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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 0-21324
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NYFIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1344888
(State or 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(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of each class)
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 $142 million at the close of the last business day
of the registrant's most recently completed second quarter (June 30, 2004).
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 $0.001, outstanding as of
May 31, 2005 was 32,442,431.
NYFIX, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
PART I
Item 1. Business............................................................8
Item 2. Properties.........................................................30
Item 3. Legal Proceedings..................................................30
Item 4. Submission of Matters to a Vote of Security Holders................31
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities................33
Item 6. Selected Financial Data............................................36
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................37
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.........74
Item 8. Financial Statements and Supplementary Data........................75
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................75
Item 9A. Controls and Procedures............................................75
Item 9B. Other Information..................................................79
PART III
Item 10. Directors and Executive Officers of the Registrant.................80
Item 11. Executive Compensation.............................................83
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.......................89
Item 13. Certain Relationships and Related Transactions.....................91
Item 14. Principal Accountant Fees and Services.............................91
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.........................93
Signatures.........................................................97
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NYFIX, INC.
CERTAIN STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS FILING
WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AND 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 of reference to the reader.
"$2 brokers" refers to an extensive array of independent brokers
operating on the trading floor of the New York Stock Exchange ("NYSE").
"AMEX" refers to the American Stock Exchange.
"APIs" refers to application programming interfaces, which is a common
expression in software programming where information is passed between programs.
"ASP" refers to an application service provider, which is a third-party
entity that manages and distributes software-based services and solutions to
customers across a wide area network from a central data center.
"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. A broker is an agent who executes
orders on behalf of clients, whereas a dealer acts as a principal and trades for
the dealer's 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.
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NYFIX, INC.
"DOT" refers to the Designated Order Turnaround system, which is the
electronic system that transmits NYSE member firms' market and day limit orders,
up to specified sizes in virtually all Listed Securities, 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 refers to the delivery or receipt of securities for cash that takes place
on the settlement date of a trade.
"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 US 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. ECN's offer after
hours trading and anonymity in trading Nasdaq stocks.
"EuroLink" refers to EuroLink Network, Inc., our wholly-owned subsidiary.
"FIX" refers to Financial Information eXchange.
"FIX protocol" refers to a messaging standard developed by market
participants 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.
"Initial Partners" refers to the seven global investment banks and
brokerage firms who, together with the Company, formed NYFIX Millennium in 1999.
"Institutional Investor" refers to a financial institution that 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).
This contrasts with an individual or 'retail' investor investing his or her own
money.
"Intra-day Funding" refers to commitments from unaffiliated institutions
to provide funding during a trading day.
"Introducing Broker" refers to a broker who is not permitted to accept
money, securities, or property from a customer.
"ISE" refers to International Securities Exchange, an electronic
options exchange.
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NYFIX, INC.
"ITS" refers to the Intermarket Trading System, which began operation in
1978. ITS, 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.
"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.
"Nasdaq" refers to the Nasdaq Stock Market, which is the largest
stock-based equity securities market in the United States of America.
"New Partners" refers to four global investment banks and brokerage
firms who became partners in NYFIX Millennium in 2001.
"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
over-the-counter markets - linked electronically by ITS computers: AMEX, BSE,
CSE, MSE, NYSE, PSE, PHLX, CBOE and Nasdaq.
"NOC" refers to a network operations center, which is the physical space
from which a typically large telecommunications network is managed, monitored
and supervised
"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) 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 LLC, 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.
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NYFIX, INC.
"OBMS" refers to our futures and derivatives Order Book 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.
"Option" refers to an option that the Company purchased from the Initial
Partners and the New Partners to buy an additional 30% ownership interest in
NYFIX Millennium.
"OTC," "OTC Securities" or "Over the Counter Securities" refers to
securities that are not traded on a listed exchange, but which are traded
between dealers by telephone or computer. Securities traded on Nasdaq markets
are OTC Securities.
"Quote Aggregator" refers to an electronic trading system capable of
receiving market data feeds from multiple sources and displaying a composite
screen of prices.
"Regulation ATS" refers to the order handling rules the SEC promulgated
in December 1998 relating to the regulation of certain ATSs.
"Regulation NMS" refers to the rules promulgated by the SEC in April
2005 relating to US Equity Market structural reform, access fees and market data
availability and revenue allocation among SROs..
"Renaissance" refers to Renaissance Trading Technologies, LLC., our
wholly-owned subsidiary.
"Sarbanes-Oxley" refers to The Sarbanes-Oxley Act of 2002.
"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.
"US" refers to the United States of America.
"Upstairs Traders" refers to a network of trading desks for the major
brokerage firms and institutional investors, which communicate with each other
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NYFIX, INC.
by means of electronic display systems and telephones to facilitate block trades
and program trades.
"WAN" refers to wide area network comprising the integration of several
or many inter-connected networks.
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NYFIX, INC.
PART I
INTRODUCTORY NOTE
We restated the accompanying consolidated financial statements for the
years ended December 31, 2003 and 2002 to reflect adjustments for misstatements
as further discussed in Note 2 to the Consolidated Financial Statements.
ITEM 1. BUSINESS
GENERAL SUMMARY
NYFIX, founded in 1991, is incorporated in Delaware and headquartered in
Stamford, Connecticut. We are an established provider to the domestic and
international financial markets of an industry interconnectivity network,
electronic trade communication technologies, trading workstations and
middle-office trade automation technologies. Our NYFIX Network is a "large
industry utility" connecting broker-dealers, institutions and exchanges
globally. In addition to providing technology, we provide via the NYFIX Network
a variety of electronic execution services and clearing through our broker
dealer subsidiaries. Through our datacenters and central organization, we
provide the underlying operating capabilities of most of the services to our
customers on a fully supported 24/7 service bureau basis. We generate our
revenue from technology and transaction fees.
We own or license all of our products and services and provide product
innovation, development, systems development, data center, network, systems and
help-desk operations support to our markets. We market directly to our end
customers globally and have little reliance upon distribution partners or other
distributors.
In addition to our headquarters in Stamford, we have offices on Wall
Street in New York City, in London's Financial District, in Chicago, in San
Francisco, and in Madrid. We operate redundant data centers in the northeastern
US with data center hubs in London, Amsterdam, Hong Kong and Tokyo.
We have organized and operate our business within two segments: our
Technology Services segment and our Transaction Services segment.
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 US 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 was approved for
membership in the NFA in 2002, is our Introducing Broker for derivative
transactions; NYFIX International, which was incorporated in the United Kingdom
on March 29, 2004, is a broker-dealer registered with the FSA in connection with
of our expansion into European and other international markets; and EuroLink. We
acquired the remaining 60% of EuroLink that we did not own, effective March 29,
2004. We have integrated EuroLink's operations, which represented our initial
transaction efforts in the European markets, into NYFIX International.
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NYFIX, INC.
Our Transaction Services segment, as a part of its customer offerings,
utilizes the NYFIX Network globally to provide electronic execution services.
NYFIX Millennium provides an electronic execution venue under Regulation ATS for
trading in US Listed Equities. NYFIX Transaction Services and NYFIX
International provide 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. In addition to providing
direct electronic market access to all the major US Equity Markets, the
Transaction Services segment provides enhancements to the electronic market
interaction process, which are designed to improve investor execution results.
While NYFIX Partners has not initiated any active business to date, we
expect to offer derivatives execution services, on a per-transaction basis, to
our current and future buy-side customers. We recently entered into one
agreement for a clearing partnership with one of our large FCM clients to
complete the business structure going forward. We are also in the process of
integrating our OBMS offering into our US datacenters as an ASP offering. When
this transition is complete, which is anticipated in 2005, we expect NYFIX
Partners to become an active Introducing Broker.
In recent years, we invested heavily in pursuing a growth-oriented
strategy and organized those efforts largely through our subsidiaries. Our
investment efforts include sustaining and growing our original technology
business servicing broker dealers during challenging market conditions. Our
efforts have focused on developing and penetrating new markets and introducing
new technologies that can change the traditional methods used to manage trading
flows in the buy-side institutional market place, a large market place not
previously serviced by us.
After the introduction of our NYFIX Network in 1998, although we
experienced quarter over quarter revenue growth from 1999 through 2001, we also
generated operating losses. Thereafter, as a result of the impact of the tragic
events of September 11, 2001 on our "broker-centric" customer base, the
subsequent downturn in the financial markets in 2001 and 2002, and the
fixed-cost base of our acquired subsidiaries, we have not been able to generate
sufficient revenue to offset our operating costs and, thus, have continued to
experience operating losses. We believed and still believe that increased
adoption and acceptance of electronic and computerized processes will hasten
changes in the US equity market structure and the distribution chain for
financial markets.
As an established provider with a track record of innovation, we
believed and still believe that our decision to continue to invest during a
period of challenges in the financial markets in recent years, was not only
necessary from a re-positioning perspective, but is also supported by our
assessment that larger opportunities will develop for us in an increasingly
electronically operated environment.
Our NYFIX Network provides us with a valuable resource for growth. We
believe that our ability to embed products that deliver improvements in speed,
quality of execution, and cost efficiency to our customers provides us a
competitive advantage.
ACQUISITIONS
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
the ability to sell our products into the 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.
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
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NYFIX, INC.
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.
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 in shares of our common
stock or cash, at our option, 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 with a fair value of $1.0 million. These amounts,
aggregating $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
Javelin's 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, net of
the tax effect, of $5.2 million, resulting in goodwill of $45.5 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, among
other things, paid us $1.2 million and distributed the shares of our common
stock held in the escrow fund to the former Javelin shareholders. We recorded
the $1.2 million of net proceeds received from the settlement in the first
quarter of 2004 as a reduction in goodwill.
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NYFIX, INC.
TRANSACTION SERVICES SEGMENT
EUROLINK
On March 6, 2002, we acquired a convertible preferred stock interest in
EuroLink, with its operations based in Madrid, for $4.0 million in cash.
EuroLink offers the European securities industry direct electronic access to the
US equity markets from Europe. EuroLink offers our equity products and services
to the European marketplace, primarily on a transaction fee basis. Our key
consideration for the acquisition of EuroLink was the expected synergy to be
achieved by combining EuroLink with NYFIX International, our recently formed
London-based broker-dealer subsidiary through which we plan to capture
electronic order flow to and from the US and within Europe.
The preferred stock automatically converted into a 40% common stock
interest on March 6, 2004. Effective March 29, 2004, we acquired the remaining
60% of EuroLink that we did not already own for $24,000 in cash and one-year
promissory notes issued and payable in shares of our common stock or cash, at
our option, having an aggregate fair value of $0.5 million. We intend to pay the
notes using shares of our common stock. Due to the delay in issuing our 2004
consolidated financial statements, we were unable to issue our common stock to
satisfy this debt. We intend to settle this obligation through the issuance of
common stock as soon as practicable subsequent to the filing of our 2004 Annual
Report on Form 10-K.
The total purchase price for 100% of EuroLink, consisting of our
pre-acquisition equity investment basis of $3.0 million, notes receivable and
advances of $1.0 million, the promissory notes of $0.5 million and
acquisition-related expenses of $0.1 million, was $4.6 million. The excess of
the purchase price over the fair value of the net assets acquired was $2.9
million and has been recorded as goodwill.
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.
In 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 collectively invested $14.0 million in exchange a collective ownership
interest of 50% in NYFIX Millennium. We invested $2.0 million and owned the
remaining 50%. We purchased from the Initial Partners an option to buy an
additional 30% ownership interest (for a total of 80% ownership interest) in
NYFIX Millennium (the "Option") by us issuing to the Initial Partners our common
stock with a fair value of $34.6 million. The Option, which had no expiration
date, was exercisable at any time, by issuing additional shares of our common
stock to the Initial Partners. The fair value of our common stock issued to the
Initial Partners was $20.6 million in excess of the $14 million Initial
Partners' cash equity investment in NYFIX Millennium. We allocated $4.2 million
to the fair value of the Option and wrote off the remaining $16.4 million in
1999.
During 2001, NYFIX Millennium added four "New Partners" consisting of
Bank of America, Wachovia Securities (formerly First Union Securities) and
LabMorgan Corporation (formerly two partners J.P. Morgan & Co. and Chase H&Q).
The New Partners collectively invested $8.0 million in exchange for a ownership
interest in NYFIX Millennium. To maintain our 50% ownership interest in NYFIX
Millennium, the Initial Partners agreed to be diluted and 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 (for a total
of 80% ownership interest) in NYFIX Millennium by issuing our common stock with
a fair value of $8.4 million to the New Partners. The fair value of our common
stock issued to the New Partners was $0.4 million in excess of the $8.0 million
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NYFIX, INC.
New Partners' cash equity investment in NYFIX Millennium. We allocated this $0.4
million to the fair value of the Option. 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 and increased
ownership interest in NYFIX Millennium to 80%, by issuing to the Initial
Partners and New Partners shares of our common stock, with a fair value of $4.5
million. The excess of the aggregate purchase price of $9.1 million over the
fair value of the net assets acquired was $7.1 million and was 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.
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 and exchange-traded derivatives markets. 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.
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 US brokerage firms, 40 of the
top 200 buy-side institutions, and a number of US and international brokerage
firms and buy-side institutional investors which trade in markets outside of the
US.
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.
Increasingly in the last several years, we believe fund-holders, pension
plans, professional end-investors and market regulators have become focused on
the conflicts that exist in the long standing practices in which money-managers
or institutional investors direct their order-flow and commission dollars to
brokers, based on the brokers' favorable bundling of executions services,
distribution of initial public and secondary offerings, commitment to deliver
research, entertainment and reimbursement of services used by money-managers and
institutional investors. The search for optimal execution quality and minimal
market impact has become a focus of investors and regulators, prompting changes
and proposed changes in regulation and investor charters, as well as increased
calls for "unbundling" of broker-provided research, reimbursement and execution
services and more transparency in reporting the existence of such relationships.
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With this increased focus on prioritizing investor execution results, we
believe that there is a market opportunity for direct electronic market access
integrated with computerized enhancements that are designed to optimize investor
execution results. We also believe that there is an increasing market for
documenting and supporting transaction costs.
Our main growth strategy, based on our established technology and
investments in new technologies and market segments, is to respond to these
market developments with a unified packaging of our NYFIX Network as a "global
utility." We offer products that are designed to address the above-described
needs while providing automatic and seamless unification of the data-elements of
trade-management, trade-routing, market access, computerized execution
enhancements and real-time transaction statistics.
For our traditional Technology Service segment, we see our strategy for
2005 as effectively managing our customer base. While we see limited opportunity
for revenue growth, we believe that we have the opportunity to generate profits
and maintain this strategically important component of our overall product mix.
We believe we can maintain our position as a leading provider of technology
solutions. While the market continues to change, our goal is to focus on
"quality" revenue and enhanced profitability.
We are a leading provider in the US 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 lease stationary
workstations and mobile systems to our customers 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 US, the interaction within and
among these markets has changed. We believe this will change further due to the
trading system technology that is available coupled with new and updated market
regulations. There have been several regulatory changes which we believe favor
and ultimately mandate that the type of technologies that we provide be
integrated into daily trading processes for both on floor and off floor
operations. Examples of SEC regulations include: Regulation 123, which mandates
on the floor trade reporting requirements; Regulation 344, which formalizes
business continuity process requirements: and the latest, Regulation SHO, which
describes short sale handling. Regulation NMS mandates intermarket protection
against trade-throughs for automated markets, which we believe will result in
significant change in the physical call auction market currently in place at the
NYSE and AMEX. There appears to be an industry consensus, based on comment
letters received by the SEC, that market participants should have access to auto
execution and auto quotation, thereby reducing the manual processes that exist
today on the floor of the NYSE and AMEX.
We are responding to the evolution of call based auction markets into
competing quote based markets with our NYFIX Renaissance offering. Our products
assist our customers in managing this potential transition away from a call
auction market for Listed Securities to a quote-based market.
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 that could help them generate cost efficiency
from a potential de-emphasis of their floor based operations. One example is the
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use of NYFIX's proprietary algorithms that simulate the behavior of a human
intermediary. NYFIX OMS clients pay for the usage of these products on a per
share basis as opposed to a fixed cost model.
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 16, "Business Segment Information" of
our Notes to Consolidated Financial Statements as noted in the Index.
OUR TECHNOLOGY SERVICES SEGMENT
PRINCIPAL MARKETS
The US equity market is made up of Listed, OTC and third market traded
stocks. Listed stocks are traded on the floors of the NYSE, the AMEX and other
regional exchanges. OTC stocks are traded in electronic market centers such as
Nasdaq, Archipelago and ECNs and ATSs, which include NYFIX Millennium. Third
market traded stocks are exchange listed securities that are not traded on the
floor of the NYSE.
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.
Since 2003, both the NYSE and Nasdaq have experienced significant
changes and challenges that will have continued through 2005. 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, we believe 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.
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 offer 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. NYFIX
Overseas established connectivity to over twenty global derivative exchanges and
has provided for its major global customers the ability to route orders between
their global order books covering three geographical regions - the United
States, Europe and the Pacific Rim. These exchanges include the major Futures
and Equity markets, such as the pan-European Exchange, including the
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London-based International derivatives market, Liffe ("Euronext"); the London
Stock Exchange ("LSE"); the European derivatives exchange, Eurex; Germany's
Xetra; the Chicago Mercantile Exchange ("CME"); the Chicago Board of Trade
("CBOT"); and the regional exchanges in Montreal, Sydney, Hong Kong and Tokyo.
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 US and Europe. 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 US equity markets, our Technology Services segment has derived
most of its revenue primarily from our automation products and services for the
Listed Securities marketplace, which encompasses trading on the NYSE, the AMEX
and regional exchanges. During 2004, as a result of our acquisition of
Renaissance, we continued to expand our sell-side trader workstation product
portfolio to target the Nasdaq OTC market.
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. The recent release of our NYFIX Sidekick product in 2004 represents our
first offering of transaction cost analyses. NYFIX Sidekick, which is embedded
within our NYFIX Network, evaluates the quality of trade executions on a real
time basis for our customers.
PRINCIPAL PRODUCTS AND METHODS OF DISTRIBUTION
We primarily sell products directly to end-customers and distribute our
services through the NYFIX Network. Capital sales are delivered with the
customer option of using the NYFIX Network facilities or they can provide their
own. Products distributed this way are the Javelin software products and the
OBMS derivatives trading platform.
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
various exchanges, ECNs and ATSs. The NYFIX Network also provides connectivity
to $2 brokers. Our Technology Services segment 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. The segment offers a variety of trading
workstation products for brokerage firm trading desks, a series of available OMS
options and 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.
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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 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; and
o A simplified, centralized one-to-many communication set-up for each
party via a main NYFIX hub.
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.
For the third layer of network products and services, we introduced in
2004 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 as an ASP, or service bureau, to
distribute our customer server application products, such as trading stations
and exchange floor stationary or wireless systems. In this ASP environment, the
server applications (e.g., back-end systems and databases) are physically
located in our data centers and the customer applications (the front-end user
application) are distributed via high-speed data circuits to the customer. The
benefits to the customer and ourselves include the logistical delivery benefits
and the ability for us to more efficiently and effectively support our systems
and operations.
CUSTOMER SERVER APPLICATION PRODUCTS
The following is a description of our customer server application
products:
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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 offering of a combined Listed Securities and OTC
trading system. NYFIX Platinum was created by integrating our existing OMS for
Listed Securities trading, FIXTrader, with the acquired Renaissance platform 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.
The NYFIX suite of client trading products is intended to provide
enterprise-level electronic trading solutions that meet customer needs and
industry requirements for front, middle, and back office trade operations.
GLOBAL DERIVATIVES AND EQUITY TRADING PLATFORM
NYFIX Overseas products provides a STP solution through electronic order
entry, order-routing and tracking capabilities on a global platform, enabling
its customers to replace several fragmented systems that exist within the major
brokerage firms.
The core component of the NYFIX Overseas product offering is OBMS, which
is part of the overall system implemented on internal or external order desks,
trading desks, and on the floor booths of open outcry exchanges. OBMS provides a
quick and efficient execution platform with pre-trade risk, and an order book
and trade management facility for all order types covering direct access to over
twenty major global electronic exchanges in Europe, the US and the Asia/Pacific
Rim region.
In addition to the core OBMS and exchange access, the NYFIX Overseas
offering provides several other components including a customer front-end
trading web browser connectivity, pre-trade risk controls, desk management for
open outcry floors and access to additional electronic exchanges and back- and
middle-office systems through our FIX based gateway APIs. NYFIX Overseas
utilizes its gateways to enable individual OBMS installations to be synchronized
and communicate in real-time globally. Our customers are supported around the
clock via help desk support in London, Chicago and Manila.
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.
FLOORREPORT AND MOBILEBROKER
Our FloorReport system provides brokerage firms with a complete
electronic OMS for exchange trading and floor operations. FloorReport provides
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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 our 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.
FIXcertier is built on the APPIA FIX technology and is a platform that
is used to automate FIX certification testing. This product was introduced in
2004 and is commercially available. In addition, this product is used by NYFIX
internally to make product operations more efficient.
C-router, which is a "rules-based" routing module, has been added as an
optional enhancement to the APPIA FIX engine software. The routing component is
for sale as an add-on to the base FIX engine.
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 430 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.
PRODUCT SUPPORT 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 redundant data centers as part of our NYFIX Network.
In our industry, service and specifically quality of service is measured
in response time to resolve a systems issue which may be causing a trading issue
affecting business. We maintain four categories of help-desk support to be
responsive and efficiently address any systems or trading issue that our clients
may encounter. The four categories of support are separated into our NOC team,
technical support desk, trading application support desk and execution service
and trade processing support desk.
BUSINESS CONTINUITY AND DISASTER RECOVERY PLANNING 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
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.
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Supported by two redundant, high-availability data centers, part of our
offerings include capabilities for data communication and data storage and the
subsequent retrieval of the customers' current and historical trading data.
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 US hedge funds. Transaction Services
segment customers fall into three categories based on their clearing and
execution needs.
Currently, the customers of our NASD registered broker-dealers consist
primarily of US securities brokerage firms and US buy-side institutions,
including hedge funds, mutual funds and other institutional investors. Our
Transaction Services segment primarily generates revenue from the application of
commissions charged on executed trades to the following three categories of
customers:
o Member, non-Member and non-US 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 commissions
to its customers on a monthly basis. These securities brokerage
firms primarily utilize our NYFIX Millennium, FIXTrader, direct
electronic access and algorithmic trading products described below.
o US hedge funds (buy-side firms) rely on prime brokers to clear
their trades. These customers primarily utilize our Patriot, NYFIX
Millennium and direct electronic access and algorithmic trading
products, described below.
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 primarily utilize
Patriot and FIXTrader, and transaction services, Millennium ATS
execution and matching system, described below.
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', and quote aggregators,
such as Eze Castle Software, Charles River Development, INDATA, Line Data,
Latent Zero, RealTick, Neovest, FlexTrade, Portware, UNX, BNY Sonic Software,
and Lava Trading. We also provide customers with our Javelin FIX Engine
technology. Our open connectivity business model 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.
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PATRIOT
Patriot integrates our customers' accessibility to market data with
order executing capabilities for all US equity and option markets. In addition
to electronic access capabilities, we believe Patriot's ability to route orders
to any destination on our NYFIX Network differentiates it in the electronic
execution aggregation market.
MILLENNIUM ATS
NYFIX Millennium developed an ATS focused on the electronic matching of
US 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
compared to and against the bid, offer, last sale, and mid-point. Volume and
bid/offer spread constraints can also be attached to these orders.
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 primarily cleared on its behalf by NYFIX Clearing.
We currently match Nasdaq trades as part of our combination printing
agreement with the ISE. In January 2004, we agreed to provide ISE member firms
with an ability to match US Equity trades in combination with corresponding
options trades. This service went into production in June 2004.
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/SFTI infrastructure. All NYSE order types, including Direct+,
Institutional Express, and Liquidity Quote, are supported by the NYFIX SIAC
gateways.
ELECTRONIC NASDAQ ACCESS
We provide direct routing of orders to Nasdaq and other venues, such as
the Archipelago Exchange and Instinet, 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.
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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 is a member of both the
Options Clearing Corporation and the NASD.
SHADOW
NYFIX Millennium's Shadow order functionality enables NYFIX Millennium
pegged orders to be represented in both NYFIX Millennium and Archipelago at the
same time. 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.
ISE COMBO MATCHING
NYFIX Millennium provides 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. Having introduced this facility in 2004,
NYFIX Millennium receives a per trade matching fee based on size of the trade,
with mutually agreed upon caps and floors.
ALGORITHMIC TRADING
In 2004, we introduced several algorithmic trading products, which work
in concert with our Listed, OTC access products and our Millennium ATS and are
designed to improve customer trading results.
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 we built. All products
and services are supported by our help-desks and operations staffs located at
our Wall Street and Stamford offices.
SALES AND MARKETING
We generally provide our products and services to our Technology
Services customers on one to three-year subscription and service agreements with
automatic annual renewals at the end of the initial term. Transaction Services
contracts identify per share commission charges but do not, typically, guarantee
order flow.
We maintain an in-house marketing department that performs marketing
functions, 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, which we believe results in
a more effective return on our marketing investment, rather than mass marketing.
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. Because our data volume is significant and to achieve the
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highest level of availability, we use multiple telecommunication carriers for
data transport between our data centers and to our customers, including AT&T,
Sprint, MCI, Qwest, Verizon, Colt and SingTel. With this diversity, we decrease
our reliance on any single telecommunication service provider without materially
losing the benefit of economies of scale.
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. We maintain two
data centers, either of which can support all of our critical production
operations and provide 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. Critical
processes are monitored by the NYFIX Network Operations Center (NOC). Hardware
and software is continuously upgraded to insure adequate capacity during peak
traffic hours.
Our primary data centers are located in two independent, separately
located data center facilities in New Jersey and New York, so-called "redundant
centers." The data centers were previously serviced by the same electric utility
via different sub-stations but are now serviced by different power companies.
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' 24x7
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
International data center hubs in co-hosted facilities in London, Amsterdam,
Hong Kong and Tokyo that have similar redundant systems and safety hazard
precautions.
APPLICATION DEVELOPMENT
We employ approximately 90 software developers and quality assurance
analysts; currently about one-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 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 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.
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All of our software is built to support the FIX protocol, both to
interface with 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
industry: 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.
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, New York, Chicago and London. We obtain
our materials, supplies and services from a variety of vendors in the US, Europe
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.
Electronic and computer components utilized within our manufactured
products are generally purchased from Tier 2 and Tier 3 resellers. We define
Tier 2 suppliers as manufacturer representatives for multiple product lines who
are generally regional or national distributors for those products. They
typically maintain an engineering or technical staff for design and
specification support and they primarily focus on resellers and manufacturers as
a customer base. We define Tier 3 suppliers 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 economic benefit, we generate a
blanket purchase order. The advantage of this is that 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, MicroDesign, Dell and
Arrow Electronics. Each of these resellers stock products from most of 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.
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NYFIX, INC.
We own the designs for these components and can source them from multiple
vendors in our immediate area or throughout the US. 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
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 our suppliers' 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 our key vendors. We have standard service agreements at
different levels depending on how critical we determine that 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 most of our vendors. Because of
the diversity in vendors, there is no significant dependence on a single vendor.
COMPETITION
Our competition varies with respect to each of our product and service
offerings. We also face competition from potential customers who choose to
maintain their own infrastructure and develop their own in-house 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 and Savvis
are large basic point-to-point networks capable of carrying FIX data
information. We consider these networks to offer basic (TCP/IP) data
transport and provide a lower price point. Thomson TradeRoute and
Tradeward have some level of value added services and are
competitively priced. While we believe 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 US Listed
Securities equity market. Our largest installation of services is on
the NYSE. Additionally, we provide service to the Chicago,
Philadelphia, and Boston Stock Exchanges but to a lesser extent. The
primary alternative to our floor trading system on the NYSE is the
NYSE's own systems, BBSS and Tradeworks. Like us, the NYSE is
continuing to develop these systems. We do not believe that
currently there are other significant vendors in the floor
technology market.
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 Securities such as BRASS (a
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NYFIX, INC.
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 continue to
install new systems, these vendors or smaller vendors could increase
their competitive efforts and, thus, market share at our expense.
o Derivatives Trading. We compete with over 20 independent software
vendors within the software market for derivatives trading,
including GL Trade, Trading Technologies, PATS, ORC and RTS. We
believe NYFIX Overseas' offering is successful for managing the
broker desk and also believe that a large percentage of Tier One
firms utilize our products.
o FIX Engines. We face competition from vendors who produce FIX
protocol engine solutions such as Financial Fusion, Cameron Systems,
B2bits 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.
o Trade Execution Services. Our Transaction Services segment faces
competition from a wide variety of correspondent clearing and
technology oriented brokerage firms and providers. Examples are ITG;
Instinet; Goldman Sachs, Jefferies & Company; 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 Liquidnet,
Instinet/Island, ITG POSIT, Archipelago and Bloomberg TRADEBOOK. Our
Patriot product competitors include Real Tick, Rediplus, Instinet
Portal, Lava Color Book, Bloomberg TradeBook, ITG's Radical product
and BNY Sonic.
Our clearing and settlement functions primarily as an in-house cost
saving and streamlining measure for our own broker-dealer subsidiaries. Thus,
this service is not currently offered externally and is not subject to direct
competition.
OUR RELIANCE UPON LARGE CUSTOMERS
For the years ended December 31, 2004, 2003 and 2002, no single customer
accounted for more than 10% 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.
The core technologies of our business are proprietary software
applications built around the FIX messaging specifications, and are protected by
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NYFIX, INC.
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 four
filed pending patent applications and two issued patents. The issued patents are
valid through the year 2007 and 2009, respectively, and of the applications
approved, once issued, those patents will be valid through 2022. There are no
known third party infringement claims against our software applications.
In addition, we seek to enter into confidentiality, intellectual
property ownership and/or non-competition agreements with all of our customers,
employees, independent contractors and business partners, and to control access
to and distribution of our intellectual property.
GOVERNMENT REGULATION
Participants in the US securities industry are subject to extensive
regulation under both Federal and state laws. Examples of SEC regulations
affecting the industry in which we compete include Regulation 123, which
mandates trade reporting requirements; Regulation 344, which formalizes business
continuity process requirements; and the latest, Regulation SHO, which describes
short sale handling. In addition, the SEC; the NYSE; the NASD; other SROs, such
as the various regional stock exchanges; and other regulatory bodies, such as
the various state securities authorities, require 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 US broker-dealer subsidiaries. The
NASD, through its regulatory subsidiary, NASDR, also conducts periodic
examinations of the operations of those subsidiaries. Our US 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 US 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 and filing reports, are minimal and do not have a material effect on
our profitability.
Participants in the United Kingdom Securities industry are subject to
extensive regulation by the FSA. The FSA's task is to achieve a marketplace that
is run in an efficient, orderly and clean manner while ensuring that consumers
receive a fair deal by being properly informed and appropriately protected. The
FSA was established by the United Kingdom and it is important to emphasize that
it is the government that is responsible for the overall scope of the FSA's
regulatory activities and powers. The FSA regulates most financial services
markets and firms. It sets the standards that they must meet and can take action
against firms if they fail to meet the required standards. This often involves
requiring firms to pay compensation to their customers.
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.
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
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NYFIX, INC.
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, FSA, other US or foreign
governmental regulatory authorities or the NASD, we are forced to incur more
costs in order to 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 US 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 US
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.
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 US 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. Our trading systems comply with
Regulation ATS and we 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 US 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 US Listed Securities, 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
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NYFIX, INC.
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. NYFIX Transaction Services and NYFIX Millennium report their
execution quality data to the SEC. An independent third party, Transaction Audit
Group "TAG" performs that service on behalf of NYFIX Transaction Services and
NYFIX Millennium.
The SEC, the FSA and the NASD, as well as other regulatory agencies and
securities exchanges within and outside the US, 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 US
broker-dealer subsidiaries are subject and the FSA's net capital rule, to which
our United Kingdom broker dealer subsidiary is 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 or the FSA and its suspension or
expulsion by the NASD and other US 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
operations, 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 the net capital of any of our broker-dealer subsidiaries
could adversely affect our consolidated financial statements.
In January 2004, the SEC proposed a new rule set known as Regulation
NMS, which initially addressed three main areas of concern for market
participants: i) trade-through reform and market linkage, ii) access fees and
standards, and iii) market data pricing and distribution. Throughout 2004, a
wide variety of industry participants responded with comments and public
testimony to the proposed set of rules. The NYSE responded with a plan named
"Hybrid" in which they described a transformation of their technology and
marketplace that would ultimately support auto execution and auto quotation. As
a result of the disparity in public commentary, the SEC voted to re-propose
Regulation NMS with an accelerated 30-day comment period. While Regulation NMS
was approved by the SEC in April 2005, the contents of Regulation NMS were not
publicly available until June 2005. We believe Regulation NMS can dramatically
change the current exchange floor environment, as was evident by the recent
announcement of the NYSE that it was merging with Archipelago Holdings, Inc.,
which operates a totally electronic exchange.
The SEC has also indicated that it is reviewing marketplace linkage that
is currently provided by ITS. The NYSE has advocated the redesign or elimination
of the ITS, which links market centers that trade Listed Securities. 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. In an open letter to the SEC, we suggested
that there was a need for a competitive bidding process in selecting the next
generation provider of linkage between US Exchanges that ultimately results from
the enactment of Regulation NMS. We are unable to predict the outcome of the
various deliberations and discussions on the evolution of the US equities market
structure and regulatory framework, although these issues or other issues of
market structure may have a significant impact on our equities business.
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NYFIX, INC.
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 include 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 the order or cancellation of the order.
The financial services industry, including the securities brokerage
business, is also heavily regulated outside of the US. We are required to comply
with regulatory controls of each specific country in which our subsidiaries or
we conduct business, as 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 outside the US and Europe, 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.
Any of the non-US or European 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 of the US and Europe may adversely affect or limit our
business or operations and adversely affect our consolidated financial
statements.
BACKLOG AND SEASONALITY
We do not believe that sales backlog is 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. In addition, our operations, to date, have not
been significantly affected by seasonality.
EMPLOYEES
As of March 31, 2005, we had 277 full-time employees, including 86 in
product development, 66 in operations, 89 in sales, marketing and support and 36
in management, general and administrative functions. None of our employees is
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NYFIX, INC.
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 26,500 square feet of leased space,
expiring in 2015. We currently maintain an office on Wall Street in New York
City, comprising 35,800 square feet of leased space expiring in 2014. We have
another office on Wall Street with 23,800 square feet of leased space expiring
in 2010, which we sub-lease to two third parties.
We also have an office in Lyndhurst, New Jersey, where we lease 2,150
square feet expiring in 2006, and an office in London, where we lease 5,500
square feet expiring in 2009. In addition, we maintain sales offices in Chicago,
San Francisco and Madrid, consisting of 2,900 square feet expiring in 2005,
2,500 square feet expiring in 2005, and 1,200 square feet expiring in 2007,
respectively. We also maintain redundant data center facilities in the New York
Metropolitan area, consisting of 850 square feet expiring in 2009 and 2,750
square feet expiring in 2011. Our International data center facilities in
London, Amsterdam, Hong Kong and Tokyo are located within the facilities of
third party operations.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
On 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 named us, our Chairman and Chief
Executive Officer, our former Chief Financial Officer, our current Chief
Financial Officer and certain of our directors as defendants. The complaint was
filed as a purported 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 alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, based on the issuance of a series of allegedly
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NYFIX, INC.
false and misleading financial statements and press releases concerning, among
other things, our investment in NYFIX Millennium. On July 20, 2004, the court
appointed three different plaintiffs to be the lead plaintiffs, as Fuller &
Thaler Asset Management withdrew as the named plaintiff. The action became
styled JOHNSON, ET AL. V. NYFIX, INC., ET AL. On August 19, 2004, the newly
named plaintiffs filed a first amended class action complaint, which added,
among other things, allegations of violations of Sections 11 and 15 of the
Securities Act of 1933, as amended. The new allegations are based fundamentally
on the same allegations that the plaintiffs asserted in the original complaint.
The defendants have filed a motion to dismiss the amended complaint with
prejudice. We believe that this amended complaint, like the original complaint,
is without merit. Although it is not possible to forecast the outcome of this
matter, we intend to vigorously defend against the complaint.
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.
SEC MATTERS
In connection with the restatement of our 1999 through 2002 consolidated
financial statements in May 2004, the Division of Enforcement of the SEC
informed us by letter dated July 14, 2004, that it was conducting an informal
inquiry. On January 25, 2005, we filed a current report on Form 8-K, which
indicated that the matter was a formal inquiry. By letter dated October 28,
2004, the Division of Enforcement of the SEC informed us that it was conducting
a second informal inquiry, which related to our stock options granted. On
February 25, 2005, we filed a current report on Form 8-K, which indicated that
we believed that the matter was a formal inquiry. We are cooperating with the
SEC with respect to both matters. We are unable to predict the outcome of either
matter at this time and can give no assurances that the outcome of either or
both matters will not have a material impact on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Our 2004 annual meeting of shareholders was held on October 19,
2004.
(b) All director nominees were elected.
(c) Matters voted on at the meeting and the number of votes cast:
Proposal No. 1 - Election of Directors for a term of one year.
NAME SHARES FOR WITHHELD VOTE
Peter K. Hansen 28,021,575 1,328,215
George O. Deehan 27,945,944 1,403,846
William C. Jennings 27,901,694 1,448,746
William J. Lynch 27,941,044 1,408,746
Thomas C. Wajnert 28,047,244 1,302,546
Proposal No. 2 - To ratify the appointment of Deloitte & Touche LLP as
our independent registered public accounting firm for the year ending
December 31, 2004.
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NYFIX, INC.
For 29,117,402
Against 172,669
Abstain 59,719
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NYFIX, INC.
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 trades on the Nasdaq National Market under the
symbol NYFX had the following high and low intra-day sale prices as reported by
the Nasdaq National 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
----------- ---------
2004
- ----
First Quarter $ 8.18 $ 4.81
Second Quarter $ 5.70 $ 3.87
Third Quarter $ 7.07 $ 3.82
Fourth Quarter $ 6.51 $ 4.39
2003
- ----
First Quarter $ 5.08 $ 3.52
Second Quarter $ 6.92 $ 3.71
Third Quarter $ 7.26 $ 5.25
Fourth Quarter $ 9.02 $ 5.68
On April 7, 2005, 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, 2004. Based on the delay in the filing of our Annual
Report on Form 10-K, Nasdaq notified us on April 5, 2005 that we were not in
compliance with its listing requirements. At a May 12, 2005 hearing with the
Nasdaq Listing Qualifications Panel, we requested an extension of time to meet
Nasdaq's listing requirements. On June 14, 2005, Nasdaq granted our request for
continued listing on the Nasdaq National Market, subject to us filing our 2004
Form 10-K and our Report on Form 10-Q for the three months ended March 31, 2005
by June 30, 2005.
With this filing of our 2004 Annual Report on Form 10-K and the filing
of our Quarterly Report on Form 10-Q for the three months ended March 31, 2005,
we believe that we have now filed all periodic reports that are due. We intend
to 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, 2005 the records of our transfer agent indicated that there
were 342 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
33
NYFIX, INC.
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, 2004:
Number of securities Number of securities
to be issued upon Weighted-average remaining available for
exercise of exercise price of future insurance under equity
Plan Category outstanding options outstanding options compensation plans
- ------------------------------------- --------------------- --------------------- -----------------------------
Equity compensation plans
approved by security holders 5,305,418 $ 10.43 173,940
Equity compensation plans not
approved by security holders (1) 277,862 $ 7.44 125,547
-------------------- ------------------------------
Total 5,583,280 $ 10.28 299,487
==================== ==============================
(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 1.0. 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
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, 2004, stock options to purchase 277,862 shares of our
common stock were outstanding under the Javelin Plan.
(e) UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 27, 2004, we issued an aggregate of 20,800 shares of our
common stock to two unitholders of Renaissance pursuant to amended promissory
note and settlement agreements with those unitholders dated September 23, 2004.
On December 30, 2004, we issued a $7.5 million Convertible Note with an
interest rate of 5% due in December 2009 (the "Note") through a private
placement to Whitebox Convertible Arbitrage Partners L.P (the "Lender"). Other
than the Note, we do not have a material relationship with the Lender. The Note
was issued pursuant to the exemption from registration contained in Section 4(2)
of the Securities Act of 1933, as amended.
At the option of the Lender, the Note is convertible into our common
stock at $6.94 per common share, which was a 20% premium over the average of our
common stock closing price for the five trading days preceding December 30,
2004. At our option, the Note is convertible into shares of our common stock
according to a formula based on the market price of our common stock during the
term of the Note which requires, among other things, our common stock to exceed
150% of the price (or $10.41 per common share) at which the Lender can convert
the Note. If we issue our common stock to convert the Note or to make interest
34
NYFIX, INC.
payments, the formula used to determine the number of shares of common stock to
be issued includes a 5% premium, payable in shares of common stock. If we
convert the Note prior to December 30, 2007, we are required to pay a
"make-whole" interest payment, in either cash or our common stock, at our
discretion, equal to the total of the remaining interest payments due for the
period from the date of the conversion through December 31, 2007.
The Note is subordinated to all of our existing and future secured
indebtedness. The Lender has certain rights to require that we register the
common stock issuable upon conversion of the Note, or for payment of interest,
under the Securities Act of 1933, as amended. Such registration statement is to
be effective by September 30, 2005. If we do not register our common stock
pursuant to this agreement, we will be required to make additional interest
payments, in cash, for each month the effective date of such registration
statement is delayed. The additional interest varies by month and has an
aggregate cap of $500,000 for the duration of the delay. In addition, at the
option of the Lender, we may issue to the Lender by March 30, 2005 up to an
additional $2.5 million note under terms substantially similar to those of the
Note. The Lender requested, and we agreed, to extend the option to issue the
additional $2.5 million note until ten days after the date we file this Annual
Report on Form 10-K.
As a result of the restatement of our financial statements for the year
ended December 31, 2003, we were in breach of certain representations and
warranties relating to those financial statements that constituted an event of
default under the Note. On June 24, 2005, the Lender waived all defaults under
the Note and extended the requirement to have a registration statement be
effective for the shares of our common stock that may be issued as payment of
principal or interest under the Note to March 31, 2006. In exchange, we agreed
to reduce the price at which the lender can convert the Note into common stock
from $6.94 per share, as described above, to $5.75 per share, which was a 16%
premium over the average of our common stock closing price for the five trading
days preceeding June 24, 2005. Accordingly, our option to convert the Note into
our common stock is based on the market price of our stock during the term of
the Note which requires, among other things, our common stock to exceed 150% of
the price (or $8.63 per common share on a revised basis) at which the Lender can
convert the Note.
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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,
----------------------------------------------------------------------
2004 2003 (1) 2002 (1) 2001 (1) 2000 (1)
---------- ---------- ----------- ------------ -------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
CONSOLIDATED STATEMENT (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OF OPERATIONS DATA:
Revenue $ 75,135 $ 65,909 $ 55,812 $ 41,397 $ 23,980
Gross profit 33,805 31,242 27,390 27,149 14,947
Operating expense 46,693 41,242 39,012 29,619 23,559
Loss from operations (12,888) (10,000) (11,622) (2,470) (8,612)
Net (loss) income (32,702) (4,915) (7,007) (6,462) 130
Net (loss) income per
common share:
Basic $ (1.02) $ (0.16) $ (0.23) $ (0.24) $ 0.01
Diluted $ (1.02) $ (0.16) $ (0.23) $ (0.24) $ --
AS OF DECEMBER 31,
---------------------------------------------------------------------
2004 2003 (1) 2002 (1) 2001 (1) 2000 (1)
---------- ---------- ----------- ------------ -------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
CONSOLIDATED BALANCE (IN THOUSANDS)
SHEET DATA:
Cash and cash equivalents $ 22,405 $ 21,006 $ 11,213 $ 4,968 $ 4,867
Short-term investments 4,466 3,448 10,727 28,974 -
Accounts receivable, net 13,405 10,371 16,601 12,949 12,058
Securities borrowed 138,456 1,945 - - -
Working capital 20,845 22,712 30,230 47,030 9,158
Property and equipment, net 16,649 16,592 18,186 14,366 11,472
Goodwill 62,519 60,904 52,861 34 -
Total assets 281,091 156,784 151,169 100,503 60,143
Securities loaned 138,375 1,700 - - -
Long-term debt, including 10,444 3,409 1,753 1,501 3,823
current portion
Stockholders' equity 106,742 136,549 136,824 90,690 44,812
(1) See Note 2 to the Consolidated Financial Statements for a discussion of the
restatement.
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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 consolidated financial statements and also to convey our expectations of the
potential impact of known trends, events, or uncertainties that may impact our
future consolidated financial statements. Our MD&A includes forward-looking
statements, including, without limitation, 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.
The following discussion and analysis gives effect to the restatement of
our consolidated financial statements to correctly account for compensation
expense attributable to stock options granted to our employees and directors and
to correctly account for deferred tax assets and liabilities related to certain
acquisitions, as discussed in Note 2 to the Consolidated Financial Statements.
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 a 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, in San Francisco and in Madrid. We
operate redundant data centers in the northeastern US and have established
additional data center hubs in London, Amsterdam, Hong Kong and Tokyo.
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 US 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 was approved for
membership in the NFA in 2002, is our Introducing Broker for derivative
transactions; NYFIX International, which was incorporated in the United Kingdom
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NYFIX, INC.
on March 29, 2004, is a broker-dealer registered with the FSA broker-dealer
license in connection with our expansion into European and other international
markets; and EuroLink. We acquired the remaining 60% of EuroLink we did not own,
effective March 29, 2004. We have integrated EuroLink's operations, which
represented our initial transaction efforts in the European markets, into NYFIX
International.
NYFIX Millennium provides a modernized electronic execution venue under
Regulation ATS for trading in US 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.
Our main growth strategy, based on our established technology and
investments in new technologies and market segments, is to respond to these
market developments with a unified packaging of our NYFIX Network as a "global
utility." We offer products that are designed to address the above-described
needs while providing automatic and seamless unification of the data-elements of
trade-management, trade-routing, market access, computerized execution
enhancements and real-time transaction statistics.
For our traditional Technology Service segment, we see our strategy for
2005 as effectively managing our customer base. While we see limited opportunity
for revenue growth, we believe that we have the opportunity to generate profits
and maintain this strategically important component of our overall product mix.
We believe we can maintain our position as a leading provider of technology
solutions. While the market continues to change, our goal is to focus on
"quality" revenue and enhanced profitability.
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, although we experienced
quarter over quarter revenue growth from 1999 through 2001, we also generated
operating losses. 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 through 2004. We believe that our decision to continue to
invest during the last three years is an important factor to help us become
better positioned to take advantage of future opportunities. We have entered new
customer market segments, launched new products and continue to pursue other
opportunities 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 consolidated
financial statements, including the assets, liabilities, revenue and expense and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and future reporting periods.
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 consider to be reasonable, the results of which
form the basis for making estimates and assumptions about the carrying values of
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NYFIX, INC.
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
understanding our consolidated financial statements. Refer to Note 1 to the
Consolidated Financial Statements 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.
We recognize revenue from software arrangements in accordance with
American Institute of Certified Public Accountants' 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, 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.
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NYFIX, INC.
Capital sale revenue, which primarily is comprised of software and
capital equipment sales and professional services fees, is generated primarily
by sales to customers in the futures, options and currencies trading market or
to those customers who typically acquire software licenses in perpetuity, and is
recognized upon shipment of the product and acceptance by the customer. Capital
sale revenue pertaining to software sales 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 amount, 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.
Transaction revenue primarily consists of per-share commissions charged
to customers who send and receive a match and execution in our ATS order
matching system, and 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 No. 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 that is invoiced in advance of the services being
performed is deferred and recognized as revenue in the period earned and until
earned 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.
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NYFIX, INC.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Included in equipment are certain costs related to the development of our NYFIX
Network to support our subscription and service based businesses. 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 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.
ACQUISITIONS AND 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 FASB 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 16 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, 2004, 2003 and 2002, there was no indication of
impairment for either of our reporting units - Transaction Services or
Technology Services as the present value of the discounted future cash flows of
each reporting unit exceeded their carrying values as of October 1, 2004, the
date of our annual impairment analysis.
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.
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NYFIX, INC.
LONG-LIVED ASSETS
We review the carrying value of long-lived assets, including property
and equipment; intangible assets; investments, notes receivable and other
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 occur,
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 exceeded the fair value of the assets. 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, 2004, 2003 and 2002.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES ("SFAS No. 109"), which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the consolidated financial statements or tax returns using
presently enacted income tax rates. To the extent we believe there will not be
sufficient taxable income to utilize these assets prior to their expiration, we
would record a valuation allowance against the unrealizable amount, and record a
charge against operating results. We established a valuation allowance on our
deferred tax assets, in accordance with SFAS No. 109, of $25.6 million at
December 31, 2004. Where there are cumulative losses in recent years, SFAS No.
109 requires, except in very limited circumstances, that a valuation allowance
be established. We did not have taxable income in the years ended December 31,
2004, 2003 or 2002. We previously estimated that our deferred tax assets,
consisting primarily of tax credit carryforwards and net operating loss
carryforwards, would be realized and no valuation allowance was required, based
on revenue and operating expense assumptions. During the third quarter of 2004,
our general and administrative expenses related to our initial compliance with
Section 404 of Sarbanes-Oxley and legal expenses increased more than forecasted
and we expect these costs, legal fees in particular, to remain at high levels in
the near term. These cost increases, together with revenues from our Transaction
Services segment being impacted by much lower than expected volumes in the
equity markets, particularly during the month of September, were the primary
reasons we reduced our forecast for the near-term. Until we can achieve and
sustain an appropriate level of profitability, we plan to maintain a valuation
allowance on our deferred tax assets.
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 at least a reasonable possibility that a
loss has been incurred or that the ultimate loss may 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 ("APB No. 25"),
and related interpretations and have elected the disclosure-only alternative
under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Stock-based
compensation expense of $0.2 million, $0.7 million and $2.5 million was included
in our operating results for the years ended December 31, 2004, 2003 and 2002,
respectively, relating to the intrinsic value of certain stock options where the
42
NYFIX, INC.
fair value of our common stock on the measurement date was in excess of the
exercise price. In accordance with SFAS No. 148, ACCOUNTING FOR STOCK BASED
COMPENSATION-TRANSITION AND DISCLOSURE, we will continue to disclose the
required pro forma information in the notes to the consolidated financial
statements.
OVERVIEW OF FINANCIAL RESULTS
The tables provided below present various views of our revenue and gross
profit. The following table presents our revenue, gross profit and gross profit
as a percentage of revenue, by reportable segment for the years indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
-------------- ------------- ----------
($ IN THOUSANDS)
Revenue:
Technology Services $ 60,439 $ 54,156 $ 48,365
Transaction Services 17,424 14,343 7,597
Eliminations (2,728) (2,590) (150)
------------ ------------ --------
Total revenue $ 75,135 $ 65,909 $ 55,812
============ ============ ========
Revenue, as a percentage of total revenue:
Technology Services 81% 82% 87%
Transaction Services 23% 22% 13%
Eliminations (4)% (4)% (0)%
------------ ------------ --------
Total 100% 100% 100%
============ ============ ========
Gross profit:
Technology Services $ 29,228 $ 27,841 $ 27,105
Transaction Services 4,577 3,401 285
------------ ------------ --------
Total gross profit $ 33,805 $ 31,242 $ 27,390
============ ============ ========
Gross profit, as a percentage of revenue:
Technology Services 48% 51% 56%
Transaction Services 26% 24% 4%
Total 45% 47% 49%
Discussion of segment revenue, cost of revenue and gross profit within
MD&A includes intercompany revenue and cost of revenue, which are eliminated, as
shown above, in consolidation.
The following table shows our revenue, cost of revenue, gross profit and
operating expense expressed as percentages of revenue for the years indicated:
43
NYFIX, INC.
YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
--------- ------ --------
REVENUE:
Subscription 54% 53% 57%
Capital sale 12% 14% 15%
Service contract 14% 14% 15%
Transaction 20% 19% 13%
------- ------ --------
Total revenue 100% 100% 100%
------- ------ --------
COST OF REVENUE:
Subscription 58% 59% 51%
Capital sale 40% 34% 35%
Service contract 37% 31% 28%
Transaction 69% 65% 98%
------- ------ --------
Total cost of revenue 55% 53% 51%
------- ------ --------
GROSS PROFIT:
Subscription 42% 41% 49%
Capital sale 60% 66% 65%
Service contract 63% 69% 72%
Transaction 31% 35% 2%
------- ------ --------
Total gross profit 45% 47% 49%
------- ------ --------
OPERATING EXPENSE:
Selling, general and administrative 54% 55% 58%
Restructuring charge 3% 0% 0%
Research and development 1% 2% 3%
Equity in loss of unconsolidated affiliates 0% 1% 4%
Depreciation and amortization 3% 4% 6%
------- ------ --------
Total operating expense 61% 62% 71%
------- ------ --------
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 and acquired
intangible assets, 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 unconsolidated
affiliates 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. SG&A expense is allocated to our segments based
on usage estimates. Equity in loss of unconsolidated affiliates consists of 40%
of EuroLink's operating losses from March 6, 2002 through March 28, 2004 (which
44
NYFIX, INC.
is when we acquired the remaining 60% of EuroLink that we did not already own),
18% of Renaissance's operating losses from October 2, 2002 through June 30, 2003
(which is when we acquired the remaining 82% of Renaissance's membership units
that we did not already own) and 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 certain intangible assets.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
REVENUE
The following table presents an overview of our revenue:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2004 2003
$ % $ %
------------------- ---------------------
($ IN THOUSANDS)
Technology Services:
Subscription $ 40,982 68% $ 35,831 66%
Capital sale 8,929 15% 8,955 17%
Service contract 10,528 17% 9,370 17%
--------- --------
Sub-total 60,439 80% 54,156 82%
--------- --------
Transaction Services:
Subscription 2,637 15% 1,611 11%
Transaction 14,787 85% 12,732 89%
--------- --------
Sub-total 17,424 23% 14,343 22%
--------- --------
Eliminations:
Subscription (2,728) n/a (2,590) n/a
-------- --------
Sub-total (2,728) n/a (2,590) n/a
--------- --------
Total revenue
Subscription 40,891 53% 34,852 53%
Capital sale 8,929 12% 8,955 14%
Service contract 10,528 14% 9,370 14%
Transaction 14,787 20% 12,732 19%
--------- --------
Consolidated revenue $ 75,135 100% $ 65,909 100%
========= ========
Segment subtotals are presented as a percentage of consolidated revenue.
Consolidated revenue increased $9.2 million, or 14%, to $75.1 million
for 2004 as compared to $65.9 million for 2003.
Our Technology Services segment revenue increased $6.2 million, or 11%,
to $60.4 million for 2004 as compared to $54.2 million for 2003.
45
NYFIX, INC.
Subscription revenue for our Technology Services segment increased to
$41.0 million for 2004 from $35.8 million for 2003. This $5.2 million increase
was primarily attributable to a $4.5 million increase in subscription revenue as
a result of our buy-side initiative, as described below, and a net increase of
$0.7 million in subscription revenue from our traditional technology,
derivatives, Renaissance and Javelin products primarily due to a net increase in
customers. In August 2002, we began a direct marketing initiative to connect
buy-side institutions to our expansive NYFIX Network. We expect our buy-side
related subscription revenue to continue to increase in 2005 as we continue to
add buy-side customers. In addition, with the integration of the Renaissance
Nasdaq trading platform product into our product offering, we expect a net
increase in customers and subscription revenue in 2005.
Capital sale revenue for our Technology Services segment was $8.9
million for 2004 as compared to $9.0 million for 2003. Reduced Javelin and
derivatives products capital sales were largely offset by increased professional
service fee revenue related to our derivatives products. Capital sale revenue
continues to vary considerably from quarter to quarter. While we expect that
capital sale revenue will be comparable in 2005 to 2004, we cannot predict the
timing and consistency of such revenue.
Service revenue for our Technology Services segment increased to $10.5
million for 2004 from $9.4 million for 2003, which was primarily attributable to
an increase in service revenue related to the aforementioned increase in
subscription revenue related to our buy-side initiative, and an increase in
maintenance revenue, which was based on prior capital sale revenue.
As a percentage of total revenue, our Technology Services segment
decreased to 80% for 2004 from 82% for 2003, primarily as Transaction Services
segment revenue, described below, grew at a faster pace in 2004.
Our Transaction Services segment revenue increased $3.1 million, or 21%,
to $17.4 million for 2004 as compared to $14.3 million for 2003. Our Transaction
Services customer base increased in 2004 to 195 from 100 at December 31, 2003,
averaging 153 and 77 for the years ended December 31, 2004 and 2003,
respectively. Average revenue per customer decreased to $114,000 in 2004 from
$186,000 in 2003. The decrease in average revenue per customer was attributed to
a decrease in revenue from several large customers and an increase in smaller
customers. The average revenue attributed to customers' orderflow was lower in
2004 than in 2003 as a result of lower volume of orderflow executed for the
average customer, coupled with continuous downward pressure on per-share pricing
for such customers. The acquisition of EuroLink and the startup of NYFIX
International in March 2004 did not have a significant effect on revenue for the
year ended December 31, 2004. For our Transaction Services segment, we expect to
continue to add customers throughout 2005 with the emphasis placed on adding the
buy-side customers to NYFIX Transaction Services. We expect this component of
our business to continue to grow as a percentage of the overall Transaction
Services segment. As a percentage of total revenue, our Transaction Services
segment increased to 23% for 2004 from 22% for 2003. We expect our Transaction
Services segment revenue to be a larger percentage of our consolidated revenue
in future periods.
COST OF REVENUE
The following table presents an overview of our cost of revenue:
46
NYFIX, INC.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2004 2003
$ % $ %
----------------------- -------------------------
($ in thousands)
Technology Services:
Subscription $ 23,755 76% $ 20,350 77%
Capital sale 3,601 12% 3,068 12%
Service contract 3,855 12% 2,897 11%
--------- --------
Sub-total 31,211 52% 26,315 49%
--------- --------
Transaction Services:
Subscription 2,467 19% 1,541 14%
Transaction 10,380 81% 9,401 86%
--------- --------
Sub-total 12,847 74% 10,942 76%
--------- --------
Corporate and Eliminations:
Corporate:
Data center and telecommunications 21,201 18,685
Fixed asset depreciation and amortization 5,592 5,413
Amortization of product enhancement costs 3,850 2,657
Allocated to:
Technology Services (25,683) (22,122)
Transaction Services (4,960) (4,633)
--------- --------
Sub-total -- --
--------- --------
Eliminations:
Subscription (2,530) n/a (1,472) n/a
Transaction (198) n/a (1,118) n/a
--------- --------
Sub-total (2,728) n/a (2,590) n/a
--------- --------
Consolidated cost of revenue $ 41,330 55% $ 34,667 53%
========= ========
Segment subtotals are presented as a percentage of segment revenue.
Consolidated cost of revenue increased $6.6 million, or 19%, to $41.3
million for 2004 as compared to $34.7 million for 2003. The primary factors for
the increase in 2004 were labor costs of $2.2 million, primarily to support
Renaissance, Javelin and traditional products, product enhancement cost
depreciation and intangible asset amortization of $1.7 million, which was
primarily due to increased investment in our Technology Services products,
transaction execution expenses, including clearing fees, of $1.2 million,
related to the increase in our transaction revenue, telecommunication expense
and cross connection fees of $1.1 million, primarily to support our buy-side
initiative, and other $0.2 million. As a percentage of revenue, cost of revenue
increased to 55% for 2004, from 53% for 2003, as the increase in the
aforementioned Technology Services costs and Transaction Services costs as
discussed below exceeded the increases in our Technology Services and
Transaction Services revenue.
Our Technology Services segment cost of revenue increased $4.9 million,
or 19%, to $31.2 million for 2004 compared to $26.3 million for 2003. This
increase was primarily attributable to higher allocated corporate expenses, such
as data center and service support labor, telecommunications expenses,
depreciation and amortization of fixed assets and amortization of product
enhancement costs, of $3.6 million. These costs were supplemented by higher
direct network connection expenses of $0.5 million and other expenses of $0.4
million. As a percentage of segment revenue, our cost of revenue increased to
52% in 2004, from 49% in 2003, as the increase in such costs grew at a faster
rate than our revenue in this segment. We expect to see a slight decrease in our
cost of revenue as a percentage of revenue in 2005 as many of the investments in
property and equipment in our data center and network infrastructure made in
recent years should yield lower costs as a percentage of revenue.
47
NYFIX, INC.
Our Transaction Services segment cost of revenue increased $1.9 million,
or 17%, to $12.8 million for 2004 compared to $10.9 million for 2003. In
addition to the previously described increase in transaction execution expenses
of $1.1 million, cost of revenue increased by $0.7 million comprised of $0.4
million in allocated corporate expenses and $0.3 million of other expenses. The
acquisition of EuroLink and the startup of NYFIX International in March 2004 did
not have a significant effect on cost of revenue for the year ended December 31,
2004. As a percentage of segment revenue, cost of revenue decreased to 74% for
2004, from 76% for 2003, as the increase in our costs grew at a slower rate than
our revenue. We expect our cost of revenue to further decline as a percentage of
Transaction Services segment revenue in 2005. 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 execution expenses partially as a result of self-clearing our
trades.
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,
--------------------------------------------
2004 2003
$ % $ %
-------------------- --------------------
($ IN THOUSANDS)
Technology Services:
Subscription $ 17,227 42% $ 15,481 43%
Capital sale 5,328 60% 5,887 66%
Service contract 6,673 63% 6,473 69%
-------- --------
Sub-total 29,228 48% 27,841 51%
-------- --------
Transaction Services:
Subscription 170 6% 70 4%
Transaction 4,407 30% 3,331 26%
-------- --------
Sub-total 4,577 26% 3,401 24%
-------- --------
Eliminations:
Subscription (198) n/a (1,118) n/a
Transaction 198 n/a 1,118 n/a
-------- --------
Sub-total -- n/a -- n/a
-------- --------
Total gross profit:
Subscription 17,199 42% 14,433 41%
Capital sale 5,328 60% 5,887 66%
Service contract 6,673 63% 6,473 69%
Transaction 4,605 31% 4,449 35%
-------- --------
Consolidated gross profit $ 33,805 45% $ 31,242 47%
======== ========
Percentages are presented as a percentage of segment revenue, except for
consolidated gross profit percentages, which are presented as a percentage of
consolidated revenue.
Consolidated gross profit increased $2.6 million to $33.8 million for
2004 from $31.2 million for 2003. Our gross profit margin decreased to 45% for
2004, as compared to 47% for 2003 as our cost of revenues grew at a higher rate
than our revenue.
48
NYFIX, INC.
Our Technology Services segment gross profit increased $1.4 million to
$29.2 million for 2004 from $27.8 million for 2003. As a percentage of segment
revenue, gross profit margin decreased to 48% for 2004 from 51% for 2003. The
decrease in gross profit margin is primarily attributable to the previously
described 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 Technology
Services segment gross profit margin in 2005, as many of the improvements to our
data center and network infrastructure made in recent years should yield lower
costs as a percentage of revenue.
Our Transaction Services segment gross profit increased $1.2 million to
$4.6 million for 2004 from $3.4 million for 2003. The increase in gross profit
was primarily attributable to the previously described increase in transaction
revenue. Transaction Services segment gross profit margin increased to 26% for
2004, as compared to 24% for 2003 as execution costs decreased as a percentage
of revenue, primarily as a result of reduced rate of broker and clearing fees.
The acquisition of EuroLink and the startup of NYFIX International in March 2004
did not have a significant effect on gross profit for the year ended December
31, 2004. We expect our Transaction Services segment gross margin, as a
percentage of revenue, to continue to improve in 2005. This is attributable to
our expected increases in customers and revenue, which should enable us to
spread our fixed costs over a greater revenue base, and continued reduction in
execution and clearing expenses as a result of utilizing fewer introducing
brokers and self-clearing our trades through NYFIX Clearing.
SG&A
The following table presents an overview of our SG&A expense:
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003
$ % $ %
---------------- ----------------
($ in thousands)
Salaries and benefits $22,973 56% $21,239 58%
Provision for doubtful accounts 763 2% 2,831 8%
Occupancy and related 4,094 10% 3,817 10%
Marketing, travel and entertainment 2,976 7% 2,382 7%
Professional fees 5,664 14% 2,527 7%
General and other 4,359 11% 3,598 10%
-------- -------
Total SG&A $40,829 54% $36,394 55%
======== =======
The total SG&A is presented as a percentage of consolidated revenue.
SG&A expense increased $4.4 million, or 12%, to $40.8 million for 2004,
as compared to $36.4 million for 2003. The increase was primarily attributable
to increased professional and consulting fees of $3.1 million due principally to
professional fees incurred in connection with the restatement of our 1999
through 2002 financial statements in May 2004, the class-action complaint filed
against us, SEC matters and consulting fees related to Sarbanes-Oxley initial
Section 404 compliance; increased salaries and benefits of $1.7 million
primarily due to increased staffing related to our July 2003 Renaissance
acquisition, annual merit increases which were effective January 1, 2004 and
increased health care costs, which were partially offset by lower stock-based
compensation expense; increased marketing, travel and entertainment expenses of
$0.6 million, primarily related to the commencement of operation for NYFIX
International and increased occupancy and related expenses of $0.3 million due
primarily to overlapping rent expense while we operated from two offices on Wall
Street and expenses associated with EuroLink of $0.5 million. These items were
partially offset by a reduced provision for doubtful accounts of $2.1 million
49
NYFIX, INC.
due to our recording of a provision of $2.2 million in the fourth quarter of
2003. As a percentage of total revenue, SG&A expense decreased to 54% for 2004
from 55% for 2003, as the increase in consolidated revenue was slightly higher
than the increase in SG&A expense. We expect that our general and administrative
expenses, particularly related to our professional fees, including legal, audit
and consulting fees in connection with the class-action complaint filed against
us, SEC matters and Sarbanes-Oxley compliance will remain at higher levels in
the near term. In addition, we expect our employee benefit costs, specifically
our primary health insurance rate, to increase approximately 20% in 2005. To
partially offset the anticipated cost increases in 2005, we deferred most of our
employees' annual merit increases to be effective July 1, 2005.
As discussed below, in February 2004, we entered into an agreement to
lease additional space at our 100 Wall Street office. Although we did not occupy
the additional space until August 2004, in accordance with SFAS No. 13,
ACCOUNTING FOR LEASES, we commenced recording rent expense on February 1, 2004.
RESTRUCTURING CHARGE
Effective February 1, 2004, we entered into an agreement to lease
additional space at our New York City offices at 100 Wall Street. In connection
with this agreement, in the second quarter of 2004 we ceased use of one of our
other offices on Wall Street and commenced consolidating our operations into the
new space and eliminated 14 staff positions. In accordance with SFAS No. 146,
ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES, we recorded a charge to operations
of $2.5 million. This charge included the fair value of the remaining rent
payments, net of anticipated sub-lease income, severance and write-offs of fixed
assets and leasehold improvements. We now maintain one office on Wall Street
comprising 35,800 square feet, which is a 23% reduction from the 46,500 square
feet previously leased. In addition to operational efficiencies, we believe that
we can realize an annual lease savings of approximately 20% for our Wall Street
office. We entered into sub-lease agreements for the entire premises of our
former office. We do not currently anticipate any restructuring charge in 2005.
R&D
R&D expense decreased $0.4 million, or 29%, to $1.0 million for 2004,
from $1.4 million for 2003 as our software developers and quality assurance
personnel focused their efforts on enhancing and extending the lives of our
products. As a percentage of total revenue, R&D expense decreased to 1% for 2004
from 2% for 2003. We expect to invest a similar amount in R&D expense in 2005.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES
In 2004, we recognized equity in the losses of EuroLink of $0.1 million
for the three months ended March 31, 2004. In 2003, we recognized equity in the
losses of EuroLink of $0.4 million and equity in the losses of Renaissance
through June 30, 2003 of $0.4 million. We accounted for our previously
unconsolidated affiliates, EuroLink and Renaissance, under the equity method
through the acquisition dates of March 29, 2004 and July 1, 2003, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $0.3 million, or 12%, to
$2.3 million for 2004, from $2.6 million for 2003 due to an increase in fully
depreciated assets. As a percentage of total revenue, depreciation and
amortization expense decreased to 3% for 2004 from 4% for 2003. The decrease as
a percentage of total revenue was primarily attributable to the decreased
amortization expense compared to the increased revenue. We expect to see a
similar decreasing trend of depreciation and amortization expense in the near
term.
50
NYFIX, INC.
LOSS FROM OPERATIONS
Loss from operations was $12.9 million for 2004, as compared to a loss
from operations of $10.0 million for 2003. The increased operating loss was
primarily due to the restructuring charge of $2.5 million; higher SG&A expense
of $4.4 million, primarily due to professional fees related to the restatement
of our 1999 through 2002 consolidated financial statements in May 2004, the
class-action complaint filed against us, SEC matters and consulting fees related
to Sarbanes-Oxley initial Section 404 compliance. The cost increases were
partially offset by increased gross profit as described above. As a percentage
of total revenue, loss from operations was a deficit of 17% for 2004 as compared
to a deficit of 15% for 2003. The increased loss as a percentage of total
revenue was attributable primarily to the greater percentage increase in
operating expenses, including the restructuring charge, as compared to the
percentage increase in revenue.
INTEREST EXPENSE
Interest expense increased $0.6 million, or 300%, to $0.8 million for
2004 from $0.2 million for 2003, primarily due to interest expense recognized on
sales tax obligations and accelerated interest expense on the notes to certain
Renaissance unitholders which were in default. We expect interest expense to
increase in 2005, primarily as a result of a $7.5 million convertible note
issued on December 30, 2004.
INVESTMENT INCOME
Investment income decreased $0.5 million, or 83%, to $0.1 million for
2004 from $0.6 million for 2003, primarily due to lower interest income on loans
to unconsolidated affiliates and lower overall invested consolidated cash
balances. We expect investment income to decrease in 2005.
OTHER INCOME (EXPENSE), NET
Other income (expense), net increased $0.2 million in 2004 primarily due
to a loss of $0.1 million on the extinguishment of debt in connection with
amended promissory notes to certain unitholders of Renaissance.
INCOME TAXES
We recorded an income tax provision of $19.1 million for 2004, compared
to a tax benefit of $4.6 million for 2003. We established an initial valuation
allowance on our deferred tax assets, in accordance with SFAS No. 109, of $21.0
million during the quarter ended September 30, 2004. Where there are cumulative
losses in recent years, SFAS No. 109 requires, except in very limited
circumstances, that a deferred tax asset valuation allowance be established. We
did not have operating income in the years ended December 31, 2004, 2003 or
2002. We had previously estimated that our deferred tax assets, consisting
primarily of tax credit carryforwards and net operating loss carryforwards,
would be realized and no valuation allowance was required, based on revenue and
operating expense assumptions. During the third quarter of 2004, our general and
administrative expenses related to Sarbanes-Oxley initial Section 404 compliance
and legal fees increased more than forecasted and we expect these costs, legal
fees in particular, to remain at high levels in the near term. These cost
increases, together with revenues from our Transaction Services segment being
impacted by much lower than expected volumes in the equity markets, particularly
during the month of September, were the primary reasons we reduced our forecast
for the near-term. Until we can achieve and sustain an appropriate level of
profitability, we plan to maintain a valuation allowance on our deferred tax
assets, and accordingly we expect our future income tax provision or benefit to
be minimal.
51
NYFIX, INC.
Our effective tax rate was 140% for 2004 as compared to an income tax
benefit rate of 48% for 2003. For 2004, our effective tax rate was higher than
the Federal statutory rate primarily due to the establishment of the valuation
allowance on our deferred tax assets of 188%. For 2003, our effective tax
benefit rate was higher than the Federal statutory rate primarily due to the
effects of recognition of certain research and development tax credits of 6% and
state income taxes of 6%.
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.
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.
Subscription revenue for our Technology Services segment increased $4.4
million, or 14%, to $35.8 million for 2003 from $31.4 million for 2002. This
increase was primarily attributable to an increase of $1.1 million from our
buy-side initiative and a net increase in subscription revenue from our
traditional technology customers of $0.8 million. In August 2002, we began an
initiative to sell circuits to buy-side institutions in order to leverage our
expansive NYFIX Network. Our traditional technology average annualized revenue
52
NYFIX, INC.
per customer was $112,000 in 2003, as compared to $114,000 in 2002. While the
average revenue per customer decreased, our total number of customers increased.
At December 31, 2003, we had approximately 285 traditional equity customers, up
from approximately 263 at December 31, 2002. In addition subscription revenues
attributable to our Javelin products increased $1.9 million, to $9.7 million in
2003 from $7.8 million in 2002, primarily due to twelve months of Javelin
subscription revenue in 2003 as compared to nine months in 2002 since our
acquisition of Javelin in March 2002.
Capital sale revenue for our Technology Services segment was $9.0
million for 2003 as compared to $8.5 million for 2002, which was primarily
attributable to the additional three months of Javelin revenue for 2003 as
compared to 2002.
Service revenue for our Technology Services segment increased to $9.4
million for 2003 from $8.5 million for 2002, which was primarily attributable to
an increase in service revenue based on our subscription revenue increase and
the additional three months of service revenue for Javelin in 2003.
Our Technology Services segment revenue increased $2.4 million related
to intercompany revenue, which was eliminated in consolidation, for products and
services provided to our Transaction Services segment for their customers.
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. As a percentage of
total revenue, our Transaction Services segment increased from 14% in 2002 to
22% in 2003.
COST OF REVENUE
The following table presents an overview of our cost of revenue:
53
NYFIX, INC.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002
$ % $ %
------------------------ -----------------------
($ in thousands)
Technology Services:
Subscription $ 20,350 77% $ 15,890 75%
Capital sale 3,068 12% 2,958 14%
Service contract 2,897 11% 2,412 11%
-------- --------
Sub-total 26,315 49% 21,260 44%
-------- --------
Transaction Services:
Subscription 1,541 14% 216 3%
Transaction 9,401 86% 7,096 97%
-------- --------
Sub-total 10,942 76% 7,312 96%
-------- --------
Corporate and Eliminations:
Corporate:
Data center and telecommunications 18,685 16,140
Fixed asset depreciation and amortization 5,413 4,420
Amortization of product enhancement costs 2,657 2,352
Allocated to:
Technology Services (22,122) (18,646)
Transaction Services (4,633) (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 $ 34,667 53% $ 28,422 51%
======== ========
Segment subtotals are presented as a percentage of segment revenue.
Consolidated cost of revenue increased $6.3 million, or 22%, to $34.7
million in 2003 as compared to $28.4 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, our cost of revenue increased slightly
to 53% in 2003, from 51% in 2002, as the increase in the Technology Services and
Transaction Services costs offset the increase in our Technology Services and
Transaction Services revenue as mentioned below.
Our Technology Services segment cost of revenue increased $5.0 million,
or 24%, to $26.3 million in 2003 as compared to $21.3 million in 2002. The
increase was primarily attributed to the 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 $0.5 million, or 21%, to $2.9 million for 2003, from $2.4
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NYFIX, INC.
million in 2002. The increase was primarily due to increased labor costs to
support our products. As a percentage of segment revenue, cost of revenue
increased to 49% in 2003, from 44% in 2002, as the increase in the costs grew
faster than revenue.
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 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.
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 $ 15,481 43% $ 15,487 49%
Capital sale 5,887 66% 5,559 65%
Service contract 6,473 69% 6,059 72%
-------- --------
Sub-total 27,841 51% 27,105 56%
-------- --------
Transaction Services:
Subscription 70 4% 272 56%
Transaction 3,331 26% 13 0%
-------- --------
Sub-total 3,401 24% 285 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 14,433 41% 15,609 49%
Capital sale 5,887 66% 5,559 65%
Service contract 6,473 69% 6,059 72%
Transaction 4,449 35% 163 2%
-------- --------
Consolidated gross profit $ 31,242 47% $ 27,390 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.
Consolidated gross profit increased $3.8 million to $31.2 million in
2003 from $27.4 million in 2002. The 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 47% for 2003, as compared to 49% for 2002.
Our Technology Services segment gross profit increased $0.7 million to
$27.8 million in 2003 from $27.1 million in 2002. As a percentage of segment
55
NYFIX, INC.
revenue, our gross profit margin decreased to 51% in 2003 from 56% in 2002. The
decrease in gross profit is primarily attributable to the previously described
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.
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.
SG&A
The following table presents an overview of our SG&A expense:
YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002
$ % $ %
----------------- ----------------
($ in thousands)
Salaries and benefits $21,239 58% $19,881 62%
Provision for doubtful accounts 2,831 8% 1,146 3%
Occupancy and related 3,817 10% 3,544 11%
Marketing, travel and entertainment 2,382 7% 2,825 9%
Professional fees 2,527 7% 2,041 6%
General and other 3,598 10% 2,803 9%
------- --------
Total SG&A $36,394 55% $32,240 58%
======= =========
The total SG&A is presented as a percentage of consolidated revenue.
SG&A expense increased $4.2 million, or 13%, to $36.4 million for 2003,
as compared to $32.2 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 cash collection program. In addition, our salaries and
benefits expenses increased $1.4 million, primarily due to increased staffing to
support our operations, annual merit increases for our staff and continuing
increases to health care costs, however these increases were partially offset by
lower compensation expense related to stock options of $0.7 million in 2003 as
compared to $2.5 million in 2002. Our professional fees increased $0.5 million
in 2003 as compared to 2002, due primarily to non-audit services related to
initial Sarbanes-Oxley compliance, in addition to other legal and professional
services. Occupancy and related expenses increased $0.3 million, primarily due
to the Renaissance acquisition. General and other expense increased $0.8
million, which included increased general insurance expense of $0.4 million and
a variety of other items aggregating $0.4 million, net. As a percentage of total
revenue, SG&A expense decreased to 55% in 2003 as compared to 58% in 2002, as
the increase in consolidated revenue outpaced the increase in SG&A expense.
R&D
R&D expense decreased $0.1 million to $1.4 million for 2003 as compared
to $1.5 million for 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.
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NYFIX, INC.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES
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 $1.4 million for the month of January 2002, which we
recognized under the equity method.
Our equity interest in our other previously unconsolidated affiliates,
Renaissance (which we acquired in July 2003) and EuroLink (which we acquired in
March 2004), 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. Effective March 29, 2004, we acquired the remaining
60% of EuroLink that we did not already own, and consolidated EuroLink's
operating results as of that date.
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 decreased $1.6 million, or 14%, to $10.0 million
for 2003, from $11.6 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. As a percentage of total revenue, loss from operations was a
deficit of 15% in 2003 and 21% in 2002.
INTEREST EXPENSE AND INVESTMENT INCOME
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. Interest expense decreased $0.1 million, or
50%, to $0.2 million for 2003, from $0.3 million for 2002, principally due to
reduced interest on capital 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.
INCOME TAXES
We recorded an income tax benefit of $4.6 million for 2003, compared to
an income tax benefit of $4.3 million for 2002. The income tax benefit in 2003
was attributable to a tax benefit on our pre-tax loss of $9.5 million and tax
benefits relating to certain Federal and state R&D tax credits aggregating $0.6
million. Our effective tax benefit rate of 48% in 2003 exceeded the Federal
statutory rate primarily due to the effect of 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
research and development tax credits, aggregating $0.9 million, from prior
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NYFIX, INC.
years. We will receive no income tax benefit for the equity in loss of NYFIX
Millennium of $1.4 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 38% for 2002 exceeded the Federal statutory rate primarily due
to the impact of our research and development tax credits of 8% and state income
taxes of 4%. This benefit was offset by the impact of the equity in loss of
NYFIX Millennium of 6%.
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, which aggregated $1.6 million from 2002 through 2004. We funded
our acquisitions of Javelin, NYFIX Millennium, Renaissance and EuroLink
primarily through the issuance of our common stock and notes payable in our
stock or cash, at our option. Please see Item 1. Business - Acquisitions.
Another significant source of funding for us is cash generated from
operations, which was $7.1 million, $15.4 million and $3.7 million in 2004, 2003
and 2002, respectively, aggregating $26.2 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 $4.8 million, $9.5 million and $7.1 million, respectively, aggregating $21.4
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 $6.7 million, $5.3 million and $4.6 million in 2004,
2003 and 2002, respectively, aggregating $16.6 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 2005 as compared to 2004.
We have capitalized product enhancements of $6.5 million, $5.3 million
and $2.8 million in 2004, 2003 and 2002, respectively, to keep our products
competitive. The increase in capitalized product enhancement costs in the last
two years was primarily attributable to our Javelin and Renaissance product
lines. We have many product enhancements in development, which we expect to
release into production during 2005. We expect to capitalize a similar amount
for product enhancements in 2005 as compared to 2004.
We acquired net cash of $1.2 million in 2004 and have invested $2.5
million, $12.1 million and $17.2 million of cash in 2003, 2002 and 2001,
respectively, aggregating $30.6 million, for our acquisitions of Javelin,
Renaissance, NYFIX Millennium, NYFIX Transaction Services and EuroLink. Included
in our 2004 amount was net proceeds of $1.3 million received primarily as a
return of funds held in escrow pursuant to a settlement agreement with a
representative of the former shareholders of Javelin. In connection with our
Renaissance acquisition we issued outstanding notes payable over the next
several years, aggregating $3.0 million, payable, at our option, in cash or our
common stock. On April 7, 2004, pursuant to notice from certain payees after we
defaulted on the notes, we issued shares of our common stock as payment in full
of $2.0 million in principal amount of such notes. On July 2, 2004 we issued
shares of our common stock in payment of $0.2 million of such notes that came
due on July 1, 2004. We intend to pay the remaining debt with our common stock,
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NYFIX, INC.
thus not requiring cash. On March 29, 2004, we acquired the remaining 60% of
EuroLink's common stock that we did not already own. We paid for the EuroLink
transaction with $24,000 in cash and one-year promissory notes payable in our
common stock or cash, at our option, valued in the aggregate at $0.5 million. We
integrated EuroLink with NYFIX International. We have no current plans for any
other acquisitions; we plan to continue 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, 2004, our principal sources of liquidity were cash, cash
equivalents and short-term investments in the aggregate of $26.9 million and
accounts receivable of $13.4 million. At December 31, 2004, we had accounts
payable and accrued expenses aggregating $18.2 million. We do not expect to make
any significant income tax payments due to available net operating loss
carryforwards and research and development tax credits.
NYFIX Clearing, NYFIX Transaction Services and NYFIX Millennium, as
registered broker-dealers, are subject to the minimum net capital requirements
of the NASD. NYFIX International, as an FSA-registered broker-dealer, is also
subject to minimum net capital requirements. During the year ended December 31,
2003, we 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 the DTCC. During the year ended December 31, 2004, we provided an
aggregate additional capital of $1.3 million in the form of capital
contributions and subordinated loans to enable our US broker-dealer subsidiaries
to individually and collectively exceed their net capital requirements, and
another $1.3 million to NYFIX International in the form of capital contributions
as a condition of NYFIX International's approval by the FSA. At December 31,
2004, our broker-dealer subsidiaries had aggregate net capital of $12.7 million,
which exceeded the aggregate minimum and minimum excess net capital
requirements, collectively by $1.7 million. At December 31, 2004, we had an
aggregate of $13.9 million of our consolidated cash, cash-equivalents and
short-term investments committed to maintain our broker-dealer subsidiaries'
collective minimum and minimum excess net capital requirements of $11.0 million.
In the first quarter of 2005, we provided our broker-dealer subsidiaries
aggregate additional capital of $2.8 million in the form of additional capital
contributions. 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, in the case of NYFIX Clearing,
its 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.
As a result of the reduced availability of cash due to our broker-dealer
net capital requirements, as described above, and our continued operating
losses, on December 30, 2004, we issued a $7.5 million Convertible Note with an
interest rate of 5% due in December 2009 (the "Note") through a private
placement to the Lender. The interest on the Note is payable in cash or, at our
option as described below, by the issuance of shares of our common stock,
semi-annually in arrears on June 30 and December 30 of each year, beginning June
30, 2005.
The Note is subordinated to all of our existing and future secured
indebtedness. The Lender has certain rights to require that we register the
common stock issuable, upon conversion of the Note or for payment of interest,
under the Securities Act of 1933, as amended. Such registration statement is to
be effective by September 30, 2005 and if it is not, we will be required to pay
additional interest, in cash, for each month the effectiveness is delayed. The
59
NYFIX, INC.
additional interest varies by month and has an aggregate cap of $500,000 for the
duration of the Note. The entire outstanding principal amount of the Note
together with all accrued but unpaid interest is due in cash on December 30,
2009; and except under certain conditions, we have no right of early prepayment
on the Note.
At the option of the Lender, the Note is convertible into our common
stock at $6.94 per common share, which was a 20% premium over the average of our
common stock closing price for the five trading days preceeding December 30,
2004. At our option, the Note is convertible into our common stock according to
a formula based on the market price of our stock during the term of the Note
which requires among other things for our common stock to exceed 150% of the
price at which the Lender can convert the Note (or $10.41 per common share).
If we issue shares of our common stock to convert the Note or to make
interest payments, we are required to pay a 5% premium based on an average
closing price of our common stock for the previous ten days. If we convert the
Note prior to December 30, 2007, we are required to pay an additional make-whole
interest payment in either cash or our common stock at our discretion.
As a result of the restatement of our financial statements for the year
ended December 31, 2003, we were in breach of certain representations and
warranties relating to those financial statements that constituted an event of
default under the Note. On June 24, 2005, the Lender waived all defaults under
the Note and extended the requirement to have a registration statement be
effective for the shares of our common stock that may be issued as payment of
principal or interest under the Note to March 31, 2006. In exchange, we agreed
to reduce the price at which the lender can convert the Note into common stock
from $6.94 per share, as described above, to $5.75 per share, which was a 16%
premium over the average of our common stock closing price for the five trading
days preceeding June 24, 2005. Accordingly, our option to convert the Note into
our common stock is based on the market price of our stock during the term of
the Note which requires, among other things, our common stock to exceed 150% of
the price (or $8.63 per common share on a revised basis) at which the Lender can
convert the Note.
In addition, at the option of the Lender, we may issue to the Lender up
to an additional $2.5 million note under terms substantially similar to those of
the Note. The Lender requested, and we agreed to extend the termination date of
the option to issue the additional $2.5 million note from March 30, 2005 to
until ten days after the date we file this 2004 Annual Report on Form 10-K.
We believe that our cash and short-term investments of $26.9 million at
December 31, 2004, together with anticipated cash to be generated from
operations, will be sufficient to support our capital and operating needs and
the net capital requirements of our broker-dealer operations for at least the
next twelve months.
The following summarizes our material commitments at December 31, 2004,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods:
60
NYFIX, INC.
PAYMENTS DUE BY PERIOD
Less than More than
Contractual Obligations Total 1 year 1-3 Years 3-5 Years 5 Years
------- ------- ------------ --------- ---------
(in thousands)
Long-term debt $ 9,038 $ 1,102 $ 436 $ 7,500 $ --
Capital lease obligations 1,406 510 896 -- --
Operating leases 26,336 4,875 7,228 5,211 9,022
Purchase obligations 10,103 4,734 4,859 510 --
------- ------- ------- ------- -------
Total $46,883 $11,221 $13,419 $13,221 $ 9,022
======= ======= ======= ======= =======
Long-term debt consists of payments on promissory notes issued in
connection with the Renaissance and EuroLink acquisitions and the Note described
above. As described earlier, under the terms of the notes issued, we may elect
to make the note payments in shares of our common stock instead of cash, which
would reduce the amounts shown above and lessen the effect on liquidity and cash
flows. Purchase obligations include minimum purchase obligations to certain
telecommunication providers in exchange for pricing discounts and a software
licensing arrangement with a minimum licensing fee.
WORKING CAPITAL
At December 31, 2004, we had working capital of $20.8 million as
compared to $22.7 million at December 31, 2003. Working capital at December 31,
2004 also included the net proceeds from the issuance of the $7.5 million Note
on December 30, 2004. The decrease in working capital was principally due to the
cash used to acquire property, equipment and leasehold improvements, enhance our
products, fund pre-acquisition working capital advances to EuroLink and current
liabilities in conjunction with the restructuring charge. These amounts were
partially offset by cash flows provided by operating activities, cash acquired
from net borrowings and net cash acquired from the Javelin escrow settlement.
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in 2004 was $7.1 million, as
our net loss of $32.7 million, adjusted for non-cash items, such as depreciation
and amortization, deferred income taxes, provision for doubtful accounts and
equity in loss of unconsolidated affiliates, provided $4.7 million. Working
capital and other assets and liabilities increased $2.4 million due to increased
accounts payable and other liabilities of $6.1 million, deferred revenue of $0.3
million and net securities borrowed of $0.2 million. These items were partially
offset by an increase in accounts receivable of $3.8 million and an increase in
prepaid expenses and other assets of $0.4 million. In 2005, we expect to
continue to generate positive cash flows from operating activities.
Net cash provided by operating activities in 2003 was $15.4 million, as
our net loss of $4.9 million, adjusted for non-cash items, such as depreciation,
amortization, deferred taxes, provision for doubtful accounts and equity in loss
of unconsolidated affiliates, provided $8.0 million. Working capital and other
assets and liabilities increased $7.4 million due to a decrease in accounts
receivable of $3.4 million and an increase in accounts payable and other
liabilities of $1.7 million.
CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities in 2004 was $13.0 million. This
amount consisted primarily of capital expenditures, primarily for data center
equipment and software, of $6.7 million, product enhancement costs of $6.5
million, net purchases of short-term investments of $1.0 million and loans and
advances to EuroLink of $0.2 million. These amounts were partially offset by
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NYFIX, INC.
cash acquired from acquisitions of $1.4 million, which included cash of $1.3
million received primarily as a return of funds held in escrow pursuant to a
settlement agreement with a representative of the former shareholders of
Javelin. In 2005, we expect to invest a similarly proportionate amount of cash
for capital expenditures for property and equipment as well as product
enhancement costs.
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 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.
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities in 2004 was $7.4 million
consisting of net proceeds from borrowings of $7.6 million (of which $7.2
million in net proceeds was received from the issuance of the Note on December
30, 2004) and proceeds of $0.4 million from the issuance of common stock
resulting from the exercise of stock options, partially offset by payments under
capital lease obligations of $0.6 million. In 2005, we expect to repay debt of
$0.4 million and capital lease obligations of $0.6 million. We may elect to pay
our promissory note obligations with shares of our common stock, thus not
requiring cash.
Net cash provided by financing activities in 2003 was $0.2 million,
consisting primarily of net proceeds from the issuance of common stock resulting
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 had nominal capital
lease obligations remaining as of December 31, 2003.
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 8 and purchase
obligations that are discussed in Note 9 to the Consolidated Financial
Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As previously mentioned in "Application of Critical Accounting
Policies", in December 2004, the FASB issued SFAS No. 123(R), SHARE-BASED
PAYMENT. SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB No. 25
and its related implementation guidance. SFAS 123(R) establishes standards for
the accounting for transactions in which an entity exchanges its equity for
goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS 123(R) focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS 123(R) allows entities to apply a modified retrospective
application to periods before the required effective date. SFAS 123(R) is
effective for public entities, such as us, that do not file as small business
issuers as of the beginning of the first annual reporting period that begins
after June 15, 2005, or in our case January 1, 2006. We are evaluating the
impact of SFAS No. 123(R), which could have a material impact on our
consolidated financial statements.
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NYFIX, INC.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY
ASSETS ("SFAS No. 153"). SFAS No. 153 addresses the measurement of exchanges of
nonmonetary assets. SFAS 153 eliminates the exception from the fair value
measurement for nonmonetary exchanges of similar product assets in paragraph
21(b) of APB Opinion No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS, and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. We
have not completed our analysis of the impact of SFAS 153, but as we have not
been involved in significant nonmonetary exchanges in the past, we do not expect
that the provisions of SFAS No. 153 will have a material impact on our
consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS ("SFAS
No. 151"). SFAS No. 151 amends Accounting Research Bulleting ("ARB") No. 43,
INVENTORY PRICING, to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges. SFAS 151 also requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We have not completed our
analysis of the impact of SFAS 151, but as inventory is not a material component
of our consolidated financial statements, we do not expect that the provisions
of SFAS No. 151 will have a material impact on our consolidated financial
statements.
RISK FACTORS RELATING TO OUR BUSINESS
WE ARE A DEFENDANT IN A CLASS-ACTION COMPLAINT RELATED TO OUR INVESTMENT IN
NYFIX MILLENNIUM.
On 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 named us, our Chairman and CEO, our
former CFO, our current CFO and certain of our directors as defendants. The
complaint was filed as a purported 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 alleged violations of Sections 10(b) and 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. On July 20,
2004, the court appointed three different plaintiffs to be the lead plaintiffs,
as Fuller & Thaler Asset Management withdrew as the named plaintiff. The action
became styled JOHNSON, ET AL. V. NYFIX, INC., ET AL. On August 19, 2004, the
newly named plaintiffs filed a first amended class action complaint, which
added, among other things, allegations of violations of Sections 11 and 15 of
the Securities Act of 1933, as amended. The new allegations are based
fundamentally on the same allegations as the plaintiffs asserted in the original
complaint. The defendants have filed a motion to dismiss the amended complaint
with prejudice. Although it is not possible to forecast the outcome of this
matter, we intend to vigorously defend against the complaint but can give no
assurance that the outcome will not have a material impact on us.
WE ARE THE SUBJECT OF TWO INQUIRIES BY THE SEC.
In connection with our restatement of our 1999 through 2002 consolidated
financial statements in May 2004, the Division of Enforcement of the SEC
informed us by letter dated July 14, 2004, that it was conducting an informal
inquiry. On January 25, 2005, we filed a current report on Form 8-K, which
indicated that we believed that the matter was a formal inquiry. By letter dated
October 28, 2004, the Division of Enforcement of the SEC informed us that it was
conducting a second informal inquiry, which related to our stock options
granted. On February 25, 2005, we filed a current report on Form 8-K, which
indicated that we believed that the matter was a formal inquiry. We are
cooperating with the SEC with respect to both matters. We are unable to predict
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the outcome of either matter at this time and can give no assurances that the
outcome of either or both matters will not have a material impact on us.
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 three years of operations, NYFIX
Transaction Services incurred a net loss of $6.5 million and required capital
contributions of $8.1 million. Although we expect NYFIX Transaction Services to
start to generate positive cash flows during 2005, we can provide no assurances
that it will do so. Accordingly, NYFIX Transaction Services may need us to
continue to provide funding to maintain its minimum net capital requirements,
thus impacting our availability of cash.
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 $41.8 million
through December 31, 2004. Although we expect NYFIX Millennium to generate
positive cash flows during 2005, we can provide no assurances that it will
continue to do so. Accordingly, NYFIX Millennium may need us to provide funding
to maintain its net capital requirements, thus impacting our availability of
cash.
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 they 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. After
the acquisition was completed, we integrated the Renaissance operation,
including sales and support of its product, into our Technology Services
Segment. 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. For
the year ended December 31, 2004, NYFIX Clearing reported net income of $0.8
million and required no incremental capital contributions during 2004. To date,
the only capital contribution required was $10.8 million during 2003. Although
we expect cost savings from using NYFIX Clearing to clear our transaction
business trades, NYFIX Clearing may need us to continue to provide funding to
maintain its minimum and excess minimum net capital requirements, thus impacting
our availability of cash.
In 2004, we formed NYFIX International, Ltd, which commenced operations
in September 2004 following approval by the FSA. Through December 2004, NYFIX
International incurred a net loss of $0.6 million and required an initial
capital contribution of $1.3 million. Although we expect NYFIX International to
start to generate positive cash flows during 2005, we can provide no assurances
that it will continue to do so. In the first quarter of 2005, we provided to
NYFIX International an additional $0.8 million of cash in the form of a capital
contribution. Accordingly, NYFIX International may need us to continue to
provide funding to maintain its minimum net capital requirements, thus impacting
our availability of cash.
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If we are not profitable in 2005 or beyond, we may be required to record
an impairment charge relating to our goodwill. If the impairment charge is
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 International, NYFIX
Clearing, NYFIX Millennium and Javelin were formed in March 2004, 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.
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 US. 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 upgrade our
systems to the extent we determine to be appropriate 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 US. 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 reasonable 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, directly or
indirectly through a consolidator: AT&T, Qwest, Sprint, MCI, Verizon, Colt and
SingTel. Customers are given the choice of using one or more network carriers to
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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, including:
o diversity of telecommunication infrastructure between the major
carriers;
o a competitive environment to help insure aggressive pricing for
network services; and
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, we believe 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.
We believe 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 INTO OUR INFORMATION SYSTEMS OR NETWORKS
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 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.
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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 US. 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. For example, we use systems from IBM, HP, 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.
Because 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 of 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.
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
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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 terrorist related or other 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 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.
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 than
we have.
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
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competition from customers who choose to maintain their own infrastructure and
develop their own in-house proprietary order management software systems.
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; and
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.
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 US 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.
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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 US. If competitors are able to use our
technology, our ability to compete effectively could be harmed. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Litigation, whether or not successful, could result in substantial
costs and diversions of resources.
WE MAY 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.
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THE SECURITIES BROKERAGE INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
IF NYFIX MILLENNIUM, NYFIX TRANSACTION SERVICES, NYFIX CLEARING OR NYFIX
INTERNATIONAL 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 and NYFIX
International is subject to extensive regulation under UK laws. In addition to
these laws, we must comply with rules of the SEC, including Regulation ATS for
NYFIX Millennium, and the NASD, FSA, 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, NYFIX Clearing and
NYFIX International 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, NYFIX Clearing or NYFIX International 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, NYFIX TRANSACTION SERVICES, NYFIX CLEARING OR NYFIX
INTERNATIONAL MAY NOT HAVE EFFECTIVE COMPLIANCE AND RISK MANAGEMENT METHODS.
NYFIX Millennium's, NYFIX Transaction Services', NYFIX Clearing's and
NYFIX International'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, NYFIX Clearing or NYFIX International
could be subject to disciplinary or other actions due to claimed noncompliance
with regulations in the future. If a claim of noncompliance is made by a
regulatory authority, the efforts of the management of NYFIX Millennium, NYFIX
Transaction Services, NYFIX Clearing or NYFIX International 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 FSA, 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.
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NYFIX, INC.
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
SEC registered broker-dealers and NASD members and NYFIX International as an FSA
registered broker-dealer are conditioned, in part, on their ability to process
and settle trades.
OUR BROKER-DEALER 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, NYFIX Clearing and
NYFIX International 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, 2004, our broker-dealers in the aggregate had minimum net
capital and minimum excess net capital requirements of $11.0 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, 2004,
we had cash and short-term investments of $12.9 million that were not subject to
our broker-dealer minimum net capital and minimum excess net capital
requirements. In the first quarter of 2005, we provided an aggregate additional
capital of $2.8 million in the form of additional capital contributions. 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 limits
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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NYFIX, INC.
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, including not being able to:
o continue to meet customer demand for service quality, availability
and competitive pricing;
o expand or to acquire complementary businesses; and
o 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, 2004, 2003 and 2002, approximately 13%,
10% and 7%, respectively, of our revenue was derived from our international
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 US;
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NYFIX, INC.
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
US 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.
Sarbanes-Oxley, as well as new rules subsequently implemented by the
SEC, has required changes in certain 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 SITUATION IN IRAQ 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 US on September 11, 2001, the declaration
of war by the US against terrorism and the current situation in Iraq have
created significant instability and uncertainty in the financial marketplace,
both in the US and globally. Such adverse political events may have a continued
negative impact on economic conditions in the financial marketplace and our
customers. The unfavorable conditions may have an adverse effect on our
financial operations including, but not limited to, our ability to expand the
market for our products, enter into strategic relationships and effectively
compete.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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NYFIX, INC.
We are exposed to market risk principally through changes in interest
rates and equity prices. Our short and long-term investment portfolios of $4.5
million and $3.4 million at December 31, 2004 and 2003, respectively, consisted
of $1.2 million and $2.4 million, respectively, of auction rate certificates.
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 the results of operations and cash flows
or their fair value.
We are subject to interest rate risk on our $3.3 million and $1.0
million of treasury bills at December 31, 2004 and 2003, 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 US dollar
as compared with foreign currencies, which are primarily 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 US dollar, British pounds sterling or the Euro. 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 years ended December 31, 2004 and
2003, we recorded a foreign exchange translation gain of $0.1 million and $0.3
million, respectively.
SECURITIES MARKET AND CREDIT RISK
NYFIX Clearing is subject to market risk when a counterparty does not
deliver cash or securities to it as expected and NYFIX Clearing holds cash (in
lieu of securities) or securities (in lieu of cash) at any point in time. This
risk arises from the potential inability of the counterparty's clearing agent to
meet its settlement obligation by delivering cash or securities, as required,
which is a credit risk. NYFIX Clearing is a member of several highly rated
clearing organizations, which have margin requirements and other mechanisms that
are designed to substantially mitigate this risk.
When necessary, NYFIX Clearing can liquidate or purchase securities in
the market to close out the position at the prevailing market price. NYFIX
Clearing's stock lending practice is to maintain collateral in excess of the
contract value and to request additional collateral whenever necessary. NYFIX
Clearing seeks high-quality, creditworthy counterparties and has controls in
place that are designed to monitor and limit this exposure.
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
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
"Disclosure controls and procedures" are defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These
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NYFIX, INC.
rules refer to the controls and other procedures of a company that are designed
to ensure that the information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized
and reported within required time periods. Disclosure controls and procedures
also include, without limitation, controls and procedures designed to ensure
that information required to be disclosed in our Exchange Act reports is
accumulated and communicated to management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
We, including our Chief Executive Officer and Chief Financial Officer,
have conducted an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act as of December 31, 2004. Based on our
evaluation of the effectiveness of the design and operation of the disclosure
controls and procedures, because of the matters discussed below, our Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were not effective as of December 31, 2004.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act). NYFIX, Inc.'s internal control over financial reporting was
designed to provide reasonable assurance to our management and NYFIX, Inc.'s
Board of Directors regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America ("generally accepted accounting principles"), and includes those
policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
NYFIX, Inc.'s assets;
- Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are being made only
in accordance with authorizations of management and directors; and
- Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of NYFIX,
Inc.'s assets that could have a material effect on the consolidated
financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some people, by collusion of two or more people, or by
management override. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, control may
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NYFIX, INC.
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. A material weakness in internal control
over financial reporting is a control deficiency (within the meaning of the
Public Company Accounting Oversight Board ("PCAOB") Auditing Standard No. 2), or
combination of control deficiencies, that results in there being more than a
remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. PCAOB Auditing Standard
No. 2 identifies a number of circumstances that, because of their likely
significant negative effect on internal control over financial reporting, are to
be regarded as at least significant deficiencies as well as strong indicators
that a material weakness exists, including the restatement of previously issued
consolidated financial statements to reflect the correction of a misstatement.
Management assessed the effectiveness of NYFIX, Inc.'s internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO, in its INTERNAL
CONTROL-INTEGRATED FRAMEWORK. Based on this assessment, management has concluded
that, as of December 31, 2004, NYFIX, Inc. did not maintain effective internal
control over financial reporting, due to the following material weakness: NYFIX,
Inc. did not design and implement adequate policies and procedures to review
certain transactions for compliance with generally accepted accounting
principles. The material weakness resulted in the misapplication of generally
accepted accounting principles related to accounting for compensation expense
attributable to stock options granted, a tenant allowance and the recognition of
rent expense as of the lease commencement date contained in an operating lease,
and deferred income taxes in connection with certain acquisitions, as summarized
below:
1) We determined that our accounting for compensation expense
attributable to stock options granted to certain employees and
directors between 1993 and 2004 was incorrect for the following
reasons: the intrinsic value of certain stock options granted to
employees and directors was calculated as of a date other than the
measurement date. The adjustments required us to correct the
accounting for compensation expense attributable to stock options
granted resulting in a material adjustment to our previously issued
consolidated financial statements. As a result, we restated our
previously issued consolidated financial statements contained in
this Form 10-K. In addition, we intend to amend our tax filings, as
necessary.
2) Based on an internal review of our accounting for leases, which was
encouraged by a letter on the subject from the Office of the Chief
Accountant of the Securities and Exchange Commission to the
American Institute of Certified Public Accountants on February 7,
2005, we determined that our accounting for a tenant allowance and
the recognition of rent expense as of the lease commencement date
contained in an operating lease, effective in 2004, for one of our
offices was incorrect for the following reasons: a) we recognized
rent expense as of the date we began operations within the premises
rather than the lease commencement date; and b) we reduced the cost
basis of our leasehold improvements by the amount of the tenant
allowance rather than recording it as deferred rent and amortizing
such amount as a credit to lease expense over the term of the
lease. We corrected these errors and properly accounted for this
lease as of December 31, 2004.
3) We determined that our accounting for deferred income taxes in
connection with certain acquisitions was incorrect, because we did
not correctly identify and account for the allocation of deferred
tax assets and liabilities acquired. As a result, we restated our
previously issued consolidated financial statements contained in
this Form 10-K.
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NYFIX, INC.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As a result of the breadth and depth of the reviews performed to
implement and to maintain compliance with the provisions of the Sarbanes-Oxley
Act of 2002, we have made and intend to continue to make, various improvements
to our system of internal control over financial reporting. The Company made the
following changes in the fourth quarter of the year ended December 31, 2004 and
in 2005 that it believes will have a material effect on internal control over
financial reporting. These improvements include additional and enhanced
reconciliations and controls over the disclosure process. In addition to the
above remediation, we have supplemented, and intend to continue supplementing,
our internal and external expertise in accounting and tax, and also intend to
enhance our internal review procedures for all new, unusual or non-routine
transactions to ensure proper treatment and disclosure.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
NYFIX, Inc.
Stamford, Connecticut
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Control over Financial Reporting", that NYFIX,
Inc. and subsidiaries (the "Company") did not maintain effective internal
control over financial reporting as of December 31, 2004, because of the effect
of the material weaknesses identified in management's assessment based on
criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the consolidated financial
statements.
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NYFIX, INC.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been identified and
included in management's assessment: the Company failed to design and implement
appropriate controls associated with the application of accounting principles
generally accepted in the United States of America. Specifically, the Company
did not design and implement adequate policies and procedures to review certain
transactions to determine that they are accounted for in compliance with
generally accepted accounting principles. This material weakness resulted in
material errors in the financial statements related to (1) compensation expense
attributable to stock options granted; (2) the classification of a tenant
allowance and the recognition of rent expense as of the lease commencement date
contained in an operating lease; and (3) deferred income taxes in connection
with certain acquisitions. This material weakness resulted in a restatement of
the Company's annual consolidated financial statements as it relates to
compensation expense and deferred income taxes. The impact of the restatement on
the previously issued consolidated financial statements is described in Note 2
to the consolidated financial statements. Material adjustments, as a result of
the restatement, were necessary to present the 2004 annual consolidated
financial statements in accordance with generally accepted accounting
principles. Due to the actual misstatements identified and the potential
pervasive effect on the financial statements and related disclosures there is a
more than remote likelihood that a material misstatement of the interim and
annual consolidated financial statements will not be prevented or detected. This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the consolidated financial statements as
of and for the year ended December 31, 2004, of the Company and this report does
not affect our report on such consolidated financial statements.
In our opinion, management's assessment that the Company did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the criteria
established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2004, based on the criteria established in INTERNAL CONTROL--INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004, of the Company and
our report dated June 28, 2005 expressed an unqualified opinion on those
financial statements.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
June 28, 2005
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors and executive officers, as of May
31, 2005, is set forth below:
NAME AGE POSITION
- ---- --- --------
Peter Kilbinger Hansen 44 President, Chief Executive Officer and
Chairman of the Board
George O. Deehan 62 Director
William C. Jennings 65 Director
William J. Lynch 63 Director
Thomas C. Wajnert 61 Director
Robert C. Gasser 40 Chief Executive Officer, NYFIX Millennium and
President of NYFIX Transaction Services
and NYFIX Clearing Corporation
Jay D. Shaffer 58 Executive Vice President - Finance and
Administration
Mark R. Hahn 47 Chief Financial Officer
Keith R. Jamaitis 34 President, NYFIX USA
Brian Bellardo 55 General Counsel and Secretary
Lars Kragh 44 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, and from 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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NYFIX, INC.
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 (now, PricewaterhouseCoopers LLP), 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 provided 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 consultant/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. Mr. Lynch also
serves as Chairman of the Board of Directors of Edgewater Technologies, a
publicly traded company.
THOMAS C. WAJNERT has served as a director since October 2004. Mr. Wajnert
serves as a member of the Nominating and Corporate Governance, Audit, and
Compensation Committees of our Board of Directors. Mr. Wajnert has been Managing
Director of Fairview Advisors, LLC, a merchant bank since January 2002. He was
Chairman and Chief Executive Officer of SEISMIQ, Inc, a provider of advanced
technology to the commercial finance and leasing industry, from its founding in
April 2000 until December 2001. Mr. Wajnert also was the Chairman of, and a
significant investor in, EPIX Holdings, Inc., a professional employer
organization, from March 1998 until November 2003, where he also served as Chief
Executive Officer from March 1998 to April 1999. Previously, Mr. Wajnert was
Chairman of the Board of Directors from January 1992 until December 1997, and
Chief Executive Officer from November 1984 until December 1997, of AT&T Capital
Corporation (NYSE), a commercial finance and leasing company. He was
self-employed from December 1997 to March 1998. Mr. Wajnert serves on the boards
of directors of Reynolds American, Inc. (NYSE) and JLG Industries, Inc. (NYSE).
OUR EXECUTIVE OFFICERS
ROBERT C. GASSER has served as Chief Executive Officer, NYFIX Millennium 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 US 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.
JAY D. SHAFFER joined us January 1, 2005 as our Executive Vice President -
Finance and Administration. Prior to joining us, Mr. Shaffer consulted for us
through Resources Connection, Inc. From 1988 to July, 2004, Mr. Shaffer was
Managing Director for Financial Management Advisory Services, where he was
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involved in various project management roles focusing on risk assessment and
internal control. Mr. Shaffer began his career with Citicorp where he spent 16
years in a variety of financial, operation and administrative positions. Mr.
Shaffer holds a Masters of Business Administration degree in Information Science
and a Bachelor of Science degree in Accounting.
MARK R. HAHN is our Chief Financial Officer. He joined us in September 2002 as
Chief Financial Officer and, until June 2003, as Secretary. 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.
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. 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 has served as General Counsel since March 2003. 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. Mr.
Bellardo, a Summa Cum Laude, Phi Betta Kappa graduate of Yale University,
received his law degree from Stanford University.
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
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required, during 2004 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 each by George O. Deehan and William J.
Lynch for stock options granted in 2000, which were not identified by the
Company as having been granted until the Company reviewed its stock option
grants in 2005 in connection with its restatement related to such grants. This
failure was inadvertent and, when the oversight was discovered, the transactions
were subsequently reported. In addition, Peter K. Hansen, George O. Deehan and
William J. Lynch timely filed amended Form 4s to reflect that options previously
reported as having been granted in two transactions for Mr. Hansen and in one
transaction each for Messrs. Deehan and Lynch were void grants. Mr. Wajnert
timely filed an amended Form 3 and an amended Form 4 to reflect that stock
options in one transaction were granted on November 10, 2004 rather than on
October 10, 2004, as previously 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain information, for the years ended
December 31, 2004, 2003 and 2002, 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, 2004 and who
were serving as executive officers on December 31, 2004 (collectively the "Named
Executive Officers").
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OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS (SHARES)
- -------------------------------- ------- --------- ---------- ------------ ----------------
Peter K. Hansen, 2004* $ 414,628 $ - $ 6,976 10,000
President and Chief Executive 2003 380,000 - 6,046 -
Officer 2002 389,231 - 5,892 100,000
Robert C. Gasser (2), 2004* 435,385 - - 10,000
Chief Executive Officer, NYFIX 2003 399,462 100,000 - -
Millennium and President, NYFIX 2002 355,897 - - 100,000
Transaction Services and NYFIX
Clearing
Lars Kragh, 2004* 272,115 - 8,894 10,000
Chief Information Officer 2003 244,632 - 7,747 -
2002 218,288 - 6,303 20,000
Mark R. Hahn (3), 2004* 326,538 - 6,000 10,000
Chief Financial Officer 2003 297,981 - - 75,000
2002 60,577 - - 60,000
Keith R. Jamaitis (4), 2004* 308,654 30,000 6,000 10,000
President of NYFIX USA 2003 217,004 - 5,500 -
2002 174,712 72,721 4,456 54,000
* As a result of our bi-weekly payroll process, there were 27 pay periods in
2004 as compared to 26 pay periods in both 2003 and 2002.
(1) Includes our Employer 401K discretionary matching contribution (see Note
14 to the Consolidated Financial Statements) and car allowances to Mr.
Hansen and Mr. Kragh.
(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.
(3) Mr. Hahn started with us in September 2002.
(4) Mr. Jamaitis started with us in 1997 and became an Executive Officer in
January 2004.
OPTION GRANTS
The following table sets forth information regarding stock options
granted to the Named Executive Officers during the year ended December 31, 2004.
These grants are also reflected on the Summary Compensation Table above.
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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 DATE OPTIONS
- ---------------------------------------------------------------------------------------------------------------------
5% 10%
------- --------
Peter K. Hansen 10,000 1.53% $7.06 2/23/14 44,375 112,454
Robert C. Gasser 10,000 1.53% $7.06 2/23/14 44,375 112,454
Mark R. Hahn 10,000 1.53% $7.06 2/23/14 44,375 112,454
Keith R. Jamaitis 10,000 1.53% $7.06 2/23/14 44,375 112,454
Lars Kragh 10,000 1.53% $7.06 2/23/14 44,375 112,454
(1) 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.
(2) Represents options to purchase shares of our common stock granted on
February 23, 2004. Of the options granted, 3,334 vested on February
23, 2005 and 3,333 will vest on each of February 23, 2006 and
February 23, 2007.
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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, 2004. The following table sets forth the number of
options held by the Named Executive Officers at December 31, 2004 and the value
of such options.
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT YEAR-END
NAME OPTIONS AT YEAR-END (1)
- ------------------- ------------------------- ---------------------------
(E) (U) (E) (U)
---------- ---------- ----------- ------------
Peter K. Hansen 220,000 30,000 $ 182,000 $ 45,000
Robert C. Gasser 317,500 130,000 182,000 45,000
Mark R. Hahn 55,000 90,000 101,000 144,000
Keith R. Jamaitis 81,225 14,800 87,000 11,000
Lars Kragh 322,250 14,000 986,000 9,000
(E) Exercisable
(U) Unexercisable
(1) Options are "in-the-money" if the market price of a share of our common
stock on December 31, 2004 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, 2004, and the aggregate exercise price of such
options. The closing price of a share of our common stock on December
31, 2004, as reported on the Nasdaq, was $6.19. In addition, for 281,250
options granted to Mr. Kragh and 30,000 options granted to Mr. Jamaitis,
we recorded compensation expense of $264,600 and $2,800, respectively,
as the fair value of our common stock on the measurement date was in
excess of the exercise price.
Employment Agreements
Mr. Hansen serves as our President and Chief Executive Officer pursuant
to an employment agreement, dated June 24, 1991. This agreement was for a term
of five years effective as of January 1, 1991 and renews automatically on
January 1 of each year thereafter as mutually agreed upon. Pursuant to the terms
of the agreement, Mr. Hansen is paid a base salary plus such bonus or additional
compensation as the board of directors or the compensation committee deems
appropriate. Effective January 1, 2004, the compensation committee of the board
of directors set Mr. Hansen's base salary at $400,000. In the event Mr. Hansen
is terminated by us for any reason other than a material breach by him of the
agreement, he is entitled to receive an amount equal to four times his then
current base salary and prorated payment of any bonus, cash or stock earned.
Mr. Gasser serves as the Chief Executive Officer of NYFIX Millennium,
President of NYFIX Transaction Services and President of NYFIX Clearing pursuant
to an employment agreement, dated September 21, 2001. This agreement was for a
term of one year commencing October 5, 2001 and renews automatically on October
5th of each year thereafter unless terminated in accordance with its terms or
unless either party gives 60 days prior written notice of intention to
discontinue the automatic extension. Pursuant to the terms of the agreement, Mr.
Gasser is paid a base salary plus a bonus of 2% of NYFIX Millennium's pre-tax
earnings and such bonus or additional compensation as the board of directors or
the compensation committee deems appropriate. Effective January 1, 2004, the
compensation committee of our board of directors set Mr. Gasser's base salary at
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NYFIX, INC.
$420,000 plus a bonus of 2% of NYFIX Millennium's pre-tax earnings. In the event
Mr. Gasser is terminated by us after the one year anniversary of employment for
any reason other than a hostile acquisition, a material breach by him of the
agreement, conduct materially injurious to us, NYFIX Millennium, its affiliates,
customers or suppliers, or any act of fraud which would constitute a felony
under federal or state law, he is entitled to receive one year of base salary in
one lump sum payment and an immediate vesting of the nearest options to be
vested of a sign-up grant of 225,000 options vesting over a three-year period at
a rate of 75,000 at the end of each of the first three years of employment. In
the event NYFIX Millennium is involved in a hostile acquisition and should the
acquiring company terminate Mr. Gasser's services, he is entitled to receive
twice his annual base and fifty percent of any unvested options will become
fully vested. In the event NYFIX Millennium should merge with another non-NYFIX
Inc. owned company or should we divest NYFIX Millennium, and Mr. Gasser were to
have his employment terminated following his second anniversary of employment,
Mr. Gasser is entitled to 100% vesting of a bonus grant of 100,000 options.
Mr. Hahn serves as our Chief Financial Officer pursuant to an employment
agreement, dated January 1, 2003. This agreement was for a term of one year and
renews automatically on January 1st of each year unless sooner terminated in
accordance with its terms. Pursuant to the terms of the agreement, Mr. Hahn is
paid a base salary, plus such special bonuses or incentives as determined by us.
Effective January 1, 2004, the compensation committee of our board of directors
set Mr. Hahn's base salary at $315,000.
Mr. Jamaitis serves as President of NYFIX USA pursuant to an employment
agreement, dated October 22, 1997. This agreement was for a term of one year and
renews automatically on November 10th of each year thereafter unless sooner
terminated in accordance with its terms. Mr. Jamaitis became an Executive
Officer of the Company in January 2004. Pursuant to the terms of his employment
agreement, Mr. Jamaitis is paid a base salary, plus such special bonuses or
incentives as determined by us. Effective January 1, 2004, the compensation
committee of our board of directors set Mr. Jamaitis' base salary at $300,000.
In addition, on May 28, 2004, Mr. Jamaitis signed a non-compete agreement with
us that extends for the term of his employment with us and for one year
thereafter. Under the terms of this agreement, in consideration of $30,000, Mr.
Jamaitis is prohibited, without our prior approval, from entering into
employment with specified organizations, unless he is terminated for reasons
other than Cause, as defined in the agreement.
Mr. Kragh serves as our Chief Information Officer pursuant to an
employment agreement, dated January 1, 2003. This agreement was for a term of
one year and renews automatically on January 1 of each year thereafter unless
either party gives 90 days prior written notice of its intention to discontinue
the automatic extension. Pursuant to the terms of the agreement, Mr. Kragh is
paid a base salary of plus such special bonuses or incentives as determined by
us. Effective January 1, 2004, the compensation committee of our board of
directors set Mr. Kragh's base salary at $262,500.
DIRECTORS' COMPENSATION
As part of their compensation for services as members of the Board of
Directors, non-employee directors receive options to purchase shares of our
common stock. Beginning in 2004, we adopted a policy that the exercise price on
such options granted after the adoption of the policy would equal the average of
the closing price of our common stock for the five trading days prior to the
date of grant. Also beginning in 2004, non-employee directors have received an
annual stipend of $25,000, which is paid quarterly. In 2004, as is our practice
when a new director joins the Board of Directors, we granted options to one, new
non-employee director. These options (exercisable into an aggregate of 70,000
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NYFIX, INC.
shares of our common stock at an exercise price of $6.03 per share when the
average of the closing price of our common stock for the five trading days prior
to the date of grant was $5.73) vest on various dates in 2005 through 2007, so
long as the director completes service through the vesting date. In addition,
for the options granted to Mr. Jennings, we recorded compensation expense of
$110,000 as the fair value of our common stock on the measurement date was in
excess of the exercise price. Non-employee directors are reimbursed for
reasonable expenses in connection with serving as a director and member of a
committee.
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 31, 2005, 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
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER (1) BENEFICIALLY OWNED (2) BENEFICIALLY OWNED
- --------------------------- ---------------------- --------------------
Carl E. Warden 2,050,990(3) 6.3%
Peter Kilbinger Hansen 1,594,122(4) 4.9%
Lars Kragh 703,709(5) 2.1%
Robert C. Gasser 375,834(6) 1.1%
Keith R. Jamaitis 107,439(7) *
George O. Deehan 121,500(8) *
William J. Lynch 116,500(9) *
Mark R. Hahn 83,334(10) *
William C. Jennings 42,000(11) *
Thomas C. Wajnert 25,000(12) *
All executive officers and directors as a 9.4%
group (11 persons) (13) 3,189,439(13)
- ---------------
* Less than 1%
(1) Unless otherwise indicated the address of each director, former
director or executive officer is c/o NYFIX, Inc., Stamford Harbor Park,
333 Ludlow Street, Stamford, Connecticut 06902.
(2) Beneficial ownership is based on 32,442,431 shares of our common stock
outstanding as of May 31, 2005. 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.
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NYFIX, INC.
(3) Based on a Schedule 13D filed in April 2005 by Carl E. Warden. Includes
(i) 100,000 shares held by the Carl and Vicki Warden Family Foundation
(the "Foundation"), of which Mr. Warden is a trustee, (ii) 359,718
shares held in a multi-generational trust (the "Trust") and (iii)
60,000 shares for which Mr. Warden has a power of attorney (the "Power
of Attorney Shares"), which enables him to vote and dispose of such
shares. Mr. Warden disclaims beneficial ownership of the shares held by
the Foundation and the Trust as well as the Power of Attorney Shares.
Does not include 1,599,165 shares held by certain adult members of Mr.
Warden's family and their children. Does not include 45,000 shares of
our common stock issuable upon exercise of options that have been
determined to be void because the stock options were not validly
granted, as described in our restatement for stock option grants.
(4) Includes 223,334 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. Does not include 1,225,625 shares of our common stock
issuable upon exercise of options that have been determined to be void
because the stock options were not validly granted, as described in our
restatement for stock option grants.
(5) Includes 325,584 shares of our common stock issuable upon exercise of
currently exercisable options. Includes 281,250 of options for which we
recognized $264,600 of compensation expense for the intrinsic value of
such options. Does not include 10,666 shares of our common stock
issuable upon exercise of options that are not currently exercisable.
(6) Includes 320,834 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 126,666 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(7) Includes 84,559 shares of our common stock issuable upon exercise of
currently exercisable options. Includes 30,000 of options for which we
recognized $2,800 of compensation expense for the intrinsic value of
such options. Does not include 11,466 shares of our common stock
issuable upon exercise of options that are not currently exercisable.
(8) Includes 116,500 shares of our common stock issuable upon exercise of
currently exercisable options, of which 67,500 shares of our common
stock issuable upon exercise, at a price of $36.00 per share, were
granted when the director started with us, but were not identified by
us as having been granted until we reviewed our stock option grants
in connection with the restatement related to such grants. Does not
include 30,000 shares of our common stock issuable upon exercise of
options that have been determined to be void because the options were
not validly granted, as described in our restatement for stock option
grants.
(9) Includes 116,500 shares of our common stock issuable upon exercise of
currently exercisable options, of which 67,500 shares of our common
stock issuable upon exercise, at a price of $38.44 per share, were
granted when the director started with us, but were not identified by
us as having been granted until we reviewed our stock option grants in
connection with the restatement related to such grants. Does not
include 30,000 shares of our common stock issuable upon exercise of
options that have been determined to be void because the stock options
were not validly granted, as described in our restatement for stock
option grants.
(10) Includes 83,334 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 61,666 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
(11) Includes 40,000 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 20,000 shares of our
common stock issuable upon exercise of options that are not currently
exercisable. In connection with these options, we will recognize
$110,000 of compensation expense for the intrinsic value of such
options over their three-year vesting period.
(12) Includes 25,000 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 45,000 shares of our
common stock issuable upon exercise of options that are not currently
exercisable.
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NYFIX, INC.
(13) Includes 1,265,646 shares of our common stock issuable upon exercise of
currently exercisable options. Does not include 407,129 shares of our
common stock issuable upon exercise of options that are not currently
exercisable. Does not include 1,330,625 shares of our common stock
issuable upon exercise of options that have been determined to be void
because the stock options were not validly granted, as described in our
restatement for stock option grants.
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
The Initial Partners and the New Partners of NYFIX Millennium are or
have been our customers.
We had a note receivable of $70,000, plus accrued interest, from a
former officer in connection with his exercise of options for our common stock,
with an annual interest rate of 5.5%, and a maturity date of May 13, 2004. In
addition, we had a note receivable of $300,000, plus accrued interest from the
same former officer, with an annual interest rate of 5.5%, and a maturity date
of July 2, 2004.
On July 27, 2004, we received notes from a former officer for $76,000
and $318,000 to replace the notes that matured on May 13, 2004 and July 2, 2004,
respectively. Both new notes mature on July 27, 2006, accrue interest annually
at 4.0%, may be prepaid at any time without penalty and are collateralized by
assets in a brokerage account of the former officer, which primarily consist of
shares of our common stock. In a separate transaction, the former officer
received an unsecured loan from an individual who was one of our directors until
October 2004. The proceeds from the loan were used to exercise stock options to
purchase our common stock, which is included in the collateral, and to repay
principal of $23,000 due on the new notes.
On July 10, 2002, Keith R. Jamaitis, then the Chief Operating Officer of
NYFIX USA, issued us a promissory note in the principal amount of $71,000. Such
note bore interest at 5.5% per annum and was scheduled to mature on July 10,
2004. The note was paid in full by Mr. Jamaitis on May 27, 2004.
On November 23, 2003, Mr. Jamaitis, then the Chief Operating Officer of
NYFIX USA, 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 $23,000 at March 31, 2005.
Mr. Jamaitis was named President of NYFIX USA and an executive officer
of our company in January 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm is Deloitte & Touche
LLP and has served in this role since the year ended December 31, 2000. In 2001,
Deloitte & Touche LLP audited our financial statements for the year ended
December 31, 1999.
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 consolidated financial statements included
in our quarterly reports on Form 10-Q were approximately $643,000 and $328,000
for the years ended December 31, 2004 and 2003, respectively.
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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 consolidated financial statements were $58,000 and $143,000
for the years ended December 31, 2004 and 2003, respectively. Such services
included accounting consultations, consents, the audit of our employee benefit
plan and 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, tax advice and research and
development tax studies for our US and foreign subsidiaries were $285,000 and
$369,000 for the years ended December 31, 2004 and 2003, respectively.
ALL OTHER FEES
The aggregate fees for professional services rendered by Deloitte &
Touche LLP for all other fees, including services related to the SEC Comment
Letter in connection with the restatement of our 1999 through 2002 consolidated
financial statements in May 2004, advisory services provided in connection with
our equity plans and audits in connection with acquisitions for 2003, were
$314,000 and $26,000 for the years ended December 31, 2004 and 2003,
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.
Audit-related fees, relating to our employee benefit plan, aggregating $15,000
and $13,000, were approved by the Audit Committee, rather than being waived
pursuant to Rule 2-01, paragraph (c)(7)(i)(C) of SEC Regulation S-X, during the
years ended December 31, 2004 and 2003, respectively.
92
NYFIX, INC.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Consolidated Financial Statements
See index to Consolidated Financial Statements on Page F-1.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts - see Note 17 to
the 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.
93
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.
94
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. Incorporated herein by
reference from Exhibit 10.11 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003
("2003 10-K").
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.). Incorporated herein by reference from Exhibit 10.11
to the Registrant's 2003 10-K.
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. Incorporated herein by
reference from Exhibit 10.11 to the Registrant's 2003 10-K.
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. Incorporated herein by reference
from Exhibit 10.11 to the Registrant's 2003 10-K.
10.27 Amendment No. 1, dated November 4, 2004, to the Employment
Agreement between Peter K. Hansen and the Registrant dated
June 24, 1991. Incorporated herein by reference from
Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 2004.
10.28 Employment Agreement between Keith R. Jamaitis and the
Registrant dated October 27, 1999. Incorporated herein by
reference from Exhibit 10.1 of Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 2004.
10.29 Employment Agreement between Jay D. Shaffer and the
Registrant dated January 1, 2005. Incorporated herein by
reference from Exhibit 99.1 of Registrant's Current Report
on Form 8-K filed on January 6, 2005.
95
NYFIX, INC.
10.30 Purchase Agreement, dated December 30, 2004, by and between
the Registrant and Whitebox Convertible Arbitrage Partners
L.P. ("Whitebox") incorporated herein by reference from
Exhibit 99.2 to the Registrant's Current Report on Form 8-K
filed on January 5, 2005.
10.31 Convertible Promissory Note, dated December 30, 2004, by
and between the Registrant and Whitebox incorporated herein
by reference from Exhibit 99.3 to the Registrant's Current
Report on Form 8-K filed on January 5, 2005.
10.32 Registration Rights Agreement, dated December 30, 2004, by
and between Registrant and Whitebox.
10.33 Agreement, dated March 30, 2005, by and between the
Registrant and Whitebox extending the Election Period on
the Convertible Promissory Note.
10.34 Agreement to Amend Convertible Promissory Note and
Registration Rights Agreement and to Waive Breaches, dated
June 24, 2005, by and among the Registrant and Whitebox.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
24 Power of Attorney (see signature page)
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended ("the Exchange Act").
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Rule 15d-14(b) of the Exchange Act and 18
U.S.C. 1350.
32.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Rule 15d-14(b) of the Exchange Act and 18
U.S.C. 1350.
(b) EXHIBITS
See Item 15(a)3.
(c) FINANCIAL STATEMENT SCHEDULES
See Item 15(a)2.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed this
28th day of June 2005 on its behalf by the undersigned, thereunto duly
authorized.
NYFIX, INC.
By: /s/ Peter Kilbinger Hansen
------------------------------
Peter Kilbinger Hansen
Chairman of the Board
and President
(Chief Executive Officer)
POWER OF ATTORNEY
NYFIX, Inc. and each of the undersigned do hereby appoint Peter
Kilbinger Hansen and 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 June 28, 2005
- -------------------------- (Principal Executive Officer)
Peter Kilbinger Hansen
/S/ MARK R. HAHN Chief Financial Officer June 28, 2005
- ---------------- (Principal Financial Officer and
Mark R. Hahn Principal Accounting Officer)
/S/ GEORGE O. DEEHAN Director June 28, 2005
- --------------------
George O. Deehan
/S/ WILLIAM C. JENNINGS Director June 28, 2005
- -----------------------
William C. Jennings
/S/ WILLIAM J. LYNCH Director June 28, 2005
- --------------------
William J. Lynch
/S/ THOMAS C. WAJNERT Director June 28, 2005
- ---------------------
Thomas C. Wajnert
97
xx
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2004 and 2003 (As Restated). F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 (As Restated) and 2002 (As Restated)........F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Loss for the Years Ended December 31, 2004, 2003 (As
Restated) and 2002 (As Restated)....................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 (As Restated) and 2002
(As Restated).......................................................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Stockholders of NYFIX, Inc.:
We have audited the accompanying consolidated balance sheets of NYFIX,
Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the three years in the period
ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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
as of December 31, 2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial statements, the
accompanying consolidated financial statements as of December 31, 2003 and for
the years ended December 31, 2003 and 2002 have been restated.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated June 28, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an adverse opinion on the effectiveness of the
Company's internal control over financial reporting because of a material
weakness.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
June 28, 2005
F-2
NYFIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-----------------------------
2004 2003
----------- --------------
(AS RESTATED
- SEE NOTE 2)
ASSETS
Current assets:
Cash and cash equivalents $ 22,405 $ 21,006
Short-term investments 4,466 3,448
Accounts receivable, less allowances of $2,107 and $1,839, respectively 13,405 10,371
Securities borrowed 138,456 1,945
Deferred income taxes -- 976
Prepaid expenses and other current assets 3,941 3,929
--------- ---------
Total current assets 182,673 41,675
Property and equipment, net 16,649 16,592
Goodwill 62,519 60,904
Acquired intangible assets, net 8,346 10,235
Investment in unconsolidated affiliate -- 3,088
Notes receivable and other amounts due from unconsolidated affiliate -- 814
Deferred income taxes -- 16,098
Other assets, net 10,904 7,378
--------- ---------
Total assets $ 281,091 $ 156,784
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,639 $ 6,664
Accrued expenses 7,579 5,442
Securities loaned 138,375 1,700
Current portion of capital lease obligations 510 531
Current portion of long-term debt and other liabilities 1,731 1,894
Deferred revenue 2,994 2,732
--------- ---------
Total current liabilities 161,828 18,963
Long-term portion of capital lease obligations 896 135
Long-term debt and other liabilities 11,625 1,137
--------- ---------
Total liabilities 174,349 20,235
--------- ---------
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; 34 33
33,752,860 shares and 33,222,475 shares issued, respectively
Additional paid-in capital 201,635 199,141
Accumulated deficit (75,773) (43,071)
Treasury stock, 1,327,230 and 1,361,300 shares, respectively, at cost (18,992) (19,480)
Notes receivable issued for common stock (67) (74)
Accumulated other comprehensive loss (95) --
--------- ---------
Total stockholders' equity 106,742 136,549
--------- ---------
Total liabilities and stockholders' equity $ 281,091 $ 156,784
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
NYFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
---------- ---------- ------------
(AS RESTATED - SEE NOTE 2)
REVENUE:
Subscription $ 40,891 $ 34,852 $ 31,715
Capital sale 8,929 8,955 8,517
Service contract 10,528 9,370 8,471
Transaction 14,787 12,732 7,109
-------- -------- --------
Total revenue 75,135 65,909 55,812
-------- -------- --------
COST OF REVENUE:
Subscription 23,692 20,419 16,106
Capital sale 3,601 3,068 2,958
Service contract 3,855 2,897 2,412
Transaction 10,182 8,283 6,946
-------- -------- --------
Total cost of revenue 41,330 34,667 28,422
-------- -------- --------
GROSS PROFIT:
Subscription 17,199 14,433 15,609
Capital sale 5,328 5,887 5,559
Service contract 6,673 6,473 6,059
Transaction 4,605 4,449 163
-------- -------- --------
Total gross profit 33,805 31,242 27,390
-------- -------- --------
OPERATING EXPENSE:
Selling, general and administrative 40,829 36,394 32,240
Restructuring charge 2,527 -- --
Research and development 959 1,367 1,488
Equity in loss of unconsolidated affiliates 74 832 2,010
Depreciation and amortization 2,304 2,649 3,274
-------- -------- --------
Total operating expense 46,693 41,242 39,012
-------- -------- --------
Loss from operations (12,888) (10,000) (11,622)
Interest expense (794) (157) (294)
Investment income 141 597 628
Other income (expense), net (98) 74 (9)
-------- -------- --------
Loss before income tax provision (benefit) (13,639) (9,486) (11,297)
Income tax provision (benefit) 19,063 (4,571) (4,290)
-------- -------- --------
Net loss $(32,702) $ (4,915) $ (7,007)
======== ======== ========
Basic and diluted loss per common share $ (1.02) $ (0.16) $ (0.23)
======== ======== ========
Basic and diluted weighted average common
shares outstanding 32,214 31,462 30,126
======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
NYFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(AS RESTATED FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ISSUED ADDITIONAL
----------------------------- PAID ACCUMULTED
SHARES PAR VALUE IN CAPITAL DEFICIT
------------ ----------- ------------ ------------
Balance January 1, 2002, as previously reported 28,869,800 $ 29 $ 127,969 $ (21,352)
Prior period adjustments (as restated, see Note 2) -- -- 13,568 (9,797)
----------- ----------- ----------- -----------
Balance January 1, 2002 (as restated, see Note 2) 28,869,800 29 141,537 (31,149)
Comprehensive loss:
Net loss (as restated, see Note 2) -- -- -- (7,007)
Net unrealized gain on available-for-sale
securities -- -- -- --
Total comprehensive loss (as restated, see Note 2)
Exercise of stock options 169,612 -- 477 --
Issuance of common stock 3,381,146 3 50,272 --
Compensation expense related to stock option
grants, (as restated, see Note 2) -- -- 2,554 --
Effect of exercise/cancellation of stock options (as
restated, see Note 2) -- -- (442) --
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 (as
restated, see Note 2) -- -- 140 --
----------- ----------- ----------- -----------
Balance December 31, 2002 (as restated, see Note 2) 32,420,558 32 194,538 (38,156)
Comprehensive loss: --
Net loss (as restated, see Note 2) -- -- -- (4,915)
Reversal of net unrealized gain on
available-for-sale securities -- -- -- --
Total comprehensive loss (as restated, see Note 2)
Exercise of stock options 279,978 -- 838 --
Issuance of common stock 521,939 1 3,031 --
Compensation expense related to stock option
grants, (as restated, see Note 2) -- -- 701 --
Effect of exercise/cancellation of stock options (as
restated, see Note 2) -- -- (166) --
Repayment of notes issued for purchase of
common stock -- -- -- --
Interest paid on notes for common stock,
net of accruals -- -- -- --
Acquisition of common stock (60,000 shares) -- -- -- --
Tax benefit from exercise of stock options (as
restated, see Note 2) -- -- 199 --
----------- ----------- ----------- -----------
Balance December 31, 2003 (as restated, see Note 2) 33,222,475 33 199,141 (43,071)
Comprehensive loss:
Net loss -- -- -- (32,702)
Foreign currency translation adjustment -- -- -- --
Total comprehensive loss
Exercise of stock options 103,211 -- 396 --
Issuance of common stock and common stock from
treasury (34,070 shares) 427,174 1 1,853 --
Compensation expense related to stock option grants -- -- 247 --
Effect of exercise/cancellation of stock options -- -- (2) --
Repayment of notes issued for purchase of
common stock -- -- -- --
Interest accrued on notes for common stock,
net of payments -- -- -- --
----------- ----------- ----------- -----------
Balance December 31, 2004 33,752,860 $ 34 $ 201,635 $ (75,773)
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
NYFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(AS RESTATED FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
NOTES RECEIVABLE OTHER TOTAL
TREASURY ISSUED COMPREHENSIVE STOCKHOLDERS'
STOCK FOR COMMON STOCK LOSS EQUITY
-------------- ---------------- ------------ -------------
Balance January 1, 2002, as previously reported $ (19,100) $ (592) $ (35) $ 86,919
Prior period adjustments (as restated, see Note 2) -- -- -- 3,771
----------- ----------- ----------- -----------
Balance January 1, 2002 (as restated, see Note 2) (19,100) (592) (35) 90,690
Comprehensive loss:
Net loss (as restated, see Note 2) -- -- -- (7,007)
Net unrealized gain on available-for-sale
securities -- -- 142 142
-----------
Total comprehensive loss (as restated, see Note 2) (6,865)
-----------
Exercise of stock options -- (70) -- 407
Issuance of common stock -- -- -- 50,275
Compensation expense related to stock option
grants, (as restated, see Note 2) -- -- -- 2,554
Effect of exercise/cancellation of stock options (as
restated, see Note 2) -- -- -- (442)
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 (as
restated, see Note 2) -- -- -- 140
----------- ----------- ----------- -----------
Balance December 31, 2002 (as restated, see Note 2) (19,100) (597) 107 136,824
Comprehensive loss:
Net loss (as restated, see Note 2) -- -- -- (4,915)
Reversal of net unrealized gain on
available-for-sale securities -- -- (107) (107)
-----------
Total comprehensive loss (as restated, see Note 2) (5,022)
-----------
Exercise of stock options -- -- -- 838
Issuance of common stock -- -- -- 3,032
Compensation expense related to stock option
grants, (as restated, see Note 2) -- -- -- 701
Effect of exercise/cancellation of stock options (as
restated, see Note 2) -- -- -- (166)
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 common stock (60,000 shares) (380) -- -- (380)
Tax benefit from exercise of stock options (as
restated, see Note 2) -- -- -- 199
----------- ----------- ----------- -----------
Balance December 31, 2003 (as restated, see Note 2) (19,480) (74) -- 136,549
Comprehensive loss:
Net loss -- -- -- (32,702)
Foreign currency translation adjustment -- -- (95) (95)
-----------
Total comprehensive loss (32,797)
-----------
Exercise of stock options -- -- -- 396
Issuance of common stock and common stock from
treasury (34,070 shares) 488 -- -- 2,342
Compensation expense related to stock option grants -- -- -- 247
Effect of exercise/cancellation of stock options -- -- -- (2)
Repayment of notes issued for purchase of
common stock -- 10 -- 10
Interest accrued on notes for common stock,
net of payments -- (3) -- (3)
----------- ----------- ----------- -----------
Balance December 31, 2004 $ (18,992) $ (67) $ (95) $ 106,742
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5A
NYFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
---------- ----------- ------------
(AS RESTATED - SEE NOTE 2)
Cash flows from operating activities:
Net loss $ (32,702) $ (4,915) $ (7,007)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 14,400 12,994 11,661
Restructuring charge 2,527 -- --
Compensation expense related to stock option grants 247 701 2,496
Deferred income taxes 19,063 (4,207) (2,868)
Provision for doubtful accounts 763 2,831 1,146
Equity in loss of unconsolidated affiliates 74 832 2,010
Loss (gain) on sale of investments 17 (235) (13)
Other, net 286 27 --
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable (3,797) 3,409 (703)
Prepaid expenses and other assets (356) 2,400 (941)
Securities borrowed (136,511) (1,945)
Deferred revenue 262 171 (598)
Accounts payable, accrued expenses and other 6,108 1,663 (1,457)
liabilities
Securities loaned 136,675 1,700 --
--------- --------- ---------
Net cash provided by operating activities 7,056 15,426 3,726
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (13,347) (7,177) (10,631)
Sales of short-term investments 12,312 14,486 32,992
Capital expenditures for property and equipment (6,661) (5,290) (4,566)
Capitalization of product enhancement costs (6,482) (5,345) (2,829)
Proceeds from sale of equipment -- 2 387
Cash acquired from acquisitions, net of payments/(payments 1,380 (97) (6,795)
for acquisitions, net of cash acquired)
Investment in unconsolidated affiliates -- -- (5,000)
Loans and advances to unconsolidated affiliates, (205) (2,408) (324)
net of repayments
--------- --------- ---------
Net cash (used in) provided by investing activities (13,003) (5,829) 3,234
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings 8,600 -- --
Financing costs (283) -- --
Repayment of borrowings (711) -- --
Principal payments under capital lease obligations (571) (1,087) (1,192)
Repayment of notes issued for purchase of common stock 10 445 70
Net proceeds from issuance of common stock 396 838 407
--------- --------- ---------
Net cash provided by (used in) financing activities 7,441 196 (715)
Effect of exchange rate changes on cash (95) -- --
--------- --------- ---------
Net increase in cash and cash equivalents 1,399 9,793 6,245
Cash and cash equivalents, beginning of year 21,006 11,213 4,968
--------- --------- ---------
Cash and cash equivalents, end of year $ 22,405 $ 21,006 $ 11,213
========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
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, is incorporated in Delaware and headquartered in Stamford, Connecticut.
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, in San Francisco and in
Madrid. The Company operates redundant data centers in the northeastern United
States and data center hubs in London, Amsterdam, Hong Kong and Tokyo. 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 broker-dealers registered with the National
Association of Securities Dealers ("NASD") or the Financial Services Authority
("FSA"), 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.
On February 1, 2002, the Company acquired an additional 30% ownership
interest in NYFIX Millennium, L.L.C. ("NYFIX Millennium") resulting in a total
ownership interest of 80% and 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 4). If and when NYFIX Millennium achieves
profitability, 24% of its profits will be allocated to the other partners in
accordance with the contractual agreement among the parties.
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 consolidated the financial statements
of Renaissance (see Note 4).
Prior to March 29, 2004, the Company's 40% ownership interest in
EuroLink Network, Inc. ("EuroLink") was accounted for under the equity method.
Effective March 29, 2004, the Company acquired the remaining 60% of EuroLink,
which the Company did not already own. As of that date, the Company consolidated
EuroLink (see Note 4).
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. 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.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Securities and
Exchange Commission ("SEC") 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 exists 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, described as follows:
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.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Capital sale revenue, which is primarily comprised of software and
capital equipment sales and professional service fees, 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 pertaining to software sales 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, typically characterized as
a percentage of the original capital sale amount, are generally for an initial
term of one year with automatic renewal periods unless the Company receives
prior notice of cancellation.
Transaction revenue primarily consists of per-share commissions charged
to customers who send and receive a match and execution in the Company's
Alternative Trading System ("ATS") and 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 that is invoiced in advance of the service being
performed is deferred and recognized as revenue in the period earned and until
earned it 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.
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.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 13, ACCOUNTING FOR LEASES ("SFAS No. 13"), rent expense on an operating
lease is charged to operations on a straight-line basis over the lease term. In
accordance with FASB Technical Bulletin ("FTB") 85-3, ACCOUNTING FOR OPERATING
LEASES WITH SCHEDULED RENT INCREASES, rent free periods in an operating lease
are included in the straight-line rent expense calculation and such reduction in
rent payments is recorded as a deferred liability. Pursuant to SFAS No. 13 and
FTB 88-1, ISSUES RELATING TO ACCOUNTING FOR LEASES ("FTB 88-1"), tenant
allowances are incentives that are recorded as a deferred liability. The
deferred liability is amortized as a credit to rent expense on a straight-line
basis over the lease term.
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 $1.0 million, $1.4 million, and
$1.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company expenses advertising costs as incurred. Advertising expense
was $1.0 million, $0.8 million, and $1.0 million for the years ended December
31, 2004, 2003 and 2002, 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 treasury bills and auction rate certificates. The cost
basis of short-term investments was $4.5 million and $3.4 million at December
31, 2004 and 2003, respectively. 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 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. There were no unrealized gains or losses as of December
31, 2004 and 2003.
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
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. The allowance for doubtful accounts was $2.1 million
and $1.8 million at December 31, 2004 and 2003, respectively. The provision for
doubtful accounts was $0.8 million, $2.8 million and $1.1 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
BUSINESS CONCENTRATIONS AND CREDIT RISK
The Company's revenue is derived from the financial services
marketplace, primarily the brokerage community. For the years ended December 31,
2004, 2003 and 2002, no single customer accounted for more than 10% of revenue.
As of December 31, 2004 and 2003, no single customer accounted for more than 10%
of accounts receivable.
INVENTORY
Inventory was $0.9 million and $0.8 million at December 31, 2004 and
2003, 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. Pursuant to SFAS No. 13 and FTB 88-1, leasehold improvements are
capitalized and tenant allowances are recorded as a deferred liability and
amortized as a credit to rent expense on a straight-line basis over the lease
term. Depreciation of property and equipment is provided using the straight-line
method over the assets' estimated useful lives. Leasehold improvements are
amortized over the shorter of the assets' economic lives or the lease term. In
situations where the Company determines that the useful life of long-lived asset
should be revised, the Company depreciates 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 date of their respective acquisition. Net
assets of acquired businesses were 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 ("SFAS No. 142") 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 16. 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, whereby 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
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 2004, 2003 and 2002.
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 long-lived assets and 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,
2004, 2003 and 2002.
DEFERRED FINANCING COSTS
The costs related to the issuance of the convertible note on December
30, 2004 of $0.3 million have been capitalized and will be amortized over the
term of the note.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES ("SFAS No. 109"), which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated financial statements or tax
returns using presently enacted income tax rates. To the extent the Company
believes there will not be sufficient future taxable income to utilize its
deferred tax assets prior to their expiration, the Company would record a
valuation allowance against the unrealizable amount, and record a charge against
operating results. Where there are cumulative operating losses in recent years,
SFAS No. 109 requires, except in very limited circumstances, that a valuation
allowance be established. The Company did not have operating income in the years
ended December 31, 2004, 2003 or 2002. The Company previously estimated that its
deferred tax assets, consisting primarily of net operating loss and other tax
credit carryforwards, would be realized and no valuation allowance was required,
based on revenue and operating expense assumptions. During the third quarter of
2004, the Company's general and administrative expenses related to compliance
with Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") and legal
expenses increased more than forecasted and the Company expects these costs to
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
remain at this higher level in the near term. These cost increases, together
with revenues from its Transaction Services segment being impacted by much lower
than expected volumes in the equity markets, particularly during the month of
September, were the primary reasons the Company reduced its forecast for the
near-term. Accordingly, the Company established a valuation allowance on the
deferred tax assets of $25.6 million as of December 31, 2004. Until the Company
can achieve and sustain an appropriate level of profitability, it plans to
maintain a valuation allowance on its deferred tax assets. See Note 11.
FINANCIAL INSTRUMENTS
The carrying value for all current assets and current liabilities
approximates fair value because of their short-term nature. The carrying value
of the $7.5 million convertible note approximates fair value as its terms are
based upon the actual, private market transaction occurring on December 30,
2004.
FOREIGN CURRENCY TRANSLATION
For most of the Company's foreign operations, primarily its London-based
subsidiary, NYFIX International, Ltd. ("NYFIX International"), which commenced
operations in 2004, local currencies are considered the functional currency. The
translation adjustments were recorded in "accumulated other comprehensive loss"
in the accompanying consolidated balance sheets. The U.S. dollar is the
functional currency for our London operation that is a branch of a Delaware
Corporation conducting its business in both U.S. dollars and pounds sterling.
The monetary assets and liabilities of our foreign operations 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. Local currency transactions of the London branch
of the Delaware Corporation are remeasured into U.S. dollars, with the resulting
exchange adjustments included in income. Aggregate foreign currency gains from
remeasurement were $280,000, $398,000 and $430,000 for the years ended December
31, 2004, 2003 and 2002, respectively, and were included in "selling, general
and administrative expense" in the accompanying consolidated statements of
operations.
COMPREHENSIVE INCOME (LOSS)
The Company reflects other comprehensive income (loss), which consists
of unrealized gains and losses on available-for-sale securities and unrealized
foreign currency translation adjustments, as a separate component of
stockholders' equity as required by SFAS No. 130, REPORTING COMPREHENSIVE
INCOME.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation 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 ("SFAS No. 123"). Stock-based compensation expense of
$0.2 million, $0.7 million and $2.5 million was included in operating results
for the years ended December 31, 2004, 2003 and 2002, respectively, for the
intrinsic value of certain stock options where the fair value of the Company's
common stock on the measurement date was in excess of the exercise price. The
following table illustrates the effect on net loss and loss per common share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
as required by SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE, to stock-based compensation for the years ended
December 31, 2004, 2003 and 2002 (also see Note 15):
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEAR ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------- ------------ ---------
(AS RESTATED - SEE NOTE 2)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss, as reported $ (32,702) $ (4,915) $ (7,007)
Add: Stock-based compensation expense included in 247 517 1,897
reported net loss, net of tax
Deduct: Stock-based compensation expense determined (3,181) (4,239) (9,822)
under the fair value method, net of tax
----------- ----------- --------
Pro forma net loss $ (35,636) $ (8,637) $(14,932)
=========== =========== ========
Basic and diluted loss per common share:
As reported $ (1.02) $ (0.16) $ (0.23)
=========== =========== ========
Pro forma $ (1.11) $ (0.27) $ (0.50)
=========== =========== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123(R), SHARE-BASED PAYMENTS
("SFAS No. 123 (R)"). SFAS No. 123(R) is a revision of SFAS No. 123 and
supersedes APB No. 25 and its related implementation guidance. SFAS 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity for goods or services. It also addressed transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS No. 123(R) focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123(R) allows entities to
apply a modified retrospective application to periods before the required
effective date. SFAS No. 123(R) is effective for public entities that do not
file as small business issuers as of the beginning of the first annual reporting
period that begins after June 15, 2005, or in the Company's case January 1,
2006. The Company is evaluating the impact of SFAS No. 123(R), which could have
a material impact on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY
ASSETS ("SFAS No. 153"). SFAS No. 153 addresses the measurement of exchanges of
nonmonetary assets. SFAS No. 153 eliminates the exception from the fair value
measurement for nonmonetary exchanges of similar product assets in paragraph
21(b) of APB Opinion No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS, and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company has not completed its analysis of the impact of SFAS No. 153
on the Company, but as the Company has not been involved in significant
nonmonetary exchanges in the past, it does not expect that the provisions of
SFAS No. 153 will have a material impact on its consolidated financial
statements.
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS ("SFAS
No. 151"). SFAS No. 151 amends Accounting Research Bulleting ("ARB") No. 43
INVENTORY PRICING to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges. SFAS No. 151 also requires that allocation of fixed
production overheads to the cost of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company has not
completed its analysis of the impact of SFAS No. 151, but as inventory is not a
material component of its consolidated financial statements, the Company does
not expect that the provisions of SFAS No. 151 will have a material impact on
its consolidated financial statements.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the issuance of the consolidated financial statements as
of and for the year ended December 31, 2003, management of the Company
determined that it incorrectly accounted for a) compensation expense
attributable to stock options granted; and b) deferred income taxes in
connection with certain acquisitions. As a result, the consolidated financial
statements as of December 31, 2003 and for the years ended December 31, 2003 and
2002 have been restated from the amounts previously reported.
The Company accounted for compensation expense attributable to stock
options granted to certain employees and directors between 1993 and 2003
incorrectly as the intrinsic value of these stock options was calculated as of a
date other than the measurement date. Correcting this error had the effect of
increasing the net loss by $0.5 million and $2.0 million for the years ended
December 31, 2003 and 2002, respectively.
The Company accounted for deferred income taxes in connection with
certain acquisitions incorrectly, whereby the Company did not correctly identify
and account for the allocation of the deferred tax assets and liabilities
acquired.
In addition, the Company reclassified its equity in loss of
unconsolidated affiliates of $0.8 million and $0.6 million for the years ended
December 31, 2003 and 2002, respectively, from "other income (expense), net" to
"equity in loss of unconsolidated affiliates".
The net effect of the adjustments made to restate the Company's
previously issued consolidated financial statements, with respect to the
accounting described above, was for the Company to increase its total assets by
$4.6 million, and increase its total liabilities and stockholders' equity by
$4.6 million as of December 31, 2003.
The increase in total assets includes:
a) an increase in goodwill of $4.9 million representing the offset
of the amount of additional deferred tax liabilities related to
certain acquisitions; and partially offset by
b) a decrease in deferred tax assets, net, of $0.3 million
representing the aforementioned additional deferred tax
liabilities of $4.9 million related to certain acquisitions,
which was substantially offset by incremental deferred tax assets
of $4.6 million attributable to the compensation expense related
to stock options granted.
The increase in total liabilities and stockholders' equity includes an
increase in:
a) accrued expenses of $0.6 million representing payroll taxes and
interest expense due as a result of certain non-qualified stock
options which were previously exercised;
b) additional paid-in capital of $16.3 million representing an
aggregate compensation expense attributable to stock options
granted of $16.4 million, which was partially offset by exercises
and cancellations of stock options of $0.1 million; and
c) accumulated deficit of $12.3 million representing the
aforementioned aggregate compensation expense attributable to
stock options granted, including the aforementioned payroll taxes
and interest, of $17.0 million, net of income tax benefit of $4.7
million.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following tables summarize the significant effects of the
restatement on the Company's consolidated statements of operations for the years
ended December 31, 2003 and 2002 and the consolidated balance sheet as of
December 31, 2003.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2003 2002
-------------------------- -------------------------
AS
AS PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
--------- ----------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Consolidated statements of operations data:
Cost of revenue:
Subscription $ 20,403 $ 20,419 $ 16,105 $ 16,106
Capital sale 3,066 3,068 2,958 2,958
Service contract 2,859 2,897 2,298 2,412
Transaction 8,273 8,283 6,945 6,946
-------- -------- -------- --------
Total cost of revenue 34,601 34,667 28,306 28,422
-------- -------- -------- --------
Operating expense:
Selling, general and administrative 35,763 36,394 29,884 32,240
Research and development 1,353 1,367 1,386 1,488
Equity in loss of unconsolidated -- 832 1,340 2,010
affiliates
Depreciation and amortization 2,649 2,649 3,274 3,274
-------- -------- -------- --------
Total operating expense 39,765 41,242 35,884 39,012
-------- -------- -------- --------
Loss from operations (8,457) (10,000) (8,378) (11,622)
Interest expense (125) (157) (262) (294)
Other income (expense), net (758) 74 (621) (9)
-------- -------- -------- --------
Loss before income tax benefit (8,743) (9,486) (8,633) (11,297)
Income tax benefit (4,370) (4,571) (3,588) (4,290)
-------- -------- -------- --------
Net loss $ (4,373) $ (4,915) $ (5,045) $ (7,007)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.14) $ (0.16) $ (0.17) $ (0.23)
======== ======== ======== ========
AS OF DECEMBER 31,
2003
----------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
----------- -----------
(IN THOUSANDS)
Consolidated balance sheet data:
Goodwill $ 55,966 $ 60,904
Deferred income taxes:
Current portion 976 976
Non-current portion 16,424 16,098
Total assets 152,172 156,784
Accrued expenses 4,807 5,442
Total current liabilities 18,328 18,963
Total liabilities 19,600 20,235
Additional paid-in capital 182,863 199,141
Accumulated deficit (30,770) (43,071)
Total stockholders' equity 132,572 136,549
Total liabilities and stockholders' equity 152,172 156,784
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consisted of the
following:
DECEMBER 31,
------------------ USEFUL LIVES
2004 2003 (YEARS)
-------- ------- ------------
(IN THOUSANDS)
Computer software $ 4,871 $ 4,456 4 - 5
Leasehold improvements 3,217 2,071 2 - 10
Furniture and equipment 7,054 6,548 3 - 7
Subscription and data center equipment 33,240 27,993 3 - 5
------- ------
Total property and equipment, gross 48,382 41,068
Less: Accumulated depreciation 31,733 24,476
------- -------
Total property and equipment, net $16,649 $16,592
======= =======
Assets held under capital leases, included in the above at December 31,
2004 and 2003, consisted of the following:
DECEMBER 31,
------------------ USEFUL LIVES
2004 2003 (YEARS)
-------- ------- ------------
(IN THOUSANDS)
Furniture and equipment $ 114 $ 115 3 - 5
Data center equipment 4,368 2,969 3 - 5
------ -----
Total property and equipment held under 4,482 3,084
capital leases, gross
Less: Accumulated depreciation 2,678 1,877
------ ------
Total property and equipment held under
capital leases, net $1,804 $1,207
====== ======
Depreciation and amortization expense for property and equipment was
$7.9 million, $8.0 million and $7.7 million for the years ended December 31,
2004, 2003 and 2002, respectively. Of these amounts, $5.6 million, $5.4 million
and $4.4 million for the years ended December 31, 2004, 2003 and 2002,
respectively, were included in cost of revenue. Amortization expense for assets
held under capital leases included above was $0.9 million, $0.8 million and $1.2
million for the years ended December 31, 2004, 2003 and 2002, respectively.
4. ACQUISITIONS, GOODWILL AND ACQUIRED INTANGIBLE ASSETS
ACQUISITIONS
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. The preferred stock automatically converted into a 40% common
stock interest on March 6, 2004.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Effective March 29, 2004, the Company acquired the remaining 60% of
EuroLink that it did not already own for $24,000 in cash and promissory notes
issued and payable in the Company's common stock or cash, at the Company's
option, in the aggregate having a fair value of $0.5 million. The fair value of
the notes, which were payable on April 28, 2005, was included in "current
portion of long-term debt and other liabilities" in the accompanying
consolidated balance sheet as of December 31, 2004. The Company intends to pay
the notes using its common stock. Due to the delay in issuing its 2004
consolidated financial statements, the Company was unable to issue its common
stock to satisfy this debt. The Company intends to settle this obligation
through the issuance of common stock as soon as practicable subsequent to the
filing of its 2004 Annual Report on Form 10-K.
In connection with the acquisition, the Company contributed to
EuroLink's capital certain obligations that EuroLink owed to the Company,
including notes receivable and advances outstanding as of March 29, 2004,
aggregating $1.0 million.
Since its initial investment and through March 29, 2004, the Company had
recorded its equity in the losses of EuroLink aggregating $1.0 million,
including $0.1 million, $0.4 million and $0.5 million for the three months ended
March 31, 2004 and the years ended December 31, 2003 and 2002, respectively.
Such losses were included in "equity in loss of unconsolidated affiliates" in
the accompanying consolidated statements of operations. In addition, the Company
had notes receivable from EuroLink at December 31, 2003 of $0.6 million, bearing
an interest rate of 6.0%. The Company also advanced to EuroLink $0.2 million
during the year ended December 31, 2004 to fund certain operating costs. Such
notes and advances were reflected as "notes receivable and other amounts due
from unconsolidated affiliate" in the accompanying consolidated balance sheet at
December 31, 2003.
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 Company's key consideration for the acquisition of
EuroLink was the expected synergy to be achieved by combining EuroLink with
NYFIX International, the Company's recently formed London-based broker-dealer
subsidiary through which it plans to capture electronic order flow to and from
the United States and within Europe.
The total purchase price for 100% of EuroLink, consisting of the
Company's pre-acquisition equity investment basis of $3.0 million, the notes
receivable and advances of $1.0 million, the promissory notes in the aggregate
of $0.5 million and acquisition-related expenses of $0.1 million, was $4.6
million. The excess of the purchase price over the fair value of the net assets
acquired was $2.9 million and has been recorded as goodwill.
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. 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
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(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 $2.2 million in the aggregate through
June 30, 2003 to fund certain operating costs and capital expenditures of
Renaissance. 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, which were included in "equity in loss of
unconsolidated affiliates" in the accompanying consolidated statements of
operations for the years ended December 31, 2003 and 2002, respectively.
Effective 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 Securities 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
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 8). The fair value of the notes
was included in "current portion of long-term debt and other liabilities" and
"long-term debt and other liabilities" in the accompanying consolidated balance
sheets at December 31, 2004 and December 31, 2003. On April 7, 2004 and on
September 27, 2004, pursuant to notice from certain payees after default on the
promissory notes, the Company issued, in the aggregate, 388,616 shares of its
common stock (of which 13,270 was issued from its treasury stock) as payment for
$2.0 million in principal amount of such notes. On July 2, 2004, the Company
issued 51,828 shares of its common stock as the first principal payment under
the promissory notes, valued at $0.2 million. On September 23, 2004, the Company
entered into amended promissory notes and settlement agreements with certain
unitholders of Renaissance (the "Amended Notes"). Pursuant to the Amended Notes,
on October 27, 2004, the Company issued an additional 20,800 shares of its
common stock to such unitholders from its treasury stock in connection with a
price protection provision. As a result, the Company recorded $0.1 million of
loss on the extinguishment of the promissory notes that were in default. Such
amount is included in "other income (expense), net" in the accompanying
consolidated statement of operations for the year ended December 31, 2004.
In connection with the acquisition, the Company contributed to
Renaissance's capital certain obligations that Renaissance owed to the Company,
including the 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 classified these
60,000 shares as "treasury stock" in the accompanying consolidated balance
sheets at December 31, 2004 and 2003.
The total purchase price, including the Company's pre-acquisition equity
investment 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.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $44.3 million and had been recorded as goodwill
Of the 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 $1.2 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.
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.
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.
In 1999, NYFIX Millennium was formed by the Company and seven global
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
collectively invested $14.0 million in NYFIX Millennium in exchange a 50%
ownership interest in NYFIX Millennium. The Company invested $2.0 million and
owned the remaining 50%. The Company purchased from the Initial Partners an
option to buy an additional 30% ownership interest (for a total of 80% ownership
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
interest) in NYFIX Millennium (the "Option")by issuing to the Initial Partners
an aggregate of 1,968,750 shares of the Company's common stock with a fair value
of $34.6 million. The Option, which had no expiration date, was exercisable at
any time, by issuing additional shares of the Company's common stock to the
Initial Partners. The fair value of the Company's common stock issued to the New
Partners was $20.6 million in excess of the $14 million Initial Partners' cash
equity investment in NYFIX Millennium in 1999. The Company allocated $4.2
million to the fair value of the Option and wrote off the remaining $16.4
million in 1999. As the Option had an indefinite life, it was not amortized.
During 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 collectively invested $8.0 million in NYFIX Millennium in exchange for
an ownership interest of NYFIX Millennium. To maintain its 50% ownership
interest in NYFIX Millennium, the Initial Partners agreed to be diluted and 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 30%
ownership interest (for a total of 80% ownership interest) in NYFIX Millennium
by issuing to the New Partners, an aggregate of 376,000 shares of its common
stock with a fair value of $8.4 million. 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 fair value of the Option. As the Option had an
indefinite life, it was not amortized. Hereinafter, references to the "Option"
include the option received from both the Initial Partners and the New Partners.
Effective February 1, 2002, the Company exercised the Option and
increased its ownership interest in NYFIX Millennium to 80% by issuing 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. 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 $7.1 million. The Company determined, in the fourth quarter of 2003, the
existence of deferred tax liabilities of $0.2 million related to its acquisition
of an 80% ownership interest in NYFIX Millennium. The Company accounted for this
incremental deferred tax liability as an increase to goodwill.
As previously mentioned in Note 1, 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 statement of operations for the one month period
ended January 31, 2002 was as follows:
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MONTH ENDED
JANUARY 31,
2002
-------------------
(IN THOUSANDS)
Revenue:
Transaction $ 77
Cost of Revenue:
Transaction 105
-------
Gross Profit:
Transaction (28)
Operating Expense:
Selling, general and administrative 1,273
Depreciation and amortization 117
-------
Total operating expense 1,390
Interest expense (38)
Interest income 20
-------
Net loss $(1,436)
=======
Financial information reconciling NYFIX Millennium's statement of
operations to the Company's equity in loss of NYFIX Millennium for the one month
period ended January 31, 2002 was as follows:
MONTH ENDED
JANUARY 31,
2002
---------------
(IN THOUSANDS)
Net loss $(1,436)
Elimination of inter-company interest 38
-------
Equity in loss of NYFIX Millennium $(1,398)
=======
The equity in loss of NYFIX Millennium was included in "equity in loss
of unconsolidated affiliates" in the accompanying consolidated statement of
operations for the year ended December 31, 2002.
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.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NYFIX
EUROLINK RENAISSANCE MILLENNIUM JAVELIN
---------- ----------- ----------- --------
Assets: (IN THOUSANDS)
Current assets $ 309 $ 129 $ 7,600 $ 5,598
Property and equipment 114 1,175 4,731 1,345
Intangible assets 680 3,100 2,200 8,800
Goodwill 2,865 8,240 7,106 44,274
Deferred tax assets 573 -- -- 3,931
Other assets 107 -- 74 288
------- ------- ------- -------
Total assets acquired 4,648 12,644 21,711 64,236
------- ------- ------- -------
Liabilities:
Current liabilities 83 706 3,904 5,244
Deferred tax liabilities -- 1,753 200 3,600
Subordinated loan payable to -- -- 6,000 --
NYFIX, Inc.
Long-term debt -- -- -- 166
Other long-term liabilites -- -- -- 356
------- ------- ------- -------
Total liabilities assumed 83 2,459 10,104 9,366
------- ------- ------- -------
Net assets acquired $ 4,565 $10,185 $11,607 $54,870
======= ======= ======= =======
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 do not
include the 2004 acquisition of EuroLink as its pro forma effect was not
significant. 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:
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEAR ENDED DECEMBER 31,
---------------------------
2003 2002
----------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Revenue $ 65,919 $ 59,573
=========== ========
Net loss $ (6,031) $(11,413)
=========== ========
Loss per common share - basic and diluted $ (0.19) $ (0.38)
=========== ========
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill and acquired intangible assets at December 31, 2004 and 2003
primarily relate to the Company's 2004 acquisition of EuroLink, 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. As of October 1, 2004, 2003 and 2002, the Company performed
its annual tests for impairment on a reporting unit basis using the discounted
cash flow valuation method. There was no indication of impairment to the value
of goodwill for the years ended December 31, 2004 and 2003.
The Company determined, in the fourth quarter of 2003, the existence of
deferred tax liabilities related to its acquisition of NYFIX Millennium of $0.2
million and deferred tax assets related to the acquisition of Javelin of $0.4
million. The Company accounted for these adjustments in its net deferred tax
asset as adjustments to goodwill. In addition, the Company recorded the $1.3
million of net proceeds it received from the Javelin settlement in the first
quarter of 2004 as a reduction in goodwill.
The changes in the carrying amount of goodwill by reportable segment for
the years ended December 31, 2004 and 2003 were as follows:
TECHNOLOGY TRANSACTION
SERVICES SERVICES TOTAL
(IN THOUSANDS)
Balance as of January 1, 2003 $ 45,921 $ 6,940 $ 52,861
Goodwill acquired or (adjusted) during year:
NYFIX Millennium (adjustment) -- 200 200
Javelin (adjustment) (397) -- (397)
Renaissance 8,240 -- 8,240
-------- -------- --------
Balance as of December 31, 2003 53,764 7,140 60,904
Goodwill acquired or (adjusted) during year:
EuroLink -- 2,865 2,865
Javelin (adjustment) (1,250) -- (1,250)
-------- -------- --------
Balance as of December 31, 2004 $ 52,514 $ 10,005 $ 62,519
======== ======== ========
Acquired intangible assets consisted of the following at December 31,
2004 and 2003:
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEAR ENDED DECEMBER 31,
----------------------- USEFUL LIVES
2004 2003 (YEARS)
-------- -------- -------------
(IN THOUSANDS)
Existing technology $10,600 $10,600 5 - 7
Customer related intangibles 3,380 2,700 5
Trademarks and other 800 800 6 - 14
------- ------
Total intangible assets, gross 14,780 14,100
Less: Accumulated amortization 6,434 3,865
------- ------
Total intangible assets, net $ 8,346 $10,235
======= =======
Amortization expense of acquired intangible assets was $2.6 million,
$2.3 million and $1.6 million for the years ended December 31, 2004, 2003 and
2002, respectively, and was included in "cost of revenue" in the accompanying
statements of operations.
Based on identified intangible assets recorded at December 31, 2004, the
future amortization expense for the next five years is expected to be as
follows:
AMOUNT
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------
2005 $ 2,595
2006 2,595
2007 1,471
2008 631
2009 575
Thereafter 479
--------
Future amortization expense $ 8,346
========
5. BROKER-DEALER OPERATIONS
BROKER-DEALER NET CAPITAL REQUIREMENTS
The SEC, the NASD and the FSA, 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 NASD's and the FSA's net capital rules,
to which the Company's broker-dealer subsidiaries are subject. The failure by
one of these subsidiaries to maintain its required net capital may lead to
suspension or revocation of its registration by the SEC and its suspension or
expulsion by the NASD, the FSA 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 the Company's broker-dealer
subsidiaries could limit that subsidiary's operations, 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.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NYFIX Clearing Corporation ("NYFIX Clearing"), NYFIX Transaction
Services Inc., and NYFIX Millennium, as registered broker-dealers, are subject
to the minimum net capital requirements of the NASD. NYFIX International, as a
broker-dealer registered with the FSA in the United Kingdom, is also subject to
minimum net capital requirements. In 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 the Depository
Trust and Clearing Corporation ("DTCC"). In 2004, the Company provided an
aggregate additional capital of $1.3 million in the form of capital
contributions and subordinated loans to enable its US-based broker-dealer
subsidiaries to individually and collectively exceed their net capital
requirements, and another $1.3 million to NYFIX International in the form of a
capital contribution as a condition of NYFIX International's approval by the
FSA. At December 31, 2004, the Company's broker-dealer subsidiaries had
aggregate net capital of $12.7 million, which exceeded the aggregate minimum
and, in the case of NYNEX Clearing, its excess minimum net capital required by
$1.7 million. 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.
SECURITIES BORROWED AND SECURITIES LOANED
In the normal course of its brokerage clearing operations, NYFIX
Clearing settles customer securities transactions. This activity may expose
NYFIX Clearing to off-balance sheet risk arising from the potential that
customers or counterparties may fail to satisfy their obligations. In the event
customers and counterparties fail to satisfy their obligations, NYFIX Clearing
may be required to purchase or sell financial instruments, at unfavorable market
prices, to satisfy those obligations. NYFIX Clearing mitigates the risk of
customer non-performance by requiring introducing brokers to maintain cash
deposits. NYFIX Clearing believes that the settlement of these transactions will
not have a material effect on NYFIX Clearing's statement of financial condition.
Liabilities to brokers and dealers related to unsettled transactions
(i.e., securities failed-to-receive) are recorded at the amounts for which the
securities were acquired and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed-to-receive, NYFIX
Clearing may, under industry regulations, purchase the underlying securities in
the market and seek reimbursement for any losses from the counterparty.
NYFIX Clearing's customer financing and securities settlement activities
require NYFIX Clearing to pledge customer securities in support of secured
financing sources such as securities loaned. In the event that the counterparty
is unable to meet its contractual obligation to return customer securities
pledged as collateral, NYFIX Clearing may be exposed to the risk of acquiring
the securities at prevailing market prices in order to satisfy customer
obligations. NYFIX Clearing controls this risk by monitoring the market value of
securities pledged on a daily basis and requiring adjustments of collateral
levels in the event of excess market exposure. Additionally, NYFIX Clearing
establishes credit limits for such activities and monitors compliance on a daily
basis. At December 31, 2004, the market value of customer securities pledged
under these secured financing transactions approximated the amounts due.
NYFIX Clearing may at times, because of processing errors, maintain
equity securities on both a long and short basis. Both long and short positions
may result in losses or gains to NYFIX Clearing as market value of securities
fluctuate. Long and short positions are marked to market daily and are
continuously monitored by NYFIX Clearing with the intent to liquidate the
positions. NYFIX Clearing is engaged in various trading activities in which
counterparties primarily include broker-dealers. In the event counterparties do
not fulfill their obligations, NYFIX Clearing may be exposed to credit risk. The
risk of default depends on the creditworthiness of the counterparty. It is NYFIX
Clearing's policy to review, as necessary, the credit standing of each
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
counterparty. NYFIX Clearing does not anticipate nonperformance by the
counterparties in the above situations.
NYFIX Clearing earns interest revenue from the cash collateral it
provides to the lender of securities and pays interest on the cash collateral
received from the borrower of the securities. Net revenue related to these
securities loan transactions, which commenced in December 2003, was $0.1 million
and nil for the years ended December 31, 2004 and 2003, respectively, and was
included in "transaction revenue" in the accompanying consolidated statement of
operations. "Securities borrowed" and "securities loaned" are recorded based on
the amounts of cash collateral advanced or received in the accompanying
consolidated balance sheets.
Securities borrowed consisted of the following at December 31, 2004 and
2003:
DECEMBER 31,
-----------------------
2004 2003
--------- ---------
(IN THOUSANDS)
Stock receivable (matched and reserved) $136,187 $ 1,466
Other 2,269 479
-------- --------
Total securities borrowed $138,456 $ 1,945
======== ========
Securities loaned consisted of the following at December 31, 2004 and
2003:
DECEMBER 31,
----------------------
2004 2003
-------- ---------
(IN THOUSANDS)
Stock payable $136,229 $ 1,385
Other 2,146 315
-------- --------
Total securities loaned $138,375 $ 1,700
======== ========
6. RESTRUCTURING CHARGE
Effective February 1, 2004, the Company entered into an agreement to
lease additional space at its New York City offices at 100 Wall Street. In
connection with this agreement, the Company ceased use, in the second quarter of
2004, of one of its other offices on Wall Street, consolidated its operations
into the new space and eliminated 14 staff positions. In accordance with SFAS
No. 146, ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES, the Company recorded a
charge to operations of $2.5 million as of June 30, 2004. This charge included
the fair value of the remaining rent payments (net of estimated sub-lease
income), severance and write-offs of property and equipment.
The Company included the restructuring charge liabilities within
"current portion of long-term debt and other liabilities" and "long-term debt
and other liabilities" in the accompanying consolidated balance sheet at
December 31, 2004, and classified the operating expense as "restructuring
charge" in the accompanying consolidated statement of operations for the year
ended December 31, 2004. The restructuring charge established by the Company,
and activities related thereto, are summarized as follows:
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
BALANCE AT NON-CASH BALANCE AT
JANUARY 1, CASH USES AND DECEMBER 31,
2004 CHARGES USES OTHER 2004
------------- ---------- --------- ------- -----------
(in thousands)
Lease costs, net of $ -- $2,097 $ (501) $ 144 $1,740
estimated sublease income
Property and equipment -- 319 -- (319) --
write-offs
Severance -- 111 (96) (15) --
------------- ------ ------ ------ ------
Total $ -- $2,527 $ (597) $ (190) 1,740
============= ====== ====== ======
Less: current portion 524
------
Long-term portion $1,216
======
7. OTHER BALANCE SHEET INFORMATION
Prepaid expenses and other current assets consisted of the following
at December 31, 2004 and 2003:
DECEMBER 31,
--------------------
2004 2003
------- -------
(IN THOUSANDS)
Income taxes receivable $1,338 $1,350
Prepaid expenses 1,010 1,246
Inventory 895 806
Other 698 527
------ ------
Total prepaid expenses and other current assets $3,941 $3,929
====== ======
Other assets, net consisted of the following at December 31, 2004 and
2003:
DECEMBER 31,
---------------------
2004 2003
-------- --------
(IN THOUSANDS)
Product enhancement costs, gross $23,107 $16,625
Less: Accumulated amortization 13,932 10,046
------- -------
Product enhancement costs, net 9,175 6,579
Other, net 1,729 799
------- -------
Total other assets, net $10,904 $ 7,378
======= =======
Amortization expense of deferred product enhancement costs of $3.9
million, $2.7 million and $2.4 million for the years ended December 31, 2004,
2003 and 2002, respectively, was included in "cost of revenue" on the
accompanying consolidated statements of operations. Amortization expense of
other assets of $74,000, $13,000 and $4,000 for the years ended December 31,
2004, 2003 and 2002, respectively, was included in "depreciation and
amortization expense" on the accompanying consolidated statements of operations.
Accrued expenses consisted of the following at December 31, 2004 and
2003:
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,
------------------
2004 2003
-------- ------
(IN THOUSANDS)
Taxes, other than income taxes $2,858 $2,360
Payroll and payroll related 1,883 1,260
Commissions 810 643
Other 2,028 1,179
------ ------
Total accrued expenses $7,579 $5,442
====== ======
8. DEBT AND CAPITAL LEASE OBLIGATIONS
CONVERTIBLE DEBT
On December 30, 2004, the Company issued a $7.5 million Convertible Note
with an interest rate of 5% due in December 2009 (the "Note") through a private
placement to a lender. The interest is payable in cash or, at the Company's
option as described below, by the issuance of shares of its common stock,
semi-annually in arrears on June 30 and December 30 of each year, beginning June
30, 2005.
The Note is subordinated to all existing and future secured indebtedness
of the Company. The lender has certain rights which require the Company to
register the common stock issuable upon conversion of the Note or for payment of
interest, under the Securities Act of 1933, as amended. Such registration
statement is to be effective by September 30, 2005 and if it is not, the Company
will be required to pay additional interest, in cash, for each month the
effectiveness is delayed. The additional interest varies by month and has an
aggregate cap of $500,000 for the duration of the Note.
The entire outstanding principal amount of the Note together with all
accrued but unpaid interest is due in cash on December 30, 2009; and except
under certain conditions, the Company has no right of early prepayment on the
Note.
At the option of the lender, the Note is convertible into the Company's
common stock at $6.94 per common share, which was a 20% premium over the average
of the Company's common stock closing price for the five trading days preceding
December 30, 2004. At the option of the Company, the Note is convertible into
its common stock according to a formula based on the market price of that stock
during the term of the Note which requires among other things for the Company's
common stock to exceed $10.41 per common share, which is 150% of the price at
which the lender can convert the Note. If the Company converts the Note prior to
December 30, 2007, the Company is required to pay an additional make-whole
interest payment in either cash or the Company's stock at the Company's
discretion. The Company determined that the conversion feature and a change in
control provision of the Note are embedded derivatives that require bifurcation,
in accordance with SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES. However, the Company determined that these embedded
derivatives were not significant and therefore did not require separate
accounting treatment at December 31, 2004.
If the Company issues its common stock in lieu of cash to convert the
Note or to make interest payments, or any portion thereof, the Company is
required to have an effective registration statement covering the public resale
of such shares and pay a 5% premium based on an average of the closing price of
its common stock for the previous ten trading days.
As a result of the restatement of the Company's financial statements for
the year ended December 31, 2003, the Company was in breach of certain
representations and warranties relating to those financial statements that
constituted an event of default under the Note. On June 24 2005, the lender
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
waived all defaults under the Note and extended the requirement to have a
registration statement be effective for the shares of the Company's common stock
that may be issued as payment of principal or interest under the Note to March
31, 2006. In exchange, the Company agreed to reduce the price at which the
lender can convert the Note into its common stock from $6.94 per share, as
described above, to $5.75 per share, which was a 16% premium over the average of
the Company's common stock closing price for the five trading days preceeding
June 24, 2005. Accordingly, the Company's option to convert the Note into its
common stock is based on the market price of its stock during the term of the
Note which requires, among other things, the common stock to exceed 150% of the
price (or $8.63 per common share on a revised basis) at which the lender can
convert the Note.
In addition, at the option of the lender, the Company may issue to the
lender up to an additional $2.5 million note under terms substantially similar
to those of the Note. In March 2005, the lender requested, and the Company
agreed to extend the termination date of the option to issue the additional $2.5
million note from March 30, 2005 to until ten days after the date the Company
files its 2004 Annual Report on Form 10-K.
OTHER DEBT
The Company borrowed $1.1 million in August 2004 from a financial
institution with which it has an investment portfolio. The loan is
collateralized by the investment portfolio, which principally consists of
auction rate certificates. The loan is payable at any time, at the Company's
discretion, and accrues interest at a rate of LIBOR plus 1.5%. The average
interest rate for the period from August 2004 through December 2004 was 3.5%.
The outstanding amount due was $0.4 million at December 31, 2004.
In connection with the acquisition of 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 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. In July 2004, the Company issued
51,828 shares of its common stock as the first principal payment under the
promissory notes, valued at $0.2 million. In September 2004, the Company entered
into amended promissory notes and settlement agreements with certain unitholders
of Renaissance (the "Amended Notes"). Pursuant to the Amended Notes, in
September 2004 and October 2004, the Company issued an additional 13,270 shares
and 20,800 shares of its common stock to such unitholders from its treasury
stock.
In connection with the acquisition of the remaining 60% of EuroLink, the
Company issued promissory notes with a face value of $0.5 million. The notes,
which have been discounted at 5.5%, were payable at the Company`s option in its
common stock or cash on April 28, 2005. The Company intends to pay the notes
using its common stock. Due to the delay in issuing its 2004 consolidated
financial statements, the Company was unable to issue its common stock to
satisfy this debt. The Company intends to settle this obligation through the
issuance of common stock as soon as practicable subsequent to the filing of its
2004 Annual Report on Form 10-K.
Annual maturities on long-term debt, including convertible debt and
other debt, outstanding at December 31, 2004 were as follows:
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AMOUNT
--------------
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------
2005 $ 1,102
2006 218
2007 218
2008 -
2009 7,500
-------
Total $ 9,038
=======
CAPITAL LEASE OBLIGATIONS
At December 31, 2004, the Company was committed under capital lease
obligations with interest rates ranging from 4.24% to 15.30% for maturities
ranging from February 7, 2005 to November 1, 2007. At December 31, 2004 and
2003, capital lease obligations were $1.4 million and $0.7 million, of which
$0.5 million and $0.6 million was classified as a current liability in the
accompanying consolidated balance sheets.
Certain leases require payment of property taxes, insurance and
maintenance costs in addition to the rent payments. Contingent and escalation
rent in excess of minimum rent payments was insignificant. Future minimum lease
payments, net of sub-lease rental income of $2.5 million, under non-cancelable
capital and operating leases with lease terms in excess of one year at December
31, 2004 were as follows:
CAPITAL OPERATING
----------- ----------------
YEAR ENDING DECEMBER 31, (in thousands)
- ------------------------
2005 $ 585 $ 4,875
2006 449 3,735
2007 515 3,493
2008 - 3,383
2009 - 1,828
Thereafter - 9,022
------------ ---------
Total minimum payments 1,549 $ 26,336
========
Less: amount representing interest 143
------------
Present value of minimum capital
lease payments $ 1,406
===========
Rent expense was $4.8 million, $6.2 million and $4.6 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
9. COMMITMENTS AND CONTINGENCIES
PURCHASE OBLIGATIONS
The Company has minimum purchase obligations with certain
telecommunication providers due to expire at various dates in 2005 through 2009.
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.
The Company also has certain maintenance agreement and purchase
obligations on data center software due to expire in 2006 that the Company
committed to when it purchased the software licenses. Under such arrangements,
the Company is invoiced quarterly by the software provider.
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company also has a licensing arrangement with a third-party software
developer due to expire in 2007, with automatic one year renewals unless
terminated by either party with prior written notice, whereby the Company is
committed to a minimum licensing fee of $50,000 per month.
Annual minimum purchase obligations at December 31, 2004 were as
follows:
AMOUNT
-------------
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------
2005 $ 4,734
2006 3,532
2007 1,327
2008 364
2009 146
--------
Total $10,103
========
LITIGATION
On 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 named the Company, its Chairman and CEO,
its former CFO, its current CFO and certain of its directors as defendants. The
complaint was filed as a purported 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 alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 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. On July 20, 2004, the court appointed three
different plaintiffs to be the lead plaintiffs, as Fuller & Thaler Asset
Management withdrew as the named plaintiff. The action became styled JOHNSON, ET
AL. V. NYFIX, INC., ET AL. On August 19, 2004, the newly named plaintiffs filed
a first amended class action complaint, which added, among other things,
allegations of violations of Sections 11 and 15 of the Securities Act of 1933,
as amended. The new allegations are based fundamentally on the same allegations
that the plaintiffs asserted in the original complaint. The defendants have
filed a motion to dismiss the amended complaint with prejudice. The Company
believes that this amended complaint, like the original complaint, is without
merit. Although it is not possible to forecast the outcome of this matter at
this time, the Company intends to vigorously defend against the complaint.
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 the outcome of which could reasonably
be expected to have a material adverse effect on its consolidated financial
statements.
SEC MATTERS
In connection with the Company's restatement of its 1999 through 2002
consolidated financial statements in May 2004, the Division of Enforcement of
the SEC informed the Company by letter dated July 14, 2004, that it was
conducting an informal inquiry. On January 25, 2005, the Company filed a current
report on Form 8-K, which indicated that the matter was a formal inquiry. By
letter dated October 28, 2004, the Division of Enforcement of the SEC informed
the Company that it was conducting a second informal inquiry, which related to
the Company's stock options granted. On February 25, 2005, the Company filed a
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
current report on Form 8-K, which indicated that the Company believed that the
matter was a formal inquiry. The Company is cooperating with the SEC with
respect to both matters. The Company is unable to predict the outcome of either
matter at this time and can give no assurances that the outcome of either or
both matters will not have a material impact on the Company.
10. EQUITY
COMMON STOCK
As described in Note 4, on July 2, 2004, the Company issued 51,828
shares of its common stock to certain unitholders of Renaissance as the first
principal payment under the promissory notes, valued at $0.2 million. On April
7, 2004, pursuant to notice from certain payees after default on the promissory
notes, the Company issued 375,346 shares of its common stock as payment for $2.0
million in principal amount of such notes.
In connection with the acquisitions mentioned in Note 4, the Company
issued i) 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, ii) 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 $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; and
v) 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.
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
As described in Note 4, pursuant to the Amended Notes, on September 27,
2004 and October 27, 2004, the Company issued 13,270 shares and 20,800 shares,
respectively, of its common stock from its treasury stock to certain unitholders
of Renaissance.
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 receipt of the treasury stock at the then current market value of
$0.4 million.
11. 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, 2004 and 2003:
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,
-----------------------
2004 2003
-------- ---------
Deferred tax assets: (IN THOUSANDS)
Bad debt expense $ 985 $ 858
Deferred revenue 913 896
Intangible asset amortization 416 --
Compensation expense attributable to stock options granted 2,376 2,346
Restructuring charge 733 --
Capitalized product enhancement costs 1,416 985
Net operating loss carryforwards 14,398 9,413
Basis in NYFIX Millennium 3,703 2,878
Equity investment in Eurolink -- 373
Research and development tax credits 1,768 1,596
Other 475 586
-------- --------
Total deferred tax assets 27,183 19,931
-------- --------
Deferred tax liabilities:
Depreciation and amortization 952 777
Intangible asset amortization -- 931
Basis difference in goodwill related to Renaissance 1,753 1,133
Other 340 16
-------- --------
Total deferred tax liabilities 3,045 2,857
-------- --------
Total deferred tax assets, gross 24,138 17,074
Valuation allowance (25,555) --
-------- --------
Total deferred tax (liabilities) assets, net $ (1,417) $ 17,074
======== ========
At December 31, 2004, the Company had net operating loss carryforwards
of $31.0 million, which may be used to offset future taxable income, if any. The
Company's Federal net operating loss carryforwards expire between 2020 and 2024.
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, 2004, the Company had state net operating loss
carryforwards of $5.0 million expiring at various dates. As described in Note 1,
the Company established a valuation allowance of $25.6 million on its deferred
tax assets at December 31, 2004 in accordance with SFAS No. 109. Until the
Company can achieve and sustain an appropriate level of profitability, it plans
to maintain a valuation allowance on its deferred tax assets. The total deferred
tax liabilities as of December 31, 2004 were included in "long-term debt and
other liabilities" in the accompanying consolidated balance sheet.
The exercise of non-qualified stock options and the disqualifying
dispositions of incentive stock options under the Company's stock option plans
give 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 additional paid-in capital by $45,000 and $0.2 million during the
years ended December 31, 2004 and 2003, respectively.
Compensation expense attributable to non-qualified stock options granted
gives rise to a temporary difference and is not deductible by the Company for
Federal and state income tax purposes until stock options are exercised. When
stock options are canceled prior to being exercised, the Company does not
receive any tax benefit and records the reduction of the deferred tax asset as
an offset to "additional paid-in capital" on the accompanying consolidated
balance sheets. Such reductions in deferred tax assets related to cancellations
were $0.1 million and $0.2 million during the years ended December 31, 2004 and
2003, respectively.
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The reconciliation between the Federal statutory income tax rate and the
Company's effective income tax (benefit) rate for the years ended December 31,
2004, 2003 and 2002 was as follows:
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- ------- --------
Statutory Federal tax (benefit) rate (35)% (35)% (35)%
State and local taxes, net of federal effect (6)% (6)% (4)%
Research and development tax credits (1)% (6)% (8)%
Equity loss in NYFIX Millennium -- -- 6 %
Valuation allowance 188 % -- --
Other (6)% (1)% 3 %
----- ----- ------
Effective tax (benefit) rate 140 % (48)% (38)%
===== ===== ======
The Company received no income tax benefit from its equity in loss of
NYFIX Millennium of $1.4 million for the year ending December 31, 2002 as these
losses were allocated to the Initial Partners and the New Partners for income
tax purposes.
Research and development tax credits of $0.2 million and $0.6 million
for the years ended December 31, 2004 and 2003 related primarily to the
estimated tax effect of research and development expenses incurred in 2004 and
2003, respectively. 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 before income taxes for the years ended December 31, 2004, 2003 and
2002 was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
--------- -------------- ----------
(IN THOUSANDS)
Domestic $(13,419) $ (9,282) $ (9,578)
Foreign (220) (204) (1,719)
-------- -------- --------
Total $(13,639) $ (9,486) $(11,297)
======== ======== ========
Significant components of the income tax provision (benefit) for the
years ended December 31, 2004, 2003 and 2002 were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
-------- --------------- ---------
(IN THOUSANDS)
Current Federal $ -- $ (364) $ (1,422)
-------- -------- --------
Deferred:
Federal (3,649) (3,150) (2,128)
State and foreign (2,888) (1,057) (740)
Valuation allowance 25,600 -- --
-------- -------- --------
Total deferred 19,063 (4,207) (2,868)
-------- -------- --------
Total income tax provision (benefit) $ 19,063 $ (4,571) $ (4,290)
======== ======== ========
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. LOSS PER SHARE
The Company's basic loss per common share ("EPS") was calculated based
on the net loss available to common stockholders and the weighted-average number
of shares outstanding during the reporting period. Stock options representing
810,552, 881,681 and 926,815 shares were excluded from the loss per share
calculations for the years ended December 31, 2004, 2003 and 2002, respectively,
as their effect was anti-dilutive.
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003 2002
------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net loss $ (32,702) $ (4,915) $ (7,007)
========== ========== ========
Loss per common share - basic and diluted $ (1.02) $ (0.16) $ (0.23)
========== ========== ========
Weighted average shares outstanding 32,214 31,462 30,126
========== ========== ========
13. RELATED PARTY TRANSACTIONS
The Initial Partners and the New Partners of NYFIX Millennium (see Note
4) are or have been customers of the Company.
At December 31, 2003, the Company had a note receivable of $70,000, plus
accrued interest, from a former officer of the Company, in connection with his
exercise of options for the Company's common stock, with an annual interest rate
of 5.5%, and a maturity date of May 13, 2004. Such note was included in "notes
receivable issued for common stock" within stockholders' equity at December 31,
2003 on the accompanying consolidated balance sheet. In addition, at December
31, 2003, the Company had a note receivable of $300,000, plus accrued interest
from the same former officer, with an annual interest rate of 5.5%, and a
maturity date of July 2, 2004. Such note was included in "prepaid expense and
other current assets" at December 31, 2003 on the accompanying consolidated
balance sheet.
On July 27, 2004, the Company received notes from the former officer,
noted above, for $76,000 and $318,000 to replace the notes that matured on May
13, 2004 and July 2, 2004, respectively. Both new notes mature on July 27, 2006,
accrue interest annually at 4.0%, may be prepaid at any time without penalty and
are collateralized by assets in a brokerage account of the former officer, which
primarily consist of shares of the Company's stock. Subsequent to July 27, 2004
and through December 31, 2004, repayments were made in the amounts of $10,000
and $33,000, respectively. Such notes were included in "notes receivable issued
for common stock" within stockholders' equity and "other assets," respectively,
at December 31, 2004 on the accompanying consolidated balance sheet. In a
separate transaction, the former officer received an unsecured loan from an
individual who was a director of the Company until October 2004. The proceeds
from the loan were used to exercise stock options to purchase the Company's
common stock, which is included in the collateral, and to repay principal of
$23,000 due on the new notes.
On July 10, 2002, the Company received a note from the then Chief
Operating Officer of a subsidiary for $71,000. Such note bore interest at 5.5%
per annum and was scheduled to mature on July 10, 2004. The note was paid in
full on May 27, 2004.
14. 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
$13,000 in 2004. The 401(k) Plan permits the Company to match employees' tax
deferred contributions up to a maximum of 3% of employees' compensation provided
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
limits. 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 $0.8 million, $0.6 million and $0.6 million in 2004, 2003 and
2002, respectively.
15. STOCK OPTION PLANS
2001 STOCK OPTION PLAN
On March 13, 2001, the Company's Board of Directors adopted the 2001
Stock Option Plan (the "2001 Plan") for which a total of 2,000,000 shares of the
Company's common stock have been reserved for issuance. The 2001 Plan was
approved at the Company's Annual Meeting of Stockholders held on June 4, 2001.
In 2002, the Company adopted an amendment to the 2001 Plan, to increase the
total number of shares of the Company's common stock reserved for issuance to
3,500,000 shares. This amendment was approved at the Company's Annual Meeting of
Stockholders held on June 10, 2002. Pursuant to the 2001 Plan, as amended, the
Company may grant stock options and stock purchase rights to the Company's
employees, officers, directors and consultants. The Board of Directors, or a
committee to whom the Board of Directors has delegated authority, selects
individuals to whom options are granted. Options generally become exercisable
over a three-year period and expire in ten years. The exercise price of
incentive stock options granted under the 2001 Plan must be at least equal to
the fair market value of the Company's stock at the date of grant, as defined.
The 2001 Plan was effective on May 1, 2001 and expires on April 30, 2011. At
December 31, 2004, stock options to purchase 3,164,833 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, 2004, stock options to purchase 277,862 shares of
the Company's common stock were outstanding.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1991 STOCK OPTION PLAN
On March 30, 1999, the Company's 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,
2004, stock options to purchase 2,140,585 shares of the Company's common stock
were outstanding.
The summary of the activity under stock option plans for the years
ending December 31, 2004, 2003, and 2002, was as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ----------
Outstanding at beginning 5,627,917 $ 10.65 5,810,982 $ 10.67 4,452,819 $ 13.84
of the year
Granted 648,200 6.46 610,501 5.27 1,906,850 4.96
Assumed in the acquisition -- -- -- -- 493,699 7.80
of Javelin
Exercised (103,211) 3.83 (279,978) 2.99 (169,612) 2.81
Cancelled (589,626) 10.66 (513,588) 8.70 (872,774) 14.27
------ ---------- -------
Outstanding at end
of the year 5,583,280 $ 10.28 5,627,917 $ 10.65 5,810,982 $ 10.67
========= ========== ========
Exercisable at end of the year 4,248,713 $ 11.48 4,192,077 $ 11.64 2,932,929 $ 11.69
========= ========== ========
Weighted average fair value $ 4.19 $ 4.11 $ 4.70
of options granted
Weighted average fair value $ 12.28
of options assumed in
the acquision of Javelin
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004:
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 - $ 4.00 1,744,833 5.5 $ 3.31 1,535,927 $ 3.23
$ 4.01 - $ 8.00 1,301,071 8.2 5.99 382,710 5.94
$ 8.01 - $12.00 357,958 7.1 9.02 258,658 9.23
$12.01 - $16.00 1,310,925 6.3 13.04 1,210,925 13.06
$16.01 - $20.00 95,542 5.0 18.37 95,542 18.37
$20.01 - $24.00 369,151 5.6 22.45 361,151 22.45
$24.01 - $28.00 82,600 5.1 25.68 82,600 25.68
$28.01 - $32.00 63,500 5.9 30.06 63,500 30.06
$32.01 - $36.00 130,500 5.6 35.17 130,500 35.17
$36.01 - $44.00 127,200 5.5 38.11 127,200 38.11
--------- ---------
5,583,280 6.4 $10.28 4,248,713 $ 11.48
========= ==========
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,
--------------------------
2004 2003 2002
------ ------ --------
Average risk-free interest rate 3.4% 3.0% 3.8%
Average expected life in years 5.7 6.0 6.5
Expected volatility 76% 78% 79%
Expected dividend yield 0% 0% 0%
16. BUSINESS SEGMENT INFORMATION
The Company has adopted the disclosure requirements of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
establishes standards for additional disclosure about operating segments for
interim and annual financial statements. This standard requires financial and
descriptive information be disclosed for segments whose operating results are
reviewed by the Company for decisions on resource allocation. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
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.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company's Transaction Services segment is comprised of six of its
subsidiaries. Three are NASD registered broker-dealers; one is an introducing
broker for derivatives and was granted its broker-dealer license in 2002 by the
National Futures Association ("NFA"); one was incorporated in the United Kingdom
on March 29, 2004 and registered as a broker-dealer with the FSA in connection
with the Company's expansion into Europe and other international markets; and
EuroLink, which we acquired the remaining 60% we did not own effective March 29,
2004 and which 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 commissions charged on executed trades.
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.
Summarized financial information by business segment for the years ended
December 31, 2004, 2003 and 2002 was as follows:
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
---------- -------------- --------
Revenue: (IN THOUSANDS)
Technology Services $ 60,439 $ 54,156 $ 48,365
Transaction Services 17,424 14,343 7,597
Eliminations (2,728) (2,590) (150)
-------- -------- --------
Total revenue $ 75,135 $ 65,909 $ 55,812
======== ======== ========
Gross Profit:
Technology Services $ 29,228 $ 27,841 $ 27,105
Transaction Services 4,577 3,401 285
-------- -------- --------
Total gross profit $ 33,805 $ 31,242 $ 27,390
======== ======== ========
Depreciation and amortization:
Technology Services $ 12,359 $ 10,691 $ 9,900
Transaction Services 1,776 1,813 1,586
Corporate 265 490 175
-------- -------- --------
Total depreciation and amortization $ 14,400 $ 12,994 $ 11,661
======== ======== ========
Capital expenditures for property and equipment:
Technology Services $ 6,295 $ 4,959 $ 3,671
Transaction Services 17 25 586
Corporate 349 306 309
-------- -------- --------
Total capital expenditures $ 6,661 $ 5,290 $ 4,566
======== ======== ========
AS OF DECEMBER 31,
----------------------------
2004 2003
---------- ----------
Identifiable assets: (IN THOUSANDS)
Technology Services $ 97,989 $ 94,449
Transaction Services 154,289 13,059
Corporate 28,813 49,276
-------- --------
Total indentifiable assets $281,091 $156,784
======== ========
Identifiable assets by segment include assets directly identifiable with
those segments. Corporate assets consist primarily of cash and cash equivalents,
short-term investments, deferred tax assets and investments in unconsolidated
affiliates associated with non-operating activities.
Reconciling information between business segments and the loss before
income taxes was as follows for the years ended December 31, 2004, 2003, and
2002:
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEAR ENDED DECEMBER 31,
---------------------------------------
2004 2003 2002
--------- --------------- ----------
(IN THOUSANDS)
Gross profit for reportable segments $ 33,805 $ 31,242 $ 27,390
Operating expenses (46,693) (40,410) (38,400)
Interest expense (794) (157) (294)
Investment income 141 597 628
Other expense, net (98) (758) (621)
-------- -------- --------
Loss before income taxes $(13,639) $ (9,486) $(11,297)
======== ======== ========
Summarized financial information by geographic location for the years
ended December 31, 2004, 2003 and 2002 was as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2003 2002
------- -------------- ---------
Revenue: (IN THOUSANDS)
United States $65,339 $59,130 $52,020
Foreign 9,796 6,779 3,792
------- ------- -------
Total revenue $75,135 $65,909 $55,812
======= ======= =======
AS OF DECEMBER 31,
---------------------------
2004 2003
-------- -------
Long-lived assets:
United States $90,399 $91,062
Foreign 3,364 2,197
------- -------
Total long-lived assets $93,763 $93,259
======= =======
Revenues were attributed based upon the origin of the product shipped or
service provided.
17. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND AND WRITE- BALANCE
YEAR EXPENSES OFFS END OF YEAR
------------ ------------- ---------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS: (IN THOUSANDS)
Year ended December 31, 2004 $ 1,839 $ 763 $ 495 $2,107
========= ========= ========= ======
Year ended December 31, 2003 $ 1,207 $ 2,831 $ 2,199 $1,839
========= ========= ========= ======
Year ended December 31, 2002 $ 511 $ 1,146 $ 450 $1,207
========= ========= ========= ======
18. SUPPLEMENTAL CASH FLOW INFORMATION
Information about the cash flow activities related to acquisitions
during the years ended December 31, 2004, 2003 and 2002 was as follows:
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
--------- -------------- ---------
(IN THOUSANDS)
Fair value of assets acquired, net of cash acquired $ (4,493) $(12,615) $(76,219)
Fair value of liabilities assumed 133 827 15,670
Promissory note converted to equity -- 1,560 --
Fair value of capital contributed 1,026 3,181 --
Fair value of notes issued 450 2,743 --
Common stock issued -- 2,997 49,154
Treasury stock acquired -- (380) --
Pre-acquisition investment basis 3,014 1,590 4,600
Javelin working capital adjustment settlement 1,250 -- --
-------- -------- --------
Payments for acquisitions, net of cash acquired $ 1,380 $ (97) $ (6,795)
======== ======== ========
Information about other cash flow activities during the years ended
December 31, 2004, 2003 and 2002 was as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
-------- -------------- --------
Supplemental disclosures of cash flow information: (IN THOUSANDS)
Cash paid for interest $ 266 $ 126 $ 262
(Refunds received) cash paid for income taxes, net 128 (2,186) 937
Supplemental schedule of noncash investing and
financing information:
Capital lease obligations incurred for the purchase 1,472 -- 1,278
of property and equipment
Common stock issued for investments in -- -- 1,121
unconsolidated affiliates
Common stock issued for notes -- -- 70
Common stock and treasury stock issued for 2,342 -- --
promissory note payments
Unrealized loss on available-for-sale securities -- 107 142
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
19. QUARTERLY FINANCIAL DATA - UNAUDITED
Three Months Ended
-----------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-----------------------------------------------------------------------------------------------------
As As As
Previously As Previously As Previously As As
Reported Restated Reported Restated Reported Restated Reported
---------- -------- ---------- -------- ---------- -------- ----------
2004
Revenue $17,136 $ 17,136 $ 18,229 $ 18,229 $ 19,490 $ 19,490 $ 20,280
======= ======== ======== ======== ========= ========= ========
Gross profit $ 7,648 $ 7,636 $ 8,476 $ 8,472 $ 9,018 $ 9,014 $ 8,683
======= ======== ======== ======== ========= ========= ========
Net loss $(1,077) $ (1,160) $ (2,915) $ (2,970) $ (22,093) $ (23,539) $ (5,033)
======= ======== ======== ======== ========= ========= ========
Basic and diluted
loss per share $ (0.03) $ (0.04) $ (0.09) $ (0.09) $ (0.68) $ (0.73) $ (0.16)
======= ======== ======== ======== ========= ========= ========
As As As As
Previously As Previously As Previously As Previously As
Reported Restated Reported Restated Reported Restated Reported Restated
---------- -------- ---------- -------- ---------- -------- ----------- --------
2003
Revenue $17,283 $17,283 $ 15,696 $ 15,696 $ 16,395 $ 16,395 $ 16,535 $ 16,535
======= ======= ======== ======== ======== ======== ======== ========
Gross profit $ 9,026 $ 9,004 $ 7,439 $ 7,427 $ 7,450 $ 7,435 $ 7,393 $ 7,376
======= ======= ======== ======== ======== ======== ======== ========
Net income (loss) $ 76 $ (156) $ (1,057) $ (1,182) $ (1,057) $ (1,151) $ (2,335) $ (2,426)
======= ======= ======== ======== ======== ======== ======== ========
Basic and diluted
loss per share $ -- $ (0.01) $ (0.03) $ (0.04) $ (0.03) $ (0.04) $ (0.07) $ (0.08)
====== ======= ======== ======== ======== ======== ======== ========
See Note 2 for a discussion of the restatement.
The sum of the 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 6, the Company recorded a restructuring charge of
$2.5 million ($1.5 million after tax, or $.05 per common share) in the second
quarter of 2004, in accordance with SFAS No. 146.
As described in Notes 1 and 11, on a restated basis, the Company
established a valuation allowance on its deferred tax asset, in accordance with
SFAS No. 109, of $22.4 million (or $0.69 per common share) during the quarter
ended September 30, 2004.
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.
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
20. SUBSEQUENT EVENTS
NASDAQ DELISTING PROCEEDING
On April 5, 2005, Nasdaq notified the Company that the Company was not in
compliance with the requirements for listing on The Nasdaq National Market
because the Company had not timely filed its 2004 Form 10-K. At a May 12, 2005
hearing with the Nasdaq Listing Qualifications Panel, the Company requested an
extension of time to meet Nasdaq's listing requirements. In a decision dated
June 14, 2005, the Nasdaq Listing Qualifications Panel determined to grant the
Company's request for continued listing on the Nasdaq National Market, subject
to the Company's filing its 2004 Form 10-K and its Quarterly Report on Form 10-Q
for the three months ended March 31, 2005 by June 30, 2005.
With this filing of the Company's 2004 Annual Report on Form 10-K and the
filing of its Quarterly Report on Form 10-Q for the three months ended March 31,
2005, the Company believes that it is in compliance with the requirements for
listing on The Nasdaq National Market. The Company will request that Nasdaq
dismiss the pending delisting action against it and permit its common stock to
resume trading on the Nasdaq National Market under the symbol NYFX.
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.
F-45