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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2003
COMMISSION FILE NUMBER 0-21324
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NYFIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 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 |_| No |X|
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 $178 million at the close of the last business day
of the registrant's most recently completed second quarter (June 30, 2003).
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.
The number of shares of NYFIX Common Stock, par value $.001, outstanding as of
April 30, 2004 was 32,263,781.
NYFIX, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
PART I
Item 1. Business...............................................................................................6
Item 2. Properties............................................................................................26
Item 3. Legal Proceedings.....................................................................................27
Item 4. Submission of Matters to a Vote of Security Holders...................................................27
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.....................................................................29
Item 6. Selected Financial Data...............................................................................31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................32
Item 7a. Quantitative and Qualitative Disclosures about Market Risk............................................67
Item 8. Financial Statements and Supplementary Data...........................................................68
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................68
Item 9a. Controls and Procedures...............................................................................69
PART III
Item 10. Directors and Executive Officers of the Registrant....................................................70
Item 11. Executive Compensation................................................................................73
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.........................................................................76
Item 13. Certain Relationships and Related Transactions........................................................77
Item 14. Principal Accountant Fees and Services................................................................78
PART IV
Item 15. Exhibits, Financial Statement Schedules and Report on Form 8-K........................................79
Signatures............................................................................................83
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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.
GLOSSARY OF TERMS
When used in this Report on Form 10-K, the terms "NYFIX," "Company," "we,"
"us," or "our" mean NYFIX, Inc. and its subsidiaries. The following glossary of
terms is intended to provide a point a reference to the reader.
"$2 brokers" refers to an extensive array of independent brokers operating
on the trading floor of the NYSE.
"AMEX" refers to the American Stock Exchange.
"APIs" refers to application programming interfaces, which are a common
expression in software programming where information is passed between programs.
"ATS" refers to an Alternate Trading System regulated under Regulation
ATS, which is an industry accessible computerized system matching buy and sell
orders from multiple natural buyers and sellers without the intervention of an
intermediary such as a Specialist (e.g., NYSE) or Market Maker (e.g., Nasdaq).
"Audit Committee" refers to the Audit Committee of our Board of Directors.
"Best execution" refers to the general requirement that a broker effect a
transaction on behalf of a client on the most favorable terms reasonably
available under the circumstances.
"Broker-dealer" refers to a person or firm registered pursuant to section
15 of the Securities Exchange Act of 1934 in the business of buying and selling
securities as a broker or a dealer depending on the transaction. A broker is an
agent who executes orders on behalf of clients, whereas a dealer acts as a
principal and trades for its own account.
"Buy-Side" refers to institutional investors such as money managers,
mutual funds, hedge funds, banks, insurance companies and pension plans who are
professional participants in the securities markets.
"Derivative" refers to a security whose price is based on the prices of
another (underlying) investment, such as futures and options.
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NYFIX, INC.
"DOT" refers to the Designated Order Turnaround system, which is the
electronic system that transmits New York Stock Exchange (NYSE) member firms'
market and day limit orders, up to specified sizes in virtually all listed
stocks, through the common message switch to the proper trading floor
workstation. Specialists receiving orders through DOT execute them in the
trading crowd at their posts, as quickly as market interest and activity permit,
and return reports to the originating firm's offices via the same electronic
circuit that brought them to the floor.
"DTCC" refers to the Depository Trust and Clearing Corporation. The DTCC,
through its subsidiaries, provides clearance, settlement and information
services for equities, corporate and municipal bonds, government and
mortgage-backed securities, over-the-counter credit derivatives and emerging
market debt trades.
"DVP/RVP" refers to Delivery Versus Payment/Receive Versus Payment, which
describes the delivery or receipt of securities for cash that takes place on the
settlement date of a transaction.
"ECN" refers to an Electronic Communication Network. An ECN is a fully
automated, private electronic network similar to an ATS, which allows market
participants on an equal basis to match orders and post quotes in the United
States equity markets with or without the participation of Market Makers or
other middlemen. ECNs permit individuals, institutions, and Market Makers to
directly make their own market in a particular stock. Although ECNs operate much
like electronic stock exchanges, they are not exchanges as a matter of law. It
offers after hours trading and anonymity in trading Nasdaq stocks.
"EuroLink" refers to EuroLink Network, Inc., our 40%-owned affiliate, of
which we acquired 100% effective March 29, 2004.
"FIX" refers to Financial Information eXchange.
"FIX protocol" refers to a messaging standard developed to enable
real-time "standard formatting" for the electronic exchange of order and
execution information between broker, buy-side, exchange and back-office trading
related systems.
"FSA" refers to the Financial Services Authority, which is the replacement
regulating body for the Securities and Investments Board (SIB). The FSA, which
came into being on October 28, 1997, has all regulatory responsibilities for the
UK financial services industry.
"Give up" refers to the action of a broker excluding his or her name in a
securities transaction that involves two other brokers.
"Introducing broker-dealer" refers to a broker-dealer who is not permitted
to accept money, securities, or property from a customer.
"Institutional investor" refers to a financial institution which invests
large amounts of money in the stock, bond and other financial markets
professionally on behalf of other people (e.g. a pension or insurance fund).
Contrast with an individual or 'retail' investor investing his or her own money.
"ISE" refers to International Securities Exchange, an electronic options
exchange
"ITS" refers to the Intermarket Trading System, which began operation in
1978, is an ECN that links nine US markets: the NYSE, AMEX, Boston (BSE),
Chicago (MSE), Cincinnati (CSE), Pacific (PSE) and Philadelphia (PHLX) stock
exchanges, the Chicago Board Options Exchange (CBOE), and Nasdaq. The system
enables market professionals to interact with their counterparts in other
markets whenever the nationwide Consolidated Quote System (CQS) shows a better
price.
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NYFIX, INC.
"Javelin" refers to Javelin Technologies, Inc., our wholly-owned
subsidiary, and its subsidiaries.
"Listed Securities" refers to securities, such as shares of stocks and
bonds which are quoted on the NYSE or AMEX.
"Market Maker" refers to a broker-dealer that is willing to accept the
risk of holding a particular number of shares of a particular security in order
to facilitate trading in that security.
"NASD" refers to the National Association of Securities Dealers, which
governs behavior of member firms.
"NFA" refers to the National Futures Association, which is the futures
industry's self-regulatory organization under Section 17 of the Commodity
Exchange Act.
"NMS" refers to the National Market System, which consists of nine markets
- - the American, Boston, Cincinnati, Chicago, New York, Pacific, Philadelphia and
Nasdaq over-the-counter markets - linked electronically by ITS computers.
"NYFIX Clearing" refers to "NYFIX Clearing Corporation, our wholly-owned
subsidiary.
"NYFIX International" refers to NYFIX International Ltd., our wholly-owned
subsidiary.
"NYFIX Millennium" refers to NYFIX Millennium, L.L.C., our 80%-owned
subsidiary. The remaining 20% is owned by ten (formerly eleven) of the largest
global investment banks.
"NYFIX Network" refers to our proprietary, owned and operated networks
connecting brokers, institutions and exchanges.
"NYFIX Overseas" refers to NYFIX Overseas, Inc., our wholly-owned
subsidiary.
"NYFIX Partners" refers to NYFIX Partners, Inc., our wholly-owned
subsidiary.
"NYFIX Transaction Services" refers to NYFIX Transaction Services, Inc.,
our wholly-owned subsidiary.
"NYFIX USA" refers to NYFIX USA, Inc., our wholly owned subsidiary.
"NYSE" refers to the New York Stock Exchange, which is the largest of the
nine exchanges in the National Market System.
"OBMS" refers to our futures and derivatives Order Billing Management
System product.
"OMS" refers to Order Management System(s).
"Open outcry" refers to a public auction system used for trading where
communication is by shouting and hand signals between traders.
"OTC," "OTC Securities" or "Over the Counter Securities" refers to a stock
or share that is not traded on a listed exchange, but which is traded between
dealers by telephone and computer. Securities traded on Nasdaq markets are OTC
Securities.
"Platform" refers to the Nasdaq trading platform that Renaissance was
formed to commercialize.
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NYFIX, INC.
"Regulation ATS" refers to the order handling rules the SEC promulgated in
December 1998 relating to the regulation of certain ATSs.
"Renaissance" refers to Renaissance Trading Technologies, Inc., our
wholly-owned subsidiary.
"SEC" refers to the United States Securities and Exchange Commission.
"Sell-Side" refers to securities and derivatives brokerage firms trading
as brokers or dealers in securities and derivatives markets.
"SIAC" refers to the Securities Industry Automation Corporation, which
operates the NYSE and AMEX automation and communications systems to support
trading, market data reporting, and surveillance activities.
"SIPC" refers to the Securities Investor Protection Corporation, which
provides certain protection for customers' accounts in the event of the
bankruptcy or other liquidation of a broker-dealer.
"Specialist" refers to a person on the trading floor of certain exchanges
who manages the auction market in specific securities and participates as an
agent and as a principal in those markets. "SRO" refers to a Self-Regulatory
Organization, such as the NYSE or NASD.
"STP" refers to straight-through-processing, the automation of front-,
middle-, and back-office environments in a "paperless" fashion.
"WAN" refers to wide area network comprising the integration of several or
many inter-connected networks.
PART I
ITEM 1. BUSINESS
GENERAL SUMMARY
NYFIX, founded in 1991 through the acquisition of a New York corporation,
is headquartered in Stamford, Connecticut. In December 2003, we reincorporated
as a Delaware corporation.
We are an established provider to the domestic and international financial
markets of trading workstations, middle-office trade automation technologies and
trade communication technologies. Our NYFIX Network is one of the industry's
largest networks, connecting broker-dealers, institutions and exchanges. In
addition to our headquarters in Stamford, we have offices on Wall Street in New
York City, in London's Financial District, in Chicago, and in San Francisco. We
operate three data centers in the northeastern United States and have
established additional data center hubs in London and Amsterdam.
We are a provider of trading technology, industry network connectivity and
execution services, offering certain underlying, universally applicable network
inter-connectivity products, systems, facilities, and supporting operations to
our two business segments: our Technology Services segment and our Transaction
Services segment. These segments, in turn, package these products and services
and add others to address the needs of their specific markets. We also provide
to our segments products specifically developed to support the marketing
strategy of that segment. We provide product development, systems development,
data center and network operations support to our segments.
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NYFIX, INC.
Our Technology Services segment is comprised of four of our subsidiaries:
NYFIX USA, NYFIX Overseas, Javelin, and Renaissance. These businesses work
together as technology providers, focusing on offering trade-management systems,
a centralized industry order-routing network, order-routing software,
exchange-floor automation systems, exchange and market access technology and
post-trade processing systems. Our Technology Services customers consist
primarily of United States securities brokerage firms and international
derivatives brokerage firms. Our Technology Services segment generates
subscription, capital sale and service revenue.
Our Transaction Services segment is comprised of six of our subsidiaries -
NYFIX Millennium, NYFIX Transaction Services, and NYFIX Clearing, which are NASD
registered broker-dealers; NYFIX Partners, which is our introducing
broker-dealer for derivatives and was granted its broker-dealer license in 2002
by the NFA; NYFIX International, which we incorporated in the United Kingdom on
March 29, 2004 and which is applying for its FSA broker-dealer license in
anticipation of our expansion into European and other international markets; and
EuroLink, of which we agreed to acquire 100% effective March 29, 2004 and which
represented our initial transaction efforts in the European markets.
NYFIX Millennium provides a modernized electronic execution venue under
Regulation ATS for trading in United States stocks. NYFIX Transaction Services
provides technology and direct market access and execution links. NYFIX
Clearing, a member of the DTCC, settles and clears transactions on behalf of
NYFIX Millennium and NYFIX Transaction Services. While NYFIX Partners has not
initiated any active business, we are discussing opportunities with sponsoring
broker-dealers and potential customers for the derivatives markets to augment
our future business plans.
In recent years, we have invested heavily in pursuing a growth-oriented
strategy and have organized those efforts largely through our subsidiaries.
After the introduction of our NYFIX Network in 1998, we experienced quarter over
quarter revenue growth from 1999 through 2001. Thereafter, as a result of the
impact of the tragic events of September 11, 2001 on our customer base, the
subsequent downturn in the financial markets in 2001 and 2002, and the
fixed-cost base of our acquired companies, we have not been able to generate
sufficient revenue to offset our operating costs and, thus, experienced
operating losses in 2002 and 2003. We believe that our decision to continue to
invest during a downturn in our markets is an important factor to help us become
better positioned to take advantage of future opportunities. We have entered new
customer market segments and launched new products and are actively pursuing
others to support trading for a variety of financial instruments in more markets
while increasing our international business opportunities.
ACQUISITIONS AND INVESTMENTS
The following represents summaries of our recent acquisitions and
investments that led to the current structure of our two business segments.
TECHNOLOGY SERVICES SEGMENT
RENAISSANCE
Renaissance was formed to commercialize our Nasdaq trading platform (the
"Platform"). Our key considerations for the acquisition of Renaissance included
our ability to sell our products into the OTC market by integrating Renaissance
features into existing NYFIX products to enable customers to have a single view
and access to the OTC and listed marketplaces from one workstation.
In the fourth quarter of 2002, we acquired an 18% interest in Renaissance.
In connection with our investment, we acquired, for $1.0 million, the
intellectual property rights and source code to the Platform from a major bank
and brokerage firm, and contributed such intellectual property rights and source
code to Renaissance. In the third quarter of 2003, we acquired the remaining 82%
of Renaissance.
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NYFIX, INC.
The total purchase price for Renaissance was $11.8 million, which included
i) the issuance of 821,939 shares of our common stock at an aggregate value of
$4.1 million; ii) promissory notes payable, at our option, in our common stock
or cash, with a fair value at the acquisition date of $2.7 million; iii) cash of
$4.4 million, which we loaned or funded to Renaissance; and iv) the source code
Platform acquired by us from an unrelated third party and contributed to
Renaissance of $1.0 million. These amounts, totaling $12.2 million, were offset
by 60,000 shares of our common stock, which we acquired from Renaissance, with a
fair value of $0.4 million. In return, we received net tangible assets with a
fair value of $0.5 million and intangible assets of $3.1 million, resulting in
goodwill of $8.2 million.
JAVELIN
Javelin specializes in the development of the actual underlying FIX
protocol software used by third party in-house or vendor based order-management
or portfolio-management systems. 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. NYFIX
was an early supporter and adopter of the FIX protocol. We provided software to
third parties, which competed with Javelin, until 1998, when we focused its FIX
development resources and expertise on imbedding the FIX protocol directly into
the NYFIX network and our portfolio of products. Given the significant market
penetration and ongoing distribution relationships with third-party order and
portfolio management systems providers, our key considerations for the
acquisition of Javelin included the ability to more quickly penetrate the
buy-side market, cross-selling multiple layers of FIX dependent product
offerings, including cross-selling of our core products and transaction
services, and a single point of electronic broker and exchange access across all
major domestic and international equity and derivatives exchanges.
In the first quarter of 2002, we acquired 100% of the outstanding stock of
Javelin. The total purchase price was $54.7 million, which we financed with a
combination of (i) cash of $10.0 million; (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. In return, we received net
tangible assets with a fair value of $4.0 million and intangible assets of $8.8
million, resulting in goodwill of $41.9 million.
Of the aforementioned purchase price, $1.0 million in cash and 270,945
shares of our common stock, having a fair value of $4.0 million at March 31,
2002, were being held in escrow by an unrelated party, subject to a working
capital adjustment. On March 15, 2004, a representative of the former
shareholders of Javelin executed a settlement agreement with us that, that among
other things, paid us $1.3 million from the escrow fund and Javelin shareholders
and distributed the shares of our common stock held in the escrow fund to the
former Javelin shareholders. We recorded the $1.3 million of net proceeds
received from the settlement in the first quarter of 2004 as a reduction in
goodwill.
TRANSACTION SERVICES SEGMENT
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.
On October 27, 1999, NYFIX Millennium was formed by us and seven global
international investment banks and brokerage firms consisting of the "Initial
Partners": 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 invested $14.0 million ($2.0 million each) in NYFIX Millennium
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NYFIX, INC.
in exchange for 175,000 units (25,000 units each) of NYFIX Millennium,
collectively owning a 50% ownership interest in NYFIX Millennium. We invested
$2.0 million and owned the remaining 50% (175,000 units). We purchased from the
Initial Partners an option to buy an additional 30% ownership interest in NYFIX
Millennium (the "Option"). As consideration for the Option, we issued to the
Initial Partners an aggregate of 1,968,750 shares of our common stock with a
fair value of $34.6 million on the measurement date of October 27, 1999. The
Option, which was exercisable at any time, had no expiration date, and required
us to issue an aggregate of an additional 236,250 shares of our common stock to
the Initial Partners upon exercise. Exercising the Option would enable us to
increase our ownership interest in NYFIX Millennium to 80% of the total
ownership interests.
On March 6, 2001 and April 2, 2001, NYFIX Millennium added four "New
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 invested $8.0 million ($2.0 million each) in
NYFIX Millennium in exchange for 100,000 units (25,000 units each) of NYFIX
Millennium. To maintain our 50% ownership interest in NYFIX Millennium, we
reduced certain of our rights to share future dividend distributions of NYFIX
Millennium. We purchased from the New Partners an option, similar to the option
purchased from the Initial Partners, to buy an additional 30% ownership interest
in NYFIX Millennium. As consideration for the option, we issued to the New
Partners an aggregate of 376,000 shares of our common stock with a fair value of
$8.4 million on the measurement dates of March 16, 2001 for one of the New
Partners and April 2, 2001 for the other three New Partners. The option, which
was also exercisable at any time, had no expiration date, and required us to
issue an aggregate of an additional 60,000 shares of our common stock to the New
Partners upon exercise. Exercising the option would enable us to increase our
ownership interest in NYFIX Millennium to 80% of the total ownership interests.
Hereinafter, references to "the Option" include the option received from both
the Initial Partners and the New Partners.
Effective February 1, 2002, we exercised the Option. In exchange for the
increased ownership interest in NYFIX Millennium, we issued to the Initial
Partners and New Partners an aggregate of 296,250 shares of our common stock,
with a fair value of $4.5 million on the date of exercise. As a result, we
increased our ownership interest in NYFIX Millennium to 80%. The excess of the
purchase price of $9.1 million over the fair value of the net assets acquired
was $6.9 million and has been recorded as goodwill. Some of our key
considerations for the acquisition of an additional 30% ownership interest in
NYFIX Millennium included our ability to control NYFIX Millennium's operations
to effect changes in its business model as a result of the attractiveness of the
synergies anticipated with our recently-acquired NYFIX Transaction Services
broker-dealer and soon-to-be acquired Javelin business.
NYFIX TRANSACTION SERVICES
In December 2001, we acquired an inactive broker-dealer for $34,000, which
we renamed NYFIX Transaction Services. NASD approved NYFIX Transaction Services'
broker-dealer status in May 2002 and it 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. Our key considerations for the acquisition of NYFIX Transaction Services
included the attractiveness of the synergies anticipated with NYFIX Millennium
and the ability to provide a broker-sponsored alternative to our customers. The
$34,000 purchase price was allocated to goodwill.
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NYFIX, INC.
EUROLINK
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
United States 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 automatically converted into a 40%
common stock interest two years from the date of our original investment, or on
March 6, 2004. On March 29, 2004, we executed a binding agreement to acquire the
remaining 60% of EuroLink that we did not own. The transaction closed on April
28, 2004. We financed the acquisition with $24,000 in cash and one-year
promissory notes payable in our common stock or cash, at our option, valued at
$0.5 million.
MARKETS - GENERAL
Our products and services provide a specialized set of technology and
technology driven execution services to the domestic and international markets
for trading in financial instruments. In order of priority, we focus on the
equities, exchange-traded derivatives and fixed-income markets.
We only provide solutions to organizations professionally engaged in
proprietary trading or handling of customer orders in the financial markets. Our
customer list includes more than 50% of the top 100 United States brokerage
firms, an increasing number of buy-side institutions, including 40 of the top
200, and a number of larger United States and international brokerage firms and
buy-side institutional investors who trade in markets outside the United States.
Through the application of technology and business concepts, we automate
work-flows, both at the user work-station level and in the interactive process
of transmitting and executing orders between buy-side institutional investors,
brokers, exchanges and alternative market venues including ECNs and ATSs.
In the last ten years, market forces and regulations have created an
industry wide transition from voice and telephone based securities trading to
computerized order-handling, transmission and real-time transaction compliance
recording.
We are a leading provider in the United States equity market of exchange
floor systems and advanced electronic gateways to connect exchanges, such as the
NYSE, and of trader workstation products for "sales" and "block" traders working
at the trading desk of a typical large brokerage firm. We own and operate
several hundred stationary workstations and mobile systems on the floor of the
NYSE and, via our NYFIX Network, typically process several hundred million
shares a day, representing a significant market share of the NYSE volume.
With the movement away from the traditional floor-broker open outcry
exchanges to electronic environments, as seen in almost all international equity
and derivatives exchanges and gradually but increasingly in the United States,
the interaction within and among these markets has changed, and we believe will
change further. Increased market transparency, the trading of the same financial
instruments in multiple market centers that provide competing quotes, the
increasingly dynamic and sophisticated computerized processes for quote and
execution handling and regulations that require systems changes in support of
the investment community are all factors of challenge and opportunity for us.
Recent industry factors particularly highlighted in the last year,
including the relationship between optimizing best-execution and "unbundling" of
broker-provided research and execution services and payment for such, will
influence the business between the brokers and the buy-side institutional
investors and us.
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NYFIX, INC.
Increasingly in the last two years, we have made significant investments
through acquisition and product development to create additional revenue
streams. We believe that the demand is increasing for value added services for
both sell-side brokers and buy-side institutional investors. While the broker
needs more sophisticated technology to interact with a much faster hybrid market
structure, many institutional investors who use computerized systems to transmit
orders to their brokers, and in turn the market, are seeing a changing role for
the traditional broker. This narrowing of the gap between the institutional
investors' systems and those of the exchange markets is illustrated, we believe,
by the fact that many orders today travel "hands-free" from the institutional
investor's computer systems via broker electronic systems to the exchange or
other execution venue and back after execution without any human intervention.
For our sell-side brokerage customers, we believe that the development of new
categories of value added capabilities can provide operating efficiencies. For
our buy-side institutional investor customers, we believe that our established
infrastructure, together with new products and services, can create value and a
more direct interaction with the marketplace.
Domestically and internationally, we are applying both technology and
business structure changes in pursuit of growth in a changing market place.
SEGMENT OVERVIEW
Our segments are responsible for all customer facing arrangements relating
to providing products and services. Financial information by segment and
geographic area is set forth in Note 14, "Business Segment Information" of our
Notes to Consolidated Financial Statements as noted in the Index.
OUR TECHNOLOGY SERVICES SEGMENT
PRINCIPAL MARKETS AND CUSTOMERS
The United States equity market is made up of stocks listed on the NYSE,
the AMEX and other regional exchanges, called listed stocks, and stocks traded
on Nasdaq, called over-the-counter or OTC stocks. Historically those stocks were
exclusively traded at the exchanges where they were listed. Through regulatory
changes and market forces, most of these stocks today trade in multiple
execution centers, such as the principal exchange for the stock, ECNs, ATSs and
third-market market makers. The exchanges have also initiated competition in the
trading of each other's stocks, either directly or through derivatives
instruments.
To trade in any of the markets, orders must be represented by a
broker-dealer subject to regulation by the SEC, the NASD and the particular
exchange. Those who directly represent orders on an exchange must also be
members of that exchange. Brokers who are not exchange members place their
orders for that exchange through member brokers.
Electronic exchange markets, market forces, and regulations have resulted
in the demand for technology to facilitate all aspects of the trading processes
between customers, correspondent brokers, member brokers, the exchanges, Nasdaq,
and alternative market venues. This emphasis on computerization and automation
is sometimes referred to as "paperless trading" and STP.
Hundreds of sell-side brokerage firms trade listed and OTC securities.
Except for very small organizations, these are the potential customers of our
Technology Services segment.
During 2003, both the NYSE and Nasdaq experienced significant changes and
challenges that have continued into 2004. ECNs and ATSs have increased the
competitive pressures on both the NYSE and Nasdaq, and attention from regulators
and buy-side institutions could lead to changes in the NYSE specialist system.
Depending on the nature of the changes, such changes could negatively impact the
future sales of technology to support floor brokers working for firms operating
directly on the floor of the NYSE.
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Other developments could have a different impact. Increased competition
has resulted in quotes for the same stock from multiple market centers with
different systems. At the same time, brokers have an obligation to obtain best
execution for their customers. In addition, top-tier sell-side firms in
particular are restructuring their trading desks to organize securities by
industry sector rather than by the market in which a given security is traded.
We believe that these factors could lead to more sell-side investment in
technology and to outsourcing solutions like those offered by our Technology
Services segment. These offerings include central market access technology
designed to address multiple market centers and direct orders to the market
center representing the best execution opportunity at any given time and
high-speed systems that can handle high trading volumes, support connectivity to
multiple market execution venues and adhere to the compliance and regulatory
specifications that are unique to each different market center.
The international derivatives market has experienced increased
consolidation of trading activities across all asset classes and competition
between market centers quoting the same or each other's instruments. We believe
these and other developments offer opportunities and challenges to our
Technology Services segment.
CURRENT BUSINESS AND BUSINESS DEVELOPMENT
Our Technology Services segment generates revenue primarily through
subscription sales of its products and services to sell-side securities
brokerage firms in the United States. These products and services include broker
desktop OMS, exchange floor systems, exchange and market access gateways,
clearing and back-office gateways, FIX engines and monitoring products, and
networked counterparty connectivity through our NYFIX Network. We offer similar
products and services, except for counterparty connectivity, to sell-side
brokerage firms in international derivatives markets.
In the United States equity markets, our Technology Services segment
derived its revenues in 2003 and in prior years primarily from our automation
products and services for the listed market place, which encompasses trading on
the NYSE, the AMEX and regional exchanges. During 2003, through the acquisition
of Renaissance, we expanded our sell-side trader workstation product portfolio
to begin targeting the Nasdaq OTC space. In addition to ongoing enhancements to
our current product portfolio, we are currently in the process of expanding our
technology offerings to include:
o Derivatives counterparty connectivity via our NYFIX Network;
o International equity counterparty connectivity via the NYFIX
network;
o Integration of NYFIX listed and Nasdaq OTC work-station products;
and
o Increased broker to buy-side connectivity services and tools.
We are also examining the market for several post trading and compliance
related products and services that can potentially be delivered via our NYFIX
Network.
PRINCIPAL PRODUCTS AND METHODS OF DISTRIBUTION
We only sell products directly to end-customers and primarily distribute
all of our services through the NYFIX Network.
For the brokerage (or sell-side) community, we provide a range of
services, available through our NYFIX Network. The NYFIX Network provides
brokerage firms with connectivity to their buy-side customers as well as to
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NYFIX, INC.
various exchanges, ECNs and ATSs. The Network also provides connectivity to $2
brokers. Our Technology Services segment offers a variety of trading workstation
products for brokerage firm trading desks and has a series of OMS options
available. Our Technology Services segment also offers OMS for exchange floor
trading, including a wireless broker handheld, which enables exchange floor
customers to receive orders electronically from trading desks and route
execution information, all in real-time. Our Technology Services segment also
offers a number of auxiliary services with our 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.
For buy-side institutional investors, including investment managers,
mutual and pension fund managers and hedge funds, our Technology Services
segment provides domestic and international connectivity to a large number of
sell-side brokerage counterparties and gateways to market venues available to
and requested by the buy-side. We differentiate ourselves by providing a number
of products and services complementing our connectivity offering. Some of our
complementary technology services are FIX Engines, a FIX Certification
department, a FIX expert help-desk providing streamlined connectivity and
systems testing with counter-parties, independent real-time storage and recovery
of orders and executions, real-time best-execution order monitoring and other
smart tools. Cross-selling opportunities exist and are being pursued by both of
our segments.
THE NYFIX NETWORK: A PRODUCT DISTRIBUTION PLATFORM AND A PRODUCT IN ITSELF
The NYFIX Network refers to our proprietary data centers and domestic and
international WAN infrastructure. 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, and other
electronic trade execution venues, such as ECNs and ATSs.
Our large scale, focus on high availability in the design of our data
centers, systems and network, and many available end-points are in our view
important competitive elements in our offering. Further information on our data
centers, systems and network is outlined under the "Technology Operations"
section in this Report.
Our network provides several layers of services, including:
o Basic high-speed connections to a large number of end-points
(counterparties and exchanges) on a secure financial transaction
network;
o Centralized certification of connected parties in compliance with
FIX;
o A simplified centralized one-to-many communication set up for each
party via a main NYFIX hub; and
o Centralized real-time storage of traffic, linked with automatic
recovery and compliance systems.
We differentiate ourselves from basic point-to-point circuit network
providers by integrating more systems and operational capabilities directly into
our network.
In addition to these basic functions, we deliver a second layer of central
gateway services to a number of diverse trading and post trading venues, often
converting and managing special host systems needed to communicate with each
particular venue. This unified approach saves the customer the need to support
multiple dedicated circuits and systems and changes to such systems as a result
of ongoing advances in technology.
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For the third layer of network products and services, we are introducing a
number of value added products for independent, benchmarked real-time monitoring
of trading activity and quality (of execution) on all customer connections
available via our NYFIX Network.
In addition to using our NYFIX Network to provide connectivity between
parties and venues, we use our NYFIX Network for a second main purpose: to
distribute our front-end user products, such as trading stations and exchange
floor stationary or wireless systems. In the industry, this arrangement is
referred to as client server applications, where the server applications (the
back end systems and databases) are residing in our data centers and the
customer applications (the front-end user application) are distributed via
high-speed data circuits to the customer. In addition to critical mass derived
cost benefits, the benefits to the customer and us include logistical delivery
benefits and the ability for us to more effectively support our systems and
operations.
The following is a description of our customer server application products
provided and distributed via our NYFIX Network.
TRADER WORKSTATION PRODUCTS
Our trader workstations provide electronic order routing and order
management. The workstations are touchpad-based or desktop software applications
that enable sell-side traders to monitor and manage the flow and execution of
equity and derivative orders. The OMS use the FIX protocol to connect to
brokerage firms, major global market centers, many regional exchanges, ECNs and
ATSs.
NYFIX Platinum is our new offering of a combined listed and OTC trading
system. NYFIX Platinum was created by integrating our existing OMS for listed
securities, FIXTrader, with the newly acquired Renaissance system for OTC
securities.
FIXTrader provides a complete order management solution for upstairs
traders: electronic entry and routing of orders and executions between buy-side
institutions, sales and block desks and exchange floor booths.
The Renaissance Trader Workstation market making application for OTC
securities includes trade automation processes for fee based trading on an
agency basis, smart order handling, and automatic preventive compliance handling
functions.
OBMS DERIVATIVES TRADING
Our Futures and Options OBMS offers sell-side traders the ability to
enter, route and manage orders and executions in real-time. Our system supports
global order routing between different international branches of the same firm
and the major global exchanges; both open outcry and electronic. OBMS provides
real-time ticketless order capture, global order routing with interfaces to
exchange supported systems and 24-hour order management.
EXCHANGE FLOOR AUTOMATION
Our exchange systems are comprised of stationary floor booth applications
and wireless handheld systems for order management and routing of market looks
and real-time market information. Our exchange systems also provide access
services to exchange provided execution facilities. We streamline customer
access by providing real-time conversion from the FIX protocol to exchange
proprietary access protocols. We deliver these exchange floor products over our
NYFIX Network.
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FLOORREPORT, MARKET LOOKS AND MOBILEBROKER
Our FloorReport system provides brokerage firms with a complete electronic
OMS for exchange trading and floor operations. FloorReport provides integrated
market looks and includes MobileBroker, a handheld trading device for wireless
communications with other systems on the exchange floor and traders on the
member firms' trading desks.
FIX ENGINE TECHNOLOGY AND PRODUCTS
Developed by Javelin, our APPIA product is a FIX engine and enables FIX
message handling and connectivity. The APPIA software supports many operating
systems and presents several APIs.
Instant Integrator is middleware software based on the APPIA FIX
technology. Instant Integrator allows a legacy, or non-standard, order handling
system to communicate using FIX.
Tradescope is a new product designed for use by operations and help-desk
staff to monitor the APPIA FIX engine and our connections in a real-time
production environment.
PRODUCTION FIX SERVICES: SYSTEMS INTEGRATION AND CERTIFICATION
Although the FIX protocol is a standard, connecting FIX systems to each
other requires effort, skill and resources. We have systems integration
specialists responsible for enabling connections to our FIX network. We have
invested substantially in lab and pre-production facilities to build a
documented knowledge base of FIX integrations that we use to cross-connect the
over 300 different customer systems within our NYFIX Network. Each customer
system must pass a formal certification test before being enabled for production
trading using our NYFIX Network.
HELP-DESK AND SERVICE
We are committed to providing our customers with high quality and reliable
products and services. 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. We maintain
multiple data centers as part of our NYFIX Network.
BUSINESS CONTINUITY AND DISASTER RECOVERY PLANNING AND OUTSOURCING
Following the tragic events of September 11, 2001 and the 2003 blackout in
New York City and elsewhere, business continuity and disaster recovery plans and
technologies have become more important in the technological infrastructure for
financial services firms. Globalization and increased reliance on STP and
process automation have also increased attention to business continuity and
disaster recovery planning.
Supported by multiple, high availability data centers, part of our
offerings include capabilities for redundant data communication and redundant
data storage and retrieval of the customers' trading data in real-time and in
historical mode.
OUR TRANSACTION SERVICES SEGMENT
PRINCIPAL MARKETS AND CUSTOMERS
Our Transaction Services segment customer base is comprised of NYSE Member
firms, non-member securities firms (NASD registered), non-US securities firms,
registered investment advisors and United States hedge funds. Transaction
Services segment customers fall into three categories based on their clearing
and execution needs.
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NYFIX, INC.
Currently, the customers of the NASD registered broker-dealers consist
primarily of United States securities brokerage firms and United States buy-side
institutions, including banks, mutual funds and other professional money
managers. Our Transaction Services segment primarily generates revenue from the
application of fees charged on executed trades to the following groups of
customers:
o Member, non-Member and non-United States securities firms (sell-side
firms) are either self- clearing or rely on a correspondent clearing
firm to clear on their behalf with our Transaction Services segment.
Our Transaction Services segment bills per share execution charges
to its customers on a monthly basis. These securities brokerage
firms are consumers of our Millennium, FIXTrader, and Direct
Electronic Access products.
o United States hedge funds (buy-side firms) rely on prime brokers to
clear their trades. These customers are consumers of our Patriot
product and our Millennium and Direct Electronic Access products.
o Registered Investment Advisors (buy-side firms) rely on custodial
banks to clear their trades. These trades are commonly referred to
as DVP/RVP clearing. These are generally net trades in which
Transaction Services segment commission charges are paid through the
settlement and clearing process, which is typically three days after
trade date. Registered investment advisors are consumers of
technology products, such as Patriot and FIXTrader and transaction
services, such as the Millennium ATS execution and matching system,
through broker sponsored agreements.
PRINCIPAL PRODUCTS AND METHODS OF DISTRIBUTION
Our Transaction Services segment leverages cross-selling opportunities for
our NYFIX Network, while distributing its products and our Technology Services
segment's Trader Workstation Products, including FIXTrader, which many of our
Transaction Services segment customers use to launch their order flow.
In addition to connecting to customer internal systems and FIX Engines,
our Transaction Services segment tests, certifies with and connects to customers
using a variety of institutional money management OMS, hedge fund systems and
broker systems, including Eze Castle Software, Charles River Development,
INDATA, LongView International, RealTick, Neovest, FlexTrade, Portware, UNX,
Sonic Software, and Lava Trading. We also provide customers with our Javelin FIX
Engine technology. Our open connectivity policy provides the customers of our
Transaction Services segment with the freedom to select among a variety of front
end user applications or FIX engine products, including those of our
competitors.
PATRIOT
Patriot integrates market data with order launching capabilities across all
United States equity and option markets. In addition to electronic access
capabilities, Patriot's ability to route orders to any destination on our NYFIX
Network differentiates it in the electronic execution aggregation market. Our
competitors include Real Tick, Rediplus, Instinet Portal, Lava, Bloomberg
TradeBook, and ITG's Radical product.
MILLENNIUM ATS
NYFIX Millennium developed an ATS focused on the electronic matching of
United States Listed Securities. It does not display a quote and our executions
are completely anonymous. Two types of orders are available: (1) pass through
and (2) conditional. Pass through orders flow through the matching facility on
their way to the NYSE or the AMEX. These orders are only executed if they find a
marketable match within the National Best Bid and Offer. If there is not a
match, these orders are immediately routed to their ultimate destination.
Conditional orders reside in the system and interact with pass through order
flow as well as execute against other conditional orders. These orders can be
pegged against the bid, offer, last sale, and mid-point. Volume and bid/offer
spread constraints can also be attached to these orders.
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NYFIX, INC.
NYFIX Millennium's ATS augments traditional auction markets by combining
the electronic execution technology of an ECN with the liquidity of traditional
primary markets. NYFIX Millennium attempts to mitigate the negative price impact
of traditional fully disclosed searches for liquidity.
NYFIX Millennium is interposed between the trading parties, extending full
anonymity of those parties throughout the clearing and settlement process. NYFIX
Millennium's volume is generally cleared by NYFIX Clearing on its behalf.
We are in the process of developing matching in Millennium of Nasdaq
traded shares as well.
ELECTRONIC NYSE ACCESS
We provide electronic access to the NYSE through the DOT system. This
service leverages our significant FIX production capabilities, advanced DOT
gateway and SIAC infrastructure. All NYSE order types, including Direct+,
Institutional Express, and Liquidity Quote, are supported.
ELECTRONIC NASDAQ ACCESS
We provide direct routing of orders to Nasdaq and other venues, such as
the Archipelago exchange, for matching and smart order routing.
ANONYMOUS NYSE FLOOR BROKER ACCESS
A subset of NYSE independent brokers, connected to our NYFIX network,
receive order flow directly from Transaction Services segment customers. These
orders are routed via our NYFIX Network. The customer identity is protected by
NYFIX Transaction Services. This service is used by customers who recognize the
need for a human agent on the floor but are concerned about the potential
information leakage that can be created. FIX based electronic messaging allows
for a significant degree of interaction without direct contact between the
counterparties.
ELECTRONIC ISE ACCESS
Direct connectivity access to the ISE via our NYFIX Network and our FIX
production environment gives options participants the same technological
flexibility afforded our customers in the cash equity markets. NYFIX Transaction
Services' electronic access ISE membership allows it to charge a per contract
execution rate. Options trade clearing is currently performed on behalf of NYFIX
Transaction Services by a third-party. NYFIX Clearing has recently been approved
as an Options Clearing Corporation member and as a NASD member.
SHADOW
NYFIX Millennium's Shadow order functionality enables NYFIX Millennium
pegged orders to be dynamically represented in NYFIX Millennium and Archipelago.
Users send pegged orders to NYFIX Millennium and a portion of the order is sent
to Archipelago and displayed in the NMS while the remainder of the order is
exposed anonymously in NYFIX Millennium and subject to execution in the
Millennium ATS.
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ISE COMBO MATCHING
NYFIX Millennium has entered into an agreement to provide the ISE and our
membership with an electronic matching facility in the underlying equities
trades that are a part of options and common stock trade combinations, which was
introduced in 2004. NYFIX Millennium will receive a per trade matching fee based
on size, with mutually agreed upon caps and floors.
ALGORITHMIC TRADING
Our Transaction Services segment is currently in the testing phase of
development for several algorithmic trading solutions. These algorithms work in
concert with our listed, OTC access products and our Millennium ATS and are
designed to improve customer trading results.
SMART TOOLS
New products provided in concert with our Technology Services segment's
sales of our NYFIX Network support the use of our Transaction Services segment's
products and services. Some of these products were available in the first
quarter of 2004, and we expect that additional products will be available during
the course of 2004.
OPERATIONS AND SUPPORT
Capacity, speed, security and uptime are considered important competitive
product parameters of our Transaction Services segment and are available as a
result of the large-scale infra-structure built by us. All products and services
are supported by our help-desks and operations staffs located at 100 Wall
Street, New York City, and in Stamford, CT.
SALES AND MARKETING
Our sales cycle for new customers is generally one to six months, while
sales of additional products and services to existing customers typically
involve 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
marketing, including production of exhibition and special events, planning and
production of collateral marketing materials and planning and production of
advertising and web promotion. We focus primarily on direct marketing efforts
designed to reach our target segments of customers, rather than mass marketing,
which we believe results in a more effective return on our marketing investment.
TECHNOLOGY OPERATIONS AND PRODUCT DEVELOPMENT
OPERATION OF OUR NYFIX NETWORK AND OUR DATACENTERS
We rely upon telecommunication carriers in operating our NYFIX Network and
our data centers. To achieve the highest level of availability, we use multiple
telecommunication carriers for data transport between core data centers and
customers, including AT&T, Sprint, MCI, Qwest and Verizon. Our data volume
is significant and we diversify our telecommunication needs across multiple
carriers, decreasing our reliance on any single telecommunication service
provider without materially losing the benefit of economies of scale.
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NYFIX, INC.
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
inserted into our architecture to accommodate continued network expansion. Our
building block architecture relies upon advanced technology standards, including
storage area network architecture, which is employed for high-performance
database access and transaction processing. This technology is scalable. We
maintain two primary 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, providing
us direct access for troubleshooting problems. An automated system continuously
monitors our NYFIX Network and data center infrastructure, logging the
performance of communication lines, equipment and systems and supporting our
effort to provide no or minimum disruption of continuous availability of our
services.
Our infrastructure currently processes several million orders and
executions per day with peak rates of hundreds of orders per second. We
currently do not exceed 50% of the overall infrastructure's capacity during peak
utilization.
Our primary data centers are located in two independent, separately
located data center facilities in the Northeast portion of the United States.
Although these data centers are serviced by the same electric utility, they are
serviced via different sub-stations. The data-centers are located in managed
co-hosted facilities. By co-locating equipment, we believe that 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. We also have European data-center hubs in co-hosted facilities
in London and Amsterdam.
APPLICATION DEVELOPMENT
We employ approximately 100 software developers and quality assurance
analysts; currently about a third of our overall workforce. These professionals
work in conjunction with the business product management, sales and production
support staffs, and directly with our customers, to identify and specify new
products and changes and enhancements to our existing products.
We develop software to meet a wide range of requirements, such as
regulatory changes, customers' requests to support new or customized workflows,
changes in market structure, opportunities to tap into new markets and
businesses for NYFIX and support for new and more cost effective technologies
for our data centers; for instance Linux and Java.
We specify, design, develop, and test our software following a consistent
process, which we developed by adopting and tailoring to our needs the best
parts of widely accepted software development methods, such as the Rational
Unified Process and the Microsoft Solutions Framework.
All our software is built to support the FIX protocol, both to interface
external systems not developed at NYFIX and as the internal protocol for
communication among our own applications. This end-to-end FIX support enhances
our ability to integrate our software with software developed by other vendors
or in-house by our customers and to offer our products as large end-to-end
solutions or as individual components.
We develop our software on the two leading operating platforms in our
space: UNIX, including Linux, for server-side mission critical high performance
applications, and Windows, for client-side Graphical User Interface, or
"GUI"-based applications. We closely follow the pace of evolution of software
development technologies and adopt new programming languages and tools as they
get established and when we believe that they can increase our staff's
productivity.
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NYFIX, INC.
Our Quality Assurance staff has access to a laboratory that closely
resembles the production environment, where software can be tested for
functionality, performance, reliability, recoverability, and interoperability.
We have in place procedures to escalate production issues and other urgent
requests to the appropriate development personnel for fast turn-around.
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 United States and Asia.
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.
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.
For our in-house manufactured hardware (TouchPad Workstations for traders
and floor brokers) and standard PC products used in customer installations, we
generally do not maintain purchasing or governing agreements with vendors. In
some cases, when it is to our benefit to stabilize competitive pricing, we
generate a blanket purchase order. The advantage of this is that competitive
pricing and product availability is stabilized for the term of the blanket
purchase order. Some of the Tier 2 resellers that we use are: CDW Corporation,
Dell and Arrow Electronics. Each of these resellers stock products from all the
major computer manufactures, such as IBM, Aaeon, Intel, Sony, NEC, Samsung,
Kingston Technology, Elo TouchSystems 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 United States. 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 IBM, HP, EMC,
Sun Microsystems, 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.
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NYFIX, INC.
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.
COMPETITION
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 products and services.
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.
We face competition in the following six areas:
o Network Services. Transaction Network Services, Radianz, Savvis, and
Global Crossing Ltd. are large basic point-to-point fiber optic
networks capable of carrying generic data information. These
networks are basic and could provide a lower price point. Thomson
TradeRoute has some level of value added services and is
competitively priced. While we have captured market share of
buy-side institutional network customers within the Thomson
TradeRoute customer base and others in the last year, there is no
assurance that this trend will continue.
o Exchange Floor Technology. We are a provider of exchange floor
automation technology, including stationary and wireless trading
technologies. While we offer access technology to numerous exchanges
globally, our most significant presence is in the United States
listed equity market. Non-specialist Member firms operate
approximately 900 booths on the NYSE. With more than 500 stationary
systems and over 250 handheld devices deployed on the NYSE exchange
floor, we have opportunity, but are also exposed to competition in
our existing installed base. The primary alternative is NYSE's own
systems. Like us, the NYSE is continuing to develop these systems.
There are currently no other significant vendors.
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), royalblue Group, Lava Trading and Bloomberg
LP. These competitors either have or are building data centers for a
service bureau offering and have the ability to pass listed order
flow through their systems to the exchange floors, including the
NYSE. While we believe that we compete effectively and that we
increased our market share in the last year, these vendors or
smaller vendors could increase their competitive efforts and market
share at our expense.
o FIX Engines. We face competition from vendors who produce FIX
protocol engine solutions such as Financial Fusion, Cameron Systems
and TransactTools. While we believe that we have improved our
technology and increased our competitive ability in the last 18
months, we could be subject to increased general competition and
increased pricing pressure in the area. We believe that when we
leverage our FIX-engine technology in combination with our NYFIX
Network or transaction offerings, we are less exposed to generic
competition from the FIX engine market.
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NYFIX, INC.
o Trade Execution Services. Our Transaction Services segment faces
competition from a wide variety of correspondent and technology
oriented brokerage firms and providers. Examples are ITG; Instinet;
Spear, Leeds & Kellogg; the Helfant Group, a division of
Jefferies & Company; ABN Amro Execution Services (recently
acquired by Merrill Lynch), and the Wave Securities division of
Archipelago. NYFIX Millennium specifically 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.
o Clearing and Settlement. We have organized our clearing and
settlement function primarily as an in-house cost saving and
streamlining measure. The service is not currently offered
externally and is thus not subject to direct competition.
OUR RELIANCE UPON LARGE CUSTOMERS
For the years ended December 31, 2003 and 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.
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 customer 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 periods 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
Participants in the United States securities industry are subject to
extensive regulation under both Federal and state laws. In addition, the SEC;
the NYSE; NASD; other SROs, such as the various stock exchanges; and other
regulatory bodies, such as the various state securities authorities, require
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NYFIX, INC.
strict compliance with their rules and regulations. We have subsidiaries that
are registered with the SEC and various states as broker-dealers. Much of the
regulation of broker-dealers has been delegated by the SEC to SROs, including
the NASD, which has been designated by the SEC as our principal examining
authority. The NASD adopts rules (subject to approval by the SEC) that regulate
the broker-dealers who are members of the NASD. These rules regulate the conduct
of our United States broker-dealer subsidiaries. The NASD, through its
regulatory subsidiary, NASDR, also conducts periodic examinations of the
operations of those subsidiaries. Our United States 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 broker-dealer subsidiaries are members of the SIPC, which
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. As part of this
regulation, we are subject to 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 is 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 customers. 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 United States or foreign
governmental regulatory authorities or the NASD, we are forced to incur more
costs in order remain in compliance with applicable regulatory requirements. We
may also be adversely affected by changes in the interpretation of existing laws
and rules by these governmental authorities and the NASD, or the enforcement
practices thereof. 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 United States Department of Justice
conducted anti-trust investigations of the NASD relating to concerns of fraud,
price fixing and collusion. In December 1997, 30 major brokerage firms and the
United States 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 new rules referred to as the order handling rules. These
rules cover how to display and execute a limit order.
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NYFIX, INC.
In December 1998, following the issuance of the order handling rules, the
SEC promulgated Regulation ATS relating to the regulation of certain ATSs, such
as NYFIX Millennium. The SEC expanded its interpretation of the definition of
"exchange" under the United States 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. 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 United States 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 also has 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 of the decrease in the additional price risk to fill
orders internally. Increased internal trading by traditional broker-dealers has
also reduced, and could continue to reduce, our order flow.
We provide our customers with access to United States exchange-listed
stocks, through connectivity to the NYSE and its exchange specialists.
Previously, NYSE Rule 390, 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,
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. Rule 390 was abolished in May 2000. As a result, we are able to
execute trades in the Millennium ATS involving all NYSE-listed stocks on behalf
of all of our customers.
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 the impact, if any, that 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 United States, 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
United States 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 United States 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 if we decided to pay 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 consolidated
financial statements.
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NYFIX, INC.
The SEC has also indicated that it is reviewing issues concerning the 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 United States equities market structure and
regulatory framework, although these issues or other issues of market structure
may have a significant impact on our equities business.
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 have begun 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. Rule 123 requires all orders received on the NYSE floor to be
input into an electronic OMS 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 United States. 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
our reputation generally.
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NYFIX, INC.
Any of the non-United States 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 United States may adversely affect or limit our business or operations and
adversely affect our consolidated financial statements.
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 March 31, 2004 we had 268 full-time employees, including 93 in
product development, 87 in operations and support, 47 in sales and marketing and
41 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 good
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.
AVAILABLE INFORMATION
We are required to file certain documents with 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.
ITEM 2. PROPERTIES
Our headquarters, executive offices and production facilities are in
Stamford, Connecticut, consisting of 21,100 square feet of leased space,
expiring in 2005. We currently maintain three offices on Wall Street in New
York, New York, comprising 46,500 square feet, with 22,700 square feet,
including a small data center, expiring in 2005 and 23,800 square feet expiring
in 2010. Effective February 1, 2004, we entered into an agreement to lease an
additional 17,900 square feet and renew an existing 17,900 square feet of office
space, expiring in 2014, in our primary office building on Wall Street. We
intend to sub-lease offices totaling 23,800 square feet and terminate a lease
for 4,800 square feet and consolidate our Wall Street operations into one
office. As of January 1, 2005, we expect to maintain one office on Wall Street
comprising 35,800 square feet. Refer to Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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NYFIX, INC.
We also have an office in Lyndhurst, New Jersey, where we lease 2,150
square feet expiring in 2006, and an office in London, England, where we lease
5,500 square feet expiring in 2009. 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 and 2005, of which 2,500 square feet are
sublet, respectively. We also maintain two data center facilities in the
Northeast United States, consisting of a total of 850 square feet with leases
expiring in 2009.
ITEM 3. LEGAL PROCEEDINGS
In May 2003, we were served as a defendant in KLEDARAS V. NYFIX, INC.
(Superior Court- NY County) Index No. 601502/03, which had been filed in New
York State court in New York City. Mr. George Kledaras, as representative of
former shareholders of Javelin, sought the release of an escrow fund consisting
of $1.0 million in cash and 270,945 shares of our common stock, having a fair
value of $4.0 million at March 31, 2002 established in connection with our
acquisition of Javelin. He also alleged damages of at least $18 million against
us and our Chairman and CEO, Mr. Peter K. Hansen, in connection with the Javelin
acquisition. In June 2003, pursuant to a stipulation with us, Mr. Kledaras
dismissed his lawsuit without prejudice. On March 15, 2004, Mr. Kledaras,
executed a settlement agreement with us that, among other things: (a) paid us
$1.3 million; (b) distributed our common stock from the escrow fund to the
former Javelin shareholders; (c) deemed that KLEDARAS V. NYFIX, INC.. be
dismissed with prejudice; and (d) provided for mutual releases with respect to
all claims related to our acquisition of Javelin. We received the $1.3 million
of net proceeds by March 31, 2004.
On or about May 13, 2004, an action entitled FULLER & THALER ASSET
MANAGEMENT V. NYFIX, INC., ET AL. was filed in the United States District Court
for the District of Connecticut. The Complaint names us, our Chairman and CEO
Peter Kilbinger Hansen, our former CFO Richard A. Castillo, our CFO Mark R.
Hahn, and our Directors George O. Deehan, William J. Lynch and Carl E. Warden as
defendants. The Complaint asserts a proposed class action claim on behalf of all
buyers of our stock between March 30, 2000 and March 30, 2004 and seeks an
unspecified amount of damages. The Complaint alleges violations of Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934, based on the issuance
of a series of allegedly false and misleading financial statements and press
releases concerning, among other things, our investment in NYFIX Millennium. We
and the other defendants intend to defend the lawsuit vigorously.
During the course of normal business, we become involved in various
routine legal proceedings. We believe that we are not presently a party to any
other material litigation, the outcome of which could reasonably be expected to
have a material adverse effect on our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of shareholders was held on October 21, 2003 and
continued on November 13, 2003.
(b) Not applicable; the meeting did not involve the election of
directors.
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NYFIX, INC.
(c) The results of the vote on a proposal to change our state of
incorporation from the State of New York to the State of Delaware by
merging NYFIX, Inc. with and into a newly formed, wholly-owned
Delaware subsidiary were as follows:
For 22,166,224
Against 1,225,335
Abstain 66,290
Broker Non-votes 0
(d) Not applicable; there was no settlement between us and any other
participant.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(A) MARKET INFORMATION
Our common stock, which was traded on the Nasdaq Stock Market under the
symbol NYFX for the periods presented, had the following high and low bid
information as reported by the Nasdaq Stock Market. Such over-the-counter market
quotations reflect inter-dealer prices, without retail markup, mark-down or
commission and may not necessarily represent actual transactions.
PRICES OF COMMON STOCK High Low
-------- --------
2003
First Quarter $ 4.85 $ 3.62
Second Quarter $ 6.86 $ 3.98
Third Quarter $ 7.25 $ 5.45
Fourth Quarter $ 8.73 $ 6.00
2002
First Quarter $ 19.00 $ 10.81
Second Quarter $ 15.65 $ 8.21
Third Quarter $ 8.24 $ 3.56
Fourth Quarter $ 5.27 $ 3.38
On April 8, 2004, our common stock began trading on the Nasdaq National
Market under the symbol NYFXE. The addition of the "E" to our trading symbol
indicated that we had not timely filed this Annual Report on Form 10-K for the
year ended December 31, 2003. Based on the delay in the filing of our Annual
Report on Form 10-K, Nasdaq notified us on April 1, 2004 that we were not in
compliance with its listing requirements. On April 8, 2004, we requested a
hearing with the Nasdaq Listing Qualifications Panel (the "Panel") for continued
listing on the Nasdaq National Market. The Panel held a hearing on April 29,
2004, where we requested an extension to May 30, 2004 to meet Nasdaq's listing
requirements. On May 19, 2004, Nasdaq notified us that the delay in the filing
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 was
viewed by Nasdaq as an additional delinquency with respect to our compliance
with its listing requirements and that the Panel will consider this factor in
its decision. We are awaiting a decision from the Panel regarding our request
for an extension.
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NYFIX, INC.
With this filing of our 2003 Annual Report on Form 10-K and once we file
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, we
believe that we will be in compliance with our SEC reporting obligations. At
that time, we will request that Nasdaq dismiss the pending delisting action
against us and permit our common stock to resume trading on the Nasdaq National
Market under the symbol NYFX.
(B) HOLDERS
At March 31, 2004 the records of our transfer agent indicated that there
were 423 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
incorporation 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.
(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information regarding our equity compensation
plans at December 31, 2003:
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 6,382,230 $ 10.42 458,432
=======
Equity compensation plans not
approved by security holders (1) 324,711 $ 8.83 78,698
---------- ======= --------
Total 6,706,941 $ 10.34 537,130
========== ======= ========
(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 were 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 were reserved for issuance upon exercise of such options.
Pursuant to the Javelin Plan, as amended, we may grant stock options and
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NYFIX, INC.
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, 2003, stock options to purchase 324,711 shares of our
common stock were outstanding under the Javelin Plan.
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NYFIX, INC.
ITEM 6. SELECTED CONSOLIDATED 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,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF (in thousands, except per share amounts)
OPERATIONS DATA:
Revenue $ 65,909 $ 55,812 $ 41,397 $ 23,980 $ 12,209
Gross profit 31,308 27,506 27,237 15,078 6,938
Operating expense 39,765 35,884 25,647 16,600 23,400
(Loss) income from operations (8,457) (8,378) 1,590 (1,522) (16,462)
Net (loss) income (4,373) (5,045) (3,457) 5,005 (16,570)
Net (loss) income per basic $ (0.14) $ (0.17) $ (0.13) $ 0.20 $ (0.76)
common share
Net (loss) income per diluted $ (0.14) $ (0.17) $ (0.13) $ 0.19 $ (0.76)
common share
As of December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET (in thousands)
DATA:
Cash and cash equivalents $ 21,006 $ 11,213 $ 4,968 $ 4,867 $ 16,887
Short-term investments 3,448 10,727 28,974 -- --
Accounts receivable, net 10,371 16,601 12,949 12,058 7,089
Working capital 23,347 30,823 47,513 9,159 18,942
Property and equipment, net 16,592 18,186 14,366 11,472 6,056
Goodwill 55,966 49,261 34 -- --
Total assets 152,172 146,615 96,249 56,428 38,401
Long-term debt, including 3,409 1,753 1,501 3,823 2,500
current portion
Stockholders' equity 132,572 132,863 86,919 41,097 29,427
Certain reclassifications have been made in the 2002 consolidated
financial statements to conform to the current year's presentation. In
connection therewith, amortization expense of intangible assets of $1.6 million
was reclassified from depreciation and amortization expense to cost of revenue
in 2002.
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NYFIX, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of management's discussion and analysis of financial condition
and results of operations ("MD&A") is to provide an overview of NYFIX, Inc.
to help facilitate an understanding of the significant factors influencing our
financial statements and also to convey our expectations of the potential impact
of known trends, events, or uncertainties that may impact our future financial
statements. Our MD&A includes forward-looking statements, including, without
limitations, our expectations. Our actual results may differ materially from
those expressed or implied in the forward-looking statements as a result of
various factors including, but not limited to, those discussed under "Risk
Factors Relating to Our Business" below. We assume no obligation to update the
forward-looking statements or such risk factors. You should read this discussion
in conjunction with our consolidated financial statements and related notes
included in this Report on Form 10-K.
OVERVIEW
NYFIX, founded in 1991 through the acquisition of a New York corporation,
is headquartered in Stamford, Connecticut. In December 2003, we reincorporated
as a Delaware corporation.
We are an established provider to the domestic and international financial
markets of trading workstations, middle-office trade automation technologies and
trade communication technologies. Our NYFIX Network is one of the industry's
largest networks, connecting broker-dealers, institutions and exchanges. In
addition to our headquarters in Stamford, we have offices on Wall Street in New
York City, in London's Financial District, in Chicago, and in San Francisco. We
operate three data centers in the northeastern United States and are
establishing additional data center hubs in London and Amsterdam.
We are a provider of trading technology, industry network connectivity and
execution services, offering certain underlying, universally applicable network
inter-connectivity products, systems, facilities, and supporting operations to
our two business segments: our Technology Services segment and our Transaction
Services segment. These segments, in turn, package these products and services
and add others to address the needs of their specific markets. We also provide
to our segments products specifically developed to support the marketing
strategy of that segment. We provide product development, systems development,
data center and network operations support to our segments.
Our Technology Services segment is comprised of four of our subsidiaries:
NYFIX USA, NYFIX Overseas, Javelin, and Renaissance. These businesses work
together as technology providers, focusing on offering trade-management systems,
a centralized industry order-routing network, order-routing software,
exchange-floor automation systems, exchange and market access technology and
post-trade processing systems. Our Technology Services customers consist
primarily of United States securities brokerage firms and international
derivatives brokerage firms. Our Technology Services segment generates
subscription, capital sale and service revenue.
Our Transaction Services segment is comprised of six of our subsidiaries -
NYFIX Millennium, NYFIX Transaction Services, and NYFIX Clearing, which are NASD
registered broker-dealers; NYFIX Partners, which is our introducing
broker-dealer for derivatives and was granted its broker-dealer license in 2002
by the NFA; NYFIX International, which we incorporated in the United Kingdom on
March 29, 2004 and which is applying for its FSA broker-dealer license in
anticipation of our expansion into European and other international markets; and
EuroLink, of which we acquired the remaining 60% we did not already own
effective March 29, 2004 and which represented our initial transaction efforts
in the European markets.
32
NYFIX, INC.
NYFIX Millennium provides a modernized electronic execution venue under
Regulation ATS for trading in United States stocks. NYFIX Transaction Services
provides technology and direct market access and execution links. NYFIX
Clearing, a member of the DTCC, settles and clears transactions on behalf of
NYFIX Millennium and NYFIX Transaction Services. While NYFIX Partners has not
initiated any active business, we are discussing opportunities with sponsoring
broker-dealers and potential customers for the derivatives markets to augment
our future business plans.
In recent years, we have invested heavily in pursuing a growth-oriented
strategy and have organized those efforts largely through our subsidiaries.
After the introduction of our NYFIX Network in 1998, we experienced quarter over
quarter revenue growth from 1999 through 2001. Thereafter, as a result of the
impact of the tragic events of September 11, 2001 on our customer base, the
downturn in the financial markets, and the fixed-cost base of our acquired
companies we have not been able to generate sufficient revenue to offset our
operating costs and, thus, experienced operating losses in 2002 and 2003. We
believe that our decision to continue to invest during the last two years is an
important factor to help us become better positioned to take advantage of future
opportunities. We have actively pursued new customer market segments and
products to support trading for a variety of financial instruments in more
markets while increasing our international business opportunities.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
This MD&A reviews 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, based
on assumptions, which if not accurate, could materially affect our financial
statements, including the assets, liabilities, revenue and expense and the
disclosure of contingent assets and liabilities at the date of the financial
statements and future reporting periods. The markets for our products are
characterized by intense competition, rapid technological development and
pricing pressures, all of which could affect the future realization of our
assets.
Estimates, including assumptions related to: the collectibility of
accounts receivable; the useful lives of tangible and intangible assets; the
recoverability of goodwill; the realization of deferred tax assets; revenue
recognition; product enhancement costs; income taxes; and contingencies are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary. We base our estimates on historical experience and on various other
factors and assumptions that we believe to be reasonable, the results of which
forms the basis for making estimates and assumptions about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates under different
assumptions.
We believe the accounting policies, described below, are critical to
understand our financial statements, due to the underlying assumptions in
estimates we use applying such accounting policies. We have reviewed the
development and selection of these accounting policies, estimates, including the
underlying assumptions and the related disclosures in the financial statements
and this MD&A with our Audit Committee. Refer to 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
We recognize revenue in accordance with the SEC's Staff Accounting
Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, as
amended by SAB 101A and 101B ("SAB 101") and SAB 104, REVENUE RECOGNITION. SAB
101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. Determination of criteria (3) and
(4) are based on our judgment regarding the fixed nature of the fee charged for
products delivered and the collectibility of those fees. Should changes in
conditions cause us to determine these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
impacted.
33
NYFIX, INC.
We recognize revenue from software arrangements in accordance with
Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION as amended by
SOP 98-9, MODIFICATION OF SOP 97-2 WITH RESPECT TO CERTAIN TRANSACTIONS. Revenue
is recognized when persuasive evidence of an arrangement exists and delivery has
occurred, provided the fee is fixed or determinable, collectibility is probable
and the arrangement does not require significant customization or modification
of the software.
We recognize revenue for contracts with multiple deliverables, which are
not covered under SOP 97-2, in accordance with the Financial Accounting
Standards Board's ("FASB")Emerging Issues Task Force 00-21, ACCOUNTING FOR
REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES ("EITF No. 00-21"). 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 was effective for revenue arrangements entered into in reporting
periods beginning after June 15, 2003 and was adopted by us effective July 1,
2003.
Our revenue is comprised of subscription, capital sale, and service
contract and transaction components, described as follows:
Subscription revenue contracts are primarily with brokerage firms,
international banks and global exchanges trading in equities and/or derivatives.
Subscription revenue contracts are for providing equipment and services and for
use of our NYFIX Network, with an initial term of generally one to three years
with automatic renewal periods unless we receive prior written notice of
cancellation. Additional services, provided under schedules, or addendums to the
contract, are either co-terminus with the original contract or have provisions
similar to the original contract. Under the terms of the subscription contracts
and addendums, customers typically contract for a flat periodic charge after
initial installation and acceptance. The revenue related to these contracts is
recognized over the term of the contract, or addendum, 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.
Capital 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 or to those customers who typically acquire licenses
in perpetuity, and is recognized upon shipment of the product and acceptance by
the customer. Capital sale revenue is recognized in accordance with SOP 97-2,
described above. As we have no history of significant sales returns or
allowances, 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, typically characterized as a
percentage of the original capital sale contract, are generally for an initial
term of one to three years with automatic renewal periods unless we receive
prior written notice of cancellation. Certain service contracts provide for
invoicing in advance of the service being performed, generally quarterly.
34
NYFIX, INC.
Transaction revenue consists of per-share fees charged to customers who
send and receive a match and execution in our ATS order matching system,
customers to whom we provide execution and smart order routing technology and
gateways to access markets in: (1) their own name, (2) a third party give up
name, or (3) our name. Revenue on these contracts is generally invoiced monthly
in arrears or is extracted from the clearing process within three days of the
trade date and recognized in the period in which it is earned. Certain
transaction revenue contracts, which include multiple deliverables, or other
types of our revenue are accounted for in accordance with EITF 00-21, described
above. Some of these contracts have minimum volume commitments or are invoiced
at a minimum transaction-based fee. The arrangement consideration is allocated
to each element based on the relative fair values of each element. We account
for each element of an arrangement with multiple deliverables separately. Vendor
specific objective evidence for fair value of services is primarily determined
by reference to renewal pricing.
Revenue on contracts invoiced in advance of the services being performed
is deferred and recognized as revenue over the period earned and is included in
"deferred revenue" in our 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We are required to estimate the collectibility of our trade receivables
and a considerable amount of judgment is required in assessing the ultimate
realization of receivables, including the current credit-worthiness of each
customer. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The collectibility of accounts receivable is evaluated based on a
combination of factors. In circumstances where we are aware of a specific
customer's inability to meet its financial obligations (e.g., bankruptcy
filings), a specific reserve for bad debts is recorded against amounts due, to
reduce the net recognized receivable to the amount we reasonably believe will be
collected. For all other customers, we estimate a reserve for bad debts based
upon 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. If circumstances change (i.e., higher
than expected defaults or an unexpected material adverse change in a major
customer's ability to meet its financial obligations to us), our estimates of
the recoverability of amounts due to us could be reduced by a material amount.
In the fourth quarter of 2003, a discussion intensified around trading
rules and other issues at the NYSE. NYSE management changes and proposed rule
changes at the exchange caused NYFIX management to become concerned with certain
customer groups and certain individual customers whose economic viability could
become challenged if such proposed rules were adopted. To increase our immediate
cash position and to reduce our exposure to these customers going forward, we
initiated an aggressive program to accelerate the collection of past due
accounts receivable through, among other things, the issuance of discounts to
certain customers. As a primary result of this program, we reduced accounts
receivable during the fourth quarter of 2003 by $8.0 million and recorded a
provision of $2.2 million for these discounts and other allowances. The
allowance for doubtful accounts was $1.8 million and $1.2 million at December
31, 2003 and 2002, respectively. The provision for doubtful accounts was $2.8
million and $1.1 million for 2003 and 2002, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation of property and equipment is provided using the straight-line
method over its estimated useful lives. Changes in circumstances such as
technological advances, changes to our business model or changes in the capital
35
NYFIX, INC.
strategy could result in the actual useful lives differing from initial
estimates. In those cases where we determine that the useful life of long-lived
asset should be revised, we will depreciate the net book value in excess of the
estimated residual value over its revised remaining useful life.
GOODWILL
Net assets of companies we acquired have been recorded at their fair value
at the date of acquisition. Goodwill represents acquisition costs in excess of
the fair value of net assets acquired and liabilities assumed. We adopted the
FASB's Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS effective January 1, 2002. The provisions of SFAS
No. 142 require that we allocate our goodwill to our various reporting units,
determine the carrying value of those businesses, and estimate the fair value of
the reporting units so that a two-step goodwill impairment test can be
performed. Our reporting units represent components of our operating segments
and are the same as the reportable segments identified in Note 14 to the
Consolidated Financial Statements. In the first step of the goodwill impairment
test, the fair value of each reporting unit is compared to its carrying value.
If the fair value exceeds the carrying value, goodwill is not impaired and no
further testing is performed. If the carrying value exceeds the fair value, then
the second step must be performed, and the implied fair value of the reporting
unit's goodwill must be determined and compared to the carrying value of the
goodwill for the reporting unit. If the carrying value of a reporting unit's
goodwill exceeds its implied fair value, then an impairment loss equal to the
difference is recorded. In the absence of circumstances requiring impairment
testing on a quarterly or other more frequent basis, our annual impairment
testing date is the beginning of our fourth quarter, which is October 1. For the
years ended December 31, 2003 and 2002, there was no indication of impairment
for either our Transaction Services segment or our Technology Services segment,
our two reporting units. The present value of the discounted future cash flows
of each segment supported their carrying values as of October 1, 2003, the date
of our annual impairment analysis. However, the excess of the discounted future
cash flows above the carrying value of our Technology Services segment was
marginal at that date. Our projected cash flows for 2004 and beyond are
sufficient to support our Technology Services segment goodwill carrying value;
however, if we are not profitable and do not have sufficient cash flows from
operations in 2004 related to our Technology Services segment, our Technology
Services segment goodwill may become partially or completely impaired. If our
goodwill were to become impaired, the resulting write-down could have a material
impact on our consolidated financial statements.
PRODUCT ENHANCEMENT COSTS
Costs incurred in the research, design and development of software for
sale to others as a separate product or embedded in a product and sold as part
of the product as a whole are charged to expense until technological feasibility
is established. Thereafter, software development costs, consisting primarily of
payroll and related costs, purchased materials and services and software to be
used within our products, which significantly enhance the marketability or
significantly extend the life of our products are capitalized, and amortized to
cost of revenue on a straight-line basis over three years, beginning when the
products are offered for sale or when the enhancements are integrated into the
product. 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. We are also
required to use professional judgment in determining whether the unamortized
capitalized cost of each product enhancement approximates the net realizable
value of such products.
36
NYFIX, INC.
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. We test intangible assets
with indefinite lives annually for impairment using a fair value methodology
such as discounted cash flows. There was no impairment of our long-lived assets
recorded for the years ended December 31, 2003, 2002 and 2001.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns using presently enacted
income tax rates. Our deferred tax assets were recorded to the extent we believe
there will be sufficient future taxable income to utilize those assets prior to
their expiration. To the extent we were unable to utilize deferred tax assets,
we would record a valuation allowance against the unrealizable amount, and
record a charge against operating results. As of December 31, 2003 and 2002, no
valuation allowance was required, as we believe it more likely than not that the
deferred tax assets will be realized. Due to ever-changing tax laws and income
tax rates, significant judgment is required to estimate the effective tax rate
expected to apply to tax differences that are expected to reverse in the future.
We must also make estimates about the sufficiency of taxable income in future
periods to offset any deductions related to deferred tax assets currently
recorded. While we expect to be profitable and generate taxable income in 2004
to fully utilize our deferred tax asset, if we are not profitable and do not
generate taxable income, we may not be able to support our assumption that it is
more likely than not that our deferred tax assets will be realized and we may be
required to record a valuation allowance against our deferred tax assets. If our
lack of profitability and resulting valuation allowance were sufficiently large,
the impact on our consolidated financial statements could be material.
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 regulations, acquisitions, trademark, patent,
personnel and other matters. We rely on the professional judgment of outside
counsel as well as our own assessment in determining whether contingencies
should be recorded.
STOCK-BASED COMPENSATION
We account for stock-based compensation for employees under the
recognition and measurement provisions of the Accounting Principles Board
("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations and have elected the disclosure-only alternative under SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. No stock-based compensation cost
was included in our operating results for the years ended December 31, 2003,
2002 and 2001 for our stock option plans, as all options granted during these
years had an exercise price equal to the market value of our stock on the date
of grant. In accordance with SFAS No. 148, ACCOUNTING FOR STOCK BASED
COMPENSATION-TRANSITION AND DISCLOSURE, we will continue to disclose the
required pro forma information in the notes to the consolidated financial
statements.
37
NYFIX, INC.
OVERVIEW OF FINANCIAL RESULTS
The tables provided below present additional views of our revenue and
gross profit. The following table presents our revenue, gross profit and gross
profit as a percentage of revenue, by reportable segment for the years
indicated:
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
($ in thousands)
Revenue:
Technology Services $ 54,156 $ 48,365 $ 41,397
Transaction Services 14,343 7,597 --
Eliminations (2,590) (150) --
------------ ------------ ------------
Total revenue $ 65,909 $ 55,812 $ 41,397
============ ============ ============
Revenue, as a percentage of total revenue:
Technology Services 82 % 87 % 100 %
Transaction Services 22 % 13 % --
Eliminations (4)% (0)% --
------------ ------------ ------------
Total 100 % 100 % 100 %
============ ============ ============
Gross profit:
Technology Services $ 26,779 $ 27,220 $ 27,237
Transaction Services 4,529 286 --
------------ ------------ ------------
Total gross profit $ 31,308 $ 27,506 $ 27,237
============ ============ ============
Gross profit, as a percentage of revenue:
Technology Services 49 % 56 % 66 %
Transaction Services 32 % 4 % --
Total 48 % 49 % 66 %
The following table shows our revenue, cost of revenue, gross profit and
operating expense expressed as percentages of revenue for the years indicated:
38
NYFIX, INC.
Year Ended December 31,
----------------------------
2003 2002 2001
---- ---- ----
REVENUE:
Subscription 53% 57% 70%
Capital sale 14% 15% 20%
Service contract 14% 15% 10%
Transaction 19% 13% 0%
---- ---- ----
Total revenue 100% 100% 100%
---- ---- ----
COST OF REVENUE:
Subscription 59% 51% 42%
Capital sale 34% 35% 11%
Service contract 31% 27% 29%
Transaction 65% 98% 0%
---- ---- ----
Total cost of revenue 52% 51% 34%
---- ---- ----
GROSS PROFIT:
Subscription 41% 49% 58%
Capital sale 66% 65% 89%
Service contract 69% 73% 71%
Transaction 35% 2% --
---- ---- ----
Total gross profit 48% 49% 66%
---- ---- ----
OPERATING EXPENSE:
Selling, general and administrative 54% 54% 30%
Research and development 2% 2% 1%
Equity in loss of NYFIX Millennium 0% 2% 28%
Depreciation and amortization 4% 6% 3%
---- ---- ----
Total operating expense 60% 64% 62%
---- ---- ----
Our revenue is described in REVENUE RECOGNITION in the preceding section.
Cost of revenue principally consists of costs associated with our data
centers where we maintain equipment and infrastructure to support our
operations, amortization of capitalized product enhancement costs, depreciation
of subscription equipment and other direct costs, including customer-specific
telecommunication costs, execution, clearing fees and market data feeds. Certain
data center costs, such as labor, equipment maintenance, software support and
depreciation and amortization, are allocated across our lines of business based
on usage estimates.
Operating expense is comprised of selling, general and administrative
("SG&A"), research and development ("R&D"), equity in loss of NYFIX
Millennium and depreciation and amortization. SG&A expense consists of
salaries and benefits, office rent and other office expense, provision for
doubtful accounts, and marketing expense. Corporate SG&A expense is
allocated to our segments based on usage estimates. Equity in loss of NYFIX
Millennium consists of 100% of NYFIX Millennium's operating losses prior to our
exercising the Option on February 1, 2002, which is when we acquired an
additional 30% ownership interest in NYFIX Millennium, resulting in our 80%
ownership interest in NYFIX Millennium, regained control of its Board of
Directors and consolidated its financial statements. R&D expense relates to
our cost of developing new products and technologies to meet the current and
future needs of our customers, up to the point of technical feasibility at which
point we capitalize such costs to bring our products to market. R&D expense
consists primarily of salaries and related costs for our technical and
development staff. Depreciation and amortization expense consists of such
expense for our corporate equipment and software and amortization of acquired
intangible assets.
39
NYFIX, INC.
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the current year's presentation. In
connection therewith, amortization expense for intangible assets was
reclassified to cost of revenue of $1.6 million for 2002.
MD&A related to segment revenue, cost of revenue and gross profit
includes intercompany revenue and cost of revenue, which have been eliminated in
consolidation.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUE
The following table presents an overview of our revenue:
Year Ended December 31,
-------------------------------------------------------
2003 2002
$ % $ %
------------------------ ------------------------
($ in thousands)
Technology Services:
Subscription $ 35,831 66% $ 31,377 65%
Capital sale 8,955 17% 8,517 18%
Service contract 9,370 17% 8,471 17%
-------- --------
Sub-total 54,156 82% 48,365 86%
-------- --------
Transaction Services:
Subscription 1,611 11% 488 6%
Transaction 12,732 89% 7,109 94%
-------- --------
Sub-total 14,343 22% 7,597 14%
Eliminations:
Subscription (2,590) n/a (150) n/a
-------- --------
Sub-total (2,590) n/a (150) n/a
-------- --------
Total revenue
Subscription 34,852 53% 31,715 57%
Capital sale 8,955 14% 8,517 15%
Service contract 9,370 14% 8,471 15%
Transaction 12,732 19% 7,109 13%
-------- --------
Consolidated revenue $ 65,909 100% $ 55,812 100%
======== ========
Segment subtotals are presented as a percentage of consolidated revenue.
Consolidated revenue increased $10.1 million, or 18%, to $65.9 million in
2003 as compared to $55.8 million in 2002.
40
NYFIX, INC.
Our Technology Services segment revenue increased $5.8 million, or 12%, to
$54.2 million in 2003 as compared to $48.4 million in 2002. Our traditional
equity products subscription and service contract revenue increased to $36.2
million in 2003 from $34.8 million in 2002. This $1.4 million increase was
primarily attributable to higher average revenue per customer. Our average
annual revenue per customer was $136,000 in 2003, as compared to $125,000 in
2002. At December 31, 2003, we had 269 traditional equity customers, up from 262
at the beginning of the year. While we added 57 new customers during 2003, we
lost 50 customers, equating to a 19% turnover rate. This turnover was mainly
attributable to our customers ceasing operations and/or merging with other
customers. In August 2002, we began an initiative to sell circuits to buy-side
institutions in order to leverage our NYFIX Network in various ways. As of
December 31, 2003, we had executed agreements with 80 customers initially
requesting basic broker connectivity valued at approximately $6 million if fully
implemented. In 2003, we recognized $1.3 million of revenue attributed to the 60
buy-side circuits installed by the end of the year. In 2004, we expect revenue
related to our buy-side initiatives to increase throughout the year. In
addition, in 2003, revenues attributable to our Javelin products increased $1.9
million, to $9.7 million in 2003 from $7.8 million in 2002, as we had full year
Javelin revenues as compared to nine months in 2002 as a result of our
acquisition of Javelin at the end of the first quarter in 2002. While we had a
nominal amount of revenue in 2003 from our Renaissance products, we believe that
with our acquisition of Renaissance, we will be able to more effectively compete
for customers who are consolidating their Nasdaq and listed trading desks and
desire to migrate to one platform. In addition, we believe we continue to
realize the synergies as expected with our Javelin and Renaissance acquisitions
and will effectively compete for customers in 2004. This increase in 2003
revenue for our Technology Services segment includes an increase of $2.4 million
for intercompany revenues on subscription products provided to Transaction
Services segment customers, which are eliminated in consolidation. As a
percentage of total revenue, our Technology Services segment decreased to 82% in
2003 from 86% in 2002.
Our Transaction Services segment revenue increased $6.7 million, or 88%,
to $14.3 million in 2003 as compared to $7.6 million in 2002. Our broker-dealer
subsidiaries, NYFIX Transaction Services and NYFIX Millennium operated for the
entire year in 2003. NYFIX Transaction Services did not begin generating revenue
until July 1, 2002 and we consolidated NYFIX Millennium upon acquisition of an
80% ownership interest in February 2002; thus our broker-dealer subsidiaries
generated revenue for six and eleven months, respectively in 2002. NYFIX
Clearing began clearing trades in November 2003, and had only intercompany
revenue, which had been eliminated in consolidation. Our Transaction Services
customer base doubled during 2003 from 50 at December 31, 2002 to 100 at
December 2003, averaging 77 for the year, with average revenue per customer of
$186,000 in 2003. This average annualized revenue per customer decreased from
$270,000 per customer in the first quarter of 2003 to $150,000 in the fourth
quarter of 2003. The decrease in average revenue per customer during 2003 was
attributed to a decrease in revenue from several large customers from whom we
generate revenue from DOT flow to the NYSE. We compete with various companies
that also offer certain execution services that we view as a low-margin,
"loss-leader" services to our customers. The revenue attributed to these
customers' DOT flow was higher during the first half of 2003 than in the second
half of the year as a result of lowering rates to competitively keep and protect
the on-going business opportunity of any with such customers. In 2004, we expect
to continue to add customers at a rate similar to 2003 and expect our average
revenue per customer to increase from our fourth quarter 2003 average due to a
targeted change in the customer mix. As a percentage of total revenue, our
Transaction Services segment increased from 14% in 2002 to 22% in 2003. We
expect our Transaction Services segment revenue to be a larger percentage of our
consolidated revenue in 2004 as compared to 2003.
41
NYFIX, INC.
COST OF REVENUE
The following table presents an overview of our cost of revenue:
Year Ended December 31,
-------------------------------------------------------
2003 2002
$ % $ %
------------------------ ------------------------
($ in thousands)
Technology Services:
Subscription $ 20,334 77% $ 15,889 75%
Capital sale 3,066 12% 2,958 14%
Service contract 2,859 11% 2,298 11%
-------- --------
Sub-total 26,259 48% 21,145 44%
-------- --------
Transaction Services:
Subscription 1,541 14% 216 3%
Transaction 9,391 86% 7,095 97%
-------- --------
Sub-total 10,932 76% 7,311 96%
-------- --------
Corporate and Eliminations:
Corporate:
Data center and telecommunications 18,662 16,138
Fixed asset depreciation and amortization 5,413 4,420
Amortization of product enhancement costs 2,657 2,352
Allocated to:
Technology Services (22,108) (18,644)
Transaction Services (4,624) (4,266)
-------- --------
Sub-total -- --
-------- --------
Eliminations:
Subscription (1,472) n/a -- n/a
Transaction (1,118) n/a (150) n/a
-------- --------
Sub-total (2,590) n/a (150) n/a
-------- --------
Consolidated cost of revenue $ 34,601 52% $ 28,306 51%
======== ========
Segment subtotals are presented as a percentage of segment revenue.
Consolidated cost of revenue increased $6.3 million, or 22%, to $34.6
million in 2003 as compared to $28.3 million in 2002. The primary factors for
the increase were data center and telecommunication expense of $2.5 million,
depreciation expense of $1.0 million and product enhancement cost amortization
of $0.3 million, which was primarily due to an increase in infrastructure and
capacity in our data centers and product enhancements costs to support our
Technology Services segment, including our derivatives, Renaissance and Javelin
products as we integrated them with our traditional equity products and onto our
NYFIX Network. In addition, cost of revenue increased by $1.0 million, which was
attributable to execution, clearing and specialist fees related to our
Transaction Services revenue, and by $0.7 million for acquired intangible asset
amortization due to a full year's expense in 2003 for the NYFIX Millennium and
Javelin acquisitions as compared to eleven months and nine months expense in
2002, respectively, and six months expense in 2003 for the Renaissance
acquisition. As a percentage of revenue, cost of revenue increased slightly to
52% in 2003, from 51% in 2002, as the increase in the aforementioned Technology
Services and Transaction Services costs offset the increase in our Transaction
Services revenue as mentioned below.
Our Technology Services segment cost of revenue increased $5.1 million, or
24%, to $26.3 million in 2003 as compared to $21.2 million in 2002. The increase
was primarily attributed to the aforementioned increases in allocated corporate
expenses, such as data center and telecommunications expenses, depreciation and
amortization of fixed assets and amortization of product enhancement costs and
amortization of acquired intangible assets. In addition, service contract cost
of revenue increased $0.6 million, or 24%, to $2.9 million for 2003, from $2.3
million in 2002. The increase was primarily due to increased labor costs to
support our products. As a percentage of revenue, cost of revenue increased to
48% in 2003, from 44% in 2002, as the increase in the aforementioned costs grew
faster than revenue. We expect to see a slight decrease in our cost of revenue
as a percentage of revenue in 2004 as many of the investments in property and
equipment in our data center and network infrastructure made in 2002 and 2003
should yield lower costs as a percentage of revenue.
42
NYFIX, INC.
Our Transaction Services segment cost of revenue increased $3.6 million,
or 50%, to $10.9 million in 2003 as compared to $7.3 million in 2002. In
addition to the aforementioned increase in transaction related expenses, cost of
revenue increased related to intercompany charges related to the Technology
Services revenue passed through to Transaction Services customers, of $2.4
million, which was eliminated in our consolidated cost of revenue. As a
percentage of revenue, cost of revenue decreased to 76% in 2003, from 96% in
2002, as the increased segment revenue absorbed relatively fixed costs. We
expect our cost of revenue to continue to decline as a percentage of Transaction
Services segment revenue in 2004. This is attributable to the expected increases
in revenue and the change in customer mix as described above, which should
enable us to spread our fixed costs over a greater revenue base, and reduced
clearing expenses as a result of self-clearing our trades through NYFIX
Clearing.
GROSS PROFIT AND GROSS PROFIT MARGIN (AS A PERCENTAGE OF REVENUE)
The following table presents an overview of our gross profit and gross
profit margin:
Year Ended December 31,
-------------------------------------------------------
2003 2002
$ % $ %
------------------------ ------------------------
($ in thousands)
Technology Services:
Subscription $ 15,497 43% $ 15,488 49%
Capital sale 5,889 66% 5,559 65%
Service contract 6,511 69% 6,173 73%
-------- --------
Sub-total 27,897 52% 27,220 56%
-------- --------
Transaction Services:
Subscription 70 4% 272 56%
Transaction 3,341 26% 14 0%
-------- --------
Sub-total 3,411 24% 286 4%
-------- --------
Eliminations:
Subscription (1,118) n/a (150) n/a
Transaction 1,118 n/a 150 n/a
-------- --------
Sub-total -- n/a -- n/a
-------- --------
Total gross profit:
Subscription 14,449 41% 15,610 49%
Capital sale 5,889 66% 5,559 65%
Service contract 6,511 69% 6,173 73%
Transaction 4,459 35% 164 2%
-------- --------
Consolidated gross profit $ 31,308 48% $ 27,506 49%
======== ========
Percentages are presented as a percentage of segment revenue, except for
consolidated gross profit percentages, which are presented as a percentage of
consolidated revenue.
43
NYFIX, INC.
Consolidated gross profit increased $3.8 million to $31.3 million in 2003
from $27.5 million in 2002. The aforementioned increases in Technology Services
and Transaction Services cost of revenue offset the increases in Technology
Services and Transaction Services revenue. Accordingly, our gross profit margin
decreased to 48% for 2003, as compared to 49% for 2002.
Our Technology Services segment gross profit increased $0.7 million to
$27.9 million in 2003 from $27.2 million in 2002. As a percentage of segment
revenue, gross profit margin decreased to 52% in 2003 from 56% in 2002. The
decrease in gross profit is primarily attributable to the aforementioned
increases in our costs, which grew faster than revenue as we were generally
unable to pass increased costs to our customers due to competitive pricing
pressures. We expect to see slight improvements in our gross profit margin in
2004, as many of the improvements to our data center and network infrastructure
made in 2002 and 2003 should yield lower costs as a percentage of revenue.
Our Transaction Services segment gross profit increased $3.1 million to
$3.4 million in 2003 from $0.3 million in 2002. Transaction Services gross
profit margin increased to 24% for 2003, as compared to 4% for 2002. The
increase in gross profit was attributable to the increase in transaction
revenue, which grew at a higher rate than costs. As mentioned previously, NYFIX
Transaction Services incurred costs for the entire year 2002, but did not start
generating revenue until July 1, 2002. We expect our gross margin to continue to
improve as a percentage of Transaction Services segment revenue in 2004. This is
attributable to the expected increases revenue and change in customer mix as
described above, which should enable us to spread our fixed costs over a greater
revenue base, and reduced clearing expenses as a result of self-clearing our
trades through NYFIX Clearing.
SG&A
The following table presents an overview of our SG&A expense:
Year Ended December 31,
-------------------------------------------------------
2003 2002
$ % $ %
------------------------ ------------------------
($ in thousands)
Salaries and benefits $ 20,116 56% $ 18,422 62%
Provision for doubtful accounts 2,831 8% 1,146 4%
Occupancy and related 2,753 8% 2,606 9%
Marketing, travel and entertainment 2,573 7% 2,837 9%
Professional fees 2,550 7% 2,032 7%
General and other 4,940 14% 2,841 9%
-------- --------
Total SG&A $ 35,763 54% $ 29,884 54%
======== ========
The total SG&A is presented as a percentage of consolidated revenue.
SG&A expense increased $5.9 million, or 20%, to $35.8 million for
2003, as compared to $29.9 million for 2002. The increase was primarily
attributable to an increased provision for doubtful accounts of $1.7 million as
a result of our recording of a provision of $2.2 million in the fourth quarter
of 2003 due principally to our aforementioned cash collection program. In
addition, our salaries and benefits increased $1.7 million, primarily due to
increased staffing to support our operations, annual merit increases for our
staff and continuing increases to health care costs. We expect similar trends in
2004. Our professional fees increased $0.5 million in 2003 as compared to 2002,
due primarily to non-audit services in connection with the requirements set
forth in the Sarbanes-Oxley Act of 2002, in addition to other legal and
professional services. We expect these costs to remain at a similar level in
2004. Occupancy and related expenses increased $0.1 million, primarily due to
the Renaissance acquisition. General and other expense increased $2.1 million,
which included increased general insurance expense of $0.4 million and a variety
of other items aggregating $1.7 million, net. As a percentage of total revenue,
SG&A expense remained constant at 54% in 2003 and 2002, as SG&A expense
increased at the same rate as revenue.
44
NYFIX, INC.
Subsequent to December 31, 2003, we entered into an agreement to lease
additional space at our 100 Wall Street office. In connection with this
agreement, we intend to cease use, in the third quarter 2004, of one of our
other offices on Wall Street and consolidate its operations into the new space.
At that time, in accordance with SFAS No. 146, ACCOUNTING FOR EXIT OR DISPOSAL
ACTIVITIES, we expect to record a charge to operating expense of up to $3.0
million, subject to a lesser amount to the extent we are able to sublease the
space or negotiate an exit settlement with the owner. This charge includes the
remaining rent payments, net of estimated sub-lease income, and other
write-offs, including unamortized leasehold improvements.
R&D
R&D expense remained constant at $1.4 million for 2003 and 2002. As a
percentage of total revenue, research and development expense decreased to 2%
for 2003 from 3% for the 2002, due to the increase in revenue. We expect a
similar amount of R&D expense in 2004.
EQUITY IN LOSS OF NYFIX MILLENNIUM
Effective February 1, 2002, we exercised the Option to increase our
ownership interest in NYFIX Millennium, from 50% to 80% and at that date
consolidated NYFIX Millennium's financial statements. NYFIX Millennium incurred
operating losses of $1.3 million for the month of January 2002, which we
recognized under the equity method.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $0.6 million, or 19%, to
$2.7 million for 2003, from $3.3 million for 2002, due primarily to reduced
depreciation expense due to reduced levels of leased equipment. As a percentage
of total revenue, depreciation and amortization expense decreased to 4% for 2003
from 6% for 2002. The decrease as a percentage of total revenue was attributable
to a combination of reduced depreciation and amortization expense and increased
revenue.
LOSS FROM OPERATIONS
Loss from operations increased $0.1 million, or 1%, to $8.5 million for
2003, from $8.4 million for 2002. The increased loss was primarily due to higher
cost of revenue and operating expense offset by the increase in revenue as
described above. In addition, our 2002 results were unfavorably impacted by the
equity in loss of NYFIX Millennium of $1.3 million. As a percentage of total
revenue, loss from operations was a deficit of 13% in 2003 and 15% in 2002.
INVESTMENT INCOME, INTEREST EXPENSE AND OTHER EXPENSE, NET
Investment income remained constant at $0.6 million for 2003 and 2002.
This was principally due to lower interest income due to lower average
investment balances and lower yields, which was offset by additional gains on
sales of short-term investments. We expect similar trends in investment income
in 2004. Interest expense decreased $0.1 million, or 52%, to $0.1 million for
2003, from $0.2 million for 2002, principally due to reduced interest on capital
45
NYFIX, INC.
lease obligations as the principal balances on such leases declined. We also
incurred a nominal amount of interest for notes issued in connection with our
Renaissance acquisition, which we expect will be the largest component of this
category in 2004. Other expense, net, which primarily included our equity
interest in our previously unconsolidated affiliates, Renaissance (which we
acquired in July 2003) and EuroLink, increased $0.2 million to $0.8 million for
2003, from $0.6 million for 2002, due primarily to our equity in the losses
incurred by these entities. We recognized our equity in the losses of EuroLink
of $0.4 million in 2003, compared to losses of $0.5 million in 2002. We
recognized our equity in the losses of Renaissance through June 30, 2003 of $0.4
million. We made our initial investment in Renaissance in the fourth quarter of
2002, and recognized our equity in its losses of $0.1 million in that period. We
accounted for Renaissance by the equity method through June 30, 2003. Effective
July 1, 2003, we acquired the remaining 82% of the membership units in
Renaissance that we did not already own, and accordingly, we consolidated the
results of operations of Renaissance as of that date. We agreed to acquire the
remaining 60% of EuroLink on March 29, 2004, and we will be consolidating
Eurolink's operating results effective as of that date. We expect that EuroLink
will improve its operating results in 2004, thereby reducing the amount of
losses included in our consolidated financial statements.
INCOME TAX BENEFIT
We recorded an income tax benefit of $4.4 million for 2003, compared to an
income tax benefit of $3.6 million for 2002. The income tax benefit in 2003 was
attributable to a tax benefit on our pre-tax loss of $8.7 million and tax
benefits relating to certain Federal and state R&D tax credits aggregating
$0.6 million. Our effective tax benefit rate of 50% in 2003 exceeded the Federal
statutory rate primarily due to the effect of the aforementioned state and
Federal tax benefits and research and development tax credits. The income tax
benefit in 2002 was attributable to a tax benefit on our pre-tax loss and
recognition of certain Federal R&D tax credits, aggregating $0.9 million,
from prior years. We will receive no income tax benefit for the equity in loss
of NYFIX Millennium of $1.3 million in 2002 as the operating loss is allocated
to the Initial Partners and New Partners for income tax purposes. Our effective
tax benefit rate of 41% for 2002 exceeded the Federal statutory rate primarily
due to the impact of the aforementioned R&D tax credits of 9% and state
income taxes of 5%. This benefit was offset by the impact of the equity in loss
of NYFIX Millennium of 8%. We expect to return to profitability in 2004 and
expect our effective tax rate to be slightly below 40%, which includes the
statutory Federal and state rates and is offset by certain R&D tax credits.
46
NYFIX, INC.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUE
The following table presents an overview of our revenue:
Year Ended December 31,
-------------------------------------------------------
2002 2001
$ % $ %
------------------------ ------------------------
($ in thousands)
Technology Services:
Subscription $ 31,377 65% $ 28,955 70%
Capital sale 8,517 18% 8,123 20%
Service contract 8,471 17% 4,319 10%
-------- --------
Sub-total 48,365 86% 41,397 100%
-------- --------
Transaction Services:
Subscription 488 6% -- n/a
Transaction 7,109 94% -- n/a
-------- --------
Sub-total 7,597 14% -- n/a
-------- --------
Eliminations:
Subscription (150) n/a -- n/a
-------- --------
Sub-total (150) n/a -- n/a
-------- --------
Total revenue
Subscription 31,715 57% 28,955 70%
Capital sale 8,517 15% 8,123 20%
Service contract 8,471 15% 4,319 10%
Transaction 7,109 13% -- n/a
-------- --------
Consolidated revenue $ 55,812 100% $ 41,397 100%
======== ========
Segment subtotals are presented as a percentage of consolidated revenue.
Consolidated 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
Javelin business, transaction revenue attributable to our 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.
Our Technology Services segment revenue increased $7.0 million, or 17%, to
$48.4 million in 2002 as compared to $41.4 million in 2001. Our traditional
equity products subscription and service contract revenue increased $1.5 million
to $34.8 million in 2002 from $33.3 million in 2001. Subscription revenue in
this segment increased $2.4 million, or 8%, to $31.4 million for 2002, from
$29.0 million for 2001, primarily due to subscription revenue attributable to
our Javelin businesses of $1.4 million, and the increased demand from our
existing customers and the net addition of new customers of $1.0 million. As a
percentage of consolidated revenue, subscription revenue decreased to 57% in
2002 from 70% 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
Javelin products. Without transaction revenue, subscription revenue would have
been 65% of consolidated revenue. Capital sale revenue increased $0.4 million,
or 5%, to $8.5 million for 2002, from $8.1 million for 2001. Capital sale
revenue increased $2.8 million due to our Javelin business. This amount was
significantly offset by lower capital 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 consolidated revenue, sales revenue
decreased to 15% in 2002, from 20% in 2001, partially due to the effect of the
addition of transaction revenue and the general slower growth of capital sale
revenue compared with our other revenue components during 2002. Service contract
revenue increased $4.2 million, or 98%, to $8.5 million for 2002, from $4.3
million in 2001. The increase was primarily due to service contract revenue of
our 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 consolidated
revenue, service contract revenue was 15% in 2002, as compared to 10% in 2001,
primarily due to the aforementioned service contract revenue for our Javelin
business, offset in part by the effect of the addition of transaction revenue
during 2002.
47
NYFIX, INC.
Our Transaction Service segment revenue was $7.6 million in 2002.
Transaction revenue was attributable to our broker-dealer operations, 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 an 80% ownership interest on February 1,
2002. At December 31, 2002, Transaction Services had 50 customers. As a
percentage of total revenue, our Transaction Services segment was 14% in 2002.
COST OF REVENUE
The following table presents an overview of our cost of revenue:
Year Ended December 31,
-------------------------------------------------------
2002 2001
$ % $ %
------------------------ ------------------------
($ in thousands)
Technology Services:
Subscription $ 15,889 75% $ 12,027 85%
Capital sale 2,958 14% 894 6%
Service contract 2,298 11% 1,239 9%
-------- --------
Sub-total 21,145 44% 14,160 34%
-------- --------
Transaction Services:
Subscription 216 3% -- n/a
Transaction 7,095 97% -- n/a
-------- --------
Sub-total 7,311 96% -- n/a
-------- --------
Corporate and Eliminations:
Corporate:
Data center and telecommunications 16,138 8,059
Fixed asset depreciation and amortization 4,420 3,286
Amortization of product enhancement costs 2,352 1,773
Allocated to:
Technology Services (18,644) (13,118)
Transaction Services (4,266) --
-------- --------
Sub-total -- --
-------- --------
Eliminations:
Transaction (150) n/a -- n/a
-------- --------
Sub-total (150) n/a -- n/a
-------- --------
Consolidated cost of revenue $ 28,306 51% $ 14,160 34%
======== ========
Segment subtotals are presented as a percentage of consolidated revenue.
Consolidated cost of revenue increased $14.1 million, or 100%, to $28.3
million for 2002, from $14.2 million in 2001, due primarily to increased data
center costs of $3.8 million, clearing, execution and other costs related to our
NYFIX Millennium and NYFIX Transaction Services businesses of $2.5 million,
increased costs attributable to supporting our 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, amortization expense for acquired intangible assets relating to our
NYFIX Millennium and Javelin acquisitions in 2002 of $1.6 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. As a percentage of revenue, cost
of revenue increased to 51% in 2002, from 34% in 2001, as the increase in the
aforementioned Technology Services and Transaction Services costs increased more
than the increases in our Technology Services and Transaction Services revenue
as mentioned below.
48
NYFIX, INC.
The increase in our Technology Service segment cost of revenue was $7.0
million. Subscription cost of revenue increased $3.9 million, or 33%, to $15.9
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 Javelin business of $0.7 million, increased
depreciation and amortization expense of $0.7 million, attributable to increased
subscription equipment at our customers' locations, increased investment in our
data center equipment to support our subscription revenue, and product
enhancement costs due to continued efforts to maintain competitive products.
Capital sale cost of revenue increased $2.1 million, or 231% to $3.0 million for
2002, from $0.9 million for 2001. The increase in capital 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 Javelin business, amortization
expense for acquired intangible assets relating to our Javelin acquisition in
2002 of $0.9 million and increased amortization expense of $0.3 million,
attributable to capitalized software included in our products. Service contract
cost of revenue increased $1.1 million, or 85% to $2.3 million for 2002, from
$1.2 million in 2001. The increase is principally due to service contract labor
costs of our Javelin business of $0.7 million and amortization expense for
acquired intangible assets relating to our Javelin acquisition in 2002 of $0.4
million. As a percentage of revenue, cost of revenue increased to 44% in 2002,
as compared to 34% in 2001, as the increase in the aforementioned costs grew
faster than revenue.
Transaction Services segment cost of revenue was $7.3 million for 2002,
and represented 96% of Transaction Services segment revenue. Transaction cost of
revenue was $7.1 million for 2002, and 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 an additional 30% ownership interest in 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 $3.2 million, clearing, specialist and execution fees of $1.9 million,
depreciation and amortization expense of $0.9 million and amortization expense
for acquired intangible assets relating to our acquisition of an 80% ownership
interest in NYFIX Millennium in 2002 of $0.3 million.
49
NYFIX, INC.
GROSS PROFIT AND GROSS PROFIT MARGIN (AS A PERCENTAGE OF REVENUE)
The following table presents an overview of our gross profit and gross
profit margin:
Year Ended December 31,
-------------------------------------------------------
2002 2001
$ % $ %
------------------------ ------------------------
($ in thousands)
Technology Services:
Subscription $ 15,488 49% $ 16,928 58%
Capital sale 5,559 65% 7,229 89%
Service contract 6,173 73% 3,080 71%
-------- --------
Sub-total 27,220 56% 27,237 66%
-------- --------
Transaction Services:
Subscription 272 56% -- n/a
Transaction 14 0% -- n/a
-------- --------
Sub-total 286 4% -- n/a
-------- --------
Eliminations:
Subscription (150) n/a -- n/a
Transaction 150 n/a -- n/a
-------- --------
Sub-total -- n/a -- n/a
-------- --------
Total gross profit:
Subscription 15,610 49% 16,928 58%
Capital sale 5,559 65% 7,229 89%
Service contract 6,173 73% 3,080 71%
Transaction 164 2% -- n/a
-------- --------
Consolidated gross profit $ 27,506 49% $ 27,237 66%
======== ========
Percentages are presented as a percentage of segment revenue, except for
consolidated gross profit percentages, which are presented as a percentage of
consolidated revenue.
Gross profit increased $0.3 million, to $27.5 million in 2002, from $27.2
million in 2001. Gross profit margin decreased to 49% for 2002 from 66% for
2001. The decrease in gross profit was primarily attributable to the impact of
lower gross profit for our Javelin business, the impact of increased labor costs
to deliver and install our hardware and software, amortization expense for
acquired intangible assets relating to our NYFIX Millennium and Javelin
acquisitions in 2002, increased depreciation and amortization expense of our
product enhancement costs and data center infrastructure investments to support
our subscription and transaction revenue components.
Our Technology Services segment gross profit remained constant at $27.2
million for both years. As a percentage of revenue, gross profit margin
decreased to 56% in 2002 from 66% in 2001. The increase in service contract
gross profit was primarily attributable to the impact of higher gross profit for
our Javelin business. The decrease in subscription gross profit is primarily
attributable to the impact of lower gross profit for our Javelin business and
depreciation and amortization expense related to our product enhancement costs
and capital and telecommunication infrastructure investments made in our data
centers. The decrease in capital sale gross profit is primarily attributable to
the impact of lower gross profit for our Javelin business, amortization expense
for acquired intangible assets relating to our Javelin acquisition in 2002 and
increased depreciation expense attributable to software capitalized which is
included in our products delivered to our customers.
Our Transaction Services segment gross profit was $0.3 million for 2002.
As a percentage of revenue, gross profit margin was 4% for 2002. Transaction
gross profit was negatively 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
50
NYFIX, INC.
have been included in our consolidated financial statements since our
acquisition of an additional 30% ownership interest in NYFIX Millennium on
February 1, 2002. Gross profit was also adversely affected by higher data center
costs to handle increased system demands and amortization expense for acquired
intangible assets relating to our acquisition of an 80% ownership interest in
NYFIX Millennium in 2002.
SG&A
The following table presents an overview of our SG&A expense:
Year Ended December 31,
-------------------------------------------------------
2002 2001
$ % $ %
------------------------ ------------------------
($ in thousands)
Salaries and benefits $ 18,422 62% $ 6,945 57%
Marketing, travel and entertainment 2,837 9% 1,395 11%
Occupancy and related 2,606 9% 1,132 9%
Professional fees 2,032 7% 587 5%
Provision for doubtful accounts 1,146 4% 233 2%
General and other 2,841 9% 1,947 16%
-------- --------
Total SG&A $ 29,884 54% $ 12,239 30%
======== ========
Total SG&A is presented as a percentage of consolidated revenue.
SG&A expense increased $17.7 million, or 145%, to $29.9 million for
2002, from $12.2 million for 2001. The increase was primarily due to the
SG&A expense for our 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, SG&A expense
increased to 54% in 2002 from 30% in 2001. The increase as a percentage of total
revenue was attributable to increased expense to support our growth and
acquisitions.
R&D
R&D 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% for 2002 as compared to 1% for 2001.
EQUITY IN LOSS OF NYFIX MILLENNIUM
Effective February 1, 2002, we exercised the Option to increase our
ownership interest in NYFIX Millennium, from 50% to 80% and at that date
consolidated NYFIX Millennium's financial statements. NYFIX Millennium incurred
operating losses of $1.3 million for the month of January 2002, which we
recognized under the equity method. This compares to $11.6 million of NYFIX
Millennium losses for 2001 which we recognized under the equity method.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.9 million, or 133%, to
$3.3 million for 2002, from $1.4 million for 2001. This increase was primarily
attributable to the continued investment in our infrastructure, and to
51
NYFIX, INC.
administrative support equipment and leasehold improvements to support our
growth, of $1.1 million, and depreciation and amortization expense for our NYFIX
Millennium and Javelin businesses of $0.8 million. As a percentage of total
revenue, depreciation and amortization expense was 6% for 2002 as compared to 3%
for 2001. The increase in percentage of revenue was primarily attributable to
the impact of the aforementioned costs.
LOSS FROM OPERATIONS
Loss from operations changed by $10.0 million, or 625%, to a loss of $8.4
million for 2002, as compared to income from operations of $1.6 million for
2001. The decline in operating results was primarily due to the increase in
operating expenses due to the acquisition of Javelin and start-up expenses
related to NYFIX Transaction Services, and increased costs of corporate
departments to support a larger organization. As a percentage of total revenue,
loss from operations was a deficit of 15% in 2002 as compared to income from
operations of 4% in 2001. The decline as a percentage of total revenue was
attributable to a higher growth in costs of our acquired businesses than
revenue.
INVESTMENT INCOME, INTEREST EXPENSE AND OTHER EXPENSE, NET
Investment income decreased slightly to $0.6 million for 2002, from $0.7
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. 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. Other
expense increased $607,000 to $621,000 for 2002, from $14,000 for 2001,
principally as a result of losses recognized from our equity ownership in our
previously unconsolidated affiliates of $474,000 for EuroLink and of $138,000
for Renaissance in 2002.
INCOME TAX (BENEFIT) PROVISION
We recorded an income tax benefit of $3.6 million for 2002, compared to a
provision for income taxes of $5.4 million for 2001. The income tax benefit was
attributable to our pre-tax 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. We will receive no income tax
benefit for the equity in loss of NYFIX Millennium of $1.3 million in 2002 and
$11.6 million in 2001 as these operating losses are allocated to the Initial
Partners and New Partners for income tax purposes. Our effective tax benefit
rate of 41% in 2002 exceeds the Federal statutory benefit rate primarily due to
the impact of the aforementioned research and development tax credits of 9% and
state income taxes of 5%. This benefit was offset by the impact of the equity in
loss of NYFIX Millennium of 8%. Our effective tax provision rate of 276% in 2001
was higher than the combined Federal statutory income tax rate primarily due to
impact of the equity in loss of NYFIX Millennium of 206% and that impact on our
state income taxes of 34%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, a significant source of our funding has been the sale of
equity securities. Between 1997 and 1999 we raised a total of $9.5 million in
net proceeds through several private placements where we issued an aggregate of
3,431,000 shares of our common stock. In 2001, we raised $57.3 million, net of
expenses, from a follow-on public offering of three million shares of our common
stock. We used a portion of the net proceeds from the follow-on public offering
to repurchase 1.3 million shares of our common stock at an aggregate cost of
$19.1 million. We also have historically received funding from the exercise of
stock options by employees, which aggregated $3.6 million from 2001 through
2003. NYFIX Inc. funded its acquisitions of Javelin, NYFIX Millennium and
Renaissance primarily through the issuance of NYFIX Inc. stock. Please see Item
1. Business - Acquisitions and Investments.
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NYFIX, INC.
Another significant source of funding for us is cash generated from
operations, which was $15.4 million, $3.7 million and $10.6 million in 2003,
2002 and 2001, respectively, aggregating to $29.7 million. Excluding changes in
assets and liabilities, net of business acquisitions, which tend to be subject
to short-term fluctuations, the comparable amount of cash generated from
operations was $8.5 million, $7.4 million, and $16.3 million, respectively,
aggregating $32.2 million. Our primary source of cash from operations is from
revenue received from our customers. Our primary uses of cash for operations
include data center expenses, including its operations and telecommunication
costs, and operating expenses, including salaries and benefits, marketing,
travel and entertainment, office rent and related occupancy, and other general
and administrative expenses.
We have invested $5.3 million, $4.6 million and $7.1 million in 2003, 2002
and 2001, respectively, aggregating $17.0 million, in our data center
infrastructure and other property and equipment to keep current with technology
trends. We expect to invest at a similar level in 2004 as compared to 2003.
We have capitalized product enhancements of $5.3 million, $2.8 million and
$2.7 million, in 2003, 2002 and 2001, respectively, to keep our products
competitive. The increase in capitalized product enhancement costs, in 2003, was
primarily attributable to our Javelin and Renaissance product lines. We have
many projects in development, as described in Item 1, which we expect to release
into production during 2004. We hope to capitalize a comparable amount to 2003
for product enhancements in 2004.
We have invested $2.5 million, $12.1 million and $17.2 million of cash in
2003, 2002 and 2001, respectively, aggregating $31.8 million for our
aforementioned acquisitions of Javelin, Renaissance, NYFIX Millennium and NYFIX
Transaction Services and our investment in EuroLink. In regards to our
Renaissance acquisition, we have issued outstanding notes payable over the next
several years, aggregating $3.0 million, which are payable, at our option, in
cash or our common stock. In April 2004, pursuant to notice from certain payees
after default on the notes, we issued shares of our common stock in payment of
$2.0 million of such notes. Certain contingent liabilities remain with respect
to such notes that could require cash payments up to $0.8 million. We intend to
pay the remaining debt with our common stock, thus not requiring cash. On March
29, 2004, we executed a binding agreement to acquire the remaining 60% of
EuroLink's common stock that we did not own. The transaction closed on April 28,
2004. We financed the transaction with $24,000 in cash and notes payable of $0.5
million. We intend to integrate EuroLink with NYFIX International, our new
London-based subsidiary through which we plan to capture order flow to and from
the United States and within Europe. To date, we have allocated $0.9 million to
this endeavor and do not expect to invest a significant additional amount within
the next twelve months. We have no current plans for any other acquisitions. We
plan to focus on the synergies arising from our previous acquisitions.
Our long-term capital needs depend on numerous factors, including the rate
at which we obtain new customers and expand our staff and infrastructure, as
needed, to accommodate such growth, and 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.
At December 31, 2003, our principal sources of liquidity were cash, cash
equivalents and short-term investments in the aggregate of $24.4 million and
accounts receivable of $10.4 million. At December 31, 2003, we had current
accounts payable and accrued expenses aggregating $13.2 million. We do not
expect to make any significant income tax payments in 2004 due to available net
operating loss carryforwards and research and development tax credits.
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NYFIX, INC.
NYFIX Clearing, NYFIX Transaction Services and NYFIX Millennium, as
registered broker-dealers, are subject to the minimum net capital requirements
of the NASD. These broker-dealers have consistently operated in excess of these
requirements. At December 31, 2003, NYFIX Clearing, NYFIX Transaction Services
and NYFIX Millennium net capital was $10.5 million, $2.6 million and $1.2
million, respectively, exceeding the minimum required by $10.3 million, $2.5
million and $1.0 million, respectively. During 2003, we funded $10.8 million to
our broker-dealer subsidiary, NYFIX Clearing, to enable it to maintain its
minimum excess net capital requirement of $10.0 million as a condition of its
approval by the DTCC. At December 31, 2003, we had an aggregate of $14.0 million
of our consolidated cash, cash-equivalents and short-term investments committed
to maintain our three broker-dealer subsidiaries' minimum and minimum excess net
capital requirements of $10.6 million. Our broker-dealer subsidiaries may need
us to fund or commit more of our consolidated cash, cash-equivalents and
short-term investments in the future to maintain their individual minimum and
minimum excess net capital requirements. If any or all of these broker-dealer
subsidiaries were to fall below their minimum or minimum excess net capital
requirements, their operations may be restricted by certain regulatory agencies.
We believe that we achieve greater synergies by integrating the product
offerings of Javelin and Renaissance with our existing product offerings.
Although our broker-dealer businesses have incurred losses through their
development and start-up stages, we believe that revenue will continue to
increase as we gain greater acceptance of our product offerings. Although we
provided our unconsolidated affiliate, EuroLink, with only $0.6 million in
cumulative funding, it may need additional working capital funding until it
generates positive cash flow, and is exploring sources of funding, including us.
We believe that our cash and short-term investments of $24.4 million at
December 31, 2003, together with anticipated cash to be generated from
operations, will be sufficient to support our capital and operating needs, our
net capital requirements of our broker-dealer operations and the operating needs
of EuroLink for at least the next twelve months. However, we may obtain credit
facilities to provide incremental availability of working capital to further
support our operating and investment strategy.
The following summarizes our material commitments at December 31, 2003,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods:
Payments due by period
Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years
------- ---------------- --------- --------- -----------------
(in thousands)
Long-term debt $ 2,743 $ 1,684 $ 706 $ 353 $ --
Capital lease obligations 666 531 135 -- --
Operating leases 15,945 4,196 5,738 4,625 1,386
Purchase obligations 6,324 3,691 2,633 -- --
------- ------- ------- ------- -------
Total $25,678 $10,102 $ 9,212 $ 4,978 $ 1,386
======= ======= ======= ======= =======
Long-term debt consists of payments on promissory notes issued in
connection with the Renaissance acquisition. As described earlier, under the
terms of the notes issued, we may elect to make the note payments in our common
stock instead of cash, which would reduce the amounts shown above and lessen the
effect on liquidity and cash flows. Operating leases assumptions do not include
the impact of executing a lease to acquire additional office space at one of our
Wall Street offices. As described in Item 2. Properties, we expect this lease
will, within the next year, reduce our space by consolidating our offices on
Wall Street into one building and vacating our other offices. Regardless of
whether we are successful in sub-leasing our space, the new lease will not have
a significant effect on our liquidity in the next twelve months. Should we not
be able to sub-lease our space, we plan to vacate, and the resulting additional
lease payments will have an impact on our working capital. Purchase obligations
include minimum purchase obligations to certain telecommunication providers in
exchange for pricing discounts.
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NYFIX, INC.
WORKING CAPITAL
At December 31, 2003, we had working capital of $23.3 million as compared
to $30.8 million at December 31, 2002. The decrease in working capital was
principally due to the cash used to acquire property and equipment, enhance
products, fund loans and advances to unconsolidated affiliates and the addition
of current liabilities in connection with our acquisition of Renaissance. These
amounts were partially offset by cash flows provided by operating activities.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in 2003 was $15.4 million, as
our net loss of $4.4 million, adjusted for non-cash items, such as depreciation,
amortization, deferred taxes, provision for doubtful accounts and equity in loss
of unconsolidated affiliates, provided $9.6 million. Favorable working capital
changes of $5.8 million included a decrease in accounts receivable of $3.4
million and an increase in accounts payable and other liabilities of $3.3
million and were partially offset by an increase in prepaid and other assets. In
2004, we expect to continue to generate positive cash flows from operating
activities.
Net cash provided by operating activities in 2002 was $3.7 million, as our
net loss of $5.0 million, adjusted for non-cash items, such as depreciation,
amortization, deferred taxes, provision for doubtful accounts, equity in loss of
unconsolidated affiliates and minority interest provided $7.2 million.
Unfavorable working capital changes offset by other changes, net of assets
acquired and liabilities assumed from our NYFIX Millennium and Javelin
acquisitions, decreased cash by $3.5 million.
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
Net cash used in investing activities in 2003 was $5.8 million. This
consisted primarily of capital expenditures for property and equipment,
principally for data center equipment and software, of $5.3 million, product
enhancement costs and other assets of $5.3 million and loans and advances to
unconsolidated affiliates of $2.4 million. These amounts were partially offset
by proceeds from the net sales of short-term investments of $7.3 million. In
2004, we expect to invest a similar amount of cash for capital expenditures for
property and equipment as well as product enhancement costs. We expect to
continue to fund EuroLink for the foreseeable future, but expect the 2004
funding to be less than $1.0 million. On March 15, 2004, a representative of
former shareholders of Javelin executed a settlement agreement with us that
provided us with $1.3 million of cash primarily as a return of funds previously
held in escrow from our acquisition of Javelin, which we received by March 31,
2004.
Net cash provided by investing activities in 2002 was $3.2 million. This
consisted primarily of proceeds from the net sales of short-term investments of
$22.4 million and proceeds from capital sale of equipment of $0.4 million,
offset by payments for our NYFIX Millennium and Javelin acquisitions, 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 million and product enhancement costs and
other assets of $2.8 million.
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net cash provided by financing activities in 2003 was $0.2 million,
consisting primarily of net proceeds from the issuance of common stock resulting
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NYFIX, INC.
from the exercise of stock options by employees of $0.8 million and repayments
of notes receivable issued for common stock of $0.5 million, partially offset by
payments under capital lease obligations of $1.1 million. We have nominal
capital lease obligations remaining as of December 31, 2003.
Net cash used in financing activities in 2002 was $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 $0.4
million and repayments of notes receivable issued for common stock of $0.1
million.
SEASONALITY AND INFLATION
We believe that our operations have not been significantly affected by
seasonality or inflation.
OFF-BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet arrangements other than, as
described above, operating leases that are discussed in Note 6 and purchase
obligations that are discussed in Note 7 to the Consolidated Financial
Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation ("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. In December, 2003, the FASB issued
FIN 46 (revised) ("FIN 46R"), CONSOLIDATION OF VARIABLE ENTITIES. FIN 46R
clarified some of the provisions of FIN 46 and deferred the effective date of
implementation for certain entities. Under the guidance of FIN 46R, entities
that do not have interests in structures that are commonly referred to as
special purpose entities ("SPEs") are required to apply the provisions of FIN
46R in financial statements for periods ending after March 15, 2004, for VIEs
that existed prior to February 1, 2003. We do not have interests in SPEs and
will apply the provisions of FIN 46R with our first quarter 2004 financial
statements. We do not expect the adoption of FIN 46R to have an effect on our
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITIES.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equities. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003.
The adoption of SFAS No. 150 did not have an effect on our consolidated
financial statements.
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NYFIX, INC.
RISK FACTORS RELATING TO OUR BUSINESS
SOME OF OUR 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 two years of operations, NYFIX
Transaction Services incurred a net loss of $2.2 million and required capital
contributions of $5.1 million. Although we expect NYFIX Transaction Services to
start to generate positive cash flows during 2004, we can provide no assurances
that it will do so. Accordingly, NYFIX Transaction Services may need us to
continue to provide the necessary capital to maintain its minimum capital
requirements, thus impacting our working capital.
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 incurred aggregate net operating losses of $31.2 million
through December 31, 2003. Although NYFIX Millennium generated positive cash
flows during 2003, we can provide no assurances that it will continue to do so.
Accordingly, NYFIX Millennium may need us to provide the necessary capital to
maintain its 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 net losses until
the fourth quarter of 2002. We believe that our synergies with Javelin will
enhance our overall operating results, but there is no assurance that it will do
so. 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.
Effective as of July 1, 2003, we acquired the remaining 82% of Renaissance
that we did not previously own. Since its inception in September 2002,
Renaissance incurred net losses of $1.6 million for the four months ended
December 31, 2002 and $2.2 million for the six months ended June 30, 2003.
Although Renaissance results are not reported separately, Renaissance continued
to incur operating losses for the remainder of 2003. We believe that our
synergies with Renaissance and the ability to sell our products into the OTC
market will enhance our overall operating results, but there is no assurance
that it will do so.
In 2003, we formed NYFIX Clearing, which commenced operations in November
2003 following approval by the DTCC to operate as a clearing firm. Through
December 2003, NYFIX Clearing incurred a net loss of $0.4 million and required
capital contributions of $10.8 million. Although we expect cost savings from
using NYFIX Clearing to clear our transaction business trades, NYFIX Clearing
may need us to continue to provide the necessary capital to maintain its minimum
capital requirements, thus impacting our working capital.
If we are not profitable in 2004 or beyond, we may be required to record
an impairment charge relating to our goodwill or a valuation allowance against
our deferred tax assets. If the impairment charge and valuation allowance,
either alone or together, are sufficiently large, the impact on our consolidated
financial statements could be material.
A NUMBER OF OUR SUBSIDIARIES HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT
DIFFICULT TO EVALUATE THEIR PROSPECTS. THEIR FUTURE FINANCIAL PERFORMANCE MAY
DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE IN OUR STOCK
PRICE.
Renaissance was formed in September 2002. NYFIX Clearing, NYFIX Millennium
and Javelin were formed in February 2003, 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 that 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. Renaissance, NYFIX Clearing, NYFIX
Millennium, Javelin and NYFIX Transaction Services may not be successful in
their businesses, and profitability may never be attained or sustained.
57
NYFIX, INC.
EUROLINK MAY NEED ADDITIONAL FUNDING FROM US, THUS HAVING AN ADVERSE IMPACT ON
OUR LIQUIDITY.
We have provided funding to EuroLink, our previously unconsolidated
affiliate and recently acquired wholly-owned subsidiary in 2004. EuroLink may
need additional funds from us, until it generates positive cash flow or obtains
other sources of capital. We cannot provide assurance that additional interim
funding, if necessary, will not have an adverse impact on our liquidity.
A SIGNIFICANT POWER OR TELECOMMUNICATIONS FAILURE COULD CAUSE US AND OUR
CUSTOMERS TO LOSE REVENUE 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
infrastructures of the utilities we use in New York City and elsewhere in the
Northeast portion of the United States. 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 the Northeast portion of the United States. 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 use
uninterruptible power supplies ("UPS") to provide limited battery backup for
critical systems. We also use diesel-powered generators to backup the UPSs.
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 switch 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 customers.
Since it is fairly common for multiple carriers to share the same physical
infrastructure such as Central Offices, telephone poles and below-ground
conduit, instances like major cable cuts or regional natural disasters could
adversely impact our customers and us.
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 network services from five major carriers: AT&T, Qwest,
Sprint, MCI 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 customers utilize a dual carrier solution.
Our relationship with each of these carriers is that of a vendor providing
us services. We currently do not provide any services to these carriers. The
contracts with these carriers have commitment terms that range from two to five
years. We receive discounts based on certain term and volume commitments.
Currently, where applicable, we are exceeding any required monthly minimum
billing amounts.
Our use of five major carriers has multiple benefits:
o Diversity of telecommunication infrastructure between the major
carriers
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NYFIX, INC.
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.
If a major carrier were to shut down its network without advance warning,
it would take at least 45 days to replace the circuits of that vendor with those
of another vendor. If we moved from one carrier to another, we would incur
substantial expenses because of the need to use two carriers for some period of
time. Exclusivity agreements between carriers and connecting points on the
network could also impact us. For example, MCI is the sole provider of network
services for NASDAQ. If MCI discontinued operations, we would incur costs
transitioning to a new NASDAQ network service provider.
The time needed to transfer circuits from one carrier to another would be
approximately four to six weeks. During the transfer, we would incur overlapping
circuit charges with each carrier for a minimum of thirty days. We would need to
have the new circuits in place before requesting that the original circuits be
disconnected, and we would have to provide 30 days prior notice for the circuits
to be disconnected. Therefore, the minimum cost for us to move our business from
one carrier to another would be at least one month of charges from the former
carrier.
WE ARE SUBJECT TO HUMAN ERROR IN OUR OPERATIONS, WHICH COULD CAUSE A DISRUPTION
IN OUR SERVICE TO OUR CUSTOMERS AND CORRUPT OUR DATA.
Our services depend on our operations staff to manage significant
databases, systems, applications and processes that receive and process orders.
An outage of our systems and service could happen as a result of human error in
our operational procedures. We believe we have experienced personnel whom we
regularly send for refresher training to hone their skills, we maintain database
backups and roll back procedures in case a human error is made and we have other
policies, processes and procedures in place that collectively help us to reduce
the possibility and consequences of human error. However we can provide no
assurance that human error will not cause a significant disruption to our
systems or service.
ANY INFILTRATION OF HARMFUL VIRUSES COULD CAUSE US TO LOSE REVENUES AND
CUSTOMERS AND SUBJECT US TO LIABILITY FOR CUSTOMER LOSSES.
Potential sources of a virus that could affect us include connections to
customer systems, emails received by us or connectivity to the Internet.
Although to date, we have not had any incidence of a virus fully penetrating our
protective layers and infiltrating our production systems, we continue to review
our protective layers and safeguards as our systems are susceptible to the
growing number of potential viruses.
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 customers 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 not to 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.
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NYFIX, INC.
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 that we use in 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.
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 United States.
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 IBM, H.P.,
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
warranty or 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.
WE DEPEND ON A LIMITED NUMBER OF NETWORK EQUIPMENT SUPPLIERS AND DO NOT HAVE
SUPPLY CONTRACTS. OUR INABILITY TO OBTAIN NECESSARY NETWORK EQUIPMENT OR
TECHNICAL SUPPORT COULD HARM OUR BUSINESS.
Some key components we use in our networks are available only from a
limited number of suppliers. We do not have long-term supply contracts with
these or any other limited source vendors, and we purchase data network
equipment on a purchase order basis. If we are unable to obtain sufficient
quantities of limited source equipment and required technical support, or to
develop alternate sources as required in the future, our ability to deploy
equipment in our networks could be delayed or reduced, or we may be forced to
pay higher prices for our network components. Delays or reductions in supplies
could lead to slowdowns or failures of our networks.
OUR RELIANCE ON A LIMITED NUMBER OF TELECOMMUNICATION SERVICES PROVIDERS EXPOSES
US TO A NUMBER OF RISKS OVER WHICH WE HAVE NO CONTROL, INCLUDING RISKS WITH
RESPECT TO INCREASED PRICES AND TERMINATION OF ESSENTIAL SERVICES.
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NYFIX, INC.
The operation of our networks depends upon the capacity, reliability and
security of services provided to us by a limited number of telecommunication
services providers. We have no control over the operation, quality or
maintenance of those services or whether the vendors will improve their services
or continue to provide services that are essential to our business. In addition,
telecommunication services providers may increase the prices at which they
provide services, which would increase our costs. If one or more of our
telecommunication services providers were to cease to provide essential services
or to significantly increase their prices, we could be required to find
alternative vendors for these services. With a limited number of vendors, we
could experience significant delays in obtaining new or replacement services,
which could lead to slowdowns or failures of our networks. This could harm our
reputation and could cause us to lose customers and revenues.
A slowdown or failure of our networks could cause us to lose customers and
revenue.
Our business is based upon our ability to rapidly and reliably receive and
transmit data through our networks. One or more of our networks could slow down
significantly or fail for a variety of reasons, including:
o undetected defects or errors in our software programs, especially
when first integrated into a network,
o unexpected problems encountered when integrating changes,
enhancements or upgrades of third party equipment or software with
our systems,
o computer viruses,
o natural or man-made disasters disrupting power or telecommunications
systems generally, and
o damage to, or failure of, our systems due to human error or
intentional disruption.
We may not have sufficient redundant systems or backup telecommunications
facilities to allow us to receive and transmit data in the event of significant
system failures. Any significant degradation or failure of one or more of our
networks could cause our customers to suffer delays in transaction processing,
which could damage our reputation, increase our service costs, or cause us to
lose customers and revenues.
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 FACE SUBSTANTIAL COMPETITION IN OUR INDIVIDUAL PRODUCT AREAS FROM COMPANIES
THAT HAVE LARGER AND GREATER FINANCIAL, TECHNICAL AND MARKETING CAPABILITIES.
THIS COULD MAKE IT MORE DIFFICULT FOR US TO GAIN OR MAINTAIN MARKET SHARE AND
MAY HINDER OUR ABILITY TO COMPETE SUCCESSFULLY.
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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 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.
IF WE DO NOT COMPETE EFFECTIVELY, WE MAY LOSE MARKET SHARE TO COMPETITORS AND
SUFFER A DECLINE IN REVENUES.
Many of our competitors have greater financial, technical, marketing and
other resources than us. As a result, they may be able to support lower pricing
and margins and to devote greater resources to marketing their current and new
products and services.
WE MAY NOT BE ABLE TO ADAPT TO CHANGING TECHNOLOGY AND OUR CUSTOMERS' TECHNOLOGY
NEEDS.
We face rapidly changing technology and frequent new service offerings by
competitors that can render existing services obsolete or unmarketable. Our
future success depends on our ability to enhance existing services and to
develop, introduce and market, on a timely and cost effective basis, new
services that keep pace with technological developments and customer
requirements.
OUR CUSTOMERS MAY DEVELOP IN-HOUSE NETWORKS OR USE NETWORK PROVIDERS OTHER THAN
NYFIX AND DIVERT PART OR ALL OF THEIR DATA COMMUNICATIONS FROM OUR NETWORKS TO
THEIR NETWORKS.
Our customers may develop in-house networks or use other network providers
because such customers want to connect to destinations not part of our NYFIX
Network or to only certain, but not all, destinations covered by our NYFIX
Network. As a result of any of these events, we could experience lower revenues
or lost revenues from delays in connecting customers to our NYFIX Network
indirectly through third party providers rather than directly by us.
WE FACE SIGNIFICANT PRESSURE ON THE PRICES FOR OUR SERVICES FROM OUR COMPETITORS
AND CUSTOMERS. OUR FAILURE TO SUSTAIN PRICING COULD IMPAIR OUR ABILITY TO
ACHIEVE OR MAINTAIN PROFITABILITY OR POSITIVE CASH FLOW.
Our competitors and customers may cause us to reduce the prices we charge
for services, the effects of which we may not be able to offset by increasing
the number of customers or transactions. The primary sources of pricing pressure
include:
o Competitors offering our customers services at reduced prices.
o Our customers seeking greater pricing discounts.
o Consolidation of existing customers.
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 is 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.
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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 change in the
current United States 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 its own.
Customer demands for increased bandwidth and speed could place significant
stress on our infrastructure requiring continued reinvestment in 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.
NYSE AND SEC SPECIFIC REGULATORY CHANGES MAY IMPAIR OUR REVENUE.
We provide our floor broker technology services to major NYSE member firms
and a large group of $2 brokers. The NYSE is proposing to update the securities
trading rules related to the DOT system services of NYSE Direct + and NYSE
Institutional Express. Both of these services are electronic trade execution
services that NYSE has created to compete, mainly with ECNs and other fully
electronic marketplaces.
If the extended functionality and access to either one or both NYSE Direct
+ and NYSE Institutional Express are successful, this may lead to a lesser need
to utilize floor brokers and clerks to execute trades on the NYSE. This
situation would proportionally reduce the need for floor booth technology. This
situation is a risk to the NYFIX subscription revenue that is generated from
existing operations. This situation also is a risk to estimating future growth
in the subscription revenue from floor booth technology provided by NYFIX.
We would be most impacted if the NYSE proposed changes happen in a very
sudden timeframe and create an immediate consolidation of large NYSE member
firms and independent member firms. We are aware that both types of firms have
been operating under sustained financial pressure due to market conditions
during 2001 to present. We anticipate that many member firms both large and
small could become insolvent within months if the given changes do make the NYSE
more electronically accessible and reduce order flow to the floor brokerage
groups.
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 include our proprietary technology,
trade secrets and customer 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
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 United States. 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.
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WE MAY FACE CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS, WHICH COULD HARM OUR
BUSINESS AND OPERATING RESULTS.
Third parties may assert claims that we are infringing their proprietary
rights. If infringement claims are asserted against us, we could incur
significant costs in defending those claims. We may be required to discontinue
using and selling any infringing technology and services, to expend resources to
develop non-infringing technology or to purchase licenses or pay royalties for
other technology. We may be unable to acquire licenses for the other technology
on reasonable commercial terms or at all. As a result, we may find that we are
unable to continue to offer the services and products upon which our business
depends.
THE SECURITIES BROKERAGE INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
IF NYFIX MILLENNIUM, NYFIX TRANSACTION SERVICES OR NYFIX CLEARING 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, NYFIX Transaction Services and NYFIX Clearing are
subject to extensive regulation under both Federal and state laws. In addition
to these laws, we must comply with rules of the SEC, including Regulation ATS
for NYFIX Millennium, and the 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, NYFIX Transaction Services and NYFIX Clearing
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, NYFIX Transaction Services or NYFIX Clearing 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 customers 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, NYFIX TRANSACTION SERVICES' OR NYFIX CLEARING'S COMPLIANCE
AND RISK MANAGEMENT METHODS MAY NOT BE EFFECTIVE.
NYFIX Millennium's, NYFIX Transaction Services' and NYFIX Clearing's
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, NYFIX
Transaction Services or NYFIX Clearing could be subject to disciplinary or other
actions due to claimed noncompliance with regulations in the future. If a claim
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of noncompliance is made by a regulatory authority, the efforts of the
management of NYFIX Millennium, NYFIX Transaction Services or NYFIX Clearing
could be diverted to responding to such claim and they 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
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 and NYFIX Clearing Corporation as an
SEC registered broker-dealers and NASD members is conditioned, in part, on their
ability to process and settle trades.
OUR BROKER-DEALERS SUBSIDIARIES MAY BE RESTRICTED IN THEIR OPERATIONS SHOULD
THEY FAIL TO MEET THEIR MINIMUM AND MINIMUM EXCESS NET CAPITAL REQUIREMENTS.
Our NYFIX Millennium, NYFIX Transaction Services and NYFIX Clearing
broker-dealer subsidiaries, individually, have to maintain certain minimum net
capital and minimum excess net capital requirements as mandated by certain
regulatory agencies. Some of these requirements vary according to the
profitability of the broker-dealer and rise as profitability falls. At December
31, 2003, our broker-dealers in the aggregate had minimum net capital and
minimum excess net capital requirements of $10.6 million. Our broker-dealer
operations may need additional funds in the future to maintain their minimum and
minimum excess net capital requirements. At December 31, 2003, we had cash and
short-term investments of $9.7 million that were not subject to our
broker-dealer minimum net capital and minimum excess net capital requirements.
If our broker-dealers fall below their minimum and minimum excess net capital
requirements, their operations would be restricted by their respective
regulatory agencies.
OUR BROKER-DEALER SUBSIDIARIES ARE AT RISK IF THEIR CUSTOMERS DEFAULT ON THEIR
TRADING OBLIGATIONS.
Under applicable regulatory requirements, our broker-dealers are required
to cover for their customers if their customers default on their trading
obligations by improperly failing to deliver cash or securities on the date when
a trade settles. The broker-dealer can pursue its customer for losses the
broker-dealer sustains by delivering the required cash or securities. Our
broker-dealers attempt to manage the risks associated with customer trading
defaults by conducting a number of background checks on their customers,
including financial history, credit, regulatory and legal checks. The
broker-dealer decides which background checks to undertake based on the
relationship with the customer and the nature and extent of the business that
the customer has with the broker-dealer. In addition, our broker-dealers monitor
trades to check that counterparties know and confirm trades before settlement
date to minimize market risk to which our broker-dealers can be exposed between
trade date and settlement date. Despite these measures to reduce the risk to our
broker-dealers from trading defaults by their customers, there can be no
assurance that our broker-dealers will avoid such risks entirely or that if
losses do occur they will not have a material impact on the financial condition
or reputation of the affected broker-dealer.
NYFIX CLEARING MAY NOT BE ABLE TO CLEAR TRADES DUE TO MAXIMUM LIMITS IMPOSED BY
THE DTCC AND THE NEED FOR INTRA-DAY FUNDING COMMITMENTS FROM THIRD PARTIES.
NYFIX Clearing is restricted to a maximum limit imposed by the DTCC. In
addition, to be able to clear trades, NYFIX Clearing may require added
commitments from unaffiliated institutions to provide funding during a trading
day ("intra-day funding"). An inability to maintain or raise its maximum limit
or to obtain and maintain third-party commitments to support intra-day funding
could have an adverse impact on NYFIX Clearing's ability to maintain or expand
its business.
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THE ABILITY OF NYFIX CLEARING TO MAINTAIN OR EXPAND ITS BUSINESS COULD BE
ADVERSELY IMPACTED IF IT DID NOT CONTINUE TO HAVE THIRD-PARTY ASSISTANCE TO
ACCESS EXCHANGES AND OTHER IMPORTANT TRADING VENUES.
NYFIX Clearing provides clearing and settlement services with the
assistance of third parties who provide NYFIX Clearing access to exchanges and
other important trading venues in the execution business. If such third parties,
exchanges or regulators determine that NYFIX Clearing must discontinue such
indirect access, this could have an adverse impact on NYFIX Clearing's ability
to maintain or expand its business.
WE MAY LACK THE CAPITAL REQUIRED TO MAINTAIN OUR COMPETITIVE POSITION OR TO
SUSTAIN OUR GROWTH.
We have historically relied on cash flow from operations and proceeds from
equity and debt to fund our operations, capital expenditures and expansion. If
we are unable to obtain sufficient capital in the future, we may face the
following risks:
o We may not be able to continue to meet customer demand for service
quality, availability and competitive pricing.
o We may not be able to expand or to acquire complementary businesses.
o We may not be able to develop new services or otherwise respond to
changing business conditions or unanticipated competitive pressures.
WE MAY NOT HAVE ADEQUATE RESOURCES TO MEET DEMANDS RESULTING FROM GROWTH.
Growth may strain our management systems and resources. We may need to
make additional investments in the following areas:
o recruitment and training,
o communications and information systems,
o sales and marketing,
o facilities and other infrastructure,
o treasury and accounting functions,
o licensing and acquisition of technology and rights, and
o employee and customer relations and management.
If we fail to develop systems, procedures and controls to handle current
and future growth on a timely basis, we may be less efficient in the management
of our business or encounter difficulties implementing our strategy, either of
which could harm our results of operations.
CONDUCTING BUSINESS IN INTERNATIONAL MARKETS SUBJECTS US TO ADDITIONAL RISKS.
ALSO, OUR STRATEGY TO EXPAND OUR BUSINESS INTERNATIONALLY MAY FAIL, WHICH MAY
IMPEDE OUR GROWTH AND HARM OUR OPERATING RESULTS.
For the years ended December 31, 2003, 2002 and 2001, approximately 10%,
7% and 15%, respectively, of our revenue was derived from our international
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operations. We believe international revenue will be an important component for
our future success. Thus, we are subject to various risks in doing business in
international markets, including:
o difficulties in recruiting, training and retaining personnel and
managing and implementing existing and new international operations;
o localizing our products to target the specific needs and preferences
of foreign customers, which may differ from our traditional customer
base in the United States,
o building our brand name and awareness of our services among foreign
customers;
o competition with existing market participants which have a longer
history in and greater familiarity with the foreign markets we
enter;
o laws and business practices that can favor local competitors;
o fluctuations in currency exchange rates;
o imposition of limitations on conversion of foreign currencies into
United States dollars or remittance of dividends and other payments
by foreign subsidiaries; and
o changes in a specific country's or region's political or economic
conditions.
If we fail adequately to address the challenges and risks associated with
our international operations and expansion, we may encounter difficulties
implementing our strategy, which could impede our growth or harm our operating
results.
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.
RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS ARE LIKELY TO INCREASE
OUR COSTS.
The Sarbanes-Oxley Act of 2002, as well as new rules subsequently
implemented by the Securities and Exchange Commission, has required changes in
some of our corporate governance and accounting practices. In addition, the
NASDAQ has promulgated a number of regulations. We expect these laws, rules and
regulations to increase our legal and financial compliance costs and to make
some activities more difficult, time consuming and costly. We also expect these
new rules and regulations to make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to
accept reduced coverage or incur significantly higher costs to obtain coverage.
These new laws, rules and regulations could also make it more difficult for us
to attract and retain qualified members of our board of directors, particularly
to serve on our audit committee, and qualified executive officers.
TERRORIST THREATS AND ATTACKS AND THE IRAQI SITUATION 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 United States on September 11, 2001, the
declaration of war by the United States against terrorism and the current
situation in Iraq have created significant instability and uncertainty in the
financial marketplace, both in the United States 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES
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 $3.4 million and
$10.7 million at December 31, 2003 and 2002, respectively, consisted of $2.4
million and $6.8 million, respectively, of auction rate certificates and $3.9
million of mutual fund securities at December 31, 2002. We also had $1.0 million
of treasury bills at December 31, 2003. Risk is limited on the auction rate
certificates portfolio due to the fact that it is invested in insured municipal
bonds. 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 operations, cash flows or fair value.
We are subject to interest rate risk on our $1.0 million of treasury bills
at December 31, 2003. A hypothetical 10% change in interest rates would not
result in a material change in their fair value.
The mutual fund securities portfolio was invested in a quoted fund that
was 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 were subject to equity price risk.
We are also subject to interest rate risk on our $0.6 million and $2.0
million of notes receivable from unconsolidated affiliates at December 31, 2003
and 2002, respectively. A hypothetical 10% change in interest rates would not
result in a material change in their fair value.
FOREIGN CURRENCY RISK
Our earnings are affected by fluctuations in the value of the United
States dollar as compared with foreign currencies, predominately the British
pound and the euro, due to our operations in the United Kingdom and Europe.
We manage foreign currency risk through the structure of our business. In
the substantial majority of our transactions, we receive payments denominated in
the United States dollar or British pounds sterling. Therefore, we do not rely
on international currency markets to obtain and pay illiquid currencies. The
foreign currency exposure that does exist is limited by the fact that the
majority of transactions are paid according to our standard payment terms, which
are generally short-term in nature. For the year ended December 31, 2003, we
recorded a foreign exchange translation gain of $0.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Financial Statements on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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ITEM 9A. CONTROLS AND PROCEDURES
Based on an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective 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.
On May 27, 2004, we restated our consolidated financial statements that
appeared in our Form 10-K/A for the year ended December 31, 2002 and the
consolidated financial statements that appeared in our Forms 10-Q/A for each of
the interim periods ended March 31, 2003, June 30, 2003 and September 30, 2003.
The restatement related to our accounting for our 1999 and 2001 investments in
and 2002 acquisition of an additional 30% ownership interest in NYFIX
Millennium. Based on an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, in light of, among other
things, the facts and circumstances of our May 27, 2004 restatement of our
consolidated financial statements, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective 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.
In light of our determination on May 27, 2004 to restate our consolidated
financial statements that appeared in our Form 10-K/A for the year ended
December 31, 2002 and our Forms 10-Q/A for each of the interim periods ended
March 31, 2003, June 30, 2003 and September 30, 2003, our management directed
that steps be taken to review the operation and effectiveness of our internal
controls and procedures with respect to our accounting for investment and
acquisition transactions.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors and executive officers, as of April
30, 2004, is set forth below:
Name Age Position
- ---- --- --------
Peter Kilbinger Hansen 43 President, Chief Executive Officer and
Chairman of the Board
George O. Deehan 61 Director
William C. Jennings 64 Director
William J. Lynch 62 Director
Carl E. Warden 65 Director
Robert C. Gasser 39 Chief Executive Officer, NYFIX Millennium
and President of NYFIX Transaction
Services and NYFIX Clearing Corporation
Mark R. Hahn 46 Chief Financial Officer
Keith R. Jamaitis 33 President, NYFIX USA
Brian Bellardo 54 General Counsel and Secretary
Lars Kragh 43 Chief Information Officer
Our Board of Directors currently consists of five members, all of whom
will serve until their reelection at our next annual meeting of stockholders or
until the election and qualification of their successors or until their prior
resignation, removal, or death. Our Board of Directors has determined that all
directors, other than Mr. Hansen, are independent under Nasdaq Rule 4200(a)(15),
based on information known to us.
OUR DIRECTORS
PETER KILBINGER HANSEN, our founder, has served as our President, Chief
Executive Officer and Chairman of the Board of Directors since June 1991. Prior
to our founding, Mr. Hansen served from 1984 to 1988 as Marketing Manager, Sales
& Marketing Manager, Managing Director respectively of Mark Computer
Systems A/S Scandinavian based international company, 1988 until 1991 as
Managing Director of Banking Systems of Business Line A/S, a Scandinavian based
international 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.
GEORGE O. DEEHAN has served as a director since August 2000. Mr. Deehan serves
as a Chairman of the Compensation Committee and a member of the Audit and
Nominating and Corporate Governance Committees of our Board of Directors. Since
October 2003, he has been the Chief Executive Officer and Chairman of the Board
of Paragon Financial Corporation, a specialty residential mortgage banker. He is
also a consultant and an investor of eOriginal, Inc., a software development
company, since March 2002. Mr. Deehan was President of eOriginal, Inc. from
August 2000 until March 2002. He was President and Chief Executive Officer of
Advanta Leasing Services, the business equipment leasing unit of Advanta
Business Services, from August 1998 until August 2000. Prior to joining Advanta,
Mr. Deehan served as President and Chief Operating Officer of Information
Technology Services for AT&T Capital. He earned a bachelor's degree from
Lenoir-Rhyne College.
WILLIAM C. JENNINGS has served as a director since July 2003. Mr. Jennings
serves as Chairman of the Audit Committee and a member of the Compensation and
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Nominating and Corporate Governance Committees of our Board of Directors. Mr.
Jennings is an audit committee financial expert as defined in Item 401 of
Regulation S-K promulgated by the SEC and is independent as defined in Item
7(d)(3)(iv) of Schedule 14A under the Exchange Act. Mr. Jennings is a retired
partner of PricewaterhouseCoopers LLP, a global accounting and advisory firm,
where he led the risk management and internal control consulting practice from
1992 until his retirement in 1999. Prior to that, Mr. Jennings served as a
senior audit partner at Coopers & Lybrand, as a senior executive vice
president at Shearson Lehman Brothers, responsible for quality assurance,
internal audit and compliance, and as an executive vice president and chief
financial officer of Bankers Trust. Since retiring from PricewaterhouseCoopers,
Mr. Jennings provides independent consulting services to a number of companies.
He is also a director of Silgan Holdings Inc. and Axcelis Technologies, Inc.,
both publicly traded companies.
WILLIAM J. LYNCH has served as a director since June 2000. Mr. Lynch serves as
Chairman of the Nominating and Corporate Governance Committee and a member of
the Audit and Compensation Committees of our Board of Directors. Since January
2001, he has been a venture partner of Catterton Partners, a private equity
fund. From 1996 through December 2000, Mr. Lynch served as Managing Director of
Capstone Partners, LLC, a venture capital firm. Prior to that, he was a partner
of the law firm Morgan Lewis and Bockius, LLP. Mr. Lynch also serves as Chairman
of the Board of Directors of Edgewater Technologies, a publicly traded company.
CARL E. WARDEN has served as a director since August 1993. Mr. Warden serves as
a member of the Audit, Compensation and Nominating and Corporate Governance
Committees of our Board of Directors. He is a self-employed private investor.
Mr. Warden received his BBA from the Freeman School of Business at Tulane
University.
OUR EXECUTIVE OFFICERS
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 NASD approval
in May 2002 and President of NYFIX Clearing Corporation, since its formation and
NASD approval in September 2003. From 1999 until 2001, Mr. Gasser was Head of
United States Equity Trading for JP Morgan, which included the firm's Nasdaq,
Listed, Convertible, and Program Trading businesses. Mr. Gasser started with JP
Morgan in 1987 and held a variety of positions. Also, 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 served on the Board of Managers from 1999 until 2001. Mr.
Gasser holds a Bachelor of Science degree in Foreign Service from Georgetown
University, School of Foreign Service.
MARK R. HAHN is our Chief Financial Officer. He joined us in September 2002 as
Chief Financial Officer and Secretary (a position he held until June 2003).
Prior to that, from April 2002 until 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 April 1998
until November 2001, Mr. Hahn was with Metromedia Fiber Network Services, Inc.,
a technology infrastructure company, as Vice President Finance, Network Planning
& Analysis from December 1999 until 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 until 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.
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NYFIX, INC.
KEITH R. JAMAITIS has served as President of NYFIX USA, since January 2004. From
January 2002 until December 2003, he was Chief Operating Officer, NYFIX USA, our
wholly-owned subsidiary. Mr. Jamaitis joined us in 1997 and has held various
positions including Senior Vice President of Operations and Vice President of
Product Management. 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.
BRIAN BELLARDO joined us in March 2003 as General Counsel. In June 2003, he
assumed the additional responsibility of Secretary. From November 2000 until
June 2002, Mr. Bellardo was General Counsel for Stockback LLC and thereafter for
a subsidiary and from March 2000 until October 2000 for Stock Power Inc., both
of which are marketing companies. From November 1995 until March 2000, he was
Vice President and Associate General Counsel with Charles Schwab & Co., a
brokerage firm. Prior to that, Mr. Bellardo was in the Office of General Counsel
of the Securities & Exchange Commission in Washington, D.C. from 1990 until
1995. He was a litigator in private practice from 1976 until 1990 with
Pillsbury, Madison & Sutro in San Francisco, CA and from 1975 until 1976
with Cahill Gordon & Reindel in New York City, both of which are law firms.
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 trading system integrations with global telecom and market data
providers. Mr. Kragh earned a Masters of Science degree in Electrical
Engineering from the Danish University of Technology.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than ten percent of a
registered class of our outstanding common stock to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the SEC and Nasdaq. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of these reports
furnished to us and the written representations that no other reports were
required, during 2003 all Section 16 (a) filing requirements applicable to our
executive officers and directors were complied with except for the failure to
timely file on Form 4 one transaction by Mark R. Hahn. This failure was
inadvertent and, when the oversight was discovered, the transaction was
subsequently reported.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to all
of our employees, including our principal executive officer and principal
financial and accounting officer. The full text of our Code of Business Conduct
and Ethics is available on our web site at www.nyfix.com under Company Info,
Investor Info, Corporate Governance. We intend to disclose future amendments to
certain provisions of our Code of Ethics, or waivers of such provisions granted
to executive officers and directors, on this web site within five business days
following the date of such amendment or waiver.
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NYFIX, INC.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain information, for the years ended
December 31, 2003, 2002 and 2001, respectively, concerning compensation awarded
to, earned by or paid to (1) our chief executive officer ("CEO"), (2) our four
most highly compensated executive officers other than our CEO whose salary and
bonus exceeded $100,000 with respect to the year ended December 31, 2003 and who
were serving as executive officers on December 31, 2003 (collectively the "Named
Executive Officers"). Other than the Named Executive Officers, no other
executive officer received compensation in excess of $100,000 for the year ended
December 31, 2003.
Long-Term
Annual Compensation Compensation
-------------------------------------------- ----------------
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation (1) Options (Shares)
- ----------------------------------------------- -------------------------------------------- ----------------
Peter K. Hansen, 2003 $ 380,000 $ -- $ -- --
President and Chief Executive Officer 2002 389,231 -- -- 100,000
2001 250,000 250,000 -- 125,000
Robert C. Gasser (2), 2003 399,462 100,000 -- --
Chief Executive Officer, NYFIX 2002 355,897 -- -- 100,000
Millennium and President, NYFIX 2001 -- -- -- --
Transaction Services and NYFIX Clearing
Lars Kragh, 2003 244,632 -- -- --
Chief Information Officer 2002 218,288 -- -- 20,000
2001 174,340 -- -- 25,000
Mark R. Hahn (3), 2003 297,981 -- -- 75,000
Chief Financial Officer 2002 60,577 -- -- 60,000
Brian Bellardo (4), 2003 164,423 -- -- 25,000
General Counsel and Secretary
(1) The aggregate amount of perquisites and other personal benefits paid to
each of the individuals listed on this table did not exceed the lesser of
ten percent (10%) of such officer's annual salary and bonus for each year
indicated or $50,000.
(2) Mr. Gasser has served as Chief Executive Officer, NYFIX Millennium, our
80%-owned broker-dealer subsidiary, since October 2001. He is also
President of NYFIX Transaction Services, since its formation and the NASD
approval in May 2002 and President of NYFIX Clearing Corporation, since
its formation and NASD approval in September 2003. Mr. Gasser's
compensation for 2002 as stated in the above table represents the period
from February 1, 2002, when our ownership in NYFIX Millennium was
increased to 80% from 50%, through December 31, 2002. Accordingly, no
compensation is included for 2001.
(3) Mr. Hahn started with us in September 2002 and received no compensation
from us in 2001.
(4) Mr. Bellardo started with us in March 2003 and received no compensation
from us in 2001 or 2002.
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NYFIX, INC.
Option Grants
The following table sets forth information regarding stock options granted
to the Named Executive Officers during the year ended December 31, 2003. These
grants are also reflected on the Summary Compensation Table above.
Number of
Securities Percentage Potential Realizable Value
Underlying of Total at Assumed Annual Rates
Stock Options Exercise of Stock Price
Options Granted to Price Per Expiration Appreciation for Stock
Name Granted Employees Share (1) Date Options (2)
- ------------------------------------- ---------- --------- ---------- --------------------------
5% 10%
--------- --------
Mark R. Hahn 75,000 (3) 13.16% $4.50 1/1/13 $212,252 $537,888
Brian Bellardo 25,000 (4) 4.39% $4.02 3/21/13 $ 63,204 $160,171
(1) The exercise price of the options granted was equal to the fair market
value of the underlying common stock on the date of grant.
(2) The potential realizable value portion of the foregoing table illustrates
values that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
annual rates of appreciation on our common stock over the term of the
options. These numbers do not take into account provisions of certain
options providing for termination of the option following termination of
employment and non-transferability, or differences in vesting periods.
Regardless of the theoretical value of an option, its ultimate value will
depend upon the market value of our common stock at a future date, and
that value will depend on a variety of factors, including the overall
condition of the stock market and our results of operations and financial
condition. There can be no assurance that the values reflected in this
table will be achieved.
(3) Represents options to purchase shares of our common stock granted on
January 1, 2003. Of the options granted, 25,000 vested on January 1, 2004
and 25,000 will vest on each of January 1, 2005 and January 1, 2006.
(4) Represents options to purchase shares of our common stock granted on March
21, 2003. Of the options granted, 8,334 vested on March 21, 2004, and
8,333 will vest on each of March 21, 2005, and March 21, 2006.
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NYFIX, INC.
AGGREGATED OPTION EXERCISES AND OPTION VALUES The Named Executive Officers did
not exercise any options in the fiscal year ended December 31, 2003.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Name Options at Year-End Options at Year-End (1)
- ------------------------ ------------------------ ------------------------
(E) (U) (E) (U)
---------- ---------- ---------- ----------
Peter K. Hansen 1,310,625 140,000 $4,088,794 $ 160,000
Robert C. Gasser 222,500 215,000 240,000 160,000
Lars Kragh 318,250 8,000 1,465,050 32,000
Mark R. Hahn 15,000 120,000 55,500 423,000
Brian Bellardo -- 25,000 -- 97,500
(E) Exercisable
(U) Unexercisable
(1) Options are "in-the-money" if the market price of a share of our common
stock on December 31, 2003 exceeded the exercise price of such options.
The value of such options is calculated by determining the difference
between the aggregate market price of our common stock underlying the
options on December 31, 2003, and the aggregate exercise price of such
options. The closing price of a share of our common stock on December 31,
2003, as reported on the Nasdaq, was $7.92.
DIRECTORS' COMPENSATION
As compensation for their services as members of the Board of Directors,
certain non-employee directors receive options to purchase shares of our common
stock at an exercise price equal to the closing price of our common stock on the
date of grant. Options granted to non-employee directors during 2003
(exercisable into an aggregate of 60,000 shares of our common stock at an
exercise price of $4.74 per share) vest on various dates in 2004 through 2006,
so long as the director completes service through the vesting date. Non-employee
directors are reimbursed for reasonable expenses in connection with serving as a
director and member of a committee. Mr. Jennings is paid a quarterly stipend for
serving as our audit committee financial expert, which amounted to $12,500 in
2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All of our outside directors serve as members of the Compensation
Committee. Compensation of all executive officers is determined by a majority of
the independent directors. None of our executive officers or directors serves as
a member of the Board of Directors or Compensation Committee of any other
company that has one or more executive officers or directors serving as a member
of our Board of Directors or Compensation Committee.
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NYFIX, INC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information concerning beneficial ownership
of our common stock, as of May 3, 2004, by (1) each person known by us to be the
beneficial owner of more than five percent of our outstanding common stock, (2)
each director, (3) each of our Named Executive Officers and (4) all directors
and executive officers as a group. Unless otherwise indicated, we believe that
each stockholder has sole voting power and sole dispositive power with respect
to the common stock beneficially owned.
Name and Address of Number of Shares Percentage of Shares
Beneficial Owner (1) Beneficially Owned (2) Beneficially Owned
- ------------------------------------------ ---------------------- --------------------
Peter Kilbinger Hansen 2,765,913 (3) 8.2%
Carl E. Warden 1,456,476 (4) 4.5%
Lars Kragh 696,375 (5) 2.1%
Robert C. Gasser 272,500 (6) *
George O. Deehan 84,000 (7) *
William J. Lynch 79,000 (7) *
Mark R. Hahn 40,000 (8) *
William C. Jennings 22,000 (9) *
Brian Bellardo 8,334 (10) *
All executive officers and directors as a
group (9 persons) (11) 5,424,598 (11) 15.8%
- ----------
* Less than 1%
(1) Unless otherwise indicated the address of each director or executive
officer is c/o NYFIX, Inc., Stamford Harbor Park, 333 Ludlow Street,
Stamford, Connecticut 06902.
(2) Beneficial ownership is based on 32,263,781 shares of our common stock
outstanding as of May 3, 2004. Shares of our common stock issuable upon
exercise of options or other rights beneficially owned that are
exercisable within 60 days are deemed outstanding for the purpose of
computing the percentage ownership of the person holding such securities
and rights but are not deemed outstanding for computing the percentage
ownership of any other person.
(3) Includes 1,310,625 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 50,000 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(4) Includes 100,000 shares of our common stock held by The Carl and Vicki
Warden Family Foundation, of which Mr. Warden is the trustee. Does not
include an aggregate of 1,249,760 shares of our common stock held by
certain adult family members of Mr. Warden and their children.
(5) Includes 308,250 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 18,000 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
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NYFIX, INC.
(6) Includes 222,500 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 225,000 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(7) Includes 79,000 shares of our common stock issuable upon exercise of
currently exercisable options.
(8) Includes 40,000 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 105,000 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(9) Includes 20,000 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 40,000 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(10) Includes 8,334 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 26,666 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(11) Includes 2,077,709 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 464,666 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
Information regarding securities authorized for issuance under our equity
compensation plans is set forth in Part II, Item 5 of this report and is
incorporated by reference in this section.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 30, 1999, Peter K. Hansen, our President and Chief Executive
Officer, issued us a promissory note in the principal amount of $16,875 as
payment for the purchase price of an option he exercised for 16,875 shares of
our common stock (at an exercise price of $1.00 per share). Such note originally
bore interest at 6% per annum, was scheduled to mature on June 30, 2005 and was
secured by the 16,875 shares. This note was revised on June 30, 2002 to reflect
an interest rate of 5.5% per annum.
On December 30, 1997, Mr. Hansen issued us a promissory note in the
principal amount of $230,000 as payment for the purchase price of an option he
exercised for 258,750 shares of our common stock (at an exercise price of $0.89
per share). Such note originally bore interest at 6% per annum, matured on
December 30, 2003 and was secured by the 258,750 shares. This note was revised
on December 30, 2000, to reflect an interest rate of 7.5% per annum.
On December 31, 1996, Mr. Hansen issued us a promissory note in the
principal amount of $50,000 as payment for the purchase price of an option he
exercised for 112,500 shares of our common stock (at an exercise price of $0.44
per share). Such note originally bore no interest, was scheduled to mature on
December 31, 2004 and was secured by the 112,500 shares. This note was revised
on December 31, 2001, to reflect an interest rate of 5.5% per annum.
The above-mentioned promissory notes, aggregating $400,096 of principal
and interest, were paid in full by Mr. Hansen on December 31, 2003.
On July 10, 2002, Keith R. Jamaitis, then the Chief Operating Officer of
our NYFIX USA subsidiary, issued us a promissory note in the principal amount of
$71,229. Such note bore interest at 5.5% per annum and matured on July 10, 2004.
The note was paid in full on May 27, 2004.
On November 23, 2003, Mr. Jamaitis, then the Chief Operating Officer of
our NYFIX USA subsidiary, issued to the NYFIX, Inc. 401(k) Plan (the "Plan") a
promissory note in the principal amount of $30,000 secured by a portion of Mr.
Jamaitis' vested account balance in the Plan. Such note bears interest at 5.0%
per annum and matures on December 12, 2008. The outstanding balance of the note,
including principal and interest, was $28,156 at May 10, 2004.
Mr. Jamaitis was named President of NYFIX USA and an executive officer in
January 2004.
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NYFIX, INC.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm, Deloitte & Touche
LLP, has served in this role since the year ended December 31, 2000.
AUDIT FEES
The aggregate fees for professional services rendered by Deloitte &
Touche LLP in connection with its audit of our annual consolidated financial
statements and reviews of the interim financial statements included in our
quarterly reports on Form 10-Q were approximately $328,000 and $292,000 for the
years ended December 31, 2003 and 2002, respectively. The aggregate fees billed
by Deloitte & Touche LLP for professional services rendered for the audit of
our financial statements for the year ended December 31, 1999, rendered in 2002,
were approximately $50,000.
AUDIT-RELATED FEES
In addition to fees disclosed under "Audit Fees" above, the aggregate fees
for professional services rendered by Deloitte & Touche LLP for assurance
and related services that are reasonably related to the performance of the audit
and reviews of our financial statements were $143,000 and $90,000 for the years
ended December 31, 2003 and 2002, respectively. Such services included
accounting consultations, consents, the audit of our employee benefit plan and,
for 2003, services related to Sarbanes-Oxley Act compliance.
TAX FEES
The aggregate fees for professional services rendered by Deloitte &
Touche LLP for tax compliance, tax planning and tax advice for the our United
States and foreign subsidiaries were $369,000 and $409,000 for the years ended
December 31, 2003 and 2002, respectively.
ALL OTHER FEES
The aggregate fees for professional services rendered by Deloitte &
Touche LLP for all other fees, including audits in connection with acquisitions
for 2003 and 2002 and information technology services relating to financial
information systems design and implementation for 2002, which were incurred
prior to the enactment of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"),
which prohibits a company's independent auditors from providing such services,
were $26,000 and $546,000 for the years ended December 31, 2003 and 2002,
respectively.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee of our Board of Directors pre-approves on an annual
basis the audit, audit-related, tax and other non-audit services to be rendered
by our accountants based on historical information and anticipated requirements
for the following fiscal year. The Audit Committee pre-approves specific types
or categories of engagements constituting audit, audit-related, tax and other
non-audit services as well as the range of fee amounts corresponding to each
such engagement. To the extent that our management believes that a new service
or the expansion of a current service provided by our accountants is necessary
or desirable, such new or expanded services are presented to the Audit Committee
for its review and approval, or to an Audit Committee member by delegation who
reports any such review and approval to the Audit Committee at its next meeting,
prior to our engagement of our accountants to render such services. Non-audit
services, relating to our employee benefit plan, aggregating $13,000, were
approved by the Audit Committee pursuant to Rule 2-01, paragraph (c)(7)(i)(C) of
SEC Regulation S-X during the year ended December 31, 2003.
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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 15 of the
Notes to Consolidated Financial Statements.
Other financial statement 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 Restated Certificate of Incorporation of the Registrant.
Incorporated herein by reference from Appendix B to the
Registrant's Proxy Statement filed September 3, 2003.
3.2 Amended By-Laws of the Registrant. Incorporated herein by
reference from Appendix C to the Registrant's Proxy Statement
filed September 3, 2003.
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.
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.
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NYFIX, INC.
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 Registrant's Form 10 filed March 5, 1993.
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.
Incorporated herein by reference from Exhibit 10.11 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002 ("2002 10-K").
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.
Incorporated herein by reference from Exhibit 10.13 to 2002
10-K.
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. Incorporated
herein by reference from Exhibit 10.14 to 2002 10-K.
10.15 Amended and Restated Limited Liability Company Operating
Agreement of Renaissance Trading Technologies, LLC.
Incorporated herein by reference from Exhibit 10.15 to 2002
10-K.
10.16 Employment Agreement between Lars Kragh and the Registrant
dated January 1, 2003. Incorporated herein by reference from
Exhibit 10.16 to 2002 10-K.
10.17 Employment Agreement between Mark R. Hahn and the Registrant
dated January 1, 2003. Incorporated herein by reference from
Exhibit 10.17 to 2002 10-K.
10.18 Employment Agreement between Robert C. Gasser and the
Registrant dated September 21, 2001. Incorporated herein by
reference from Exhibit 10.18 to 2002 10-K.
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NYFIX, INC.
10.19 Secured Promissory Note from Renaissance Trading Technologies,
LLC to the Registrant, dated as of March 12, 2003, in the
principal amount of $1.0 million. Incorporated herein by
reference from Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 2003.
10.20 Form of Agreement and Plan of Merger between NYFIX, Inc., a New
York Corporation, and NYFIX (Delaware) Inc. Incorporated herein
by reference from Appendix A to the Registrant's Proxy
Statement filed September 3, 2003.
10.21 Form of Option to Purchase Common Stock of EuroLink Network,
Inc. Incorporated herein by reference from Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2003.
10.22 Purchase Agreement, dated as of September 26, 2003, by and
between the Registrant and the sellers of Renaissance Trading
Technologies, LLC. Incorporated herein by reference from
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 2003.
10.23 Employment Agreement between Brian Bellardo and the Registrant
dated March 21, 2003.
10.24 Business Continuity Services Master Agreement, dated October
15, 1997, between Comdisco, Inc. (Predecessor to Sungard) and
Trinitech Systems, Inc. (Predecessor to NYFIX, Inc.).
10.25 Advanced Recovery (AR) Schedule, dated February 15, 2000, to
the Master Agreement dated October 15, 1997 between Comdisco,
Inc. (Predecessor to Sungard) and NYFIX, Inc. listing
additional equipment and extending the term of the agreement
through February 15, 2005.
10.26 Addendum to Advanced Recovery (AR) Schedule, dated February 15,
2000, to the Master Agreement dated October 15, 1997 between
Sungard Recovery Services LP and NYFIX Millennium, LLC, dated
December 31, 2003, extending the term of the agreement through
February 14, 2009 and changing the monthly Subscription Fees.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (see signature page)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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NYFIX, INC.
(B) REPORTS ON FORM 8-K
On October 29, 2003, we reported under Items 7 and 12 of Form 8-K
our results for the third quarter 2003.
On November 12, 2003, we reported under Items 5 and 7 of Form 8-K
that our wholly-owned subsidiary, NYFIX Clearing, had received approval
from the Depository Trust and Clearing Corporation to operate as a
clearing firm.
On November 17, 2003, we reported under Items 5 and 7 of Form 8-K
that our shareholders had voted at a special meeting to approve a proposal
to change our state of incorporation from New York to Delaware.
(C) EXHIBITS
See in Item 15(a)3.
(D) FINANCIAL STATEMENT SCHEDULES
See in Item 15(a)2.
82
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
26th day of May 2004 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, the
following persons on behalf of the registrant and in the capacities and on the
dates indicated have signed this report below.
/s/ Peter Kilbinger Hansen Chairman of the Board and President May 28, 2004
- -------------------------- (Principal Executive Officer)
Peter Kilbinger Hansen
/s/ Mark R. Hahn Chief Financial Officer May 28, 2004
- ---------------- (Principal Financial Officer and
Mark R. Hahn Principal Accounting Officer)
/s/ George O. Deehan Director May 28, 2004
- --------------------
George O. Deehan
/s/ William C. Jennings Director May 28, 2004
- -----------------------
William C. Jennings
/s/ William J. Lynch Director May 28, 2004
- --------------------
William J. Lynch
/s/ Carl E. Warden Director May 28, 2004
- ------------------
Carl E. Warden
83
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2003 and 2002.............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001.................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 2003, 2002 and 2001.. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001.................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of NYFIX, Inc.:
We have audited the accompanying consolidated balance sheets of NYFIX,
Inc. and subsidiaries (the "Company") at December 31, 2003 and 2002, 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, 2003. 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of NYFIX, Inc. and subsidiaries at
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
May 27, 2004
F-2
NYFIX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31,
-----------------------
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 21,006 $ 11,213
Short-term investments 3,448 10,727
Accounts receivable, less allowances of $1,839 and $1,207, respectively 10,371 16,601
Due from unconsolidated affiliates -- 537
Deferred income taxes 976 590
Prepaid expenses and other current assets 5,874 4,036
--------- ---------
Total current assets 41,675 43,704
Property and equipment, net 16,592 18,186
Goodwill 55,966 49,261
Acquired intangible assets, net 10,235 9,404
Investments in unconsolidated affiliates 3,088 5,510
Notes receivable and other amounts due from unconsolidated affiliates 814 2,521
Deferred income taxes 16,424 12,879
Other assets, net 7,378 5,150
--------- ---------
Total assets $ 152,172 $ 146,615
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,664 $ 3,729
Accrued expenses 6,507 5,360
Current portion of capital lease obligations 531 1,089
Deferred revenue 2,732 2,561
Current portion of long-term debt and other liabilities 1,894 142
--------- ---------
Total current liabilities 18,328 12,881
Long-term portion of capital lease obligations 135 664
Long-term debt and other liabilities 1,137 207
--------- ---------
Total liabilities 19,600 13,752
--------- ---------
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;
33,222,475 shares and 32,420,558 shares issued, respectively 33 32
Additional paid-in capital 182,863 178,818
Accumulated deficit (30,770) (26,397)
Treasury stock, 1,361,300 and 1,301,300 shares, respectively, at cost (19,480) (19,100)
Notes receivable issued for common stock (74) (597)
Accumulated other comprehensive income -- 107
--------- ---------
Total stockholders' equity 132,572 132,863
--------- ---------
Total liabilities and stockholders' equity $ 152,172 $ 146,615
========= =========
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,
----------------------------------
2003 2002 2001
-------- -------- --------
REVENUE:
Subscription $ 34,852 $ 31,715 $ 28,955
Capital sale 8,955 8,517 8,123
Service contract 9,370 8,471 4,319
Transaction 12,732 7,109 --
-------- -------- --------
Total revenue 65,909 55,812 41,397
-------- -------- --------
COST OF REVENUE:
Subscription 20,403 16,105 12,027
Capital sale 3,066 2,958 894
Service contract 2,859 2,298 1,239
Transaction 8,273 6,945 --
-------- -------- --------
Total cost of revenue 34,601 28,306 14,160
-------- -------- --------
GROSS PROFIT:
Subscription 14,449 15,610 16,928
Capital sale 5,889 5,559 7,229
Service contract 6,511 6,173 3,080
Transaction 4,459 164 --
-------- -------- --------
Total gross profit 31,308 27,506 27,237
-------- -------- --------
OPERATING EXPENSE:
Selling, general and administrative 35,763 29,884 12,239
Research and development 1,353 1,386 452
Equity in loss of NYFIX Millennium -- 1,340 11,550
Depreciation and amortization 2,649 3,274 1,406
-------- -------- --------
Total operating expense 39,765 35,884 25,647
-------- -------- --------
(Loss) income from operations (8,457) (8,378) 1,590
Investment income 597 628 737
Interest expense (125) (262) (343)
Other expense, net (758) (621) (14)
-------- -------- --------
(Loss) income before income tax (benefit) provision (8,743) (8,633) 1,970
Income tax (benefit) provision (4,370) (3,588) 5,427
-------- -------- --------
Net loss $ (4,373) $ (5,045) $ (3,457)
======== ======== ========
Loss per common share - basic and diluted $ (0.14) $ (0.17) $ (0.13)
======== ======== ========
Weighted average common shares outstanding 31,462 30,126 26,784
======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
NYFIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND CCOMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Common stock issued
----------------------- Additional Accumulated Treasury
Shares Par value paid-in capital deficit stock
------------ --------- --------------- ------------ ------------
Balance January 1, 2001 $ 25,109,550 $ 25 $ 59,629 $ (17,895) $ --
Comprehensive loss:
Net loss -- -- -- (3,457) --
Net unrealized loss on available-for-sale
securities -- -- -- -- --
Total comprehensive loss
Exercise of stock options 384,250 -- 2,223 -- --
Issuance of common stock 3,376,000 4 65,661 -- --
Issuance of warrants -- 44 -- --
Repayment of notes issued for purchase of
common stock -- -- -- -- --
Interest accrued on notes for common stock,
net of payments -- -- -- -- --
Purchase of treasury stock(1,301,300 shares) -- -- -- -- (19,100)
Tax benefit from exercise of stock options -- -- 412 -- --
------------ --------- ------------ ------------ ------------
Balance December 31, 2001 28,869,800 29 127,969 (21,352) (19,100)
Comprehensive loss:
Net loss -- -- -- (5,045) --
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 -- --
Repayment of notes issued for purchase of
common stock -- -- -- -- --
Interest accrued on notes for common stock,
net of payments -- -- -- -- --
Tax benefit from exercise of stock options -- -- 100 -- --
------------ --------- ------------ ------------ ------------
Balance December 31, 2002 32,420,558 32 178,818 (26,397) (19,100)
Comprehensive loss:
Net loss -- -- -- (4,373) --
Reversal of net unrealized gain on
available-for-sale securities -- -- -- -- --
Total comprehensive loss
Exercise of stock options 279,978 -- 838 -- --
Issuance of common stock 521,939 1 3,031 -- --
Repayment of notes issued for purchase of
common stock -- -- -- -- --
Interest paid on notes for common stock,
net of accruals -- -- -- -- --
Acquisition of treasury stock (60,000 shares) -- -- -- -- (380)
Tax benefit from exercise of stock options -- -- 176 -- --
------------ --------- ------------ ------------ ------------
Balance December 31, 2003 33,222,475 $ 33 $ 182,863 $ (30,770) $ (19,480)
============ ========= ============ ============ ============
Notes Accumulated
receivable other Total
issued for comprehensive stockholders'
common stock income (loss) equity
------------ ------------ ------------
Balance January 1, 2001 $ (662) $ -- 41,097
Comprehensive loss:
Net loss -- -- (3,457)
Net unrealized loss on available-for-sale
securities -- (35) (35)
------------
Total comprehensive loss (3,492)
------------
Exercise of stock options (78) -- 2,145
Issuance of common stock -- -- 65,665
Issuance of warrants -- -- 44
Repayment of notes issued for purchase of
common stock 150 -- 150
Interest accrued on notes for common stock,
net of payments (2) -- (2)
Purchase of treasury stock(1,301,300 shares) -- -- (19,100)
Tax benefit from exercise of stock options -- -- 412
------------ ------------ ------------
Balance December 31, 2001 (592) (35) 86,919
Comprehensive loss:
Net loss -- -- (5,045)
Net unrealized gain on available-for-sale
securities -- 142 142
------------
Total comprehensive loss (4,903)
------------
Exercise of stock options (70) -- 407
Issuance of common stock -- -- 50,275
Repayment of notes issued for purchase of
common stock 70 -- 70
Interest accrued on notes for common stock,
net of payments (5) -- (5)
Tax benefit from exercise of stock options -- -- 100
------------ ------------ ------------
Balance December 31, 2002 (597) 107 132,863
Comprehensive loss:
Net loss -- -- (4,373)
Reversal of net unrealized gain on
available-for-sale securities -- (107) (107)
------------
Total comprehensive loss (4,480)
------------
Exercise of stock options -- -- 838
Issuance of common stock -- -- 3,032
Repayment of notes issued for purchase of
common stock 445 -- 445
Interest paid on notes for common stock,
net of accruals 78 -- 78
Acquisition of treasury stock (60,000 shares) -- -- (380)
Tax benefit from exercise of stock options -- -- 176
------------ ------------ ------------
Balance December 31, 2003 $ (74) $ -- $ 132,572
============ ============ ============
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)
Years Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net loss $ (4,373) $ (5,045) $ (3,457)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 12,994 11,661 6,465
Deferred income taxes (2,509) (2,540) 1,473
Provision for doubtful accounts 2,831 1,146 233
Equity in loss of unconsolidated affiliates 832 1,952 11,550
(Gain) loss on sale of investments (235) (13) --
Other, net 27 -- (1)
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable 3,409 (703) (1,124)
Prepaid expenses and other assets (1,042) (567) (1,149)
Deferred revenue 171 (598) (5,696)
Accounts payable, accrued expenses and other
liabilities 3,321 (1,567) 2,286
-------- -------- --------
Net cash provided by operating activities 15,426 3,726 10,580
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (7,177) (10,631) (91,183)
Sales of short-term investments 14,486 32,992 62,150
Capital expenditures for property and equipment (5,290) (4,566) (7,121)
Capitalization of product enhancement costs and other (5,345) (2,829) (2,744)
Proceeds from sale of equipment 2 387 --
Payments for acquisitions, net of cash acquired (97) (6,795) --
Investments in unconsolidated affiliates -- (5,000) (8,000)
Loans and advances to unconsolidated affiliates,
net of repayments (2,408) (324) (9,194)
-------- -------- --------
Net cash (used in) provided by investing activities (5,829) 3,234 (56,092)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (1,087) (1,192) (846)
Repayment of borrowings -- -- (2,000)
Repayment of notes issued for purchase of common stock 445 70 150
Acquisition of treasury stock -- -- (19,100)
Net proceeds from issuance of common stock 838 407 67,409
-------- -------- --------
Net cash provided by (used in) financing activities 196 (715) 45,613
-------- -------- --------
Net increase in cash and cash equivalents 9,793 6,245 101
Cash and cash equivalents, beginning of year 11,213 4,968 4,867
-------- -------- --------
Cash and cash equivalents, end of year $ 21,006 $ 11,213 $ 4,968
======== ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
NYFIX, Inc., (together with its subsidiaries, the "Company"), founded in
1991 through the acquisition of a New York corporation, is headquartered in
Stamford, Connecticut. In December 2003, the Company reincorporated as a
Delaware corporation. The Company is an established provider to the domestic and
international financial markets of trading workstations, middle office trade
automation technologies and trade communication technologies. The Company's
NYFIX Network connects broker-dealers, institutions and exchanges. In addition
to its headquarters in Stamford, the Company has offices on Wall Street in New
York City, in London's Financial District, in Chicago, and in San Francisco. The
Company operates three data centers in the northeastern United States and has
established additional data center hubs in London and Amsterdam. The Company has
two business segments: its Technology Services segment and its Transaction
Services segment. The Company provides trading technology, industry network
connectivity and execution services, offering certain underlying, universally
applicable network inter-connectivity products, systems, facilities, and
supporting operations to its segments. The Company's Technology Services segment
is a technology provider, focusing on offering trade-management systems, a
centralized industry order-routing network, order-routing software,
exchange-floor automation systems, exchange and market access technology and
post-trade processing systems. The Company's Technology Services segment
customers consist primarily of United States securities brokerage firms and
international derivatives brokerage firms. The Company's Transaction Services
segment is primarily comprised of its NASD registered broker-dealers, which in
addition to the technology provided by the Company's Technology Services
segment, provides an electronic execution venue for trading in United States
stocks and direct market access and execution links.
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.
From October 1999 to November 2000, the Company consolidated the financial
statements of NYFIX Millennium, L.L.C. ("NYFIX Millennium") and recorded 100% of
NYFIX Millennium's operating losses as the Company controlled NYFIX Millennium's
Board of Directors. Effective November 1, 2000, the Company no longer controlled
the NYFIX Millennium Board of Directors and, accordingly, accounted for its
investment in NYFIX Millennium under the equity method. Since the Company was
the only investor with a substantive economic investment or risk of investment
in NYFIX Millennium, the Company absorbed 100% of NYFIX Millennium's operating
losses as an operating expense. On February 1, 2002, the Company acquired an
additional 30% ownership interest in NYFIX Millennium resulting in a total
ownership interest of 80% and regained control of the NYFIX Millennium Board of
Directors. Effective on that date, the Company consolidated the financial
statements of NYFIX Millennium and recognized 100% of NYFIX Millennium's
operating losses (see Note 3). Prior to July 1, 2003, the Company's 18%
ownership in Renaissance Trading Technologies, LLC ("Renaissance") was accounted
for under the equity method, since the Company had the ability to exercise
significant influence over the operating and financial policies of Renaissance.
Effective July 1, 2003, the Company acquired the remaining 82% of Renaissance,
which the Company did not already own. Since that date, the Company has
consolidated the financial statements of Renaissance (see Note 3). The Company's
40% ownership interest in EuroLink Network, Inc. ("EuroLink") is accounted for
under the equity method (see Note 4).
F-7
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 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 useful lives of tangible and intangible assets, the
recoverability of goodwill 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 materially 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, amortization expense of intangible assets of $1.6 million
was reclassified from depreciation and amortization expense to cost of revenue
of $1.6 million for 2002.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, as amended by SAB 101A and 101B ("SAB 101") and SAB 104,
REVENUE RECOGNITION. SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the fee is
fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's judgment
regarding the fixed nature of the fee charged for products delivered and the
collectibility of those fees.
The Company recognizes revenue from software arrangements in accordance
with the American Institute of Certified Public Accountants' ("AICPA") Statement
of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION as amended by SOP 98-9,
MODIFICATION OF SOP 97-2 WITH RESPECT TO CERTAIN TRANSACTIONS. Revenue is
recognized when persuasive evidence of an arrangement exits and delivery has
occurred, provided the fee is fixed or determinable, collectibility is
reasonably assured and the arrangement does not require significant
customization or modification of the software.
The Company recognizes revenue for contracts with multiple deliverables
that are not covered under SOP 97-2 in accordance with the Financial Accounting
Standards Board's ("FASB") Emerging Issues Task Force ("EITF") 00-21, ACCOUNTING
FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES ("EITF No. 00-21"). 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 was effective for revenue arrangements entered into in reporting
periods beginning after June 15, 2003 and was adopted by the Company effective
July 1, 2003.
The Company's revenue is comprised of subscription, sale, service
contract, and transaction revenue.
F-8
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Subscription revenue contracts are for providing the Company's systems and
use of its NYFIX Network, with an initial term of generally one to three years
with automatic annual renewal periods unless the Company receives prior written
notice of cancellation. Additional services, provided under schedules, or
addendums to the contracts, are either co-terminus with the original contract or
have provisions similar to the original contract. Under the terms of the
subscription contracts and addendums, customers are typically invoiced a flat
periodic charge after initial installation and acceptance. The revenue related
to these contracts is recognized over the initial term of the contract or
addendum, 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.
Capital 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. Capital sale revenue is recognized in
accordance with SOP 97-2, described above. As the Company has no history of
significant sales returns or allowances, 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 consists of per-share fees charged to customers who
send and receive a match and execution in the Company's Alternative Trading
System ("ATS"), customers to whom the Company provides execution and smart order
routing technology and gateways to access markets in: (i) their own name, (ii) a
third party name, or (iii) the Company's name. Revenue on these contracts is
generally invoiced monthly in arrears or is obtained through the clearing
process within three days of the trade date and recognized in the period in
which it is earned. Certain transaction revenue contracts, which include
multiple deliverables, or other types of revenue are accounted for in accordance
with EITF 00-21, described above. Some of these contracts have basic minimum
fees reflecting the Company's commitment of technology to the customer. The
arrangement consideration is allocated to each element based on the relative
fair values of each element. The Company accounts for each element of an
arrangement with multiple deliverables separately. Vendor specific objective
evidence for fair value of services is primarily determined by reference to
renewal pricing.
Revenue on contracts invoiced in advance of the service being performed 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.
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.
F-9
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Amortization expense of acquired intangible assets is recognized as a cost
of revenue relating to the applicable revenue category.
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, $1.4 million, and
$0.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company expenses advertising costs as incurred. Advertising expense
was $0.8 million, $1.0 million, and $0.2 million for the years ended December
31, 2003, 2002 and 2001, respectively.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. 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 the FASB's 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, which are primarily mutual
funds, at December 31, 2003 and 2002 were $3.4 million and $10.5 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 due to the inability of customers to make required payments. The
collectibility of accounts receivable is evaluated based on a combination of
factors. In circumstances where the Company is aware of a specific customer's
inability to meet its financial obligations (e.g., bankruptcy filings), a
specific reserve for bad debts is recorded against amounts due to reduce the net
receivable to the amount the Company reasonably believes will be collected. For
all other customers, management estimates a reserve for bad debts based upon
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.
In the fourth quarter of 2003, a discussion intensified around trading
rules and other issues at the NYSE. NYSE management changes and proposed rule
changes at the exchange caused the Company's management to become concerned with
certain customer groups, including independent "$2 brokers," and certain
individual customers whose economic viability could become challenged if such
proposed rules were adopted. To increase the Company's immediate cash position
and to reduce the Company's exposure to these customers going forward, the
Company initiated an aggressive program to accelerate the collection of past due
accounts receivable through, among other things, the issuance of discounts to
certain customers. Principally as a result of this program, the Company reduced
its accounts receivable, net from $18.4 million at September 30, 2003 to $10.4
million at December 31, 2003 and recorded an incremental provision of $2.2
million for these discounts and other allowances which is included in "selling,
general and administrative" expense in the accompanying 2003 consolidated
statement of operations.
F-10
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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,
2003, no customer accounted for more than 10% of accounts receivable or more
than 10% of revenue. 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. For the year ended December 31, 2001, one customer
accounted for 12% of revenue and another customer accounted for 10% of revenue.
INVENTORY
Inventory was $0.8 million and $1.1 million at December 31, 2003 and 2002,
respectively, and is included in "prepaid expenses and other current assets" in
the accompanying consolidated balance sheets.
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. Depreciation of property and equipment is provided using the
straight-line method over their estimated useful lives. In those cases where the
Company determines that the useful life of long-lived asset should be revised,
the Company will depreciate the net book value in excess of the estimated
residual value over its revised remaining useful life.
ACQUISITIONS AND GOODWILL
The consolidated financial statements 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 and liabilities assumed. The Company adopted SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS effective January 1, 2002. The
provisions of SFAS No. 142 require that the Company allocate its goodwill to its
various reporting units, determine the carrying value of those reporting units,
and estimate the fair value of the reporting units so that a goodwill impairment
test can be performed. The Company's reporting units are the same as its
reportable segments identified in Note 14. In the first step of the goodwill
impairment test, the fair value of each reporting unit is compared to its
carrying value. If the fair value exceeds the carrying value, goodwill is not
deemed to be impaired and no further testing is performed. If the carrying value
exceeds the fair value, the second step must be performed, and the implied fair
value of the reporting unit's goodwill must be determined and compared to the
carrying value of the goodwill for the reporting unit. If the carrying value of
a reporting unit's goodwill exceeds its implied fair value, then an impairment
loss equal to the difference is recorded. In the absence of circumstances
requiring impairment testing on a quarterly or other more frequent basis, the
Company's annual impairment testing date, using the discounted cash flow
valuation method, is the beginning of the fiscal fourth quarter, which is
October 1. In accordance with SFAS No. 142, goodwill would be tested for
impairment on an interim basis if events or changes in circumstances suggest
that goodwill might be impaired. There was no impairment of goodwill for the
years ended December 31, 2003 and 2002.
F-11
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PRODUCT ENHANCEMENT COSTS
Costs incurred in the research, design and development of software for
sale to others as a separate product or embedded in a product and sold as part
of the product as a whole are charged to expense until technological feasibility
is established. Thereafter, product enhancement costs, consisting primarily of
payroll and related costs, purchased materials and services and software to be
used within the Company's products that significantly enhance the marketability
or significantly extend the life of the products are capitalized and amortized
to cost of revenue on a straight-line basis over three years, beginning when the
products are offered for sale or the enhancements are integrated into the
products. Product enhancement costs are included in "other assets" on the
accompanying consolidated balance sheets. 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.
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 charge 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,
2003, 2002 and 2001.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns using presently enacted
income tax rates. Management records deferred tax assets to the extent it
believes there will be sufficient future taxable income to utilize those assets
prior to their expiration. To the extent the Company is unable to realize
deferred tax assets, the Company would record a valuation allowance against the
unrealizable amount, and record a charge against operating results. As of
December 31, 2003 and 2002, no valuation allowance was required, as the Company
believes it more likely than not that the deferred tax assets 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 United States 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.
F-12
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 the Accounting Principles Board
Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
interpretations and has elected the disclosure-only alternative under SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. 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 SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, as required by SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, to stock-based employee compensation
(also see Note 13):
Year Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(in thousands, except per share amounts)
Net loss, as reported $ (4,373) $ (5,045) $ (3,457)
Compensation expense based on the fair value
method, net of tax (5,013) (8,046) (7,948)
-------- -------- --------
Pro forma net loss $ (9,386) $(13,091) $(11,405)
======== ======== ========
Basic and diluted loss per common share:
As reported $ (0.14) $ (0.17) $ (0.13)
======== ======== ========
Pro forma $ (0.30) $ (0.43) $ (0.43)
======== ======== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. ("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. In December 2003, the FASB issued FIN
46 (revised) ("FIN 46R"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN 46R
clarified some of the provisions of FIN 46 and deferred the effective date of
implementation for certain entities. Under the guidance of FIN 46R, entities
that do not have interests in structures that are commonly referred to as
special purpose entities ("SPEs") are required to apply the provisions of FIN
46R in financial statements for periods ending after March 15, 2004, for VIEs
that existed prior to February 1, 2003. The Company does not have interests in
SPEs and will apply the provisions of FIN 46R starting with the Company's first
quarter 2004 financial statements. The Company does not expect the adoption of
FIN 46R to have an effect on its consolidated financial statements.
F-13
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITIES.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equities. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003.
The adoption of SFAS No. 150 did not have an effect on the Company's
consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
--------------------------- Useful Lives
2003 2002 (Years)
-------- -------- ------------
(in thousands)
Computer software $ 4,456 $ 4,042 4 - 5
Leasehold improvements 2,071 1,943 2 - 8
Furniture and equipment 6,548 5,757 3 - 7
Subscription and data center equipment 27,993 22,868 3 - 5
-------- --------
Total property and equipment, gross 41,068 34,610
Less: Accumulated depreciation 24,476 16,424
-------- --------
Total property and equipment, net $ 16,592 $ 18,186
======== ========
Assets held under capital leases, included in above, consisted of the
following:
December 31,
--------------------------- Useful Lives
2003 2002 (Years)
-------- -------- ------------
(in thousands)
Furniture and equipment $ 115 $ 115 3 - 5
Data center equipment 2,969 2,969 3 - 5
-------- --------
Total property and equipment held under
capital leases, gross 3,084 3,084
Less: Accumulated depreciation 1,877 1,018
-------- --------
Total property and equipment held under
capital leases, net $ 1,207 $ 2,066
======== ========
Depreciation and amortization expense for property and equipment was $8.0
million, $7.7 million and $4.7 million for the years ended December 31, 2003,
2002 and 2001, respectively. Of these amounts, $5.4 million, $4.4 million and
$3.3 million for the years ended December 31, 2003, 2002 and 2001, respectively,
were included in cost of revenue. Amortization expense for assets held under
capital leases included above was $0.8 million, $1.2 million and $0.5 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
F-14
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. ACQUISITIONS, GOODWILL AND ACQUIRED INTANGIBLE ASSETS
ACQUISITIONS
RENAISSANCE
On October 2, 2002, the Company acquired an 18% interest in the membership
units of Renaissance. Renaissance was formed to commercialize a Nasdaq trading
platform (the "Platform"). The Company acquired its interest in return for
300,000 shares of the Company's common stock with a fair value of $3.74 per
share, totaling $1.1 million. In addition, the Company received an option to
purchase, between October 2004 and October 2006, 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. The intellectual property rights and source
code to the Platform were developed over the last several years by a major bank
and brokerage firm. In connection with its investment, the Company acquired, for
$1.0 million, the intellectual property rights and source code to the Platform
from the major bank and brokerage firm, and contributed such intellectual
property rights and source code to Renaissance. The total $2.1 million
investment in Renaissance was reflected as "investments in unconsolidated
affiliates" in the accompanying consolidated balance sheet at December 31, 2002.
In consideration for the intellectual property rights contributed and funding of
the operating costs and capital expenditures, the Company was to share in 50% of
Renaissance's revenue for, at a minimum, three years.
In October 2002, the Company loaned $1.5 million to Renaissance in
exchange for a convertible secured promissory note. The note bore an interest
rate of 5.5%, was due in October 2007, or was convertible into 6,400,000 units
(or 32% of the total outstanding membership units, subject to dilution) of
Renaissance, at the Company's option. In February 2003, the Company loaned an
additional $1.0 million to Renaissance in exchange for a secured promissory
note. The note bore an interest rate of 5.5% and was due in February 2008. In
addition, the Company funded Renaissance $1.0 million and $1.2 million during
the three months ended December 31, 2002 and six months ended June 30, 2003,
respectively, for certain operating costs and capital expenditures of
Renaissance. The $1.0 million advance was reflected as "notes receivable and
other amounts due from unconsolidated affiliates" in the accompanying
consolidated balance sheet at December 31, 2002. The Company sublet
approximately 8,000 square feet of office space to Renaissance at an annual cost
of $0.2 million. Prior to July 1, 2003, the Company's investment in Renaissance
was accounted for under the equity method. During the six months ended June 30,
2003 and the three months ended December 31, 2002, the Company recorded its
equity in the losses of Renaissance of $0.3 million and $0.1 million,
respectively, which were included in "other expense, net" in the accompanying
consolidated statements of operations for the years ended December 31, 2003 and
2002.
On July 1, 2003, the Company acquired the remaining 82% of the membership
units of Renaissance, which it did not already own. The Company's key
considerations for the acquisition of Renaissance included the ability to sell
its products into the over the counter ("OTC") market, or by integrating
Renaissance features into existing NYFIX products to enable customers to have a
single view and access to the OTC and listed marketplaces from one workstation.
The Company financed the July 2003 Renaissance acquisition by (i)
exercising its option to convert the outstanding $1.5 million promissory note,
plus accrued interest of $0.1 million, for an additional 32% of the outstanding
membership units in Renaissance; and (ii) acquiring from the unitholders the
remaining 50% of the membership units in Renaissance, for a total value of $5.7
million, by issuing (a) 462,286 shares of its common stock into an irrevocable
trust for the benefit of certain unitholders of Renaissance, having a fair value
of $2.7 million; (b) promissory notes payable, at the Company's option, in its
common stock or cash to certain unitholders of Renaissance maturing in December
2004, having a fair value of $1.3 million; (c) promissory notes payable, at the
F-15
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Company's option, in its common stock or cash to certain unitholders of
Renaissance with annual maturity dates ranging between June 2004 and June 2007,
having a fair value of $1.3 million; and (d) 59,653 shares of the Company's
common stock with selling restrictions to certain unitholders of Renaissance,
having a fair value of $0.3 million (see Note 6). On April 7, 2004, pursuant to
notice from certain payees after default on the notes, the Company issued shares
of its common stock in payment of $2.0 million of such notes. Certain contingent
liabilities remain with respect to such notes.
In connection with the acquisition, the Company contributed to
Renaissance's capital certain obligations that Renaissance owed to the Company,
including the aforementioned promissory note and advances aggregating $3.2
million. In addition, the Company acquired 60,000 shares of its common stock,
valued at $0.4 million, that it had issued in connection with its original
investment in Renaissance, and which Renaissance had acquired. The Company has
classified these 60,000 shares as "treasury stock" in the accompanying
consolidated balance sheet at December 31, 2003.
The total purchase price, including the Company's pre-acquisition basis of
$1.3 million, was $11.8 million. The excess of the purchase price over the fair
value of the net assets acquired was $8.2 million and has been recorded as
goodwill.
JAVELIN
Javelin Technologies, Inc. (with its subsidiaries, "Javelin") is a
provider of electronic trade communication technology and FIX protocol
technology. The FIX protocol is a 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
included increased connectivity to the buy-side institutional market,
consolidated product offering, including cross-selling of the Company's 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 at March 31, 2002; and (iii) 493,699 shares of
common stock of the Company having a fair value of $3.5 million at March 31,
2002, 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 paid with available
funds. The excess of the purchase price of $56.1 million over the fair value of
the net assets acquired was $41.9 million and has been recorded as goodwill. As
a result of filing its 2002 tax returns, the Company determined, in the fourth
quarter of 2003, the existence of deferred tax assets related to its acquisition
of Javelin of $0.4 million. The Company accounted for this incremental deferred
tax asset as a reduction of 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 at March 31, 2002,
was being held in escrow by an unrelated party subject to a final working
capital adjustment. On March 15, 2004, a representative of the former
shareholders of Javelin executed a settlement agreement with the Company that,
among other things, paid the Company $1.3 million and distributed the Company's
common stock held in the escrow fund to the former Javelin shareholders. The
Company recorded the $1.3 million of net proceeds it received from the
settlement in the first quarter of 2004 as a reduction in goodwill.
F-16
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In connection with the acquisition of Javelin, the Company assumed the
liability for the servicing of Javelin's service maintenance contracts. The
Company 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 were recognized as revenue on a
straight-line basis over the remaining service maintenance contract periods
through March 31, 2003. The purchase price allocation of these obligations was
included in "deferred revenues" in the accompanying consolidated balance sheet
at December 31, 2002.
NYFIX MILLENNIUM
NYFIX Millennium, a broker-dealer, developed an ATS, which, in this case,
is an electronic system that matches buyers and sellers in a completely
anonymous environment.
On October 27, 1999, the measurement date, NYFIX Millennium was formed by
the Company and seven global international investment banks and brokerage firms
consisting of the "Initial Partners": 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 invested $14.0 million ($2.0
million each) in NYFIX Millennium in exchange for 175,000 units (25,000 units
each) of NYFIX Millennium, collectively owning a 50% ownership interest in NYFIX
Millennium. The Company invested $2.0 million and owned the remaining 50%
(175,000 units). The Company purchased from the Initial Partners an option to
buy an additional 30% ownership interest in NYFIX Millennium (the "Option"). As
consideration for the Option, the Company issued to the Initial Partners an
aggregate of 1,968,750 shares of its common stock with a fair value of $34.6
million on October 27, 1999. The Option, which was exercisable at any time, had
no expiration date, and required the Company to issue an aggregate of an
additional 236,250 shares of its common stock to the Initial Partners upon
exercise. Exercising the Option would enable the Company to increase its
ownership interest in NYFIX Millennium to 80% of the total ownership interests.
Viewing the transactions as an integrated transaction, the accounting reflected
the issuance of the Company's common stock with a fair value of $34.6 million to
the Initial Partners in exchange for $14 million in cash and the Option. The
$34.6 million fair value of the Company's common stock issued was $20.6 million
in excess of the $14 million cash invested by the Initial Partners. Of this
$20.6 million excess, the Company allocated $4.2 million to the Option based on
its fair value. As the Option had an indefinite life, it was not amortized.
There were no other intangible assets acquired. The remaining $16.4 million was
accounted for as a prior period adjustment related to 1999.
Since the fair value of the Company's common stock issued to purchase the
Option was greater than the cash equity investment by the Initial Partners, it
was determined that the Initial Partners' consideration given in the option
F-17
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
transaction was not viewed as having economic substance or investment risk.
Thus, the Company accounted for this integrated transaction as a sale of its
common stock to the Initial Partners, in exchange for cash and the Option. The
Company accounted for the total $16 million contributed to NYFIX Millennium (the
Company's $2 million and the Initial Partners' $14 million) as its investment in
NYFIX Millennium and absorbed 100% of the operating losses.
On March 16, 2001 and April 2, 2001, NYFIX Millennium added four "New
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 invested $8.0 million ($2.0 million each) in NYFIX
Millennium in exchange for 100,000 units (25,000 units each) of NYFIX
Millennium. To maintain its 50% ownership interest in NYFIX Millennium, the
Company reduced certain of its rights to share future dividend distributions of
NYFIX Millennium. The Company purchased from the New Partners an option, similar
to the option purchased from the Initial Partners, to buy an additional
ownership interest in NYFIX Millennium. As consideration for that option, the
Company issued to the New Partners, an aggregate of 376,000 shares of its common
stock with a fair value of $8.4 million on the measurement dates of March 16,
2001 for one of the New Partners and April 2, 2001 for the other three New
Partners. The option, which was also exercisable at any time, had no expiration
date, and required the Company to issue an aggregate of an additional 60,000
shares of its common stock to the New Partners upon exercise. Hereinafter,
references to the "Option" include the option received from both the Initial
Partners and the New Partners. Exercising the Option would enable the Company to
increase its ownership interest in NYFIX Millennium to 80% of the total
ownership interests. The fair value of the Company's common stock issued to the
New Partners was $0.4 million in excess of the $8 million New Partners' cash
equity investment in NYFIX Millennium. The Company allocated this $0.4 million
to the Option based on its fair value. As the Option had an indefinite life, it
was not amortized.
As with the investment of the Initial Partners, since the fair value of
the Company's common stock issued to purchase the Option was greater than the
cash equity investment by the New Partners, it was determined that the New
Partners' consideration given in the option transaction is not viewed as having
economic substance or investment risk. Viewing the transactions as an integrated
transaction, the accounting reflected the issuance of the Company's common stock
to the New Partners, in exchange for cash and the Option. The Company accounted
for the total $8 million contributed to NYFIX Millennium ($2 million from each
of the New Partners) as its investment in NYFIX Millennium and continued to
absorb 100% of the operating losses.
Effective February 1, 2002, the Company exercised the Option. In exchange
for the increased ownership interest in NYFIX Millennium, the Company issued to
the Initial Partners and New Partners an aggregate of 296,250 shares of its
common stock, with a fair value of $4.5 million on the date of exercise. As a
F-18
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
result, the Company increased its ownership interest in NYFIX Millennium to 80%.
At the point of exercising the Option and regaining control of the NYFIX
Millennium Board and as a result of the aforementioned items, the Company's
aggregate purchase price of NYFIX Millennium was $9.1 million, which consisted
of: (i) the Option issued by the Initial Partners with a fair value of $4.2
million; (ii) the Option issued by the New Partners with a fair value of $0.4
million, and (iii) the Company's common stock issued to the Initial Partners and
New Partners for exercise of the Option with a fair value of $4.5 million on the
date of exercise. The Company allocated $2.2 million to the fair value of
intangible assets acquired, resulting in goodwill of $6.9 million. As a result
of filing its 2002 tax returns, the Company determined, in the fourth quarter of
2003, the existence of deferred tax assets of $1.1 million related to its
acquisition of an 80% ownership interest in NYFIX Millennium. The Company
accounted for this incremental deferred tax asset as a reduction of goodwill.
As previously mentioned, the Company absorbed 100% of NYFIX Millennium's
operating losses from the date of NYFIX Millennium's inception. If and when
NYFIX Millennium achieves profitability, 24% of its profits will be allocated to
the Initial Partners and New Partners in accordance with the contractual
agreement amongst the parties.
Some of the Company's key considerations for the acquisition of an
additional 30% ownership interest in NYFIX Millennium included its ability to
control NYFIX Millennium's operations to effect changes in NYFIX Millennium's
business model as a result of the attractiveness of the synergies anticipated
with the Company's recently-acquired NYFIX Transaction Services broker-dealer
and soon-to-be-acquired Javelin business.
NYFIX Millennium's statements of operations for the one month period ended
January 31, 2002 and the year ended December 31, 2001 were as follows:
F-19
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Month Ended Year Ended
January 31, December 31,
2002 2001
----------- ------------
(in thousands)
Revenue:
Transaction $ 77 $ 142
Cost of Revenue:
Transaction 105 900
-------- --------
Gross Profit:
Transaction (28) (758)
Operating Expense:
Selling, general and administrative 1,215 8,129
Research and development -- 2,000
Depreciation and amortization 117 960
-------- --------
Total operating expense 1,332 11,089
Interest expense (38) (43)
Interest income 20 297
-------- --------
Net loss $ (1,378) $(11,593)
======== ========
Financial information reconciling NYFIX Millennium's statements of
operations to the Company's equity in loss of NYFIX Millennium for the one month
period ended January 31, 2002 and the year ended December 31, 2001 were as
follows:
Month Ended Year Ended
January 31, December 31,
2002 2001
----------- ------------
(in thousands)
Net loss $ (1,378) $(11,593)
Elimination of inter-company interest 38 43
-------- --------
Equity in loss of NYFIX Millennium $ (1,340) $(11,550)
======== ========
F-20
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. NASD
approved the application 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 $34,000 cost of the acquisition was allocated to
goodwill.
ALLOCATION OF ASSETS ACQUIRED
The purchase prices of the aforementioned acquisitions have been allocated
to the assets acquired and liabilities assumed based on the fair values at the
respective acquisition dates.
NYFIX
Renaissance Millennium Javelin
----------- ---------- -------
Assets: (in thousands)
Current assets $ 129 $ 7,600 $ 5,598
Property and equipment 1,175 4,731 1,345
Intangible assets 3,100 2,200 8,800
Goodwill 8,240 5,768 41,924
Deferred tax assets -- 1,138 3,931
Other assets -- 74 288
------- ------- -------
Total assets acquired 12,644 21,511 61,886
------- ------- -------
Liabilities:
Current liabilities 706 3,904 5,244
Deferred tax liabilities 113 -- --
Subordinated loan payable to
NYFIX, Inc. -- 6,000 --
Long-term debt -- -- 166
Other long-term liabilites -- -- 356
------- ------- -------
Total liabilities assumed 819 9,904 5,766
------- ------- -------
Net assets acquired $11,825 $11,607 $56,120
======= ======= =======
PRO FORMA EFFECT
The table below presents the summarized unaudited pro forma combined
results of operations for the years ended December 31, 2003 and 2002, assuming
the acquisitions of NYFIX Millennium and Javelin had taken place on January 1,
2002 and the acquisition of Renaissance had taken place on September 9, 2002
(date of commencement of operations), and giving effect to the addition of the
New Partners and the Option exercise as of January 1, 2002 and the issuance of
NYFIX shares issued in connection with the acquisition of Renaissance. The
unaudited pro forma combined results of operations for both years was prepared
based upon the historical results of operations of the Company, Renaissance,
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,
--------------------------
2003 2002
---------- --------
(in thousands,
except per share amounts)
Revenue $ 65,919 $ 59,573
========== ========
Net loss $ (5,489) $ (9,451)
========== ========
Loss per common share - basic and diluted $ (0.17) $ (0.31)
========== ========
F-21
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill and other acquired intangibles at December 31, 2003 and 2002
primarily relate to the Company's 2003 acquisition of Renaissance and 2002
acquisition of an additional 30% ownership interest in NYFIX Millennium and the
acquisition of Javelin described above. In the absence of circumstances
requiring impairment testing on a quarterly or other more frequent basis, the
Company has set October 1 as its annual testing date for goodwill impairment.
Effective October 1, 2003 and 2002, the Company performed its annual test for
impairment using the discounted cash flow valuation method. There was no
indication of impairment to the value of goodwill for the years ended December
31, 2003 and 2002. The Company completed the asset valuations for the
Renaissance acquisition during the fourth quarter of 2003, and intangible assets
were adjusted from the estimated amount of $3.0 million as of September 30, 2003
to $3.1 million, with fourth quarter amortization expense adjusted accordingly.
As a result of the filing of income tax returns for Javelin and NYFIX
Millennium, the Company adjusted goodwill to realize incremental deferred tax
assets of $0.4 million and $1.1 million, respectively.
The changes in the carrying amount of goodwill by reportable segment for
the years ended December 31, 2003 and 2002 were as follows:
Technology Transaction
Services Services Total
(in thousands)
Balance as of January 1, 2002 $ -- $ 34 $ 34
Goodwill acquired during year:
NYFIX Millennium -- 6,906 6,906
Javelin 42,321 -- 42,321
-------- -------- --------
Balance as of December 31, 2002 42,321 6,940 49,261
Goodwill acquired or (adjusted) during year:
NYFIX Millennium -- (1,138) (1,138)
Javelin (397) -- (397)
Renaissance 8,240 -- 8,240
-------- -------- --------
Balance as of December 31, 2003 $ 50,164 $ 5,802 $ 55,966
======== ======== ========
As previously described, as a result of filing its 2002 tax returns, the
Company determined, in the fourth quarter of 2003, the existence of deferred tax
assets related to its acquisitions of NYFIX Millennium and Javelin of $1.1
million and $0.4 million, respectively. The Company accounted for these
incremental deferred tax assets as reductions of goodwill.
F-22
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Acquired intangible assets consisted of the following at December 31, 2003
and 2002:
Year Ended December 31,
---------------------------- Useful Lives
2003 2002 (Years)
-------- -------- ------------
(in thousands)
Existing technology $ 10,600 $ 7,500 5 - 7
Customer related intangibles 2,700 2,700 5
Trademarks and other 800 800 6 - 14
-------- --------
Total intangible assets, gross 14,100 11,000
Less: Accumulated amortization 3,865 1,596
-------- --------
Total intangible assets, net $ 10,235 $ 9,404
======== ========
Amortization expense of acquired intangible assets was $2.3 million and
$1.6 million for the years ended December 31, 2003 and 2002, respectively, and
was included in cost of revenue.
Based on identified intangible assets recorded at December 31, 2003, the
future amortization expense for the next five years is expected to be as
follows:
Amount
------
Year ending December 31, (in thousands)
- ------------------------
2004 $ 2,491
2005 2,491
2006 2,491
2007 1,366
2008 526
Thereafter 870
--------
Future amortization expense $ 10,235
========
4. INVESTMENT IN AFFILIATE
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 United States equity markets from Europe. EuroLink
offers the Company's equity products and services to the European marketplace,
primarily on a transaction fee basis. The preferred stock automatically
converted into a 40% common stock interest two years from the date of the
Company's original investment, or March 6, 2004. The Company also had 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 ranged from a minimum of
$1.0 million to a maximum of $10.0 million. The option was exercisable between
April 1, 2004 and June 30, 2004 and was 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 years ended December 31, 2003 and 2002, the
Company recorded its equity in the losses of EuroLink of $0.4 million and $0.5
million, respectively, which were included in "other expense, net" in the
accompanying consolidated statements of operations. In addition, the Company had
notes receivable from EuroLink at December 31, 2003 and 2002 of $0.6 million and
$0.5 million, respectively, bearing an interest rate of 6.0%. The Company also
funded EuroLink $0.2 million for certain operating costs. Such notes and
advances were reflected as "notes receivable and other amounts due from
unconsolidated affiliates" in the accompanying consolidated balance sheets. On
March 29, 2004, the Company executed a binding agreement to acquire the
remaining 60% of EuroLink that it did not already own. The transaction closed on
April 28, 2004. The Company financed the acquisition with $24,000 in cash and
one-year promissory notes payable in its common stock or cash, at the Company's
option, valued at $0.5 million.
F-23
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. OTHER BALANCE SHEET INFORMATION
Prepaid expenses and other current assets consisted of the following:
December 31,
------------------------
2003 2002
------- -------
(in thousands)
Brokerage receivables $ 1,945 $ --
Prepaid expenses 1,246 1,136
Inventory 806 1,098
Income taxes receivable, net 1,350 1,327
Other 527 475
------- -------
Total prepaid expenses and other current assets $ 5,874 $ 4,036
======= =======
Other assets, net consisted of the following:
December 31,
------------------------
2003 2002
------- -------
(in thousands)
Product enhancement costs, gross $16,625 $11,280
Less: Accumulated amortization 10,046 7,390
------- -------
Product enhancement costs, net 6,579 3,890
Other, net 799 1,260
------- -------
Total other assets, net $ 7,378 $ 5,150
======= =======
Included in cost of revenue was amortization expense of deferred product
enhancement costs of $2.7 million, $2.4 million and $1.8 million for 2003, 2002
and 2001, respectively. Included in depreciation and amortization expense was
amortization expense of other assets of $13,000, $4,000 and $4,000 for 2003,
2002 and 2001, respectively.
Accrued expenses consisted of the following:
December 31,
------------------------
2003 2002
------- -------
(in thousands)
Taxes, other than income taxes $2,360 $2,216
Brokerage payables 1,700 --
Commissions 643 561
Payroll and payroll related 625 1,153
Other 1,179 1,430
------ ------
Total accrued expenses $6,507 $5,360
====== ======
6. DEBT AND CAPITAL LEASE OBLIGATIONS
In connection with the acquisition for the remaining 82% of the membership
units of Renaissance, the Company issued promissory notes with a face value of
$3 million. The notes, which have been discounted at 5.5%, to $2.7 million, are
F-24
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
payable at the Company`s option in its common stock or cash to certain
unitholders of Renaissance with various maturity dates ranging between June 2004
and June 2007. In April 2004, pursuant to notice from certain payees after
default on the notes, the Company issued 375,346 shares of its common stock in
payment of $2.0 million of such notes.
Annual maturities on the promissory notes outstanding at December 31, 2003
were as follows:
Amount
------
Year ending December 31, (in thousands)
- ------------------------
2004 $ 1,684
2005 353
2006 353
2007 353
-------
Total $ 2,743
=======
At December 31, 2003, the Company was committed under capital lease
obligations with interest rates ranging from 4.24% to 15.30% for maturities
ranging from January 2, 2004 to May 1, 2005. At December 31, 2003, capital lease
obligations were $0.7 million, of which $0.6 million was classified as a current
liability in the accompanying 2003 consolidated balance sheet.
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, 2003 were as follows:
Capital Operating
------- ---------
Year ending December 31, (in thousands)
- ------------------------
2004 $ 551 $ 4,196
2005 136 3,459
2006 - 2,279
2007 - 2,304
2008 - 2,321
Thereafter - 1,386
------- -------
Total minimum payments 687 $15,945
=======
Less: amount representing interest 21
-------
Present value of minimum capital lease payments $ 666
=======
Rent expense, net of sub-lease income, was $6.2 million, $4.6 million and
$1.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
See Note 18.
7. COMMITMENTS AND CONTINGENCIES
BROKER-DEALER NET CAPITAL REQUIREMENTS
The SEC and the NASD, as well as other regulatory agencies and securities
exchanges within and outside the United States, 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 the
Company's United States 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 United States or international regulatory
F-25
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 the Company's 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 the Company cannot assure that it would be able to
furnish the affected subsidiary with the requisite additional capital to offset
that charge. The net capital rules could also restrict the Company's ability to
withdraw capital from its broker-dealer subsidiaries, which could limit the
Company's ability to pay cash dividends, repay debt or repurchase shares of its
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect the Company's financial condition,
results of operations or cash flows.
NYFIX Clearing, NYFIX Transaction Services and NYFIX Millennium, as
registered broker-dealers, are subject to the minimum net capital requirements
of the NASD. These broker-dealers have consistently operated in excess of such
requirements. NYFIX Clearing's net capital was $10.5 million at December 31,
2003, which exceeded the amount required by $10.3 million. NYFIX Transaction
Services' net capital was $2.6 million at December 31, 2003, which exceeded the
amount required by $2.5 million. NYFIX Millennium's net capital was $1.2 million
at December 31, 2003, which exceeded the amount required by $1.0 million. During
2003, the Company funded $10.8 million to NYFIX Clearing to enable it to
maintain its minimum excess net capital requirement of $10.0 million as a
condition of its approval by DTCC. The Company's broker-dealer subsidiaries may
need the Company to fund or commit more of its consolidated cash,
cash-equivalents and short-term investments in the future to maintain their
individual minimum and minimum excess net capital requirements. If any or all of
these broker-dealer subsidiaries were to fall below their minimum or minimum
excess net capital requirements, their operations may be restricted.
PURCHASE OBLIGATIONS
The Company has minimum purchase obligations with certain
telecommunication providers due to expire in 2005 through 2006. Under such
arrangements, the Company has agreed to minimum monthly or annual purchase
volumes in exchange for pricing discounts from the telecommunication providers.
There have been no instances of the Company failing to meet its minimum
obligations.
Annual minimum purchase obligations at December 31, 2003 were as follows:
Amount
Year ending December 31, (in thousands)
- ------------------------
2004 $ 3,241
2005 1,916
2006 600
-------
Total $ 5,757
=======
The Company also has certain maintenance agreement obligations on data
center software due to expire in 2005 that the Company committed to when it
purchased the software licenses. Under such arrangements, the Company is
invoiced quarterly by the software provider. Such obligations are $0.2 million
in 2004 and $0.1 million in 2005.
The Company has also committed to purchase software for customer
administration and billing for $0.2 million in 2004.
F-26
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
LITIGATION
In May 2003, the Company was served as a defendant in KLEDARAS V. NYFIX,
INC. Mr. George Kledaras, as representative of former shareholders of Javelin,
sought the release of an escrow fund consisting of $1.0 million in cash and
270,945 shares of common stock, having a fair value of $4.0 million at March 31,
2002 and alleged damages of at least $18 million against the Company and its
Chairman and CEO, Mr. Peter K. Hansen, in connection with such acquisition. In
June 2003, pursuant to a stipulation with the Company, Mr. Kledaras dismissed
his lawsuit without prejudice. On March 15, 2004, Mr. Kledaras, as
representative of former shareholders of Javelin executed a settlement agreement
with us that, among other things: (a) paid the Company $1.3 million; (b)
distributed the shares of the Company's common stock from the escrow fund to the
former Javelin shareholders (c) deemed that KLEDARAS V. NYFIX, INC. be dismissed
with prejudice; and (d) provided for mutual releases with respect to all claims
related to its acquisition of Javelin. The Company received the $1.3 million of
net proceeds in the first quarter of 2004.
On or about May 13, 2004, an action entitled FULLER & THALER ASSET
MANAGEMENT V. NYFIX, INC., ET AL. was filed in the United States District Court
for the District of Connecticut. The Complaint names the Company, its Chairman
and CEO, its former CFO, its CFO, and certain of its directors as defendants.
The Complaint asserts a proposed class action claim on behalf of all buyers of
the Company's stock between March 30, 2000 and March 30, 2004 and seeks an
unspecified amount of damages. The Complaint alleges violations of Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934, based on the issuance
of a series of allegedly false and misleading financial statements and press
releases concerning, among other things, the Company's investment in NYFIX
Millennium. The Company and the other defendants intend to defend the lawsuit
vigorously.
During the course of normal business, the Company becomes involved in
various routine legal proceedings. The Company believes that it is not presently
a party to any other material litigation that the outcome of which could
reasonably be expected to have a material adverse effect on its consolidated
financial statements.
8. EQUITY
COMMON STOCK
In connection with the acquisitions mentioned in Note 4, the Company
issued i) an aggregate of 1,968,750 shares of common stock to the NYFIX
Millennium Initial Partners in October 1999, with a fair value of $36.4 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 $8.4 million; ii) 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; iii) an aggregate of 300,000
shares of common stock to the Renaissance unitholders in October 2002, with a
fair value of $3.74 per share, totaling $1.1 million, iv) an aggregate of
462,286 shares of common stock into an irrevocable trust for the benefit of
certain unitholders of Renaissance in July 2003, with a fair value of $2.7
million; v) and an aggregate of 59,653 shares of common stock with certain
selling restrictions to certain unitholders of Renaissance in July 2003, with a
fair value of $0.3 million.
F-27
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
STOCKHOLDERS' 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 July 1, 2003, in connection with its acquisition of Renaissance, the
Company acquired 60,000 shares of its common stock that it had issued to
Renaissance unitholders in connection with its original investment in
Renaissance, and which Renaissance had subsequently acquired. The Company
recorded the treasury stock at the then current market value of $0.4 million.
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.
9. INCOME TAXES
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities consisted of the following at December
31, 2003 and 2002:
F-28
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31,
-----------------------
2003 2002
------- -------
Deferred tax assets: (in thousands)
Bad debt expense $ 858 $ 590
Deferred revenue 896 900
Intangible asset amortization 2,669 353
Capitalized product enhancement costs 985 941
Net operating loss carryforwards 7,147 2,513
Basis in NYFIX Millennium 4,216 9,363
Equity investment in Eurolink 373 --
Research and development tax credits 1,596 579
Other 586 446
------- -------
Total deferred tax assets 19,326 15,685
------- -------
Deferred tax liabilities:
Depreciation and amortization 777 2,044
Basis in Renaissance assets 1,133 --
Other 16 172
------- -------
Total deferred tax liabilities 1,926 2,216
------- -------
Total deferred tax assets, net $17,400 $13,469
======= =======
At December 31, 2003, the Company had net operating loss carryforwards of
$15.7 million, which may be used to offset future taxable income. The Company's
Federal net operating loss carryforwards expire between 2020 and 2023. A portion
of the Company's Federal net operating loss carryforwards ($4.1 million)
associated with the Javelin acquisition is subject to an annual limitation of
$2.2 million, as defined in Section 382 of the Internal Revenue Code. At
December 31, 2003, the Company had state net operating loss carryforwards
expiring at various dates. No valuation allowance has been established against
the deferred tax assets, as the Company 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 $0.2 million and $0.1 million during the years
ended December 31, 2003 and 2002, respectively.
The reconciliation between the Federal statutory income tax rate and the
Company's effective income tax (benefit) rate was as follows:
Year Ended December 31,
--------------------------------
2003 2002 2001
------- ------- -------
Statutory Federal tax (benefit) rate (35)% (35)% 35 %
State and local taxes, net of federal effect (6)% (5)% 34 %
Research and development tax credits (7)% (9)% 1 %
Equity loss in NYFIX Millennium -- 8 % 206 %
Other (2)% -- --
------- ------- -------
Effective tax (benefit) rate (50)% (41)% 276 %
======= ======= =======
F-29
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company received no income tax benefit from its equity in loss of
NYFIX Millennium of $1.3 million and $11.6 million for the years ending December
31, 2002 and 2001, respectively, as these losses were allocated to the Initial
Partners and New Partners for income tax purposes.
Research and development tax credits of $0.6 million for the year ended
December 31, 2003 related primarily to the estimated tax effect of research and
development expenses incurred in 2003. Research and development tax credits of
$0.9 million for the year ended December 31, 2002 related primarily to the
estimated tax effect of research and development expenses incurred in 1999
through 2002.
(Loss) income before income taxes was as follows:
Year Ended December 31,
-------------------------------
2003 2002 2001
------- ------- -------
(in thousands)
Domestic $(8,539) $(6,914) $ (966)
Foreign (204) (1,719) 2,936
------- ------- -------
Total $(8,743) $(8,633) $ 1,970
======= ======= =======
Significant components of the income tax (benefit) provision were as
follows:
Year Ended December 31,
-------------------------------
2003 2002 2001
------- ------- -------
Current: (in thousands)
Federal $(1,861) $(1,048) $ 2,101
State and foreign -- -- 1,853
------- ------- -------
Total current (1,861) (1,048) 3,954
------- ------- -------
Deferred:
Federal (1,586) (1,331) 1,255
State and foreign (923) (1,209) 218
------- ------- -------
Total deferred (2,509) (2,540) 1,473
------- ------- -------
Total income tax (benefit) provision $(4,370) $(3,588) $ 5,427
======= ======= =======
10. LOSS PER SHARE
The Company's basic loss per common share ("EPS") was calculated based on
net loss available to common stockholders and the weighted-average number of
shares outstanding during the reported period. Stock options representing
1,183,721, 1,285,298 and 1,758,130 shares were excluded from the loss per share
calculations for the years ended December 31, 2003, 2002 and 2001, respectively,
as their effect was anti-dilutive.
Year Ended December 31,
-------------------------------
2003 2002 2001
------- ------- -------
(in thousands, except per share amounts)
Net loss $(4,373) $(5,045) $(3,457)
======= ======= =======
Loss per common share - basic and diluted $ (0.14) $ (0.17) $ (0.13)
======= ======= =======
Weighted average shares outstanding 31,462 30,126 26,784
======= ======= =======
F-30
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. RELATED PARTY TRANSACTIONS
The Initial and New Partners of NYFIX Millennium (see Note 3) are or have
been customers of the Company. See Note 4 for discussion of transactions with
affiliate.
At December 31, 2003, the Company had a note receivable from a former
officer for the exercise of options for the Company's common stock, with
interest at a rate of 5.5%, maturing on May 13, 2004. At December 31, 2002, the
Company had notes receivable from a current and a former officer for the
exercise of options for the Company's common stock, with interest at rates
ranging from 5.5% to 7.5%, with maturities ranging from October 1, 2003 to June
30, 2005. Such notes aggregated $0.1 million and $0.6 million at December 31,
2003 and 2002, respectively, and were included in "notes receivable issued for
common stock" within stockholders' equity on the accompanying consolidated
balance sheets. At December 31, 2003 and 2002, the Company had notes receivable
from a former and a current officer, both with interest rates of 5.5% and
maturing in July 2004. Such notes aggregated $0.4 million and were included in
"prepaid expense and other current assets" at December 31, 2003 on the
accompanying consolidated balance sheets.
12. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) retirement plan (the "401(k) Plan") covering
substantially all of its United States 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 2003. 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. The Company's
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 were
discretionary. On July 1, 2003, the Javelin 401(k) Plan was merged into the
401(k) Plan with the same provisions as the 401(k) Plan.
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, $0.6 million and $0.3 million in 2003, 2002 and
2001, respectively.
13. STOCK-BASED COMPENSATION
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,
F-31
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 2003, stock options to
purchase 2,962,468 shares of the Company's 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 were 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, 2003, stock options to purchase 324,711 shares of
the Company's common stock were outstanding.
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
became exercisable over a three-year period and expired in ten years. The 1991
Plan expired on June 23, 2001. All available options were granted under the 1991
Plan, as amended, and no further grants will be made. At December 31, 2003,
stock options to purchase 3,419,762 shares of the Company's common stock were
outstanding.
F-32
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The summary of the activity under stock option plans for the years ending
December 31, 2003, 2002, and 2001, was as follows:
Year Ended December 31,
-----------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning
of the year 7,024,799 $ 10.53 5,753,940 $ 12.95 4,529,387 $ 11.50
Granted 570,001 5.21 1,900,850 4.97 2,025,926 15.58
Assumed in the acquisition
of Javelin -- -- 493,699 7.80 -- --
Exercised (279,978) 2.99 (169,612) 2.81 (384,250) 5.79
Cancelled (607,881) 10.98 (954,078) 14.32 (417,123) 16.58
---------- ---------- ----------
Outstanding at end
of the year 6,706,941 $ 10.34 7,024,799 $ 10.53 5,753,940 $ 12.95
========== ========== ==========
Exercisable at end of the year 5,229,618 $ 10.76 3,963,679 $ 10.34 2,835,723 $ 9.03
========== ========== ==========
Weighted average fair value
of options granted $ 4.09 $ 3.23 $ 12.47
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, 2003:
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 2,670,118 5.9 $ 3.10 2,117,498 $ 2.88
$ 4.41 - $ 8.80 1,109,238 7.4 6.90 531,560 7.26
$ 8.81 - $13.20 1,055,000 7.6 12.20 873,534 12.09
$13.21 - $17.60 869,609 6.1 14.77 860,942 14.75
$17.61 - $22.00 132,850 6.8 20.91 120,683 20.89
$22.01 - $26.40 376,276 6.7 23.37 339,217 23.41
$26.41 - $30.80 90,650 6.6 27.97 82,984 27.96
$30.81 - $35.20 306,000 6.4 32.62 206,000 32.43
$35.21 - $39.60 86,700 6.7 36.70 86,700 36.70
$39.61 - $44.00 10,500 6.8 40.13 10,500 40.13
----------- -----------
6,706,941 6.6 $ 10.34 5,229,618 $ 10.76
=========== ===========
F-33
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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:
Year Ended December 31,
----------------------------------
2003 2002 2001
------ ------ ------
Average risk-free interest rate 3.0% 3.8% 4.6%
Average expected life in years 6.0 6.5 4.3
Expected volatility 78% 79% 71%
Expected dividend yield 0% 0% 0%
14. BUSINESS SEGMENT INFORMATION
The Company has adopted the disclosure requirements of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
establishes standards for additional disclosure about operating segments for
interim and annual financial statements. This standard requires financial and
descriptive information be disclosed for segments whose operating results are
reviewed by the Company for decisions on resource allocation. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
The Company operates as a financial services technology company in two
industry segments, Technology Services and Transaction Services.
The Company's Technology Services segment is comprised of four of its
subsidiaries, which work together as technology providers, focusing on offering
trade-management systems, a centralized industry order-routing network,
order-routing software, exchange-floor automation systems, exchange and market
access technology and post-trade processing systems. The Technology Services
customers consist primarily of United States securities brokerage firms and
international derivatives brokerage firms. The Company's Technology Services
segment primarily generates subscription, capital sale and service revenue.
The Company's Transaction Services segment is comprised of six of its
subsidiaries. Three are NASD registered broker-dealers; one is an introducing
broker-dealer for derivatives and was granted its broker-dealer license in 2002
by the NFA; one was incorporated in the United Kingdom on March 29, 2004 and is
applying for its FSA broker-dealer license in anticipation of the Company's
expansion into Europe and other international markets; and EuroLink, which we
agreed to acquire effective March 29, 2004 and has represented the Company's
initial transaction efforts in the European markets. Currently, the customers of
the NASD registered broker-dealers consist primarily of United States securities
brokerage firms and United States buy-side institutions, including banks, mutual
funds and other professional money managers. The Company's Transaction Services
segment primarily generates revenues from the application of fees charged on
executed trades.
Prior to 2002, the Company operated as a single segment. 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.
F-34
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized financial information by business segment for the years ended
December 31, 2003, 2002 and 2001 was as follows:
Year Ended December 31,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
Revenue: (in thousands)
Technology Services $ 54,156 $ 48,365 $ 41,397
Transaction Services 14,343 7,597 --
Eliminations (2,590) (150) --
--------- --------- ---------
Total revenue $ 65,909 $ 55,812 $ 41,397
========= ========= =========
Gross Profit:
Technology Services $ 26,779 $ 27,220 $ 27,237
Transaction Services 4,529 286 --
--------- --------- ---------
Total gross profit $ 31,308 $ 27,506 $ 27,237
========= ========= =========
Identifiable assets:
Technology Services $ 90,849 $ 85,300 $ 34,053
Transaction Services 11,721 14,938 8,479
Corporate 49,602 46,377 53,717
--------- --------- ---------
Total indentifiable assets $ 152,172 $ 146,615 $ 96,249
========= ========= =========
Depreciation and amortization:
Technology Services $ 10,691 $ 9,900 $ 6,406
Transaction Services 1,813 1,586 --
Corporate 490 175 59
--------- --------- ---------
Total depreciation and amortization $ 12,994 $ 11,661 $ 6,465
========= ========= =========
Capital expenditures for property and equipment:
Technology Services $ 4,959 $ 3,671 $ 6,593
Transaction Services 25 586 --
Corporate 306 309 528
--------- --------- ---------
Total capital expenditures $ 5,290 $ 4,566 $ 7,121
========= ========= =========
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.
F-35
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Reconciling information between business segments and the (loss) income
before income taxes and minority interest was as follows:
Year Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Gross profit for reportable segments $ 31,308 $ 27,506 $ 27,237
Operating expenses (39,765) (35,884) (25,647)
Interest expense (125) (262) (343)
Investment income 597 628 737
Other expense (758) (621) (14)
-------- -------- --------
(Loss) income before income taxes $ (8,743) $ (8,633) $ 1,970
======== ======== ========
Summarized financial information by geographic location for 2003, 2002 and
2001 was as follows:
Year Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
Revenue: (in thousands)
United States $ 59,130 $ 52,020 $ 35,134
Foreign 6,779 3,792 6,263
-------- -------- --------
Total revenue $ 65,909 $ 55,812 $ 41,397
======== ======== ========
As of December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
Long-lived assets:
United States $ 91,062 $ 86,126 $ 37,563
Foreign 2,197 2,014 1,626
-------- -------- --------
Total long-lived assets $ 93,259 $ 88,140 $ 39,189
======== ======== ========
Revenues were attributed based upon the origin of the product delivered or
service provided.
15. VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to
Beginning of Costs and Deductions Balance at
Year Expenses and Write-offs End of Year
------------ ---------- -------------- -----------
Allowance for doubtful accounts: (in thousands)
Year ended December 31, 2003 $1,207 $2,831 $2,199 $1,839
====== ====== ====== ======
Year ended December 31, 2002 $ 511 $1,146 $ 450 $1,207
====== ====== ====== ======
Year ended December 31, 2001 $ 421 $ 233 $ 143 $ 511
====== ====== ====== ======
F-36
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. SUPPLEMENTAL CASH FLOW INFORMATION
Information about the cash flow activities related to acquisitions during
the years ended December 31, 2003 and 2002 were as follows:
Year Ended
December 31,
-----------------------
2003 2002
-------- --------
(in thousands)
Fair value of assets acquired, net of cash acquired $ 12,615 $ 76,219
Fair value of liabilities assumed (827) (15,670)
Promissory note converted to equity (1,560) --
Fair value of capital contributed (3,181) --
Fair value of notes issued (2,743) --
Common stock issued (2,997) (49,154)
Treasury stock acquired 380 --
Pre-acquisition investment basis (1,590) (4,600)
-------- --------
Payments for acquisitions, net of cash acquired $ 97 $ 6,795
======== ========
Information about other cash flow activities during the years ended
December 31, 2003, 2002 and 2001 was as follows:
Year Ended December 31,
--------------------------------------
2003 2002 2001
------- ------- -------
Supplemental disclosures of cash flow information: (in thousands)
Cash paid for interest $ 126 $ 262 $ 301
(Refunds received) cash paid for income taxes, net (2,186) 937 2,985
Supplemental schedule of noncash investing and
financing information:
Capital lease obligations incurred for the purchase
of property and equipment -- 1,278 524
Common stock issued for investments in
unconsolidated affiliates -- 1,121 --
Common stock issued for notes -- 70 78
Unrealized loss (gain) on available-for-sale securities 107 142 (35)
F-37
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
17. QUARTERLY FINANCIAL DATA - UNAUDITED
Three Months Ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
2003 (in thousands, except per share amounts)
Revenue $ 17,283 $ 15,696 $ 16,395 $ 16,535
========= ========= ========= =========
Gross profit, as previously
reported $ 9,538 $ 7,951 $ 8,045 $ 7,393
Reclassification (512) (512) (595) --
--------- --------- --------- ---------
Gross profit, as reclassified $ 9,026 $ 7,439 $ 7,450 $ 7,393
========= ========= ========= =========
Net income (loss) $ 76 $ (1,057) $ (1,057) $ (2,335)
========= ========= ========= =========
Income (loss) per share:
Basic $ 0.00 $ (0.03) $ (0.03) $ (0.07)
========= ========= ========= =========
Diluted $ 0.00 $ (0.03) $ (0.03) $ (0.07)
========= ========= ========= =========
2002
Revenue $ 10,071 $ 13,086 $ 15,368 $ 17,287
========= ========= ========= =========
Gross profit, as previously
reported $ 5,624 $ 6,201 $ 7,920 $ 9,357
Reclassification -- -- (1,541) (55)
--------- --------- --------- ---------
Gross profit, as reclassified $ 5,624 $ 6,201 $ 6,379 $ 9,302
========= ========= ========= =========
Net income (loss) $ (1,781) $ (2,919) $ (906) $ 561
========= ========= ========= =========
Income (loss) per share:
Basic $ (0.06) $ (0.10) $ (0.03) $ 0.02
========= ========= ========= =========
Diluted $ (0.06) $ (0.10) $ (0.03) $ 0.02
========= ========= ========= =========
The sum of income (loss) per share for the four quarters of 2003 does not
equal total loss per share due to changes in the average number of shares
outstanding during the respective periods.
As described in Note 1, certain amortization expense of acquired
intangible assets was reclassified from depreciation and amortization expense to
cost of revenue.
As described in Note 1, in the fourth quarter of 2003, the Company
initiated a program to accelerate the collection of past due accounts receivable
through, among other things, the issuance of discounts to certain customers.
Primarily as a result of this program, the Company recorded a charge of $2.2
million ($1.4 million after tax, or $0.04 per common share) in the fourth
quarter of 2003. In the fourth quarter of 2002, the Company recorded a tax
benefit of $0.5 million ($0.02 per common share) for the favorable results of a
completed study relating to research and development tax credit incentives
available to the Company for 1999 through 2002.
F-38
NYFIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
18. SUBSEQUENT EVENTS
LEASE DISPOSITION
Effective February 1, 2004, the Company entered into an agreement to lease
additional space in the same building on an adjoining floor at its New York City
offices at 100 Wall Street office. In connection with this agreement, the
Company intends to cease use, in the second or third quarter 2004, of one of its
other offices on Wall Street and consolidate its operations into the new space.
At that time, in accordance with SFAS No. 146, ACCOUNTING FOR EXIT OR DISPOSAL
ACTIVITIES, the Company expects to record a charge to operating expense of up to
$3.0 million. This charge includes the remaining rent payments, net of estimated
sub-lease income, and other write-offs, including unamortized leasehold
improvements.
RENAISSANCE NOTES
On April 7, 2004, pursuant to notice from certain payees after default on
the notes, the Company issued shares of its common stock in payment of $2.0
million of such notes (see Note 3). Certain contingent liabilities remain with
respect to such notes.
NASDAQ DELISTING PROCEEDING
On April 1, 2004, Nasdaq notified the Company that the Company was not in
compliance with Nasdaq's listing requirements because the Company had not timely
filed its Annual Report on Form 10-K for the year ended December 31, 2003. On
April 8, 2004, the Company requested a hearing with the Nasdaq Listing
Qualifications Panel (the "Panel") for continued listing on the Nasdaq National
Market. At the April 29, 2004 hearing, the Company requested an extension to May
30, 2004 to meet Nasdaq's listing requirements. On May 19, 2004, Nasdaq notified
the Company that Nasdaq viewed the delay in the filing of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 as an
additional delinquency with respect to the Company's compliance with its listing
requirements and that the Panel will consider this factor in its decision. The
Company is awaiting a decision from the Panel regarding the Company's request
for an extension.
Once the Company files its 2003 Annual Report on Form 10-K and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, the Company
believes that it will be in compliance with its SEC reporting obligations. At
that time, the Company will request that Nasdaq dismiss the pending delisting
action against it.
If the Company's common stock is delisted from Nasdaq, stockholders may
find it more difficult to obtain timely and accurate quotes and execute trades
in our common stock. In addition, if our common stock is delisted from Nasdaq
and the market price of our common stock is less than $5.00 per share, our
common stock could be considered a penny stock and become subject to the
regulations applicable to penny stocks.
LITIGATION
On or about May 13, 2004, an action entitled FULLER & THALER ASSET
MANAGEMENT V. NYFIX, INC., ET AL. was filed in the United States District Court
for the District of Connecticut. The Complaint names the Company, its Chairman
and CEO, its former CFO, its current CFO, and certain of its directors as
defendants. The Complaint asserts a proposed class action claim on behalf of all
buyers of the Company's stock between March 30, 2000 and March 30, 2004 and
seeks an unspecified amount of damages. The Complaint alleges violations of
Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, based on
the issuance of a series of allegedly false and misleading financial statements
and press releases concerning, among other things, the Company's investment in
NYFIX Millennium. The Company and the other defendants intend to defend the
lawsuit vigorously.
F-39