing of our
equipment and use of our NYFIX Network, with an initial term of one to three
years with automatic renewal periods unless we receive prior notice of
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NYFIX, INC.
cancellation. Under the terms of the subscription contracts, customers are
typically invoiced a flat periodic charge after initial installation and
acceptance. Revenue related to these contracts is recognized over the initial
term of the contract on a straight-line basis. We also include within our
subscription revenue, telecommunication and other charges, which we provide to
the customer at cost plus a normal profit. Such revenue is recognized as the
services are provided. As we have no history of significant cancellations, we do
not record a reserve for cancellations.
Sale revenue, which is comprised of software and capital equipment
sales, is recognized when the software and equipment have been shipped and
accepted by the customer and when other contractual obligations, including
installation if applicable, have been satisfied and collection of the resulting
receivable is reasonably assured. As we have no history of significant sales
returns, we do not record a reserve for sales returns and allowances.
Service contract revenue, which is comprised of maintenance contracts
for subscription equipment and software and capital equipment, is recognized
over the contract period on a straight-line basis. Service contracts for
subscription equipment are generally co-terminus with the subscription contract.
Service contracts for software and capital equipment are generally for an
initial term of one to three years with automatic renewal periods unless we
receive prior notice of cancellation.
Transaction revenue contracts provide for transaction or execution
services, which are comprised of a usage or transaction-based fee for trades
executed through our broker-dealer operations. Revenue on these contracts is
generally invoiced in arrears and recognized in the period in which it is
earned. We periodically enter into contracts, which include subscription
equipment and telecommunication charges to be invoiced at a minimum
transaction-based fee. We account for these contracts as both subscription
revenue, for its minimal fee, and transaction revenue, for the amount earned in
excess of its minimal fee. We value the minimal fee as the fair value of similar
subscription equipment leased and telecommunication charges provided to similar
customers.
Certain subscription and service contract agreements provide for
invoicing in advance of the service being performed, generally quarterly.
Revenue on contracts invoiced in advance is deferred and recognized as revenue
over the period earned and is included in "deferred revenue" in our accompanying
consolidated balance sheets. Shipping, handling and installation charges, if
any, are generally invoiced to a customer and are included in revenue upon
completion of the installation.
We periodically enter into arrangements that include multiple
deliverables, which typically consist of the sale of software and capital
equipment with additional services, such as installation, training and service
among others. Services provided subsequent to initial delivery and installations
are typically invoiced separately. We account for each element of an arrangement
with multiple deliverables separately. The arrangement consideration is
allocated to each element based on the relative fair values of each element.
Vendor specific objective evidence for fair value of services is primarily
determined by reference to renewal pricing.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that we believe to be
uncollectible. The estimate of our allowance for doubtful accounts is based on
collection experience, which includes analyzing prior accounts receivable
written-off and reviewing the aging of the accounts receivable. Our allowance
for doubtful accounts includes amounts for specific accounts that are believed
to be uncollectible, as well as amounts that have been computed by applying
certain percentages based on historical loss trends, to certain accounts
receivable aging categories, net of accounts receivable for which revenue
recognition has been deferred.
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NYFIX, INC.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Included in equipment are certain costs related to the development of our NYFIX
Network to support our subscription and service based businesses.
BUSINESS COMBINATIONS AND GOODWILL
Business combinations are accounted for under the purchase method of
accounting and include the results of operations of the acquired businesses from
the dates of their respective acquisition. Net assets of acquired companies are
recorded at their fair value to us at the date of acquisition. Goodwill
represents acquisition costs in excess of the fair value of net assets acquired.
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS effective January 1, 2002, which requires
that goodwill and certain other intangible assets having indefinite lives no
longer be amortized to income, but instead be tested for impairment annually as
well as on an interim basis if events or changes in circumstances indicate that
goodwill might be impaired. Effective October 1, 2002, we performed the annual
test for impairment using the discounted cash flow valuation method. There was
no impairment to the value of our recorded goodwill.
CAPITALIZED PRODUCT ENHANCEMENT COSTS
We capitalize certain costs of internally developed software as product
enhancement costs. Internally capitalized costs consist of payroll and payroll
related costs, purchased materials and services and software to be used within
our products. We defer those costs that significantly enhance the marketability
or significantly extend the life of our products. We are required to use
professional judgment in determining whether product enhancement 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 amortized using the
straight-line method over three years.
LONG-LIVED ASSETS
We review the carrying value of long-lived assets, including property
and equipment, intangible assets, investments and other long-term amounts due
from unconsolidated affiliates, and capitalized product enhancement costs for
impairment whenever events or circumstances indicate that the carrying amount
may not be fully recoverable. If such an event or circumstances occurs, the
related estimated fair value of the assets would be compared to the carrying
amount, and if needed, we would record an impairment to the extent by which the
carrying amount exceeds the fair value of the asset. There was no impairment of
long-lived assets recorded for the years ended December 31, 2002, 2001 and 2000.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the estimated future tax consequences of differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using presently enacted
tax rates in effect for the periods the temporary differences are expected to be
settled. A valuation allowance is established, as needed, to reduce net deferred
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NYFIX, INC.
tax assets to realizable value. A valuation allowance has not been established
for our deferred tax assets, as we believe it is more likely than not that they
will be realized.
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. We use outside counsel to assist us in
various matters including securities and SEC regulations, acquisitions,
trademark, patent and personnel matters. We rely on the professional judgment of
outside counsel as well as our own assessment in determining whether
contingencies should be recorded.
OVERVIEW OF FINANCIAL RESULTS
The following table shows our revenue, gross profit and gross profit, as
a percentage of revenue, by reportable segment for the periods indicated:
Year Ended December 31,
-----------------------------------------
2002 2001 2000
-------- -------- --------
Revenue: (in thousands)
Technology Services $ 48,853 $ 41,397 $ 23,980
Transaction Services 7,109 -- --
Eliminations (150) -- --
-------- -------- --------
Total revenue $ 55,812 $ 41,397 $ 23,980
======== ======== ========
Gross profit:
Technology Services $ 28,608 $ 27,237 $ 15,078
Transaction Services 494 -- --
-------- -------- --------
Total gross profit $ 29,102 $ 27,237 $ 15,078
======== ======== ========
Gross profit, as a percentage of revenue:
Technology Services 59 % 66 % 63 %
Transaction Services 7 % -- --
-------- -------- --------
Total 52 % 66 % 63 %
======== ======== ========
The following table shows our revenue, cost of revenue, gross profit and
operating expense expressed as percentages of revenue for the periods indicated:
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NYFIX, INC.
Year Ended December 31,
----------------------------------
2002 2001 2000
------ ------ ------
Revenue:
Subscription 56.8% 70.0% 66.5%
Sale 15.3% 19.6% 21.2%
Service contract 15.2% 10.4% 12.3%
Transaction 12.7% -- --
------ ------ ------
Total revenue 100.0% 100.0% 100.0%
------ ------ ------
Cost of Revenue:
Subscription 50.8% 41.5% 47.4%
Sale 24.3% 11.0% 13.2%
Service contract 22.6% 28.7% 23.0%
Transaction 93.1% -- --
Total cost of revenue 47.9% 34.2% 37.1%
Gross Profit:
Subscription 49.2% 58.5% 52.6%
Sale 75.7% 89.0% 86.8%
Service contract 77.4% 71.3% 77.0%
Transaction 6.9% -- --
Total gross profit 52.1% 65.8% 62.9%
Operating Expense:
Selling, general and administrative 53.5% 29.6% 31.6%
Research and development 2.5% 1.1% 1.9%
Depreciation and amortization 8.7% 3.4% 2.4%
------ ------ ------
Total operating expense 64.7% 34.1% 35.9%
------ ------ ------
Our revenue is comprised of subscription, sale, service contract and
transaction components. Subscription fees currently represent a majority of
total revenue. 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 automatic renewal
periods, unless we receive prior notice of cancellation. Subscription revenue is
recognized on a straight-line basis over the lives of the subscription
agreements and begins once installation is complete and accepted by the
customer. Sale revenue, which is comprised of software and capital equipment
sales, is generated primarily by sales to customers in the futures, options and
currencies trading market, and is recognized upon shipment of the product and
acceptance by the customer. Service contract revenue is comprised of maintenance
contracts for software and capital equipment sales and subscription equipment
and is recognized over the contract period on a straight-line basis. Service
contract revenue is typically charged to customers as a fixed percentage of the
original sale contract. Transaction revenue consists of per-share fees charged
to customers who route orders through our order matching system, and per-share
fees charged to customers, primarily domestic and international broker-dealers
and specialized trading firms, to provide execution and smart order routing
solutions.
Cost of revenue principally consists of costs associated with our data
centers where we maintain equipment and infrastructure to support our
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NYFIX, INC.
operations, amortization of capitalized product enhancement costs, depreciation
of subscription equipment and execution, clearing fees and market data feeds.
Selling, general and administrative expense accounts for the majority of
our operating expense and consists of salaries and benefits, rent and office
expense, provision for doubtful accounts and marketing expense. During the past
several years, we have expanded our efforts to support an increasing number of
services and to increase the number of exchanges, sell-side firms and buy-side
institutions connecting to our NYFIX Network.
Research and development expense relates to developing new products and
technologies to meet the current and future needs of our 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 corporate equipment and software, and amortization of intangible
assets.
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the current year's presentation.
In connection therewith, we reclassified certain operating expense to cost of
revenue, during the years ended December 31, 2001 and 2000.
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, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUE
Total revenue increased $14.4 million, or 35%, to $55.8 million for
2002, from $41.4 million for 2001, primarily due to revenue attributable to our
recently acquired Javelin business, transaction revenue attributable to our
recently acquired broker-dealer subsidiaries, and increased subscription and
service contract revenue from increased demand from our existing customers and
the addition of new customers. These amounts were slightly offset by lower
revenue attributable to capital sales of software and hardware.
Subscription revenue increased $2.7 million, or 10%, to $31.7 million
for 2002, from $29.0 million for 2001, primarily due to subscription revenue
attributable to our recently acquired Javelin and NYFIX Millennium businesses of
$1.8 million, increased demand from our existing customers and the net addition
of new customers, of $0.9 million. As a percentage of total revenue,
subscription revenue decreased to 56.8% in 2002 from 70.0% in 2001, primarily
due to the addition of transaction revenue in 2002 and the increase of service
contract revenue of $3.6 million for our recently acquired Javelin products.
Without transaction revenue, subscription revenue would have been 65.1% of total
revenue.
Sale revenue increased $0.4 million, or 5%, to $8.5 million for 2002,
from $8.1 million for 2001. Sale revenue increased $2.8 million due to our
recently acquired Javelin business. This amount was significantly offset by
lower sale revenue for our core products of $2.4 million, principally due to our
continued effort to convert customers to our subscription-based model. As a
percentage of total revenue, sales revenue decreased to 15.3% in 2002, from
19.6% in 2001, partially due to the effect of the addition of transaction
revenue and the general slower growth of sale revenue compared with our other
revenue components during 2002.
Service contract revenue increased $4.2 million, or 96%, to $8.5 million
for 2002, from $4.3 million in 2001. The increase is primarily due to service
contract revenue of our recently acquired Javelin business of $3.6 million, and
an increase in subscription contract revenue for our core products of $0.6
million. As a percentage of total revenue, service contract revenue was 15.2% in
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NYFIX, INC.
2002, as compared to 10.4% in 2001, primarily due to the aforementioned service
contract revenue for our recently acquired Javelin business, offset in part by
the effect of the addition of transaction revenue during 2002.
Transaction revenue amounted to $7.1 million for 2002, and represented
12.7% of total revenue for the year. Transaction revenue was attributable to our
broker-dealer businesses, including NYFIX Transaction Services, which started
generating revenue on July 1, 2002, and NYFIX Millennium, whose results have
been included in our consolidated financial statements since our acquisition of
NYFIX Millennium on February 1, 2002.
COST OF REVENUE
Total cost of revenue increased $12.6 million, or 89%, to $26.7 million
for 2002, from $14.1 million in 2001, due primarily to increased data center
costs of $3.8 million, clearing, execution and other costs related to our
recently acquired NYFIX Millennium and NYFIX Transaction Services businesses, of
$2.5 million, increased costs attributable to support our recently acquired
Javelin business of $2.5 million, increased telecommunication charges due to
more desktop connections and increased capacity in our data centers to support
our core business, of $1.7 million, increased depreciation expense attributable
to investment in data center equipment to support our subscription revenue
components, of $1.3 million, and increased amortization expense of product
enhancement costs due to continued efforts to maintain competitive products of
$0.6 million.
Subscription cost of revenue increased $4.1 million, or 34%, to $16.1
million for 2002, from $12.0 million for 2001, primarily due to increased data
center costs, including telecommunication charges due to more desktop
connections and increased capacity in our data centers, of $2.5 million,
increased costs attributable to our recently acquired Javelin business of $0.7
million, increased depreciation and amortization expense of $0.7 million,
attributable to increased subscription equipment at our customers, increased
investment in our data center equipment to support our subscription revenue, and
product enhancement costs due to continued efforts to maintain competitive
products. As a percentage of subscription revenue, subscription cost of revenue
increased to 50.8% in 2002 from 41.5% in 2001, primarily due to increases in the
aforementioned costs related to investments in our data centers, which we
believe will support future revenue growth.
Sale cost of revenue increased $1.2 million, or 132% to $2.1 million for
2002, from $0.9 million for 2001. The increase in sale cost of revenue is
primarily due to increased labor costs to deliver and install our hardware and
software of $0.9 million, attributable to our recently acquired Javelin
business, and increased amortization expense, of $0.3 million, attributable to
capitalized software included in our products. As a percentage of sale revenue,
sale cost of revenue increased to 24.3% in 2002, from 11.0% in 2001, primarily
due to the aforementioned cost increases.
Service contract cost of revenue increased $0.7 million, or 55% to $1.9
million for 2002, from $1.2 million in 2001. The increase is principally due to
service contract labor costs of our recently acquired Javelin business of $0.7
million. As a percentage of service contract revenue, service contract cost of
revenue decreased to 22.6% in 2002, as compared to 28.7% in 2001.
Transaction cost of revenue was $6.6 million for 2002, and represented
93.1% of transaction revenue. Transaction cost of revenue was attributable to
our previously mentioned broker-dealer businesses, including NYFIX Transaction
Services, which started generating revenue on July 1, 2002, and NYFIX
Millennium, which results have been included in our consolidated financial
statements since our acquisition of NYFIX Millennium on February 1, 2002.
Transaction cost of revenue primarily included data center cost, including
labor, maintenance, lease, communication and data feed expenses, of $3.3
million, clearing and execution related fees of $1.9 million and depreciation
and amortization expense of $1.0 million.
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NYFIX, INC.
GROSS PROFIT
Gross profit decreased to 52.1% for 2002, from 65.8% for 2001. The
decrease in gross profit is primarily attributable to the impact of lower gross
profit for our recently acquired Javelin business, the impact of increased labor
costs to deliver and install our hardware and software, increased depreciation
and amortization expense of our product enhancement costs and data center
infrastructure investments to support our subscription and transaction revenue
components.
Subscription gross profit decreased to 49.2% for 2002, from 58.5% for
2001. The decrease in subscription gross profit is primarily attributable to the
impact of lower gross profit for our recently acquired Javelin business and
depreciation and amortization expense related to our product enhancement costs
and capital and telecommunication infrastructure investments made in our data
center.
Sale gross profit decreased to 75.7% for 2002, from 89.0% for 2001. The
decrease in sale gross profit is primarily attributable to the impact of lower
gross profit for our recently acquired Javelin business and increased
depreciation expense attributable to software capitalized which is included in
our products delivered to our customers.
Service contract gross profit increased to 77.4% for 2002, from 71.3%
for 2001. The increase in service contract gross profit is primarily
attributable to the impact of higher gross profit for our recently acquired
Javelin business.
Transaction gross profit was 6.9% for 2002. Transaction gross profit was
adversely affected by the impact of certain fixed costs incurred prior to the
start of our NYFIX Transaction Services business, which started generating
revenue on July 1, 2002, and NYFIX Millennium, which results have been included
in our consolidated financial statements since our acquisition of NYFIX
Millennium on February 1, 2002. Gross profit was also adversely affected by
higher data center costs to handle increased system demands.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased $17.7 million, or
144% to $29.9 million for 2002, from $12.2 million for 2001. The increase was
primarily due to the selling, general and administrative expense for our
recently acquired NYFIX Millennium and Javelin businesses and start-up expenses
related to NYFIX Transaction Services of $13.2 million, and increased costs of
corporate departments to support a larger organization, of $4.5 million, which
reflects increased salaries, commissions and related benefit costs, rent
expense, and various office expenses due to an increase in personnel to support
our growth and acquisitions. As a percentage of total revenue, selling general
and administrative expense increased to 53.5% in 2002 from 29.6% in 2001. The
increase as a percentage of total revenue was attributable to increased expense
to support our growth and acquisitions.
RESEARCH AND DEVELOPMENT
Research and development expense increased to $1.4 million for 2002,
from $0.5 million for 2001, primarily as a result of our continuing efforts to
develop new products and services. As a percentage of total revenue, research
and development expense was 2.5% for 2002 as compared to 1.1% for 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $3.5 million, or 246%,
to $4.9 million for 2002, from $1.4 million for 2001. This increase was
primarily attributable to the depreciation and amortization expense for our
recently acquired NYFIX Millennium and Javelin businesses, of $0.8 million, the
continued investment in our infrastructure, and to administrative support
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NYFIX, INC.
equipment and leasehold improvements to support our growth, of $1.1 million, and
amortization expense related to our acquired intangible assets in connection
with our recently acquired NYFIX Millennium and Javelin businesses, of $1.6
million. As a percentage of total revenue, depreciation and amortization expense
was 8.7% for 2002 as compared to 3.4% for 2001. The increase in percentage of
revenue was primarily attributable to the impact of the aforementioned costs.
INTEREST EXPENSE
Interest expense decreased $81,000, or 24% to $262,000 for 2002, from
$343,000 for 2001, principally as a result of decreased interest expense on
loans due to the payoff of our line of credit during July 2001 of $118,000 and
lower interest paid on capital lease obligations of $33,000. Slightly offsetting
these amounts was interest incurred in connection with late payments of certain
obligations, of $70,000.
INVESTMENT INCOME
Investment income decreased slightly to $0.7 million for 2002, from $0.8
million for 2001, principally due to the combination of lower average investment
balances coupled with lower yields on cash equivalents and short-term
investments in 2002 as compared to 2001.
OTHER EXPENSE
Other expense increased $607,000 to $621,000 for 2002, from $14,000 for
2001, principally as a result of losses recognized from our unconsolidated
affiliates of $474,000 for EuroLink and of $138,000 for Renaissance in 2002.
INCOME TAX
We recorded an income tax benefit of $3.8 million for 2002, compared to
a provision for income taxes of $5.4 million for 2001. The income tax benefit
was attributable to our pretax loss in 2002 and certain Federal and state
research and development tax credits, of $0.9 million, available for research
and development expenses incurred during 1999 to 2002. Our effective tax benefit
rate of 52% in the current year exceeds the Federal statutory benefit rate
primarily due to the effects of the aforementioned research and development tax
credits and state income taxes.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE
Total revenue increased $17.4 million, or 73%, to $41.4 million for
2001, from $24.0 million for 2000, primarily due to increased demand among
existing subscription customers, the addition of new customers, new product
offerings sold to existing and new customers and increased demand for capital
sales of our derivatives products, offset slightly by lower hardware sales.
Subscription revenue increased $13.0 million, or 81%, to $29.0 million
for 2001, from $16.0 million for 2000, primarily due to increased demand among
existing subscription customers, the addition of new customers and new product
offerings. As a percentage of total revenue, subscription revenue increased to
70.0% in 2001 from 66.5% in 2000, due to our continued effort to convert
customers to a subscription-based revenue model.
Sale revenue increased $3.0 million, or 60% to $8.1 million for 2001,
from $5.1 million for 2000. The increase in sale revenue was attributable to
increased customer demand for our OBMS product of $3.6 million, offset in part
by a decrease in hardware sales of $0.6 million. As a percentage of total
revenue, sales revenue decreased to 19.6% in 2001, from 21.2% in 2000, primarily
39
NYFIX, INC.
due to our efforts to convert customers to a subscription-based model and less
reliance on capital sales.
Service contract revenue increased $1.4 million, or 47%, to $4.3 million
for 2001, from $2.9 million in 2000, due primarily to an increase in
subscription revenue for our core products. As a percentage of total revenue,
service contract revenue was 10.4% in 2001, as compared to 12.3% in 2000. This
decrease was primarily due to subscription revenue increasing more than service
contract revenue. Telecommunication fees revenue, which is a component of
subscription revenue but not subject to service contracts, increased $2.0
million.
COST OF REVENUE
Total cost of revenue increased $5.3 million, or 59%, to $14.2 million
for 2001, from $8.9 million in 2000, due primarily to increased data center
costs, including telecommunication, maintenance and rental expenses due to more
desktop connections and increased capacity in our data centers, of $2.3 million,
increased depreciation expense attributable to increased subscription equipment
leased to our customers and increased investment in our data center equipment to
support our subscription revenue components, of $1.3 million, increased labor
costs of $1.1 million, to support our subscription and service contract revenue,
and increased amortization expense of product enhancement costs of $0.6 million,
due to continued efforts to maintain competitive products.
Subscription cost of revenue increased $4.4 million, or 59%, to $12.0
million for 2001, from $7.6 million for 2000, primarily due to increased data
center costs, including telecommunication, maintenance and rental expenses due
to more desktop connections and increased capacity in our data centers, of $1.8
million, increased depreciation expense attributable to increased subscription
equipment at our customers and increased investment in our data center equipment
to support our subscription revenue, of $1.3 million, increased labor costs, of
$0.9 million to support our subscription revenue, and increased amortization
expense of product enhancement costs due to continued efforts to maintain
competitive products, of $0.3 million. As a percentage of subscription revenue,
subscription cost of revenue decreased to 41.5% in 2001 from 47.4% in 2000,
primarily due to greater increases in subscription revenue than subscription
cost of revenue.
Sale cost of revenue increased $0.2 million, or 33% to $0.9 million for
2001, from $0.7 million for 2000. The increase in sale cost of revenue is
primarily due to increased amortization expense for product enhancement costs.
As a percentage of sale revenue, sale cost of revenue decreased to 11.0% in
2001, from 13.2% in 2000, primarily due to greater increases in sale revenue
than sale cost of revenue.
Service contract cost of revenue increased $0.5 million, or 84% to $1.2
million for 2001, from $0.7 million for 2000. The increase is primarily due to
increased labor costs to support our customers. As a percentage of service
contract revenue, service contract cost of revenue increased to 28.7% in 2001,
as compared to 23.0% in 2000.
GROSS PROFIT
Gross profit increased to 65.8% for 2001, from 62.9% for 2000. The
increase in gross profit is primarily attributable to more profitable software
installations as compared to equipment installations, offset in part by
increased communication charges relating to increased desktop connections,
higher labor costs due to increased data center costs and service contract
revenue, increased depreciation expense for subscription-based equipment due to
additional units being placed into service and higher amortization expense
related to product enhancement costs.
Subscription gross profit increased to 58.5% for 2001, from 52.6% for
2000. The increase in subscription gross profit is attributable to software
being a larger component of the installation as opposed to equipment, which had
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NYFIX, INC.
a higher gross profit, offset in part by increased communication charges
relating to increased desktop connections, higher labor costs due to increased
subscription contract revenue, increased depreciation expense for
subscription-based equipment due to additional units being placed into service
and increased purchases and leases of data center equipment and higher
amortization expense related to product enhancement costs.
Sale gross profit increased slightly to 89.0% for 2001, from 86.8% for
2000. The increase in sale gross profit is primarily attributable to the sale of
more profitable software, primarily our OBMS product.
Service contract gross profit decreased to 71.3% for 2001, from 77.0%
for 2000. The decrease in service contract gross profit is primarily
attributable to higher costs of labor to service our products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense increased $4.6 million, or
61% to $12.2 million for 2001, from $7.6 million for 2000. The increase was
primarily due to increased salaries and commissions, related personnel costs,
rent expense and various office expenses to support an increase in employees of
24% in 2001 from 2000 to support our growth. As a percentage of total revenue,
selling general and administrative expense decreased to 29.6% in 2001 from 31.6%
in 2000. The decrease as a percentage of total revenue was attributable to a
greater increase in revenue as compared to the increased expense to support our
growth and acquisitions.
RESEARCH AND DEVELOPMENT
Research and development expense of $0.5 million for 2001 was constant
with the $0.5 million for 2000. As a percentage of total revenue, research and
development expense was 1.1% for 2001 as compared to 1.9% for 2000 as revenue
increased for 2001 while research and development expense remained constant.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $0.8 million, or 149%,
to $1.4 million for 2001, from $0.6 million for 2000. This increase was
primarily attributable to additional investment in administrative support
equipment and leasehold improvements to support our growth. As a percentage of
total revenue, depreciation and amortization expense was 3.4% for 2001 as
compared to 2.4% for 2000. The increase in percentage of revenue was primarily
attributable to the impact of the aforementioned costs.
INTEREST EXPENSE
Interest expense of $0.3 million for 2001 was constant with the $0.3
million for 2000, as we had increased interest on capital lease obligations of
$0.1 million, offset by a decrease in loan interest expense of $0.1 million due
to the payoff of our line of credit during July 2001.
INVESTMENT INCOME
Investment income increased to $0.8 million for 2001, from $0.2 million
for 2000, principally due to the higher average investment balances as a result
of the proceeds from our offering of common stock in June 2001.
INCOME TAX
Our income tax provision increased to $5.4 million in 2001 as compared
to $0.6 million for 2000. The increase in our income tax provision was
attributable to an increase in our pretax income in 2001. Our effective tax
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NYFIX, INC.
provision rate of 40% in 2001 reflects the combined Federal statutory income tax
rate and state income taxes. The effective income tax provision rate of 9.6% for
2000 was lower than the Federal statutory tax rate as a result of the reversal
of valuation allowances as we believed that we would realize the benefit of
prior income tax net operating losses and other temporary differences, which
resulted in the previously established valuation allowance.
EVENTS OF SEPTEMBER 11TH
The events of September 11, 2001, did not have a material effect on our
financial position, results of operations, or cash flows. We believe that these
events did not affect our overall growth outlook. We credited the ongoing
investment in state-of-the-art redundant data centers and our NYFIX Network
infrastructure for our ability to maintain 100% effective operations across all
products and services throughout the month of September 2001. While our
employees worked around the clock to assist many clients in recovery testing,
and in some cases establishing temporary emergency operations, we opted not to
charge any customers one-time fees in connection with these efforts. We also did
not incur any significant incremental expense in connection with the events of
September 11, 2001.
Although the events of September 11, 2001 did not have a significant
effect on our results of operations, they did have an effect on NYFIX
Millennium, which we had a 50% ownership interest in, at that time. After
roll-out efforts were temporarily stalled by the tragic events of September
11th, NYFIX Millennium usage increased later in the fourth quarter of 2001,
bringing the system back to initial execution levels.
LIQUIDITY AND CAPITAL RESOURCES
In June 2001, we raised $57.3 million, net of expenses, from a follow-on
public offering of 3 million shares of our common stock. We used a portion of
the net proceeds for working capital requirements, to re-purchase 1.3 million
shares of our common stock, to continue to invest in our infrastructure and
products and, subsequently, to acquire Javelin in March of 2002 and invest in
EuroLink and Renaissance. At December 31, 2002, our cash, cash equivalents and
short-term investments totaled $21.9 million as compared to $33.9 million at
December 31, 2001. We had investments of $10.7 million in current marketable
security instruments, having interest rates ranging from 1.2% to 3.5%, $0.6
million in a tax-free money fund with an average 30 day yield of 0.55% and $6.3
million in money market funds with an average 30 day yield of 1.1%, at December
31, 2002.
At December 31, 2002, we had total debt of $1.8 million, which
represented current and long-term amounts outstanding under capital lease
obligations. At December 31, 2002, we had no material commitments for capital
expenditures or inventory purchases. Our long-term capital needs depend on
numerous factors, including the rate we obtain new clients and expand our staff
and infrastructure, as needed, to accommodate such growth, as well as the rate
at which we choose to invest in new technologies to modify our NYFIX Network and
infrastructure. We have ongoing needs for capital, including working capital for
operations and capital expenditures to maintain and expand our operations.
We believe that we can achieve synergies from our recently acquired
NYFIX Millennium and Javelin businesses. Although our NYFIX Millennium business
has incurred losses through its development and start-up stages, we believe that
revenue will continue to increase as we gain greater acceptance of our product
offerings. However, we expect NYFIX Millennium to possibly need additional
working capital during the first six to nine months of 2003, until it achieves
positive cash flow from operations. Our strategy is to migrate Javelin to more
of a subscription-based revenue model, similar to our core NYFIX USA business.
This may cause Javelin capital sale revenue to be unpredictable and
inconsistent. As such, this too, may unfavorably impact our working capital. In
addition, our unconsolidated affiliates, Renaissance and EuroLink, have required
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NYFIX, INC.
$3.1 million in funding from us in the past. We may be required to provide
additional funding to them, until they generate positive cash flow or obtain
other sources of capital. Such additional funding, if required, may unfavorably
impact our working capital.
We believe that our cash and investments of $21.9 million, together with
anticipated cash to be generated from operations will be sufficient to support
our capital and operating needs, including the operating needs of NYFIX
Millennium and Javelin for at least the next twelve months.
The following summarizes our contractual obligations under capital and
operating leases at December 31, 2002, and the effect such obligations are
expected to have on our liquidity and cash flows in future periods:
Capital Operating Total
------- ------- -------
Year ending December 31, (in thousands)
- -----------------------
2003 $ 1,161 $ 4,983 $ 6,144
2004 551 4,898 5,449
2005 136 2,224 2,360
2006 -- 786 786
2007 -- 820 820
Thereafter -- 2,030 2,030
------- ------- -------
Total minimum lease payments $ 1,848 $15,741 $17,589
======= ======= =======
WORKING CAPITAL
At December 31, 2002, we had working capital of $30.8 million as
compared to $47.5 million at December 31, 2001. Our present capital resources
include proceeds from internal operations. The decrease in working capital was
principally due to the cash used to acquire Javelin and invest in and provide
loans and working capital advances to our unconsolidated affiliates, EuroLink
and Renaissance.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in 2002 was $4.1 million, as
our net loss of $3.2 million, adjusted for non-cash items, such as depreciation,
amortization, deferred taxes, provision for bad debts, equity in loss of
unconsolidated affiliates and minority interest provided $7.4 million.
Unfavorable working capital changes offset by other changes, net of assets
acquired and liabilities assumed from our recently acquired NYFIX Millennium and
Javelin businesses, decreased cash by $3.3 million.
Net cash provided by operating activities in 2001 was $10.6 million, as
our net income of $8.1 million, adjusted for non-cash items, such as
depreciation, amortization, deferred taxes and provision for bad debts provided
$16.3 million. Unfavorable working capital offset by other changes decreased
cash by $5.7 million.
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
The 2002 cash provided by investing activities was $2.8 million. This
consisted primarily of net proceeds from the sales and purchases of short-term
investments of $22.4 million, offset by payments for our recently acquired NYFIX
Millennium and Javelin businesses, net of cash acquired, of $6.8 million,
investments in and net advances to unconsolidated affiliates of $5.4 million,
capital expenditures, mostly for data center equipment and software, of $4.6
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NYFIX, INC.
million and product enhancement costs of $2.8 million.
The 2001 cash used in investing activities was $48.1 million. This
consisted primarily of net purchases of short-term investments of $29.0 million
using the proceeds from our follow-on offering, loans and net advances to an
unconsolidated affiliate of $9.2 million, capital expenditures, mostly for data
center equipment and to support our infrastructure, of $7.1 million and product
enhancement costs of $2.7 million.
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
In 2002, our net cash used in financing activities totaled $0.7 million,
consisting primarily of principal payments under capital lease obligations of
$1.2 million, offset by net proceeds from the exercise of stock options by
employees of $0.5 million.
In 2001, our net cash provided by financing activities totaled $37.6
million, consisting primarily of $57.3 million raised in our follow on offering
and $2.2 million provided by net proceeds from the exercise of stock options by
employees, offset by purchases of treasury stock of $19.1 million, repayments of
borrowings under our credit facility of $2.0 million and principal payments
under capital lease obligations of $0.8 million.
SEASONALITY AND INFLATION
We believe that our operations have not been significantly affected by
seasonality or inflation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS, which
supercedes SFAS No. 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 Accounting Principles Board Opinion ("APB") No. 30, REPORTING THE
RESULTS OF OPERATIONS - 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 No. 144 retains
many of the provisions of SFAS No. 121, but addresses certain implementation
issues associated with that Statement. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. We adopted SFAS No. 144 effective
January 1, 2002. The adoption of SFAS No. 144 did not have a material effect on
our financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 eliminates extraordinary accounting treatment for
reporting gains or losses on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections. We adopted
SFAS No. 145 effective January 1, 2003. The adoption of SFAS No. 145 did not
have a material effect on our financial position, results of operations or cash
flows.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR EXIT OR
DISPOSAL ACTIVITIES. SFAS No. 146 requires recording costs associated with exit
or disposal activities at their fair values when a liability has been incurred.
Under previous guidance, certain exit costs were accrued upon management's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities initiated after December 31, 2002. We do not expect
that adoption of SFAS No. 146 will have a material effect on our financial
position, results of operations or cash flows.
In November 2002, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on No. 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE
DELIVERABLES. EITF No. 00-21 applies to certain contractually binding
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NYFIX, INC.
arrangements under which a company performs multiple revenue generating
activities and requires that all companies account for each element within an
arrangement with multiple deliverables as separate units of accounting if (a)
the delivered item has value on a stand-alone basis, (b) there is objective and
reliable evidence of fair value and (c) the amount of the total arrangement
consideration is fixed. EITF No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. We are evaluating
the provisions of EITF No. 00-21 and whether the implementation of this
statement will have a material effect on our financial position, results of
operations or cash flows.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45 disclosure requirements
are effective for the year ended December 31, 2002 and other provisions are
effective for 2003. The interpretation requires additional disclosure relating
to guarantees and in some cases requires the recognition of a liability for the
fair value of certain guarantees. The adoption of FIN 45 had no effect on us, as
we do not guarantee the liabilities of others.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE. SFAS No. 148 amends SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods
of transition for companies that voluntarily change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 and APB No. 28, INTERIM
FINANCIAL REPORTING, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and income per share
in annual and interim financial statements. The disclosure provisions of SFAS
No. 148 are effective for both interim and annual periods ending after December
15, 2002. We have adopted the disclosure provisions of SFAS No. 148 at December
31, 2002.
In January 2003, the FASB issued FIN 46, CONSOLIDATION OF VARIABLE
INTEREST ENTITIES, which requires the consolidation of certain entities
considered to be variable interest entities ("VIEs"). An entity is considered to
be a VIE when it has equity investors which lack the characteristics of a
controlling financial interest, or its capital is insufficient to permit it to
finance its activities without additional subordinated financial support.
Consolidation of a VIE by an investor is required when it is determined that the
investor will absorb a majority of the VIE's expected losses or residual returns
if they occur. FIN 46 provides certain exceptions to these rules, including
qualifying special purpose entities subject to the requirements of SFAS No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. VIEs created after January 31, 2003 must be consolidated
immediately, while VIEs that existed prior to February 1, 2003 must be
consolidated as of July 1, 2003. We are evaluating the provisions of FIN 46 and
whether the implementation of this statement, with regard to our unconsolidated
affiliates, will have a material effect on our financial position, results of
operations or cash flows.
FACTORS AFFECTING OPERATING RESULTS
SOME OF OUR RECENTLY-ACQUIRED SUBSIDIARIES HAVE NOT BEEN PROFITABLE AND
THEREFORE WE MAY NOT BE PROFITABLE IN THE FUTURE.
In December 2001, we acquired an inactive broker-dealer and renamed it
NYFIX Transaction Services, Inc. In May 2002, the NASD approved NYFIX
Transaction Services' membership application and it first started generating
revenues as of July 1, 2002. Through its first year of operations, NYFIX
Transaction Services had incurred a net loss of $0.8 million. Although we expect
NYFIX Transaction Services to start to generate positive cash flows during 2003,
we can provide no assurances of our success in doing such. Accordingly, NYFIX
Transaction Services may need us to provide the necessary capital to maintain
their minimum capital requirements, thus impacting our working capital.
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NYFIX, INC.
Effective as of February 1, 2002, we increased our ownership interest in
NYFIX Millennium from 50% to 80%. NYFIX Millennium was formed in September 1999
and since that time has been in the development and start-up stages and has
incurred aggregate net losses of $28.0 million through December 31, 2002.
Although we expect NYFIX Millennium to start to generate positive cash flows
towards the latter half of 2003, we can provide no assurances of our success in
doing such. Accordingly, NYFIX Millennium may need us to provide the necessary
capital to maintain their minimum capital requirements, thus impacting our
working capital.
Effective as of March 31, 2002, we acquired Javelin. Javelin incurred
net losses of $1.8 million, $6.7 million and $2.0 million for the years 2000 and
2001 and the three months ended March 31, 2002, respectively. Although Javelin
results are not reported separately, Javelin continued to incur operating losses
until the fourth quarter of 2002. We believe that our synergies with Javelin
will enhance our overall operating results. However, our strategy to apply our
subscription-based model to Javelin's products, where feasible, may not be
successful. Javelin's business is heavily concentrated towards capital sales,
which are very unpredictable and inconsistent. Transitioning Javelin to more of
a subscription-based model could have an adverse impact on our working capital.
A NUMBER OF OUR SUBSIDIARIES HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT
DIFFICULT TO EVALUATE THEIR PROSPECTS, SO THEIR FUTURE FINANCIAL PERFORMANCE MAY
DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK
PRICE.
NYFIX Millennium and Javelin were formed in September 1999 and November
1997, respectively. Also, we purchased NYFIX Transaction Services in December
2001. Because of their limited operating history, these entities have limited
financial data, which can be used to evaluate their businesses. Consideration
must be given to their prospects in light of the risks, expenses, delays,
problems and difficulties frequently encountered in the establishment of a new
business in an emerging and rapidly evolving industry. NYFIX Millennium, Javelin
and NYFIX Transaction Services may not be successful in their businesses, and
profitability may never be attained or sustained.
WE HAVE TWO UNCONSOLIDATED SUBSIDIARIES, WHICH MAY NEED ADDITIONAL FUNDING FROM
US, THUS HAVING AN ADVERSE IMPACT ON OUR LIQUIDITY.
We have provided funding to our unconsolidated affiliates, Renaissance
and EuroLink, in the past. In our balance sheet, at December 31, 2002, we have
amounts due and notes receivable from unconsolidated affiliates of $3.1 million.
We provided Renaissance an additional $1.0 million in the first quarter of 2003
in exchange for a secured promissory note. Renaissance may require additional
funds from us, until they generate positive cash flow or obtain other sources of
capital. We cannot provide assurance that additional interim funding, if
required, won't have an adverse impact on our liquidity.
A SIGNIFICANT POWER AND TELECOMMUNICATIONS FAILURE COULD CAUSE US TO LOSE
REVENUES AND CUSTOMERS AND SUBJECT US TO LIABILITY FOR CUSTOMER LOSSES.
Our services depend on our ability to store, retrieve, process and
manage significant databases and to electronically receive and process trade
orders. Our systems and data centers could fail due to power failures, caused by
a variety of factors, or outages, caused by high demand placed on the utility's
infrastructure. Due to the complexity of these electrical systems, errors or
failures could occur which render an entire site to be unusable.
We constantly monitor system loads and performances and as necessary
upgrade our systems to handle estimated increases in power consumption. However,
we may not be able to accurately predict future demand. To mitigate the impact
of power failures, we maintain critical data center facilities at two separate
locations in North Bergen, New Jersey and Carlstadt, New Jersey. Although these
data centers are serviced by the same utility, they are serviced via different
sub-stations. In the event of a power outage at any of our data centers, we
maintain uninterruptible power supplies ("UPS") to provide limited battery
backup for critical systems. We also maintain diesel-powered generators to
backup the UPSs.
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NYFIX, INC.
In the event of loss of power or telecommunications services at either
of these locations, we believe there are sufficient backup facilities in place
to give us the necessary time to access, or fail-over to, our redundant data
center. It is possible that multiple telecommunications vendors could be
impacted so severely that the multi-vendor and multi-site strategy would not
insure communications services to our clients.
Since it is fairly common for multiple carriers to share the same
physical infrastructure such as Central Offices (CO's), telephone poles and
below-ground conduit, instances like major cable cuts or regional natural
disasters could adversely impact our clients and us.
ANY INFILTRATION OF HARMFUL VIRUSES COULD CAUSE US TO LOSE REVENUES AND
CUSTOMERS AND SUBJECT US TO LIABILITY FOR CUSTOMER LOSSES.
We utilize multiple methods to combat viruses. The first method is to
prevent viruses from entering our NYFIX Network. This is done by placing rigid
restrictions on our NYFIX Network called access controls lists ("ACL"). ACLs are
used where clients or vendors connect to our NYFIX Network. A second method of
preventing viruses from entering our NYFIX Network is the use of firewalls. A
firewall typically guards an internal network against malicious access from the
outside; however, firewalls may also be configured to limit access to the
outside from internal users. In spite of the ACLs and firewalls, it may still be
possible for viruses to enter our NYFIX Network.
If a virus is still able to penetrate our NYFIX Network, we utilize
centrally managed anti-virus scanning software on servers and workstations. Our
anti-virus software actively scans servers and workstations on the network. In
spite of the active anti-virus scanning, it is possible for a virus to not be
detected.
As an additional method to combat viruses, we utilize intrusion
detection software ("IDS"). IDS servers and software are located at key points
around the network and monitor systems for malicious activity.
WE RELY ON MULTIPLE TELECOMMUNICATIONS CARRIERS FOR DATA DELIVERY. ANY
DISRUPTIONS TO THESE SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
We utilize frame relay network services from five major carriers: AT&T,
Qwest, Sprint, WorldCom and Verizon. Customers are given the choice of using one
or more network carriers to provide network services to their location. A
majority of NYFIX clients utilize a dual carrier solution.
The utilization of five major carriers has multiple benefits:
o Diversity of telecommunication infrastructure between the major
carriers
o A competitive environment to help insure aggressive pricing for
network services
o The ability to completely migrate circuits from one carrier to another
due to non-competitive pricing or a carrier no longer providing
adequate services.
In the event that a major carrier was to shut down their network with no
advance warning (e.g. WorldCom), it would take at least 45 days to replace the
circuits with another vendor. In the event of a move from one carrier to
another, we would incur substantial expenses related to the cost of utilizing
two carriers for the same period of time. We could also be impacted by
exclusivity agreements between carriers and connecting points on the network.
For example, WorldCom is the sole provider of network services for NASDAQ. In
the event WorldCom discontinued operations, we would incur costs transitioning
to a new NASDAQ network service provider.
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NYFIX, INC.
The approximate time necessary for the transfer of circuits from one
carrier to the other would be four to six weeks. During the transfer, we would
incur overlapping circuit charges for a minimum of thirty days. These charges
are due to a thirty day delay that begins when the original circuit is
disconnected, therefore, the minimum cost of moving business from one carrier to
another would be at least one months worth of charges from the original carrier.
WE FACE SUBSTANTIAL COMPETITION IN OUR INDIVIDUAL PRODUCT AREAS FROM COMPANIES
THAT HAVE LARGER AND GREATER FINANCIAL, TECHNICAL AND MARKETING CAPABILITIES,
WHICH COULD MAKE IT MORE DIFFICULT TO GAIN OR MAINTAIN MARKET SHARE AND MAY
HINDER OUR ABILITY TO COMPETE SUCCESSFULLY.
We operate in a highly competitive market and expect competition to
intensify in the future. Certain of our competitors, including the financial
exchanges, may have significantly greater financial, technical and marketing
resources and more extensive customer bases and extensive knowledge of the
industry.
Our industry is constantly evolving through technological and regulatory
change. Our competition varies widely and we encounter different categories of
competitors for each of our product and service offerings. We also face
competition from customers who choose to maintain their own infrastructure and
develop their own in-house proprietary order management software systems.
OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES AND GROW OUR BUSINESS COULD BE
SIGNIFICANTLY IMPAIRED IF WE LOSE THE SERVICES OF KEY PERSONNEL.
Our business is highly dependent on a number of key executive officers,
including Peter K. Hansen, our founder, Chief Executive Officer and President,
and Lars Kragh, our Chief Information Officer, who have been with us since our
inception in 1991. The loss of the services of any of our key personnel could
have a material adverse effect on our business and results of operations.
WE RELY, IN PART, ON OTHERS TO SUPPLY THE MATERIALS AND SUPPLIES, UNDERLYING
SOFTWARE AND SYSTEMS WE USE TO PROVIDE OUR SERVICES. IF WE ARE UNABLE TO OBTAIN
THIRD PARTY SUPPORT AND DELIVERY ON A TIMELY AND RELIABLE BASIS, OUR ABILITY TO
PERFORM SERVICES COULD BE HINDERED AND THE RELATIONSHIPS WE HAVE WITH OUR
CUSTOMERS COULD BE HARMED.
Our manufactured products are based on standard PC components readily
available in the consumer market place. All electronic, computer-related
components utilized within our products are not manufacturer or supplier
specific. We can substitute components from a diverse group of manufacturers
with no assembly or delivery delays to our customers.
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However, our manufactured products contain several custom parts specific
to our design. These parts are limited to sheet metal enclosures and internal
wiring. We own the designs for these components and can source them from
multiple vendors in our immediate area or throughout the U.S. Currently we
maintain relationships with a minimum of two alternate vendors for cabling and
sheet metal, either of which can deliver components within standard delivery
cycles. For both of these components we use vendors such as CTC, Advantage Sheet
Metal and Interface Technology. Although we maintain relationships with numerous
vendors for our manufactured products, if we are unable to obtain third party
delivery and support on a timely and reliable basis, our ability to provide our
product and services could be hindered.
We rely on a number of third parties to supply software and systems, as
well as equipment and related maintenance. Our systems are built using a number
of commonly used technologies. As an example, we use systems from EMC, Sun Micro
Systems, Oracle, Sybase, Veritas and Microsoft. Our products are subject to
potential defects in these third party components. Although we (as well as the
individual vendors) exercise strict testing and verification of systems and
software, defects can cause disruptions of customer service. We have invested in
various test systems to make sure supplier's components work as well as our
developed software.
Since we depend on third parties to supply us with underlying software
and systems on a reliable, timely basis, we maintain service and maintenance
agreements with all our main vendors. We have standard service agreements at
different levels, depending on how critical the vendor's system is to the
operation of our business. For most systems we have a high level of redundancy,
which gives us less time critical dependency on a particular vendor. We have
service and maintenance agreements with all above-mentioned vendors. Because of
the diversity in vendors, there is no dependence on a single vendor. However, if
we are unable to obtain third party support and delivery on a timely and
reliable basis, our ability to perform services could be hindered and the
relationships we have with our customers could be harmed.
OUR PRODUCTS MAY SUFFER FROM DEFECTS OR ERRORS, WHICH MAY HARM OUR REPUTATION OR
SUBJECT US TO PRODUCT LIABILITY CLAIMS.
The products we offer are inherently complex. Despite testing and
quality control, current versions, new versions or enhancements of our products
may contain errors. Any errors, slowdown or failure in our products may harm our
reputation or subject us to product liability claims. Significant technical
challenges also arise with our products because our customers purchase and
integrate them with a number of third party computer applications and software.
Such integration may not always be successful. Any defects or errors that are
discovered after commercial release could result in the loss of revenue or delay
in market acceptance of our products. Moreover, we could face higher development
costs if our products contain undetected errors, or if we fail to meet our
customers' expectations. Although we maintain general liability insurance
coverage, this coverage may not continue to be available on reasonable terms or
at all. In addition, a product liability claim, whether or not successful, could
harm our business by increasing our costs and distracting our management.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD
WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUES AND INCREASE OUR COSTS.
Our success and ability to compete are dependent to a significant degree
on our intellectual property rights, which includes our proprietary technology,
trade secrets and client base. However, no one patent, trademark or other form
of intellectual property rights is critical to our business.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Monitoring unauthorized use of our products is difficult and we
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NYFIX, INC.
cannot be certain that the steps we have taken will prevent unauthorized use of
our technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the U.S. If competitors are able to use
our technology, our ability to compete effectively could be harmed. Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the 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.
CONDUCTING BUSINESS IN INTERNATIONAL MARKETS SUBJECTS US TO ADDITIONAL RISKS.
For the years ended December 31, 2000, 2001 and 2002, approximately 11%,
15% and 5%, respectively, of our revenue was derived from our international
operations. Although we have recently relied less on international revenue, we
believe it will be an important component for our future success. Thus, we are
subject to risks inherent in doing business in international markets, including:
o difficulties in recruiting and retaining personnel and managing
international operations;
o a high degree of costs associated with servicing smaller national
markets; and
o fluctuations in currency exchange rates.
Any of the above could affect the profitability of our international
operations or hinder our ability to expand further internationally.
A DECLINE IN SUBSCRIPTION REVENUE, OUR LARGEST SOURCE OF REVENUE, OR TRANSACTION
REVENUE WOULD ADVERSELY AFFECT OUR PROFITABILITY.
Subscription revenue is our most significant source of revenue.
Subscription revenue is fixed based on a contractual period of time, typically
one to three years, and are not affected by trading volumes. However, trading
volumes do affect the revenues of our customers and this could affect their
future purchases of our technology and services. Pricing pressures due to
competition, failure to sign new agreements with customers because of reductions
in their new technology spending, and observed consolidation in the financial
sector could affect our revenues and profitability. Our costs associated with
supporting the subscription agreements are generally fixed and thus a loss of
revenue would impact profitability.
Transaction revenue has been a growing component of our revenue,
however, there is no assurance we can continue to grow transaction revenue. As
our costs to support transaction revenue are generally fixed, a decline in
revenue would directly impact our profitability. Several risk factors apply to
the analysis of the potential growth of transaction revenue.
There is significant competitive pressure brought on by a proliferation
of electronic execution competitors. There is the potential for changes in the
current U.S. Market Structure that may make it difficult for the transaction
business to compete with more traditional broker-dealer business models. For
example, the NYSE could establish limits on electronic access, or the NYSE could
create an electronic matching order engine of their own.
Customer demands for increased bandwidth and speed could place
significant stress on our infrastructure requiring continued reinvestment in
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hardware and software to keep pace with overall business growth. We have no
current plans to transition from the subscription or transaction-based revenue
model due to general acceptance of it in the marketplace and the current trend
of recurring, predictable revenue recognition and cash flows.
THE SECURITIES BROKERAGE INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
IF NYFIX MILLENNIUM OR NYFIX TRANSACTION SERVICES FAIL TO COMPLY WITH THESE
REGULATIONS, THEY MAY BE SUBJECT TO DISCIPLINARY OR OTHER ACTION BY REGULATORY
ORGANIZATIONS.
We are subject to extensive government regulation and may be subject to
disciplinary or other action by regulatory organizations if we fail to comply
with such regulation, which could increase our capital expenditures and decrease
our earnings.
NYFIX Millennium and NYFIX Transaction Services are subject to extensive
regulation under both federal and state laws. In addition to these laws, we must
comply with rules of the Securities and Exchange Commission (SEC), including
Regulation ATS for NYFIX Millennium, and The National Association of Securities
Dealers, Inc. (NASD), various stock exchanges, state securities commissions and
other regulatory bodies charged with safeguarding the integrity of the
securities markets and other financial markets and protecting the interests of
investors participating in these markets. As registered broker dealers, NYFIX
Millennium and NYFIX Transaction Services are subject to numerous regulations
covering the securities business, including:
o marketing practices;
o capital structure, including net capital requirements;
o record keeping; and
o conduct of directors, officers and employees.
Any failure to comply with these regulations could subject NYFIX
Millennium and NYFIX Transaction Services to censure, fines, the issuance of
cease-and-desist orders or the suspension, and/or disqualification of its
officers, directors or employees. The fines, if material, could have an adverse
effect on our earnings because it could greatly increase our capital
expenditures. If any of our employees were suspended or disqualified, we may be
unable to meet the needs of our clients or to solicit new business. This could
also have an adverse effect on our earnings. Furthermore, any such penalties
could materially harm our reputation in the industry, which could have a
long-term effect on our financial growth.
NYFIX MILLENNIUM'S AND NYFIX TRANSACTION SERVICES' COMPLIANCE AND RISK
MANAGEMENT METHODS MAY NOT BE EFFECTIVE.
NYFIX Millennium's and NYFIX Transaction Services' ability to comply
with regulations depends largely on the establishment and maintenance of an
effective compliance system, as well as their ability to attract and retain
qualified compliance personnel. NYFIX Millennium and NYFIX Transaction Services
could be subject to disciplinary or other actions due to claimed noncompliance
with regulations in the future. If a claim of noncompliance is made by a
regulatory authority, the efforts of the management of NYFIX Millennium and
NYFIX Transaction Services could be diverted to responding to such claim and
NYFIX Millennium and NYFIX Transaction Services could be subject to a range of
possible consequences, including the payment of fines, civil lawsuits and the
suspension of one or more portions of its business. In addition, their mode of
operation and profitability may be directly affected by:
o additional legislation;
o changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges
or other self-regulatory organizations; or
51
NYFIX, INC.
o changes in the interpretation or enforcement of existing laws and
rules.
In addition, NYFIX Millennium's status as a recognized ATS requires that
its trade execution and communication systems be able to handle anticipated
present and future peak trading volumes. If any of our systems become disabled,
the ability to process trades and handle peak trading volumes will be
compromised. The status of NYFIX Millennium as an SEC registered broker-dealer
and NASD member is conditioned, in part, on its ability to process and settle
trades.
TERRORIST THREATS AND ATTACKS AND THE IRAQI WAR HAVE CREATED SIGNIFICANT
INSTABILITY AND UNCERTAINTY IN THE FINANCIAL MARKETPLACE TO WHICH WE SELL AND
MAY CREATE A MORE VOLATILE ENVIRONMENT.
The terrorist attacks in the U.S. on September 11, 2001, the declaration
of war by the U.S. against terrorism and the current war in Iraq have created
significant instability and uncertainty in the financial marketplace, both in
the U.S. and globally. Such adverse political events may have a continued
negative impact on economic conditions in the financial marketplace and our
customers. The unfavorable conditions may have an adverse effect on our
financial operations including, but not limited to, our ability to expand the
market for our products, enter into strategic relationships and effectively
compete.
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. We do not use derivative financial
instruments for any purpose.
We are exposed to market risk principally through changes in interest
rates and equity prices. Our short-term investment portfolio of $10.7 million
and $29.0 million at December 31, 2002 and 2001, respectively, consisted of $6.8
million and $9.0 million, respectively, of auction rate certificates and $3.9
million and $20.0 million, respectively, of mutual fund securities. Risk is
limited on the auction rate certificates portfolio due to the fact that it is
invested in insured municipal bonds of which no more than 5% of our portfolio
can be invested in any one security issue. The potential decrease in fair value
resulting from a hypothetical 10% change in interest rates for the auction rate
certificates would not be material to income, cash flows or fair value.
The mutual fund securities portfolio was invested in a quoted fund that
is managed by an institution which primarily invests in investment grade
securities, with up to a maximum of 10% invested in high yield securities rated
B or higher. These securities are subject to equity price risk. The estimated
potential loss in fair value resulting from a hypothetical 10% decrease in the
quoted price is $0.4 million.
We are also subject to interest rate risk on our $2.0 million of notes
receivable from unconsolidated affiliates at December 31, 2002. A hypothetical
10% change in interest rates would not result in a material change in their fair
value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Financial Statements on Page F-1. NYFIX Millennium
financial statements for each of the years ended December 31, 2001 and
2000 immediately follow the Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
52
NYFIX, INC.
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 our Proxy Statement for the June 10, 2003 Annual
Meeting of Stockholders, to be filed with the SEC no later than April 30, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the Section entitled "Executive Compensation" in our Proxy
Statement for the June 10, 2003 Annual Meeting of Stockholders, to be filed with
the SEC no later than April 30, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by
reference to the Section entitled "Security Ownership" of our Proxy Statement
for the June 10, 2003 Annual Meeting of Stockholders, to be filed with the SEC
no later than April 30, 2003. Information regarding securities authorized for
issuance under our equity compensation plans is set forth in Part II, Item 5 of
this report.
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 our Proxy Statement for the June 10, 2003 Annual Meeting of
Stockholders, to be filed with the SEC no later than April 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-14(c). In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply our judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date we completed our evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
53
NYFIX, INC.
PART IV
ITEM 15. 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 F-1.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts - see
Note 17 in the Notes to Consolidated Financial Statements.
NYFIX Millennium, L.L.C. financial statements for the
year ended December 31, 2001 and NYFIX Millennium, L.L.C.
financial statements for the year ended December 31, 2000
immediately follow the Notes to Consolidated Financial
Statements.
All other supplemental schedules included audited
financial statements of NYFIX Millennium, L.L.C. for the years
ended December 31, 2001 and 2000. Other 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
the Registrant. Incorporated herein by
reference from Exhibit 3.1 to the
Registrant's Form S-3 filed June 1, 2001.
3.2 By-Laws of the Registrant. Incorporated
herein by reference from Exhibit 3.2 to the
Registrant's Form 10 filed March 5, 1993.
("Form 10")
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. Incorporated herein
by reference from Exhibit 2 to the
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.
Incorporated herein by reference from
Exhibit 3 to the Registrant's registration
statement on Form 8-A12B/A filed November 3,
1999.
10.1 Limited Liability Company Operating
Agreement of NYFIX Millennium, L.L.C.
Incorporated herein by reference from
Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1999.
10.2 Amendments to Operating Agreement of NYFIX
Millennium, L.L.C. as of November 1, 2000.
Incorporated herein by reference from
Exhibit 2.2 to the Registrant's Current
Report on Form 8-K/A filed April 17, 2002.
54
NYFIX, INC.
10.3 Agreement and Plan of Merger among the
Registrant, NYOlympus, Inc. and Javelin
Technologies, Inc., dated as of March 12,
2002. Incorporated herein by reference from
Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed April 15, 2002
("Javelin 8-K").
10.4 Amendment No. 1 to Agreement and Plan of
Merger among the Registrant, NYOlympus, Inc.
and Javelin Technologies, Inc., dated as of
March 20, 2002. Incorporated herein by
reference from Exhibit 2.2 of Javelin 8-K.
10.5 Amendment No. 2 to Agreement and Plan of
Merger among the Registrant, NYOlympus, Inc.
and Javelin Technologies, Inc., dated as of
March 26, 2002. Incorporated herein by
reference from Exhibit 2.3 of Javelin 8-K.
10.6 Employment Agreement between Peter K. Hansen
and the Registrant dated June 24, 1991.
Incorporated herein by reference from
Exhibit 3.2 of Form 10.
10.7 Amended and Restated 1991 Incentive Stock
Option Plan of NYFIX, Inc. Incorporated
herein by reference from Exhibit 10.3 to the
Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
10.8 Amendment No. 1 to Amended and Restated 1991
Incentive and Nonqualified Stock Option
Plan. Incorporated herein by reference from
Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 2000 ("2000 10-K").
10.9 Amendment No. 2 to Amended and Restated 1991
Incentive and Nonqualified Stock Option
Plan. Incorporated herein by reference from
Exhibit 10.5 to 2000 10-K.
10.10 NYFIX, Inc. 2001 Stock Option Plan.
Incorporated herein by reference from
Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended
June 30, 2001.
10.11 Amendment No. 1 to NYFIX, Inc. 2001 Stock
Option Plan.
10.12 Subordinated Loan Agreement for Equity
Capital, dated October 30, 2001, between the
Registrant and NYFIX Millennium, L.L.C.
Incorporated herein by reference from
Exhibit 10.1 to the Registrant's Form 8-K
filed February 14, 2002.
10.13 Purchase Agreement, dated as of October 2,
2002, between Edward Brandman, Daniel Ryan,
Ken DeGiglio and the Registrant.
10.14 Convertible Secured Promissory Note from
Renaissance Trading Technologies, LLC to the
Registrant, dated as of October 2, 2002, in
the principal amount of $1.5 million.
10.15 Amended and Restated Limited Liability
Company Operating Agreement of Renaissance
Trading Technologies, LLC.
10.16 Employment Agreement between Lars Kragh and
the Registrant dated January 1, 2003.
10.17 Employment Agreement between Mark R. Hahn
and the Registrant dated January 1, 2003.
10.18 Employment Agreement between Robert C.
Gasser and the Registrant dated September
21, 2001.
55
NYFIX, INC.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (see signature page)
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
See in Item 15(a)3.
(D) FINANCIAL STATEMENT SCHEDULES
See in Item 15(a)2.
56
NYFIX, INC.
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
31st day of March 2003 on our 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 Mark R. Hahn, 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 and President March 31, 2003
- -------------------------- (Principal Executive Officer)
Peter Kilbinger Hansen
/s/ Mark R. Hahn Chief Financial Officer and Secretary March 31, 2003
- -------------------------- (Principal Financial Officer and
Mark R. Hahn Principal Accounting Officer)
/s/ George O. Deehan Director March 31, 2003
- --------------------------
George O. Deehan
/s/ William J. Lynch Director March 31, 2003
- --------------------------
William J. Lynch
/s/ Carl E. Warden Director March 31, 2003
- --------------------------
Carl E. Warden
57
NYFIX, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
--------------
I, Peter K. Hansen, certify that:
1. I have reviewed this annual report on Form 10-K of NYFIX, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial position, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
our consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Peter K. Hansen
- -------------------------------------------
Peter K. Hansen
Chairman, President and
Chief Executive Officer
58
NYFIX, INC.
I, Mark R. Hahn, certify that:
1. I have reviewed this annual report on Form 10-K of NYFIX, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial position, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
our consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date");
and c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Mark R. Hahn
- -------------------------------------------
Mark R. Hahn
Chief Financial Officer
59
Index to Financial Statements
Page
Independent Auditors' Report................................................... F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 2002 and 2001................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000....................................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended
December 31, 2002, 2001 and 2000....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000....................................... F-6
Notes to Consolidated Financial Statements..................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of NYFIX, Inc.
We have audited the accompanying consolidated balance sheets of NYFIX,
Inc. at December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss), and cash flows
for each of the three years in the period ended December 31, 2002. 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. at December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
February 24, 2003
F-2
NYFIX, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31,
----------------------
2002 2001
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 11,213 $ 4,968
Short-term investments 10,727 28,974
Accounts receivable, less allowances of $1,207 and $511 16,601 12,949
Inventory, net 1,098 1,599
Due from unconsolidated affiliates 537 5,222
Deferred income taxes 590 443
Prepaid expenses and other 2,938 2,139
--------- ---------
Total current assets 43,704 56,294
Property and equipment, net 18,186 14,366
Goodwill 70,161 34
Acquired intangible assets, net 9,404 --
Investments in unconsolidated affiliates 5,510 27,500
Notes receivable from unconsolidated affiliates 1,519 6,043
Other amounts due from unconsolidated affiliates 1,002 --
Deferred income taxes 6,181 348
Other assets 5,150 3,987
--------- ---------
Total assets $ 160,817 $ 108,572
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,729 $ 3,848
Accrued expenses 5,360 3,530
Current portion of capital lease obligations 1,089 952
Deferred revenue 2,561 451
Other current liabilities 142 --
--------- ---------
Total current liabilities 12,881 8,781
Long-term portion of capital lease obligations 664 549
Other long-term liabilities 207 --
--------- ---------
Total liabilities 13,752 9,330
--------- ---------
Commitments and contingencies (See Notes)
Stockholders' equity:
Preferred stock, $1.00 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $0.001 par value; 60,000,000 shares authorized; 32 29
32,420,558 and 28,869,800 issued
Additional paid-in capital 161,347 110,498
Retained earnings 5,276 8,442
Treasury stock, 1,301,300 shares, at cost (19,100) (19,100)
Due from officers (597) (592)
Accumulated other comprehensive income (loss) 107 (35)
--------- ---------
Total stockholders' equity 147,065 99,242
--------- ---------
Total liabilities and stockholders' equity $ 160,817 $ 108,572
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
NYFIX, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
Revenue:
Subscription $ 31,715 $ 28,955 $ 15,955
Sale 8,517 8,123 5,089
Service contract 8,471 4,319 2,936
Transaction 7,109 -- --
-------- -------- --------
Total revenue 55,812 41,397 23,980
-------- -------- --------
Cost of Revenue:
Subscription 16,105 12,027 7,557
Sale 2,072 894 670
Service contract 1,918 1,239 675
Transaction 6,615 -- --
-------- -------- --------
Total cost of revenue 26,710 14,160 8,902
-------- -------- --------
Gross Profit:
Subscription 15,610 16,928 8,398
Sale 6,445 7,229 4,419
Service contract 6,553 3,080 2,261
Transaction 494 -- --
-------- -------- --------
Total gross profit 29,102 27,237 15,078
-------- -------- --------
Operating Expense:
Selling, general and administrative 29,884 12,239 7,584
Research and development 1,386 452 454
Depreciation and amortization 4,870 1,406 565
-------- -------- --------
Total operating expense 36,140 14,097 8,603
-------- -------- --------
(Loss) income from operations (7,038) 13,140 6,475
Interest expense (262) (343) (333)
Investment income 666 780 156
Other expense (621) (14) (20)
-------- -------- --------
(Loss) income before income tax (benefit) (7,255) 13,563 6,278
provision and minority interest
Income tax (benefit) provision (3,783) 5,427 601
-------- -------- --------
(Loss) income before minority interest (3,472) 8,136 5,677
Minority interest in NYFIX Millennium, net of tax of $195 306 -- --
-------- -------- --------
Net (loss) income $ (3,166) $ 8,136 $ 5,677
======== ======== ========
Basic (loss) income per common share $ (0.11) $ 0.30 $ 0.23
======== ======== ========
Basic weighted average common shares outstanding 30,126 26,784 24,480
======== ======== ========
Diluted (loss) income per common share $ (0.11) $ 0.29 $ 0.21
======== ======== ========
Diluted weighted average common shares outstanding 30,126 28,542 26,425
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
NYFIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amounts)
Retained
Common stock issued earnings
-------------------------------- Additional (accumulated
Shares Par value paid-in capital deficit)
---------- ---------- --------------- ------------
Balance January 1, 2000 23,854,837 $ 24 $ 35,863 $ (5,371)
Net income and
comprehensive income - - - 5,677
Payment for fractional shares - - (4) -
Exercise of stock options and warrants 1,254,713 1 3,988 -
Issuance of warrants - - 76 -
Advances to officers, net - - - -
Tax benefit from exercise of
stock options - - 2,635 -
---------- ------- --------------- ------------
Balance December 31, 2000 25,109,550 25 42,558 306
Comprehensive income:
Net income - - - 8,136
Net unrealized loss on
available-for-sale securities - - - -
Total comprehensive income
Exercise of stock options 384,250 - 2,223 -
Issuance of common stock 3,376,000 4 65,261 -
Issuance of warrants - 44 -
Payments from officers, net - - - -
Purchase of treasury stock
(1,301,300 shares) - - - -
Tax benefit from exercise of
stock options - - 412 -
---------- ------- --------------- ------------
Balance December 31, 2001 28,869,800 29 110,498 8,442
Comprehensive loss:
Net loss - - - (3,166)
Net unrealized gain on
available-for-sale securities - - - -
Total comprehensive loss
Exercise of stock options 169,612 - 477 -
Issuance of common stock 3,381,146 3 50,272 -
Advances to officers, net - - - -
Tax benefit from exercise of
stock options - - 100 -
---------- ------- --------------- ------------
Balance December 31, 2002 32,420,558 $ 32 $ 161,347 $ 5,276
========== ======= =============== ============
Accumulated other Total
Treasury Due from comprehensive stockholders'
stock officers income (loss) equity
--------- ------- ---------------- ----------
Balance January 1, 2000 $ - $ (632) $ - $ 29,884
Net income and
comprehensive income - - - 5,677
Payment for fractional shares - - - (4)
Exercise of stock options and warrants - - - 3,989
Issuance of warrants - - - 76
Advances to officers, net - (30) - (30)
Tax benefit from exercise of
stock options - - - 2,635
--------- ------- ---------------- ----------
Balance December 31, 2000 - (662) - 42,227
Comprehensive income:
Net income - - - 8,136
Net unrealized loss on
available-for-sale securities - - (35) (35)
----------
Total comprehensive income 8,101
----------
Exercise of stock options - - - 2,223
Issuance of common stock - - 65,265
Issuance of warrants - - - 44
Payments from officers, net - 70 - 70
Purchase of treasury stock
(1,301,300 shares) (19,100) - - (19,100)
Tax benefit from exercise of
stock options - - - 412
--------- ------- ---------------- ----------
Balance December 31, 2001 (19,100) (592) (35) 99,242
Comprehensive loss: -
Net loss - - - (3,166)
Net unrealized gain on
available-for-sale securities - - 142 142
----------
Total comprehensive loss (3,024)
----------
Exercise of stock options - - - 477
Issuance of common stock - - - 50,275
Advances to officers, net - (5) - (5)
Tax benefit from exercise of
stock options - - - 100
--------- ------- ---------------- ----------
Balance December 31, 2002 $ (19,100) $ (597) $ 107 $ 147,065
========= ======= ================ ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
NYFIX, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net (loss) income $ (3,166) $ 8,136 $ 5,677
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 11,661 6,465 3,697
Deferred income taxes (2,540) 1,473 (585)
Provision for bad debts 1,146 233 416
Equity in loss of unconsolidated affiliates 612 -- --
Minority interest in NYFIX Millennium (306) -- --
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable (703) (1,124) (5,385)
Inventory 501 143 (439)
Prepaid expenses and other (892) (1,292) (212)
Deferred revenue (598) (5,696) 2,969
Accounts payable, accrued expenses and other (1,567) 2,286 3,220
liabilities
Other, net (13) (1) 48
-------- -------- --------
Net cash provided by operating activities 4,135 10,623 9,406
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (10,631) (91,183) --
Proceeds from sales of short-term investments 32,992 62,150 --
Capital expenditures for property and equipment (4,566) (7,121) (6,084)
Capitalization of product enhancement costs and other (2,829) (2,744) (2,180)
Proceeds from sale of equipment 387 -- --
Payments for acquisitions, net of cash acquired (6,795) -- --
Investments in unconsolidated affiiliates (5,000) -- --
Loans and advances to unconsolidated affiiliates, net of (362) (9,237) (1,123)
repayments
(Advances to) payments from officers (371) 72 (4)
-------- -------- --------
Net cash provided by (used in) investing activities 2,825 (48,063) (9,391)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (1,192) (846) (200)
Repayment of borrowings -- (2,000) (500)
Purchases of treasury stock -- (19,100) --
Net proceeds from issuance of common stock 477 59,487 3,986
-------- -------- --------
Net cash (used in) provided by financing activities (715) 37,541 3,286
-------- -------- --------
Net increase in cash and cash equivalents 6,245 101 3,301
Cash and cash equivalents, beginning of year 4,968 4,867 1,566
-------- -------- --------
Cash and cash equivalents, end of year $ 11,213 $ 4,968 $ 4,867
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
NYFIX, Inc., (together with its subsidiaries, the "Company"), founded in
1991, provides electronic trading technology infrastructure and execution
services to the professional trading segment of the brokerage industry. The
Company's products and services automate institutional trading workflows by
streamlining data entry and seamlessly integrate electronic order and execution
handling. The Company offers a complete electronic desktop order management
solution, stationary and wireless handheld exchange floor technology, and a high
volume trade execution platform. The Company's products deliver straight through
processing for front, middle and back office trade information handling. The
Company delivers our products mainly as a service bureau offering and maintains
an extensive data center with a network of electronic circuits that link
industry participants together and provide access to the domestic and
international equities and derivatives markets. Headquartered in Stamford,
Connecticut, the Company has additional offices in New York City, London,
Chicago and San Francisco.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of NYFIX, Inc. and its majority-owned and wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Prior to February 1, 2002, the Company's 50% ownership in NYFIX
Millennium, L.L.C. ("NYFIX Millennium") was accounted for under the equity
method. The Company's ownership of EuroLink Network, Inc. ("EuroLink") and
Renaissance Trading Technologies, LLC ("Renaissance") was accounted for by the
equity method, since the Company has the ability to exercise significant
influence over the operating and financial policies of those companies.
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 affects the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the dates of the consolidated financial statements and the reported amounts
of revenue and expense during the reporting periods in the consolidated
financial statements and accompanying notes. The estimates include the
collectibility of accounts receivable, the use and recoverability of inventory,
the useful lives of tangible and intangible assets and the realization of
deferred tax assets, among others. The markets for the Company's products are
characterized by intense competition, rapid technological development and
pricing pressures, all of which could affect the future realizability of the
Company's assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary. Actual results could differ from
those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform to the current year's presentation.
In connection therewith, the Company reclassified certain operating expenses to
cost of revenue, during the years ended December 31, 2001 and 2000.
F-7
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
REVENUE RECOGNITION
The Company's revenue is comprised of subscription, sale, service
contract, and transaction components.
Subscription revenue contracts are generally for leasing of the
Company's equipment and use of its NYFIX Network, with an initial term of one to
three years with automatic renewal periods unless the Company receives prior
notice of cancellation. Under the terms of the subscription contracts, customers
are typically invoiced a flat periodic charge after initial installation and
acceptance. Revenue related to these contracts is recognized over the initial
term of the contract on a straight-line basis. The Company also includes within
its subscription revenue, telecommunication and other charges, which the Company
provides to the customer at cost plus a normal profit. Such revenue is
recognized as the services are provided. As the Company has no history of
significant cancellations, the Company does not record a reserve for
cancellations.
Sale revenue, which is comprised of software and capital equipment
sales, is recognized when the software and equipment have been shipped and
accepted by the customer and when other contractual obligations, including
installation if applicable, have been satisfied and collection of the resulting
receivable is reasonably assured. As the Company has no history of significant
sales returns, the Company does not record a reserve for sales returns and
allowances.
Service contract revenue, which is comprised of maintenance contracts
for subscription equipment and software and capital equipment, is recognized
over the contract period on a straight-line basis. Service contracts for
subscription equipment are generally co-terminus with the subscription contract.
Service contracts for software and capital equipment are generally for an
initial term of one year with automatic renewal periods unless the Company
receives prior notice of cancellation.
Transaction revenue contracts provide for transaction or execution
services, which are comprised of a usage or transaction-based fee for trades
executed through the Company's broker-dealer operations. Revenue on contracts is
generally invoiced in arrears and recognized in the period in which it is
earned. The Company periodically enters into contracts, which include
subscription equipment and telecommunication charges to be invoiced at a minimum
transaction-based fee. The Company accounts for these contracts as both
subscription revenue, for its minimal fee, and transaction revenue, for the
amount earned in excess of its minimal fee. The Company values the minimal fee
as the fair value of similar subscription equipment leased and telecommunication
charges provided to similar customers.
Certain subscription and service contract agreements provide for
invoicing in advance of the service being performed, generally quarterly.
Revenue on contracts invoiced in advance is deferred and recognized as revenue
over the period earned and is included in "deferred revenue" in the accompanying
consolidated balance sheets. Shipping, handling and installation charges, if
any, are generally invoiced to a customer and are included in revenue upon
completion of the installation.
The Company periodically enters into arrangements that include multiple
deliverables, which typically consist of the sale of software and capital
equipment with additional services, such as installation, training and service
among others. Services provided subsequent to initial delivery and installations
are typically invoiced separately. The Company accounts for each element of an
arrangement with multiple deliverables separately. The arrangement consideration
is allocated to each element based on the relative fair values of each element.
Vendor specific objective evidence for fair value of services is primarily
determined by reference to renewal pricing.
F-8
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
COST AND EXPENSE
Inbound freight charges are included in inventory. When the inventory is
sold, the cost of inventory, including the inbound freight charges, is relieved
and charged to cost of revenue. When the inventory is leased on a subscription
basis, the cost of inventory, including the inbound freight charges, is relieved
and transferred to a subscription and service bureau equipment account included
within "property and equipment, net" in the accompanying consolidated balance
sheets. The cost of the leased subscription and service bureau equipment is then
depreciated over the estimated useful life of the equipment. The depreciation
expense related to this equipment is included in cost of subscription revenue in
the accompanying consolidated statements of operations.
The Company operates data centers where it maintains equipment and
infrastructure to support its operations. Telecommunication and other costs
incurred on behalf of its customers and costs to maintain the data centers,
including depreciation and amortization of assets utilized by the data centers,
are recognized as either a cost of subscription or cost of transaction revenue,
as appropriate.
Research and development costs are expensed as incurred. These costs
consist primarily of salaries and related costs for technical and programming
personnel. Research and development expense was $1.4 million, $0.5 million, and
$0.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company expenses advertising costs as incurred. Advertising expense
was $1.0 million, $0.2 million, and $0.2 million for the years ended December
31, 2002, 2001 and 2000, respectively.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents. The short-term investments consist
of auction rate certificates and mutual funds. Such investments are stated at
fair value as determined by the most recently traded price of each security at
the balance sheet date. The Company's short-term investments are classified as
available-for-sale securities under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES.
Management determines the appropriate classification of its investments
in debt and equity 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 other comprehensive income (loss) and as a separate component of
stockholders' equity. Sales of securities are recorded by the specific
identification method.
The cost basis of short-term investments at December 31, 2002 and 2001
was $10.5 million and $29.0 million, respectively.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that the Company believes are
uncollectible. The Company's estimate of its allowance for doubtful accounts is
based on collection experience, which includes analyzing prior accounts
receivable written-off and reviewing the aging of the accounts receivable. The
Company's allowance for doubtful accounts includes amounts for specific accounts
that are believed to be uncollectible, as well as amounts that have been
computed by applying certain percentages based on historical loss trends, to
certain accounts receivable aging categories, net of accounts receivable for
F-9
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
which revenue recognition has been deferred.
BUSINESS CONCENTRATIONS AND CREDIT RISK
The Company's revenue is derived from the financial services
marketplace, primarily the brokerage community. As of and for the year ended
December 31, 2002, one customer accounted for 11% of accounts receivable, but no
customer accounted for more than 10% of revenue. As of and for the year ended
December 31, 2001, one customer accounted for 12% of revenue and 16% of accounts
receivable another customer accounted for 10% of revenue, and a third customer
accounted for 15% of accounts receivable. As of and for the year ended December
31, 2000, no customer accounted for more than 10% of revenue or more than 10% of
accounts receivable.
INVENTORY VALUATION
Inventory consists of parts, finished goods and materials and is stated
at the lower of cost, determined on an average cost basis, or market.
Provisions, when required, are made to reduce excess and obsolete inventories to
the estimated net realizable values. Inventory provisions are calculated using
management's best estimate of inventory value based on the age of the inventory,
quantities on hand compared with historical and projected usage and current and
anticipated demand.
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
Company's NYFIX Network to support its subscription and service based
businesses.
BUSINESS COMBINATIONS AND GOODWILL
Business combinations are accounted for under the purchase method of
accounting and include the results of operations of the acquired businesses from
the dates of their respective acquisition. Net assets of acquired businesses are
recorded at their fair value at the date of acquisition. Goodwill represents
acquisition costs in excess of the fair value of net assets acquired. The
Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective
January 1, 2002, which requires that goodwill and certain other intangible
assets having indefinite lives not be amortized to income, but instead be tested
for impairment annually as well as on an interim basis if events or changes in
circumstances indicate that goodwill might be impaired. Effective October 1,
2002, the Company performed its annual test for impairment using the discounted
cash flow valuation method. There was no impairment to the value of the
Company's recorded goodwill.
CAPITALIZED PRODUCT ENHANCEMENT COSTS
The Company capitalizes certain costs of internally developed software
as product enhancement costs. Internally capitalized costs consist of payroll
and payroll related costs, purchased materials and services and software to be
used within the Company's products. The Company defers those costs that
significantly enhance the marketability or significantly extend the life of the
Company's products. Management is required to use professional judgment in
determining whether product enhancement 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 amortized using the straight-line method over three years.
F-10
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
LONG-LIVED ASSETS
The Company reviews the carrying value of long-lived assets, including
property and equipment, intangible assets, investments and other long-term
amounts due from unconsolidated affiliates and capitalized product enhancement
costs for impairment whenever events or circumstances indicate that the carrying
amount may not be fully recoverable. If such an event or circumstances occurs,
the related estimated fair value of the assets would be compared to the carrying
amount, and if needed, the Company would record an impairment to the extent by
which the carrying amount exceeds the fair value of the asset. There was no
impairment of long-lived assets recorded for the years ended December 31, 2002,
2001 and 2000.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the estimated future tax consequences of differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using presently enacted
tax rates in effect for the periods the temporary differences are expected to be
settled. A valuation allowance is established, as needed, to reduce net deferred
tax assets to their realizable value. A valuation allowance has not been
established for the Company's deferred tax assets, as the Company believes it is
more likely than not that they will be realized.
FINANCIAL INSTRUMENTS
The carrying value for all current assets and current liabilities
approximates fair value because of their short-term nature.
FOREIGN CURRENCY TRANSLATION
The Company's functional currency is the U.S. dollar. Accordingly, the
monetary assets and liabilities of the London operation are translated at
year-end exchange rates while non-monetary assets and liabilities are translated
at historical rates. Revenue and expense 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.
COMPREHENSIVE INCOME (LOSS)
The Company reflects other comprehensive income (loss), which consists
of unrealized gains and losses on available-for-sale securities, as a separate
component of stockholders' equity as required by SFAS No. 130, REPORTING
COMPREHENSIVE INCOME.
STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for its stock-based employee compensation plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
interpretations. The Company does not recognize stock-based compensation expense
in its reported results as all stock options granted had an exercise price equal
to the fair value of the underlying common stock on the date of grant. The
following table illustrates the effect on net (loss) income and (loss) income
per share if the Company had applied the fair value recognition provisions of
F-11
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SFAS No. 123, as required by SFAS No. 148, to stock-based employee compensation
(also see Note 15):
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
---------------------------------------------------
(in thousands, except per share amounts)
Net (loss) income, as reported $ (3,166) $ 8,136 $ 5,677
Compensation expense based on the fair value
method, net of tax (4,553) (7,948) (7,327)
--------- --------- ---------
Pro forma net (loss) income $ (7,719) $ 188 $ (1,650)
========= ========= =========
Basic (loss) income per common share:
As reported $ (0.11) $ 0.30 $ 0.23
========= ========= =========
Pro forma $ (0.26) $ 0.01 $ (0.07)
========= ========= =========
Diluted (loss) income per common share:
As reported $ (0.11) $ 0.29 $ 0.21
========= ========= =========
Pro forma $ (0.26) $ 0.01 $ (0.07)
========= ========= =========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, which supercedes SFAS No. 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
OPERATIONS - 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 No. 144 retains many of the
provisions of SFAS No. 121, but addresses certain implementation issues
associated with that Statement. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 effective
January 1, 2002. The adoption of SFAS No. 144 did not have a material effect on
the Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS. SFAS No. 145 eliminates extraordinary accounting treatment for
reporting gains or losses on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections. The Company
adopted SFAS No. 145 effective January 1, 2003. The adoption of SFAS No. 145 did
not have a material effect on the Company's financial position, results of
operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR EXIT OR
DISPOSAL ACTIVITIES. SFAS No. 146 requires recording costs associated with exit
or disposal activities at their fair values when a liability has been incurred.
Under previous guidance, certain exit costs were accrued upon management's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit
or disposal activities initiated after December 31, 2002. The Company does not
expect that adoption of SFAS No. 146 will have a material effect on its financial
position, results of operations or cash flows.
F-12
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In November 2002, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on No. 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE
DELIVERABLES. EITF No. 00-21 applies to certain contractually binding
arrangements under which a company performs multiple revenue generating
activities and requires that all companies account for each element within an
arrangement with multiple deliverables as separate units of accounting if (a)
the delivered item has value on a stand-alone basis, (b) there is objective and
reliable evidence of fair value and (c) the amount of the total arrangement
consideration is fixed. EITF No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company is
evaluating the provisions of EITF No. 00-21 and whether the implementation of
this statement will have a material effect on the Company's financial position,
results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN 45 disclosure requirements
are effective for the year ended December 31, 2002 and other provisions are
effective for 2003. The interpretation requires additional disclosure relating
to guarantees and in some cases requires the recognition of a liability for the
fair value of certain guarantees. The adoption of FIN 45 had no effect on the
Company, as it does not guarantee the liabilities of others.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE. SFAS No. 148 amends SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods
of transition for companies that voluntarily change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 and APB No. 28, INTERIM
FINANCIAL REPORTING, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and income per share
in annual and interim financial statements. The disclosure provisions of SFAS
No. 148 are effective for both interim and annual periods ending after December
15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148 at
December 31, 2002.
In January 2003, the FASB issued FIN 46, CONSOLIDATION OF VARIABLE
INTEREST ENTITIES, which requires the consolidation of certain entities
considered to be variable interest entities ("VIEs"). An entity is considered to
be a VIE when it has equity investors which lack the characteristics of a
controlling financial interest, or its capital is insufficient to permit it to
finance its activities without additional subordinated financial support.
Consolidation of a VIE by an investor is required when it is determined that the
investor will absorb a majority of the VIE's expected losses or residual returns
if they occur. FIN 46 provides certain exceptions to these rules, including
qualifying special purpose entities subject to the requirements of SFAS No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. VIEs created after January 31, 2003 must be consolidated
immediately, while VIEs that existed prior to February 1, 2003 must be
consolidated as of July 1, 2003. The Company is evaluating the provisions of FIN
46 and whether the implementation of this statement, with regard to the
Company's unconsolidated affiliates, will have a material effect on the
Company's financial position, results of operations or cash flows.
2. INVENTORY
Inventory consisted of the following:
F-13
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31,
---------------------
2002 2001
------ ------
(in thousands)
Parts and materials $ 912 $1,120
Work in process 52 152
Finished goods 294 409
------ ------
Total inventory, gross $1,258 $1,681
Less: Allowance for obsolescence 160 82
------ ------
Total inventory, net $1,098 $1,599
====== ======
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
-----------------
2002 2001 Useful Lives
------- ------- ------------
(in thousands)
Computer software $ 4,042 $ 1,124 4 - 5 years
Leasehold improvements 1,943 1,312 2 - 8 years
Furniture and equipment 5,757 3,253 3 - 7 years
Subscription and data center equipment 22,868 18,428 3 - 5 years
------- -------
Total property and equipment, gross 34,610 24,117
Less: Accumulated depreciation 16,424 9,751
------- -------
Total property and equipment, net $18,186 $14,366
======= =======
Assets held under capital leases, included in above, consisted of the
following:
December 31,
--------------
2002 2001 Useful Lives
------ ------ ------------
(in thousands)
Furniture and equipment $ 115 $ -- 3 - 5 years
Data center equipment 2,969 2,547 3 - 5 years
------ ------
Total property and equipment held under
capital leases, gross 3,084 2,547
Less: Accumulated depreciation 1,018 629
------ ------
Total property and equipment held under
capital leases, net $2,066 $1,918
====== ======
Depreciation and amortization expense for property and equipment was
$7.7 million, $4.7 million and $2.5 million for the years ended December 31,
2002, 2001 and 2000, respectively. Of these amounts, $4.4 million, $3.3 million
and $2.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively, were included in cost of revenue. Amortization expense for assets
held under capital leases included above was $1.2 million, $0.5 million and $0.1
million for the years ended December 31, 2002, 2001 and 2000, respectively.
F-14
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. ACQUISITIONS, GOODWILL AND ACQUIRED INTANGIBLE ASSETS
ACQUISITIONS
NYFIX MILLENNIUM
NYFIX Millennium, a broker-dealer, developed an ATS, which is an
electronic system that matches buyers and sellers in a completely anonymous
environment. The system aims to provide high quality execution for clients
through computerized matching technologies. NYFIX Millennium offers 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.
In September 1999, NYFIX Millennium was formed as a limited liability
company, by the Company and seven international investment banks and brokerage
firms, consisting of Deutsche Bank, ABN Amro Securities (formerly ING Barings),
Lehman Brothers, Morgan Stanley Dean Witter Equity Investments Ltd., Alliance
Capital Management (formerly Sanford C. Bernstein & Co.), Societe Generale
Investment Corporation (formerly SG Cowen) and UBS Warburg (the "Initial
Partners"). Each of the Initial Partners invested $2.0 million in NYFIX
Millennium in exchange for 25,000 units of NYFIX Millennium, collectively owning
a 50% membership interest in NYFIX Millennium. The Company invested $2.0 million
and owned 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. The Option allowed the Company to
increase its membership interest in NYFIX Millennium up to 80% of the total
membership interest through the exchange of one share of its common stock for
each unit of NYFIX Millennium purchased, subject to certain adjustments.
In March 2001, NYFIX Millennium added four more partners, consisting of
Bank of America, Wachovia Securities (formerly First Union Securities) and
LabMorgan Corporation (formerly J.P. Morgan & Co. and Chase H&Q) (the "New
Partners"). Pursuant to the terms of the NYFIX Millennium Operating Agreement,
each New Partner invested $2.0 million in NYFIX Millennium in exchange for
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 4% of the 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.
At December 31, 2001, the Company's investment in NYFIX Millennium of
$27.5 million consisted of $25.5 million of shares of its common stock
(1,968,750 shares in 1999 of the Company's common stock at $8.89 per share and
376,000 shares in March and April 2001 of the Company's common stock at $21.28
per share) and the Company's capital cash contribution of $2.0 million. The
Company's funded certain operating costs and capital expenditures on behalf of
NYFIX Millennium. Such advances of $5.2 million were reflected as "due from
unconsolidated affiliates" on the accompanying consolidated balance sheet at
December 31, 2001. In addition, the Company loaned to NYFIX Millennium an
aggregate of $11.0 million, plus accrued interest, of which $5.0 million was
loaned in 2002. The $6.0 million loaned in 2001, plus accrued interest, is
reflected in "notes receivable from unconsolidated affiliates" on the
accompanying consolidated balance sheet at December 31, 2001.
F-15
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On January 23, 2002, the Company notified the Initial Partners and New
Partners that the Company would exercise its Option, effective February 1, 2002.
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 the Company's common stock with a fair value of $4.5 million, 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
increased its ownership of NYFIX Millennium to 80%. The results of operations of
NYFIX Millennium have been included in the accompanying 2002 consolidated
statement of operations since the acquisition date. All advances and loans,
including accrued interest, have been eliminated in consolidation commencing on
February 1, 2002. The excess of the purchase price over the fair value of the
net assets acquired was $27.8 million and has been recorded as goodwill. Some of
the Company's key considerations for the acquisition of NYFIX Millennium
included NYFIX Millennium's growth in revenue, the attractiveness of the
synergies we anticipated with the Company's recently-acquired NYFIX Transaction
Services broker-dealer, and the Company's ability to exercise significant
control over NYFIX Millennium's operations.
Pursuant to the NYFIX Millennium Operating Agreement, as amended, the
first $22.0 million in NYFIX Millennium operating losses since inception was
allocated to the Initial Partners and New Partners, which equaled the extent of
their capital contribution to NYFIX Millennium. The minority interest in NYFIX
Millennium disclosed on the accompanying consolidated statement of operations
for the year ended December 31, 2002 reflects the allocation of NYFIX Millennium
losses to the Initial Partners and New Partners post acquisition to the extent
of their capital contribution, thereby reducing their minority interest to zero.
In addition, the Company has recognized NYFIX Millennium operating losses of
$6.0 million for the year ended December 31, 2002, which were $4.0 million
greater than the Company's capital contribution of $2.0 million. While the
Company expects NYFIX Millennium to be profitable in the future, there can be no
assurances of such profitability. As a result, the Company has not allocated to
the Initial Partners and New Partners their pro rata share of NYFIX Millennium
losses in excess of the Company's capital contribution, aggregating $1.0
million, at December 31, 2002, since the Company cannot assure recoverability of
the asset that such an allocation would create. At such time when NYFIX
Millennium achieves profitability, 24% of its profits, net of the Company's
recovering its over-allocated losses, will be allocated to the Initial Partners
and New Partners.
JAVELIN
Javelin Technologies, Inc. ("Javelin") is a provider of electronic trade
communication technology and FIX protocol technology. The FIX protocol is the
messaging standard underlying language, which was developed to enable real-time
electronic trading and communications. In utilizing the FIX protocol technology,
companies can eliminate the high costs and associated risks of developing their
own proprietary network links and implementing a non-standard protocol.
On March 31, 2002, the Company acquired 100% of the capital stock of
Javelin. Some of the Company's key considerations for the acquisition of Javelin
include: increased connectivity to the buy-side institutional market,
F-16
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 Company financed the transaction with a combination of (i) $10.0
million in net cash; (ii) 2,784,896 shares of common stock of the Company having
a fair value of $41.2 million; and (iii) 493,699 shares of common stock of the
Company having a fair value of $3.5 million reserved for issuance upon exercise
of Javelin stock options assumed by the Company. The Company incurred
approximately $1.2 million in costs directly associated with the acquisition,
which were included in the overall consideration. The cash portion of the
purchase price was financed through available funds. In addition, the Company
agreed to issue additional shares to the Javelin stockholders contingent on
attainment of certain 2002 revenue targets. The revenue targets were not
achieved and, accordingly, no additional shares were issued. The results of
operations of Javelin have been included in the consolidated results of
operations since the acquisition date. The excess of the purchase price over the
fair value of the net assets acquired was $42.3 million and has been recorded as
goodwill.
Of the aforementioned purchase price, $1.0 million in cash and 270,945
shares of common stock, having a fair value of $4.0 million, is being held in
escrow by an unrelated party and is subject to a final working capital
adjustment to be calculated as of March 31, 2002 and the effect of the outcome
of specific litigation to be determined based on activities through March 31,
2003. The Company will record the return of escrow, if any, based upon
activities through March 31, 2003, as a reduction in goodwill.
In connection with the acquisition of Javelin, the Company assumed the
liability for the servicing of Javelin's service maintenance contracts. The
Company has accounted for the deferred revenues related to these service
contracts of Javelin in connection with the acquisition in accordance with EITF
01-3, ACCOUNTING IN A BUSINESS COMBINATION FOR DEFERRED REVENUE OF AN ACQUIREE.
The Company recorded a liability as of the date of the acquisition equal to the
fair value of this liability and adjusted the amount for the expected gross
profit that Javelin would normally realize on service maintenance contracts.
Such amounts since the date of acquisition are recognized as revenue on a
straight-line basis over the remaining service maintenance contract period. The
purchase price allocation of these obligations was included in "deferred
revenues" in the accompanying consolidated balance sheet at December 31, 2002.
NYFIX TRANSACTION SERVICES
In December 2001, the Company acquired an inactive broker-dealer for
$34,000 and filed a membership application with the National Association of
Securities Dealers ("NASD") to operate as a broker-dealer through the wholly
owned subsidiary, which was renamed NYFIX Transaction Services, Inc. The
application was approved in May 2002 and NYFIX Transaction Services began
generating revenue on July 1, 2002. NYFIX Transaction Services provides
electronic execution, primarily to domestic and international broker-dealers and
specialized trading firms. The acquisition was accounted for as a purchase and
the cost of the acquisition has been allocated to goodwill.
ALLOCATION OF ASSETS ACQUIRED
The purchase prices of the above acquisitions have been allocated to the
assets acquired and liabilities assumed based on the fair values at the
respective acquisition dates, as follows:
F-17
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NYFIX
Millennium Javelin
---------- -------
Assets: (in thousands)
Current assets $ 7,600 $ 5,598
Property and equipment 4,731 1,345
Intangible assets 2,200 8,800
Goodwill 27,806 42,321
Deferred tax assets -- 3,534
Other assets 74 288
------- -------
Total assets acquired 42,411 61,886
------- -------
Liabilities:
Current liabilities 3,904 5,244
Long-term debt 6,000 166
Other long-term liabilites -- 356
Minority interest 501 --
------- -------
Total liabilities assumed 10,405 5,766
------- -------
Net assets acquired $32,006 $56,120
======= =======
PRO FORMA EFFECT
The table below depicts the summarized unaudited pro forma combined
results of operations for the years ended December 31, 2002 and 2001, assuming
the acquisitions of NYFIX Millennium and Javelin had taken place at the
beginning of each of those years, and giving effect to the addition of the New
Partners and the Option exercise as of January 1, 2001. The unaudited pro forma
combined results of operations for both years was prepared based upon the
historical results of operations of NYFIX, NYFIX Millennium and Javelin for the
respective years, and include certain adjustments, such as additional
amortization expense as a result of acquired intangible assets. The unaudited
pro forma combined results of operations presented below have been prepared for
comparative purposes only and do not necessarily reflect future events that may
occur after the acquisitions. As a result of these assumptions, estimates and
uncertainties, the accompanying unaudited pro forma combined results of
operations does not purport to describe the actual results of operations that
would have been achieved had the acquisitions in fact occurred on the dates
indicated, nor does it purport to predict the Company's future results of
operations.
The summarized unaudited pro forma combined results of operations were
as follows:
Year Ended December 31,
-----------------------
2002 2001
-------- --------
(in thousands,
except per share amounts)
Revenue $ 59,573 $ 53,295
======== ========
Net (loss) income $ (4,620) $ 3,123
======== ========
Basic (loss) income per common share $ (0.15) $ 0.10
======== ========
F-18
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangibles at December 31, 2002, primarily
relate to the Company's 2002 acquisitions of NYFIX Millennium and Javelin
described above. The Company completed the asset valuations for the acquisitions
and the annual goodwill impairment test during the fourth quarter of 2002. Upon
completion of the valuations, intangible assets were adjusted from the estimated
amount of $11.9 million as of September 30, 2002 to $11.0 million, and fourth
quarter amortization expense was adjusted accordingly.
Acquired intangible assets consisted of the following at December 31,
2002:
Weighted-Average
Amount Useful Life
------------- -----------------
(in thousands)
Existing technology $ 7,500 5.2 years
Customer related intangibles 2,700 10.5 years
Trademarks and other 800 5.3 years
----------
Total intangible assets, gross 11,000
Less: Accumulated amortization 1,596
----------
Total intangible assets, net $ 9,404
==========
Amortization expense of acquired intangible assets was $1.6 million for
the year ended December 31, 2002. Future estimated amortization expense for the
next five years is as follows:
Amount
------------
Year ending December 31, (in thousands)
2003 $ 2,048
2004 2,048
2005 2,048
2006 2,048
2007 923
Thereafter 289
------------
Future estimated amortization expense $ 9,404
============
The changes in the carrying amount of goodwill by segment for the year
ended December 31, 2002, were as follows:
F-19
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Technology Transaction
Services Services Total
---------- ----------- -------
(in thousands)
Balance as of January 1, 2002 $ -- $ 34 $ 34
Goodwill acquired during year:
NYFIX Millennium -- 27,806 27,806
Javelin 42,321 -- 42,321
------- ------- -------
Balance as of December 31, 2002 $42,321 $27,840 $70,161
======= ======= =======
5. INVESTMENTS IN AFFILIATES
EUROLINK
On March 6, 2002, the Company acquired a convertible preferred stock
interest in EuroLink, with its operations based in Madrid, Spain, for $4.0
million in cash. EuroLink offers the European securities industry direct
electronic access to the U.S. equity markets from Europe. EuroLink offers the
Company's equity terminals and market access services to the European
marketplace, primarily on a transaction fee basis. The preferred stock will
automatically convert into a 40% common stock interest upon the earlier of two
years from the date of the agreement or a change of control, as defined, of
EuroLink. The Company also has an option to purchase up to an additional 40%
common stock interest in EuroLink from certain of its stockholders at a price to
be determined based upon a formula of EuroLink's earnings, as defined. Such
exercise price ranges from a minimum of $1.0 million to a maximum of $10.0
million. The option is exercisable between April 1, 2004 and June 30, 2004 and
is payable in equal amounts of cash and the Company's common stock. The
investment in EuroLink is being accounted for under the equity method. During
the year ended December 31, 2002, the Company recorded a loss on the investment
of $0.5 million, which was included in "other expense" in the accompanying
consolidated statement of operations. In addition, the Company had a note
receivable from EuroLink at December 31, 2002 in the amount of $0.5 million, due
October 2003, bearing an interest rate of 6.0%, which was included in "due from
unconsolidated affiliates" in the accompanying consolidated balance sheet.
RENAISSANCE
On October 2, 2002, the Company acquired an 18% interest in Renaissance.
The Company acquired its interest in return for 300,000 shares of the Company's
stock with a fair value of $1.1 million. Renaissance was formed to commercialize
a NASDAQ trading platform (the "Platform"). The Company also has an option to
purchase a minimum of 20% to a maximum of 40% of the total outstanding
membership units of Renaissance at a price to be determined based upon a
formula, between October 2004 and October 2006. The Company also loaned $1.5
million to Renaissance, for which Renaissance issued a convertible secured
promissory note. The note bears an interest rate of 5.5%, is due in October
2007, and is convertible into 6,400,000 units (or 32% of the total outstanding
membership units, subject to dilution) of Renaissance, at the Company's option
anytime after October 2003. The investment in Renaissance is being accounted for
under the equity method. During the year ended December 31, 2002, the Company
recorded a loss on the investment of $0.1 million, which was included in "other
expense" in the accompanying consolidated statements of operations.
F-20
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In connection with its investment, the Company acquired, for $1.0
million, and contributed to Renaissance, the intellectual property rights and
source code to the Platform, which was developed over the last several years by
a major bank and brokerage firm and contributed such intellectual property
rights and source code to Renaissance. In addition, the Company advanced to
Renaissance $1.0 million to fund certain operating costs and capital
expenditures. Such advances were reflected as "other amounts due from
unconsolidated affiliates" in the accompanying consolidated balance sheet. In
consideration for the intellectual property rights contributed and the advanced
funding of the operating costs and capital expenditures, the Company will share
in 50% of Renaissance's revenue for, at minimum, 3 years. The Company subleases
approximately 8,000 square feet of office space to Renaissance at annual cost of
$0.2 million.
6. OTHER ASSETS
Other assets included deferred product enhancement costs of $3.9 million
and $3.4 million at December 31, 2002 and 2001, respectively, net of accumulated
amortization of $7.4 million and $5.0 million at December 31, 2002 and 2001,
respectively. Included in cost of revenue was amortization expense of deferred
product enhancement costs of $2.4 million, $1.8 million and $1.2 million for
2002, 2001 and 2000, respectively. Included in depreciation and amortization
expense was amortization expense for other assets of $4,000 in each of the three
years in the period ended December 31, 2002.
7. ACCRUED EXPENSES
Accrued expense consisted of the following:
December 31,
-----------------------
2002 2001
------ ------
(in thousands)
Income taxes payable $ -- $ 536
Taxes, other than income taxes 2,216 1,729
Commissions payable 561 560
Payroll-related accruals 1,153 334
Other current liabilities 1,430 371
------ ------
Total accrued expenses $5,360 $3,530
====== ======
8. DEBT AND 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 LIBOR plus 1.25%, or the bank's prime
rate, at the Company's discretion. The Company drew down an aggregate of $1.8
million under the agreement during 1998 and an additional $0.7 million during
1999. The weighted average outstanding borrowings were approximately $1.8
million at a weighted average interest rate of 6.49% for 2001. The Company paid
the outstanding balance in full on July 17, 2001 and did not renew the expiring
credit facility.
At December 31, 2002, the Company was committed under capital lease
obligations with interest rates ranging from 4.24% to 12.59% for maturities
ranging from January 2, 2003 to May 1, 2005. At December 31, 2002, capital lease
obligations were $1.8 million, of which $1.1 million was classified as current
in the accompanying consolidated balance sheet.
F-21
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Future minimum lease payments, net of sub-lease rental income, under
non-cancelable capital and operating leases with lease terms in excess of one
year at December 31, 2002 were as follows:
Capital Operating
------------ -----------
Year ending December 31, (in thousands)
2003 $ 1,161 $ 4,983
2004 551 4,898
2005 136 2,224
2006 -- 786
2007 -- 820
Thereafter -- 2,030
------------ -----------
Total minimum lease payments 1,848 $ 15,741
===========
Less: amount representing interest 95
------------
Present value of minimum capital lease payments $ 1,753
============
Aggregate rental expense, net of sub-lease rental income, amounted to
$4.6 million, $1.5 million and $1.0 million for the years ended December 31,
2002, 2001 and 2000, respectively.
9. CONTINGENCIES
LITIGATION
During the course of normal business, the Company becomes involved in
various routine legal proceedings. The Company maintains insurance coverage of
types and in amounts, which it believes to be adequate. The Company believes
that it is not presently a party to any material litigation that the outcome of
which could reasonably be expected to have a material adverse effect on its
financial position, results of operations or cash flows.
10. EQUITY
COMMON STOCK
In connection with the acquisitions mentioned in Notes 4 and 5, the
Company issued an aggregate of 1,968,750 shares of common stock to the NYFIX
Millennium Initial Partners in October 1999, with a fair value of $17.5 million,
an aggregate of 376,000 shares of common stock to the NYFIX Millennium New
Partners in March and April 2001, with a fair value of $8.0 million, an
aggregate of 296,250 shares of common stock to the NYFIX Millennium Initial
Partners and New Partners in February 2002, with a fair value of $4.5 million,
an aggregate of 2,784,896 shares of common stock to Javelin stockholders in
March 2002, with a fair value of $41.2 million and an aggregate of 300,000
shares of common stock to the Renaissance stockholders in October 2002, with a
fair value of $1.1 million.
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.
F-22
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STOCKHOLDER'S RIGHTS PLAN
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 stockholders of record on September 19, 1997. Each
share of common stock issued by the Company after such record date has the same
Right attached thereto. Each Right entitles the registered holder to purchase
from the Company, at any time after a stockholder 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.
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, 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.
11. 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 at December 31, 2002 and 2001
were presented below:
December 31,
-------------------
2002 2001
------ ------
Deferred tax assets: (in thousands)
Bad debt expense $ 590 $ 243
Deferred revenue 900 --
Inventory obsolescence 34 34
Intangible asset amortization 353 --
Capitalized product development costs 941 611
Net operating loss carryforward 2,513 108
Basis in NYFIX Millennium 2,665 --
Research and development tax credits 579 --
Other 412 77
------ ------
Total deferred tax assets 8,987 1,073
------ ------
Deferred tax liabilities:
Depreciation and amortization 2,044 282
Other 172 --
------ ------
Total deferred tax liabilities 2,216 282
------ ------
Total deferred tax assets, net $6,771 $ 791
====== ======
F-23
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 2002, the Company had a Federal net operating loss
carryforward of $5.3 million, which may be used to offset future taxable income,
if any. The Company's net operating loss carryforward results primarily from net
operating loss carryforwards acquired in connection with the acquisition of
Javelin and expire between 2020 and 2022. The Company's net operating loss
carryforward is subject to an annual limitation, as defined in Section 382 of
the Internal Revenue Code, of approximately $2.2 million. No valuation allowance
has been established against the deferred tax asset since management believes it
is more likely than not that the deferred tax assets will be realized.
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 $0.1 million and $0.4 million during the years
ended December 31, 2002 and 2001, respectively.
The reconciliation between the Federal statutory income tax rate and the
Company's effective income tax rate was as follows:
Year Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Statutory Federal tax rate (35)% 35 % 34 %
State and local taxes, net of federal benefit (5)% 5 % 2 %
Research and development tax credits and other (12)% -- 1 %
Valuation allowance -- -- (27)%
----- ----- -----
Effective tax rate (52)% 40 % 10 %
===== ===== =====
Research and development tax credits for the year ended December 31,
2002 related primarily to research and development expenses incurred in 1999
through 2002.
Significant components of the income tax (benefit) provision were as
follows:
Year Ended December 31,
----------------------------
2002 2001 2000
------- ------- -------
Current: (in thousands)
Federal $(1,243) $ 2,101 $ 1,020
State and foreign -- 1,853 166
------- ------- -------
Total current (1,243) 3,954 1,186
------- ------- -------
Deferred:
Federal (1,331) 1,255 1,200
State and foreign (1,209) 218 225
Decrease in valuation allowance -- -- (2,010)
------- ------- -------
Total deferred (2,540) 1,473 (585)
------- ------- -------
Total income tax (benefit) provision $(3,783) $ 5,427 $ 601
======= ======= =======
F-24
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. (LOSS) INCOME PER SHARE
The Company's basic (loss) income per common share ("EPS") was
calculated based on net (loss) income available to common stockholders and the
weighted-average number of shares outstanding during the reported period.
Diluted EPS included additional dilution from common stock equivalents, such as
stock issuable pursuant to the exercise of outstanding stock options and
warrants. Stock options representing 1,285,298 shares were excluded from the
loss per share calculation for the year ended December 31, 2002, as their effect
was anti-dilutive.
Year Ended December 31,
---------------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands, except per share amounts)
Net (loss) income $ (3,166) $ 8,136 $ 5,677
======== ======== ========
Basic (loss) income per common share $ (0.11) $ 0.30 $ 0.23
======== ======== ========
Basic weighted average common shares outstanding 30,126 26,784 24,480
Potentially dilutive effect of stock options and warrants -- 1,758 1,945
-------- -------- --------
Diluted weighted average shares outstanding 30,126 28,542 26,425
======== ======== ========
Diluted (loss) income per common share $ (0.11) $ 0.29 $ 0.21
======== ======== ========
13. RELATED PARTY TRANSACTIONS
The Initial and New Partners of NYFIX Millennium (see Note 4) are
customers of the Company.
The Company has notes receivable from certain of its officers for the
exercise of options for the Company's common stock, with interest at rates
ranging from 5.5% to 7.5%, for maturities ranging from October 1, 2003 to June
30, 2005. Such notes aggregated $0.6 million and $0.6 million at December 31,
2002 and 2001, respectively, and were included in "due from officers" within
stockholders' equity on the accompanying consolidated balance sheets. The
Company has notes receivable from certain of its officers, with an interest at
rate of 5.5% and maturing July 2004. Such notes aggregated $0.4 million at
December 31, 2002 and were included in "other assets" on the accompanying
consolidated balance sheet. The Company also had amounts receivable from certain
of its officers for travel and payroll advances of $0.2 million and $0.2 million
at December 31, 2002 and 2001, respectively and were included in "prepaid
expense and other" on the accompanying consolidated balance sheets.
14. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) retirement plan (the "401(k) Plan")
covering substantially all of its U.S. employees who meet eligibility
requirements. The 401(k) Plan permits participants to contribute a percentage of
their annual compensation, as defined, not to exceed the Federal limit of
$12,000 in 2002. The 401(k) 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.
As a result of the Company's acquisition of Javelin on March 31, 2002,
the Company assumed Javelin's 401(k) retirement plan (the "Javelin 401(k)
Plan"). The Javelin 401(k) Plan permitted participants to contribute a
percentage of their annual compensation, as defined, not to exceed the Federal
limit of $12,000 in 2002. The Javelin 401(k) Plan required the Company to
contribute an amount equal to 3% of the employees' compensation, regardless of
their participation in the plan. Remaining contributions under the Plan are
discretionary.
F-25
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company also maintains various benefit plans for its international
employees. The Company may make discretionary contributions to these plans. The
aggregate cost of contributions made by the Company to all employee benefit
plans were $0.6 million, $0.3 million and $0.1 million in 2002, 2001 and 2000,
respectively.
15. STOCK-BASED COMPENSATION
STOCK WARRANTS
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 stockholder
of the Company and the Company's president. In consideration for securing the
Agreement, the non-employee stockholder 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.
2001 STOCK OPTION PLAN
On March 13, 2001, the Company adopted the 2001 Stock Option Plan (the
"2001 Plan") for which a total of 2,000,000 shares of the Company's common stock
have been reserved for issuance. The 2001 Plan was approved at the Company's
Annual Meeting of Stockholders held on June 4, 2001. In 2002, the Company
adopted an amendment to the 2001 Plan, to increase the total number of shares of
the Company's common stock reserved for issuance to 3,500,000 shares. This
amendment was approved at the Company's Annual Meeting of Stockholders held on
June 10, 2002. Pursuant to the 2001 Plan, as amended, the Company may grant
stock options and stock purchase rights to the Company's employees, officers,
directors and consultants. The Board of Directors, or a committee to whom the
Board of Directors has delegated authority, selects individuals to whom options
are granted. Options generally become exercisable over a three-year period and
expire in ten years. The exercise price of incentive stock options granted under
the 2001 Plan must be at least equal to the fair market value of the Company's
stock at the date of grant, as defined. The 2001 Plan was effective on May 1,
2001 and expires on April 30, 2011. At December 31, 2002, stock options to
purchase 2,996,976 shares of the Company common stock were outstanding.
JAVELIN STOCK OPTION PLAN
As a result of the Company's acquisition of Javelin on March 31, 2002,
the Company assumed the outstanding stock options of Javelin that were granted
pursuant to the Javelin 1999 Stock Option Plan (the "Javelin Plan"). The Javelin
Plan authorized grants of stock options of Javelin. At the acquisition date, the
Javelin options where converted into the Company's options at a conversion rate
of 0.51 to one. The options granted under the Javelin Plan were fully vested at
the time of the Company's acquisition of Javelin pursuant to a change of control
clause within the Javelin Plan. A total of 511,167 shares of the Company's
common stock have been reserved for issuance. Pursuant to the Javelin Plan, as
amended, the Company may grant stock options and stock purchase rights to the
Company's employees, officers, directors and consultants. The maximum term of an
incentive stock option grant under the Javelin Plan is limited to ten years. The
exercise price of incentive stock options granted under the Javelin Plan must be
at least equal to the fair market value of the Company's stock at the date of
grant, as defined. The Javelin Plan was effective on July 1, 1999 and expires on
June 30, 2009. At December 31, 2002, stock options to purchase 348,680 shares of
the Company common stock were outstanding.
F-26
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1991 STOCK OPTION PLAN
On March 30, 1999, the Board of Directors adopted the first amendment to
the Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan (the
"1991 Plan"). Under the 1991 Plan, as amended, 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
Stockholders held on June 7, 1999. On March 29, 2000, the Board of Directors
adopted the second amendment to the 1991 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 Stockholders held on June 5, 2000. Options granted generally
become exercisable over a three-year period and expire in ten years. The 1991
Plan expired on June 23, 2001. All available options have been granted under the
1991 Plan, as amended and no further grants will be made. At December 31, 2002,
stock options to purchase 3,679,143 shares of the Company common stock were
outstanding.
The summary of the activity of stock warrants for the years ending
December 31, 2001 and 2000, was as follows:
Year Ended December 31,
-----------------------------------------------------
2001 2000
------------------------- ------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
-------- ---------- --------- ----------
Outstanding at beginning
of the year 56,250 $ 2.83 551,250 $ 2.74
Granted - - - -
Exercised (56,250) 2.83 (495,000) 2.70
Cancelled - - - -
Outstanding and excercisable -------- ----------
at end of the year - $ - 56,250 $ 2.83
======== =========
The summary of the activity under stock option plans for the years
ending December 31, 2002, 2001, and 2000, was as follows:
F-27
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31,
-----------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------- ---------- --------- ---------- --------- ----------
Outstanding at beginning
of the year 5,753,940 $12.95 4,529,387 $11.50 3,552,485 $ 4.09
Granted 1,900,850 4.97 2,025,926 15.58 2,007,063 28.00
Assumed in the acquisition
of Javelin 493,699 7.80 -- -- - --
Exercised (169,612) 2.81 (384,250) 5.79 (759,713) 3.75
Cancelled (954,078) 14.32 (417,123) 16.58 (270,448) 12.41
Outstanding at end --------- --------- ---------
of the year 7,024,799 $10.53 5,753,940 12.95 4,529,387 11.50
========= ========= =========
Exercisable at end of the year 3,963,679 $10.34 2,835,723 $ 9.03 1,376,321 $ 3.16
========= ========= =========
Weighted average fair value
of options granted $ 3.23 $12.47 $16.02
Weighted average fair value
of options assumed in
the acquision of Javelin $12.28 $ -- $ --
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Life Exercise Exercise
Prices Shares (Years) Price Shares Price
- ----------------- --------- --------- --------- --------- ----------
$ 1.14 - $ 4.40 2,957,296 6.9 $ 3.06 1,570,496 $ 2.29
$ 4.41 - $ 8.80 853,160 8.2 7.46 437,910 6.80
$ 8.81 - $13.20 1,123,000 8.6 12.16 581,643 12.02
$13.21 - $17.60 957,192 7.3 14.76 724,459 14.70
$17.61 - $22.00 224,725 4.9 21.25 185,192 21.29
$22.01 - $26.40 398,776 7.7 23.38 241,661 23.42
$26.41 - $30.80 99,650 7.0 28.03 72,818 27.98
$30.81 - $35.20 307,800 7.5 32.62 78,200 32.00
$35.21 - $39.60 92,700 7.7 36.68 63,300 36.70
$39.61 - $44.00 10,500 7.8 40.13 8,000 40.09
--------- ---------
7,024,799 7.4 $ 10.53 3,963,679 $ 10.34
========= =========
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:
F-28
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31,
-----------------------------------------
2002 2001 2000
-------- -------- --------
Average risk-free interest rate 3.8 % 4.6 % 6.1 %
Average expected life 6.5 years 4.3 years 5.0 years
Expected volatility 79 % 71 % 70 %
Expected dividend yield 0 % 0 % 0 %
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.
Prior to 2002, the Company operated 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 acquisitions
of NYFIX Millennium and NYFIX Transaction Services (see Note 4), the Company now
operates as a financial services technology company in two industry segments,
Technology Services and Transaction Services. The Company's reportable segments
are based upon the nature of products within the Company. The products
comprising the reportable segments are managed separately and have differing
technology and marketing strategies. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies contained herein within Note 1. The operating segments
reported below are the segments of the Company for which separate financial
information is available and for which operating results are evaluated regularly
by senior management in deciding how to allocate resources and in assessing
performance.
The Technology Services segment provides desktop solutions, wireless
exchange floor systems, electronic automation systems and straight through
processing to the professional trading segment of the brokerage community.
The Transaction Services segment, which is substantially comprised of
the Company's NYFIX Millennium and NYFIX Transaction Services businesses,
provides an electronic order routing and matching environment, anonymous order
matching and execution services to both the Company's existing technology
customers and web-based desktop users, and execution and smart order routing
solutions, primarily to domestic and international broker-dealers and
specialized trading firms.
Summarized financial information by business segment for the years ended
December 31, 2002, 2001 and 2000 was as follows:
F-29
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
--------- --------- ---------
Revenue: (in thousands)
Technology Services $ 48,853 $ 41,397 $ 23,980
Transaction Services 7,109 -- --
Eliminations (150) -- --
--------- --------- ---------
Total revenue $ 55,812 $ 41,397 $ 23,980
========= ========= =========
Gross Profit:
Technology Services $ 28,608 $ 27,237 $ 15,078
Transaction Services 494 -- --
--------- --------- ---------
Total gross profit $ 29,102 $ 27,237 $ 15,078
========= ========= =========
Identifiable assets:
Technology Services $ 85,300 $ 34,053 $ 28,811
Transaction Services 35,838 -- --
Corporate 39,679 74,519 28,747
--------- --------- ---------
Total indentifiable assets $ 160,817 $ 108,572 $ 57,558
========= ========= =========
Depreciation and amortization:
Technology Services $ 9,900 $ 6,406 $ 3,664
Transaction Services 1,586 -- --
Corporate 175 59 33
--------- --------- ---------
Total depreciation and amortization $ 11,661 $ 6,465 $ 3,697
========= ========= =========
Capital expenditures:
Technology Services $ 3,671 $ 6,593 $ 5,982
Transaction Services 586 -- --
Corporate 309 528 102
--------- --------- ---------
Total capital expenditures $ 4,566 $ 7,121 $ 6,084
========= ========= =========
Identifiable assets by segment include assets directly identifiable with
those segments. Corporate assets consist primarily of cash and cash equivalents,
short-term investments, deferred tax assets and investments in unconsolidated
affiliates associated with non-operating activities.
Reconciling information between business segments and the (loss) income
before income taxes and minority interest was as follows:
F-30
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year Ended December 31,
----------------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Gross profit for reportable segments $ 29,102 $ 27,237 $ 15,078
Operating expenses (36,140) (14,097) (8,603)
Interest expense (262) (343) (333)
Investment income 666 780 156
Other expense (621) (14) (20)
-------- -------- --------
(Loss) income before income taxes and minority interest $ (7,255) $ 13,563 $ 6,278
======== ======== ========
Summarized financial information by geographic location for 2002, 2001
and 2000 was as follows:
Year Ended December 31,
----------------------------------------------
2002 2001 2000
-------- -------- --------
Revenue: (in thousands)
United States $ 52,774 $ 35,134 $ 21,302
Foreign 3,038 6,263 2,678
-------- -------- --------
Total revenue $ 55,812 $ 41,397 $ 23,980
======== ======== ========
Long-lived assets:
United States $115,099 $ 50,652 $ 32,573
Foreign 2,014 1,626 1,626
-------- -------- --------
Total long-lived assets $117,113 $ 52,278 $ 34,199
======== ======== ========
Revenues were attributed based upon the origin of the product delivered
or service provided. Revenue from export sales, principally software sale
revenue, was $2.6 million, $4.0 million and $2.4 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
Classes of products representing 10% or more of revenue were:
Year Ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
Technology Services Revenue:
Subscription revenue - Fix Trader 13.8% 17.2% 16.3%
Subscription revenue - communication charges (1) 10.1% (1)
Sale revenue - OBMS software (1) 14.9% 17.0%
(1) less than 10%
F-31
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
17. VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Deductions
Beginning of Costs and and Balance at
Year Expenses Write-offs End of Year
------------ ---------- ---------- -----------
Allowance for doubtful accounts: (in thousands)
Year ended December 31, 2002 $ 511 $ 1,146 $ 450 $ 1,207
======= ======= ======= =======
Year ended December 31, 2001 $ 421 $ 233 $ 143 $ 511
======= ======= ======= =======
Year ended December 31, 2000 $ 125 $ 416 $ 120 $ 421
======= ======= ======= =======
Inventory reserve:
Year ended December 31, 2002 $ 82 $ 78 $ -- $ 160
======= ======= ======= =======
Year ended December 31, 2001 $ 92 $ (10) $ -- $ 82
======= ======= ======= =======
Year ended December 31, 2000 $ 82 $ 10 $ -- $ 92
======= ======= ======= =======
18. SUPPLEMENTAL CASH FLOW INFORMATION
Information about the cash flow activities related to acquisitions
during the year ended December 31, 2002 were as follows:
Year Ended
December 31,
2002
-------------
(in thousands)
Fair value of net assets acquired, net of cash acquired $ 99,620
Fair value of liabilities assumed (16,171)
Common stock issued for acquisitions (49,154)
Pre-acquisition investment basis (27,500)
--------
Payments for acquisitions, net of cash acquired $ 6,795
========
Information about other cash flow activities during the years ended
December 31, 2002, 2001 and 2000 were as follows:
Year Ended December 31,
--------------------------------------------
2002 2001 2000
-------- --------- ---------
Supplemental disclosures of cash flow information: (in thousands)
Cash paid for interest $ 262 $ 301 $ 274
Cash paid for income taxes, net of refunds 937 2,985 286
Supplemental schedule of noncash investing and
financing information:
Capital lease obligations incurred for the purchase 1,278 524 2,023
of property and equipment
Common stock issued for investments in 1,121 8,000 --
unconsolidated affiliates
Unrealized (gain) loss on available-for-sale securities 142 (35) --
F-32
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
19. QUARTERLY FINANCIAL DATA - UNAUDITED
Three Months Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------- -------- ------------- ------------
2002 (in thousands, except per share amounts)
Revenue $ 10,071 $ 13,086 $ 15,368 $ 17,287
======== ======== ======== ========
Gross profit, as previously
reported $ 7,328 $ 8,735 $ 10,799 $ 9,357
Reclassification (1,704) (2,534) (2,879) --
-------- -------- -------- --------
Gross profit, as reclassified $ 5,624 $ 6,201 $ 7,920 $ 9,357
======== ======== ======== ========
Net income (loss) $ 98 $ (2,919) $ (906) $ 561
======== ======== ======== ========
Income (loss) per share:
Basic $ -- $ (0.10) $ (0.03) $ 0.02
======== ======== ======== ========
Diluted $ -- $ (0.10) $ (0.03) $ 0.02
======== ======== ======== ========
2001
Revenue $ 8,422 $ 9,511 $ 11,404 $ 12,060
======== ======== ======== ========
Gross profit, as previously
reported $ 6,482 $ 7,255 $ 8,959 $ 9,370
Reclassification (909) (1,125) (1,440) (1,355)
-------- -------- -------- --------
Gross profit, as reclassified $ 5,573 $ 6,130 $ 7,519 $ 8,015
======== ======== ======== ========
Net income (loss) $ 1,464 $ 1,602 $ 2,758 $ 2,312
======== ======== ======== ========
Income (loss) per share:
Basic $ 0.06 $ 0.06 $ 0.10 $ 0.08
======== ======== ======== ========
Diluted $ 0.05 $ 0.06 $ 0.10 $ 0.08
======== ======== ======== ========
As described in Note 1, certain reclassifications have been made to the
quarterly information noted above to conform to the current year's presentation.
In connection therewith, certain operating expenses were reclassified to cost of
revenue.
F-33
NYFIX MILLENNIUM, L.L.C. (A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2001, AND FOR THE PERIOD
SEPTEMBER 9, 1999 TO DECEMBER 31, 2001 AND
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
To the Members of
NYFIX Millennium, L.L.C.
New York, New York
We have audited the following financial statements of NYFIX Millennium,
L.L.C. (a development stage company) (the "Company"), as of December 31, 2001
and for the year ended December 31, 2001 and for the period September 9, 1999
(date of inception) to December 31, 2001 that you are filing pursuant to Rule
17a-5 under the Securities Exchange Act of 1934.
Page
Statement of Financial Condition 3
Statements of Operations 4
Statements of Cash Flows 5
Statements of Changes in Members' Capital 6
Statements of Changes in Subordinated Borrowings 7
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2001, and the
results of its operations and its cash flows for the year ended December 31,
2001 and for the period from September 9, 1999 (date of inception) to December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
The Company is in the development stage at December 31, 2001. As discussed in
Note 1 to the financial statements, successful completion of the Company's
development program and, ultimately, the attainment of profitable operations is
dependent upon future events, including maintaining adequate financing to
fulfill its development activities, and achieving a revenue level adequate to
support the Company's cost structure.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
February 22, 2002
-2-
NYFIX MILLENNIUM L.L.C.
(A Development Stage Company)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
ASSETS
CASH $ 2,585,436
SECURITIES - At estimated market value 8,492,031
PROPERTY AND EQUIPMENT - Net 4,799,343
OTHER ASSETS 469,951
------------
TOTAL ASSETS $ 16,346,761
============
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Due to NYFIX, Inc. $ 5,221,736
Subordinated loan payable to NYFIX, Inc. 6,000,000
Accounts payable and accrued expenses 1,246,397
------------
Total liabilities 12,468,133
------------
MEMBERS' CAPITAL:
Capital contributions 24,000,000
Deficit accumulated while in development stage (20,121,372)
------------
Total members' capital 3,878,628
------------
TOTAL LIABILITIES AND MEMBERS' CAPITAL $ 16,346,761
============
See notes to financial statements.
-3-
NYFIX MILLENNIUM L.L.C.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Period
September 9,
1999 (Date of
Inception) to
Year Ended December 31,
2001 2001
REVENUES:
Commissions $ 142,139 $ 142,139
Interest income 294,528 1,141,106
Other 1,368 1,368
----------- -----------
Total revenues 438,035 1,284,613
----------- -----------
EXPENSES:
Employee compensation and benefits 6,149,337 11,440,603
Communications and data processing 2,597,044 3,864,078
Occupancy 861,149 1,497,502
Marketing and promotion 568,060 827,533
Professional services 276,339 833,549
Depreciation and amortization 960,159 1,328,741
Interest expense 43,151 43,151
Clearing 33,512 33,512
Administrative and other 542,827 1,537,316
----------- -----------
Total expenses 12,031,578 21,405,985
----------- -----------
NET LOSS $(11,593,543) $(20,121,372)
=========== ===========
See notes to financial statements.
-4-
NYFIX MILLENNIUM, L.L.C.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------
Period
September 9,
1999 (Date of
Inception) to
Year Ended December 31,
2001 2001
OPERATING ACTIVITIES:
Net loss $(11,593,543) $(20,121,372)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 960,159 1,328,741
Changes in operating assets and liabilities:
Increase in other assets (115,330) (469,951)
Increase in due to NYFIX, Inc. 3,236,655 5,221,736
Increase in accounts payable and accrued expenses 707,633 1,246,397
------------ ------------
Net cash used in operating activities (6,804,426) (12,794,449)
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities, net (2,088,010) (8,492,031)
Purchases of property and equipment (2,777,333) (6,128,084)
------------ ------------
Net cash used in investing activities (4,865,343) (14,620,115)
------------ ------------
FINANCING ACTIVITIES:
Increase in subordinated loan payable to NYFIX, Inc. 6,000,000 6,000,000
Capital contributions 8,000,000 24,000,000
------------ ------------
Net cash provided by financing activities 14,000,000 30,000,000
------------ ------------
NET INCREASE IN CASH 2,330,231 2,585,436
CASH, BEGINNING OF PERIOD 255,205 --
------------ ------------
CASH, END OF PERIOD $ 2,585,436 $ 2,585,436
============ ============
See notes to financial statements.
-5-
NYFIX MILLENNIUM, L.L.C.
(A Development Stage Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
- --------------------------------------------------------------------------------
Period
September 9,
1999 (Date of
Inception) to
Year Ended December 31,
2001 2001
BALANCE, BEGINNING OF PERIOD $ 7,472,171 $ --
Capital contributions 8,000,000 24,000,000
Net loss 11,593,543 20,121,372
----------- -----------
BALANCE, DECEMBER 31, 2001 $ 3,878,628 $ 3,878,628
=========== ===========
See notes to financial statements.
-6-
NYFIX MILLENNIUM, L.L.C.
(A Development Stage Company)
STATEMENTS OF CHANGES IN SUBORDINATED BORROWINGS
- --------------------------------------------------------------------------------
Period
September 9,
1999 (Date of
Inception) to
Year Ended December 31,
2001 2001
SUBORDINATED BORROWINGS, BEGINNING OF PERIOD $ -- $ --
Issuance of subordinated notes 6,000,000 6,000,000
---------- ----------
SUBORDINATED BORROWINGS, DECEMBER 31, 2001 $6,000,000 $6,000,000
========== ==========
See notes to financial statements.
-7-
NYFIX MILLENNIUM, l.l.c.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
NYFIX Millennium, L.L.C. (the "Company") is a limited liability company
that was organized on September 9, 1999. The Company was organized
primarily for the purpose of generating transaction-oriented revenue by
providing broker-dealers and institutional investors with stock market
trade executions through an alternative trading system ("ATS"). Through
September 4, 2001, activities consisted primarily of the development of
an ATS. On September 5, 2001, the Company placed the ATS into service
and revenue began to be generated. The Company is owned by NYFIX, Inc.
("NYFIX") and a group of eleven banks and brokerage firms, (the "Other
Members"), (collectively, the "Members"). As of December 31, 2001, NYFIX
owns 50% of the Company and the Other Members own the remaining 50%.
NYFIX contributed $2 million for its member's interest and the Other
Members each contributed $2 million for their members' interests for a
total cash contributed capital amount of $24,000,000. In addition, NYFIX
purchased an option from the Other Members allowing NYFIX to purchase up
to an additional 30% of the Company's members' interests from the Other
Members. See Note 7.
The Company is registered as a broker-dealer in securities under the
Securities Exchange Act of 1934 and operates as an ATS in compliance
with Securities and Exchange Commission ("SEC") regulations. Further,
the Company is a member of the National Association of Security Dealers,
Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITIES - Security transactions and the related income and expense
are recorded on a trade-date basis. Interest is accrued as earned.
Securities are carried at estimated market value based on quoted market
prices, with the realized and unrealized gains and losses reflected
within operations. All securities are held in the Company's name and
custodied with one major financial institution. There were no gains or
losses on sales of securities during the year ended December 31, 2001.
COMMISSIONS - Commissions and the related clearing expenses are recorded
on a trade-date basis as securities transactions occur.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and
are depreciated over their estimated useful lives, which range from 3 to
5 years, on a straight-line basis. Leasehold improvements are amortized
over the lesser of their economic useful lives or the terms of the
related leases. Costs incurred for computer software developed or
obtained for internal use, including payroll and payroll-related costs
for employees incurred in developing internal-use software, are
capitalized during development stage activities. Upon placing the
software into service, the costs are amortized, on a straight-line
basis, over three years.
INCOME TAXES - The Company is a limited liability company that is
treated as a partnership for federal and state income tax purposes. As
such, the Company is not subject to income tax. The loss applicable to
the operations of the Company is includable in the income tax returns of
the Members.
-8-
MEMBERS' CAPITAL - Capital contributions of the members are recorded as
received. Withdrawal of capital by a member would be recognized at the
withdrawal date. There have been no withdrawals of capital.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts in the financial statements for the
period September 9, 1999 (date of inception) to December 31, 2001 have
been reclassified to conform to the 2001 presentation.
NEW ACCOUNTING PRONOUNCEMENT - On January 1, 2001, the Company adopted
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended in June 1999 by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133, and in June 2000 by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging
Activities (collectively, "SFAS No. 133"). SFAS No. 133 requires that
all derivatives, including certain derivatives embedded in other
contracts, be recognized in the statement of financial condition, either
as assets or as liabilities, and be measured at their fair value. The
adoption of SFAS No. 133 had no impact on the Company's financial
statements. As of December 31, 2001, the Company had no derivatives.
3. PROFIT AND LOSS ALLOCATIONS
Pursuant to the Company's operating agreement, the first $22 million in
losses of the Company will be allocated to the Other Members, which
equals their capital investment in the Company. Profits, distributed as
dividends, are allocated 76% to NYFIX and 24% to the Other Members. In
the event of liquidation, distribution of the assets of the Company will
be distributed to the Members in accordance with the extent of their
positive capital accounts.
4. REGULATORY NET CAPITAL REQUIREMENT
The Company is subject to the Uniform Net Capital Rule (Rule 15c3-1)
under the Securities and Exchange Act of 1934 which requires the
maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital both as defined, shall not exceed
15 to 1. At December 31, 2001, the Company had regulatory net capital
and minimum regulatory net capital requirements of $4,614,752 and
$431,209, respectively. The Company's net capital ratio was 1.40 to 1 at
December 31, 2001.
5. RELATED PARTY TRANSACTIONS
During 2001, and for the period September 9, 1999 to December 31, 2001,
certain operating costs and capital expenditures were paid by NYFIX on
behalf of the Company. Such costs are being repaid to NYFIX with the
unpaid balance reflected as Due to NYFIX, Inc. on the Company's
statement of financial condition. The balance due to NYFIX was
$5,221,736 at December 31, 2001.
NYFIX has entered into several lease agreements for computer and office
equipment and office space. The equipment and office space is used by
the Company under the terms of a management agreement with NYFIX. The
management agreement requires the Company to repay NYFIX for the amount
of the
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lease payments on a month-to-month basis. The leases in effect at
December 31, 2001 expire at various dates through November 2005.
Future payments to NYFIX for such leases are expected to be as follows:
Year Ending
December 31,
2002 $ 508,616
2003 452,201
2004 447,691
2005 302,190
----------
$1,710,698
==========
Loans have been made to an officer of the Company. These loans are
unsecured and are repayable during 2002. Loans receivable were $150,000
at December 31, 2001 and are included in other assets within the
accompanying statement of financial condition.
On October 30, 2001, the Company entered into a Subordinated Loan
Agreement for Equity Capital (the "Loan Agreement") with NYFIX effective
November 30, 2001, pursuant to which NYFIX loaned $6,000,000 to the
Company. The loan 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. The subordinated loan is available in computing net capital under
the SEC's uniform net capital rule. To the extent that such loan is
required for the Company's continued compliance with minimum net capital
requirements, it may not be repaid. The fair value of this loan
approximates the carrying value in the statement of financial condition.
Interest expense was $43,151 on the Loan Agreement during the year ended
December 31, 2001.
6. PROPERTY AND EQUIPMENT
Software $ 2,503,045
Office computers 1,846,697
Data center equipment 1,276,557
Furniture, fixtures, and leasehold improvements 501,785
Less accumulated depreciation and amortization (1,328,741)
-----------
$ 4,799,343
===========
As of December 31, 2001, the Company's property and equipment is
comprised of the following:
7. SUBSEQUENT EVENT
On February 1, 2002, NYFIX exercised its option to purchase an
additional 30% of the Company by issuing shares of NYFIX common stock to
the Other Members, thereby making the Company an 80% owned subsidiary of
NYFIX.
******
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NYFIX MILLENNIUM, L.L.C. (A DEVELOPMENT STAGE COMPANY)
2000 FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
NYFIX Millennium, L.L.C.
New York, New York
We have audited the following financial statements of NYFIX Millennium, L.L.C.
(a development stage company) (the "Company"), as of December 31, 2000 and for
the year ended December 31, 2000 and for the period September 9, 1999, (date of
inception) to December 31, 2000 that you are filing pursuant to Rule 17a-5 under
the Securities Exchange Act of 1934.
Page
Statement of Financial Condition 3
Statements of Operations 4
Statements of Cash Flows 5
Statements of Changes in Members' Capital 6
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 financial statements present fairly, in all material
respects, the financial position of NYFIX Millennium, L.L.C. at December 31,
2000, and the results of its operations and its cash flows for the year ended
December 31, 2000 and for the period from September 9, 1999 to December 31, 2000
in conformity with accounting principles generally accepted in the United States
of America.
The Company is in the development stage at December 31, 2000. As discussed in
Note 1 to the financial statements, successful completion of the Company's
development program and, ultimately, the attainment of profitable operations is
dependent upon future events, including maintaining adequate financing to
fulfill its development activities, and achieving a revenue level adequate to
support the Company's cost structure.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
February 23, 2001
-2-
NYFIX MILLENNIUM, L.L.C.
(A Development Stage Company)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 2000
- --------------------------------------------------------------------------------
ASSETS
CASH $ 255,205
SECURITIES - At market value 6,404,021
PROPERTY AND EQUIPMENT - Net 2,982,169
OTHER ASSETS 354,621
------------
TOTAL ASSETS $ 9,996,016
============
LIABILITIES
DUE TO NYFIX, INC $ 1,985,081
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 538,762
------------
Total liabilities 2,523,843
------------
MEMBERS' CAPITAL
CAPITAL CONTRIBUTIONS 16,000,000
DEFICIT ACCUMULATED WHILE IN DEVELOPMENT STAGE (8,527,827)
------------
Total members' capital 7,472,173
------------
TOTAL LIABILITIES AND MEMBERS' CAPITAL $ 9,996,016
============
See notes to financial statements.
-3-
NYFIX MILLENNIUM L.L.C.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Period
September 9,
1999 (Date of
Inception) to
December 31,
2000 2000
REVENUES - Dividend and interest income $ 719,655 $ 846,578
---------- ----------
EXPENSES:
Employee compensation and benefits 4,685,634 5,291,264
Communications and data processing 1,254,492 1,267,034
Occupancy 956,524 1,004,935
Professional services 404,643 557,210
Administrative and other 788,694 1,253,962
---------- ----------
Total expenses 8,089,987 9,374,405
---------- ----------
NET LOSS $(7,370,332) $(8,527,827)
========== ==========
See notes to financial statements.
-4-
NYFIX MILLENNIUM, L.L.C.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Period
September 9,
1999 (Date of
Inception) to
December 31,
2000 2000
OPERATING ACTIVITIES:
Net loss $ (7,370,332) $ (8,527,827)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 362,420 368,583
Changes in operating assets and liabilities:
Increase in other assets (162,378) (354,621)
Increase in due to NYFIX, Inc. 1,162,034 1,985,081
Increase in accounts payable and accrued expenses 507,959 538,762
------------ ------------
Net cash used in operating activities (5,500,297) (5,990,022)
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities owned, net (6,404,021) (6,404,021)
Purchases of fixed assets (3,162,049) (3,350,752)
------------ ------------
Net cash used in investing activities (9,566,070) (9,754,773)
------------ ------------
FINANCING ACTIVITIES:
Capital contributions -- 16,000,000
------------ ------------
NET INCREASE IN CASH (15,066,367) 255,205
CASH, BEGINNING OF PERIOD 15,321,572 --
------------ ------------
CASH, END OF PERIOD $ 255,205 $ 255,205
============ ============
See notes to financial statements.
-5-
NYFIX MILLENNIUM, L.L.C.
(A Development Stage Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
- --------------------------------------------------------------------------------
Period
September 9,
1999 (Date of
Inception) to
December 31,
2000 2000
BALANCE, BEGINNING OF PERIOD $ 14,842,505 $ --
Capital contributions -- 16,000,000
Net loss (7,370,332) (8,527,827)
------------ ------------
BALANCE, DECEMBER 31, 2000 $ 7,472,173 $ 7,472,173
============ ============
See notes to financial statements.
-6-
NYFIX MILLENNIUM, l.l.c.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
NYFIX Millennium, L.L.C. (the "Company") is a limited liability company that was
organized on September 9, 1999. The Company was organized primarily for the
purpose of generating transaction- oriented revenue by providing institutional
investors with stock market trade executions through an alternative trading
system ("ATS"). Through December 31, 2000 activities have consisted primarily in
the development of an ATS. In December 2000, the Company placed the ATS into
service and revenue is anticipated to begin in 2001. The Company is owned by
NYFIX Inc. ("NYFIX") and a group of seven banks and brokerage firms, ("Other
Members"), (collectively, the "Members"). NYFIX owns 50% of the Company and the
Other Members own the remaining 50%. NYFIX contributed $2 million for their
ownership interest and the Other Members each contributed $2 million for their
ownership interests for a total cash contributed capital amount of $16,000,000.
In addition, NYFIX purchased an option from the Other Members allowing NYFIX to
purchase up to an additional 30% of the Company's common stock from the Other
Members.
The Company is registered as a broker-dealer in securities under the Securities
Exchange Act of 1934 and will operate as an ATS in compliance with Securities
and Exchange Commission ("SEC"), regulations. Further, the Company is a member
of the National Association of Security Dealers, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITIES - Security transactions and the related income and expense are
recorded on a trade date basis. Dividends are recorded on the ex-dividend date
and interest is accrued as earned. Securities are carried at market value with
the realized and unrealized gains and losses reflected within net income. There
were no realized or unrealized gains or losses during 1999 or 2000. All
securities are held in the Company's name and custodied with one major financial
institution.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and are
depreciated over their estimated useful lives. Leasehold improvements are
amortized over the lesser of their economic useful lives or the terms of the
related leases.
INCOME TAXES - The Company is a limited liability company that is treated as a
partnership for federal and state income tax purposes. As such, the Company is
not subject to income tax. The loss applicable to the operations of the Company
is includable in the income tax returns of the Members.
MEMBERS' CAPITAL - Capital contributions of the members are recorded as
received. Withdrawal of capital by a member would be recognized at the
withdrawal date. During 1999, there were $16 million of contributions. There
have been no withdrawals during 2000 or 1999.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year. Actual results could differ
from those estimates.
-7-
PENDING ACCOUNTING PRONOUNCEMENTS - In September 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 140, which replaces SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (SFAS No. 125). It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of the provisions of SFAS
No. 125 without reconsideration. SFAS No. 140 is effective for transfers,
servicing, or extinguishments occurring after March 15, 2001, except for certain
provisions relating to the accounting and disclosure for secured borrowings and
collateral, for which the effective date was December 15, 2000. The adoption of
the effective provisions of this statement did not impact the Company's
financial condition or results of operations. Management does not believe the
adoption of the remaining provisions will have a material impact on the
Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133), as amended in June 1999 by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SEAS No. 133, and in June 2000 by SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities (collectively, SFAS No. 133). SFAS No. 133 requires that all
derivatives, including certain derivatives embedded in other contracts, be
recognized in the statement of financial condition, either as assets or as
liabilities, and be measured at their fair value. SFAS No. 133 became effective
January 1, 2001. No adjustment was required as a result of the adoption of this
statement.
3. PROFIT AND LOSS ALLOCATIONS
Pursuant to the Company's operating agreement, the first $14 million in losses
of the Company will be allocated to the Other Members, which equals their
capital investment in the Company. Profits, distributed as dividends, are
allocated 80% to NYFIX and 20% to the Other Members. In the event of
liquidation, distribution of the assets of the Company will be distributed to
the Members in accordance with the extent of their positive capital accounts.
4. REGULATORY NET CAPITAL REQUIREMENT
The Company is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the
Securities and Exchange Act of 1934, which requires the maintenance of minimum
net capital and requires that the ratio of aggregate indebtedness to net capital
both as defined, shall not exceed 15 to 1. At December 31, 2000, the Company had
regulatory net capital and minimum regulatory net capital requirements of
$4,128,525 and $168,256, respectively. The Company's net capital ratio was .61
to 1 at December 31, 2000.
5. RELATED PARTY TRANSACTIONS
During 2000, and for the period September 9, 1999 to December 31, 2000, certain
operating costs and capital expenditures were paid by NYFIX on behalf of the
Company. Such costs are reflected as Due to NYFIX, Inc. on the Company's
statement of financial condition. As of December 31, 2000 a payable to NYFIX of
approximately $2 million is recorded.
-8-
NYFIX entered into several lease agreements for computer equipment and office
space. The equipment and office space is used by the Company under the terms of
a management agreement with NYFIX. The management agreement requires the Company
to repay NYFIX for the amount of the expense on a month-to-month basis. The
leases in effect at December 31, 2000 expire at various dates through June 2005.
Future payments to NYFIX for such leases are expected to be as follows:
2001 $ 848,604
2002 700,104
2003 227,223
2004 68,916
2005 34,458
-----------
$ 1,879,305
===========
Loans are made to employees of the Company at the discretion of management.
These loans are unsecured and repayable upon demand. During 2000, the maximum
amount outstanding was $119,000. Loans receivable under this program were
$117,000 at December 31, 2000 and are included in other assets within the
accompanying statement of financial condition.
-9-