-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UxpIq/QTEyyo5iMLiAUTS4+r0Rk0XRc41ggK5zgYuBbraOyq+UBqHRlcWjdgkIXe pHTSsx7PplJvz0002XA31w== 0000921895-00-000264.txt : 20000404 0000921895-00-000264.hdr.sgml : 20000404 ACCESSION NUMBER: 0000921895-00-000264 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NYFIX INC CENTRAL INDEX KEY: 0000099047 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 061344888 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12292 FILM NUMBER: 591929 BUSINESS ADDRESS: STREET 1: 333 LUDLOW STREET CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2034258000 FORMER COMPANY: FORMER CONFORMED NAME: TRINITECH SYSTEMS INC DATE OF NAME CHANGE: 19940404 10-K 1 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1999 OR Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________to________ Commission file number: 0-21324 NYFIX, INC. (Exact name of registrant as specified in its charter) NEW YORK 06-1344888 (State of incorporation) (I.R.S. Employer identification number) 333 LUDLOW STREET, STAMFORD, CT 06902 (Address of principal executive offices) Registrant's telephone number, including area code: (203) 425-8000 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, $.001 PAR VALUE PER SHARE NASDAQ STOCK MARKET (Title of each class) (Name of each exchange on which registered) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The Issuer's revenues for the fiscal year ended December 31, 1999 were $12,209,451. The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $719 million, as of March 23, 2000. Solely for the purposes of this calculation, shares held by directors and officers of the Registrant have been excluded. Such exclusion should not be deemed a determination by the Registrant that such individuals are, in fact, "affiliates" of the Registrant. As of March 23, 2000 there were 16,237,062 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference Proxy Statement for the 2000 Annual Meeting of Stockholders Part III, Items 10 - 13 PART I ITEM 1. BUSINESS Description of Business NYFIX, Inc. (the "Company" or "NYFIX") develops and markets advanced electronic trading systems to brokerage firms, international banks and global exchanges trading in equities, futures & options, and currencies. The Company's NYFIX Network, a combined FIX (Financial Information Exchange protocol) and Exchange Access Network, enables users to electronically communicate trade data among the buy-side, sell-side and exchange floor environments. NYFIX is headquartered in Stamford, Connecticut and maintains operations in New York, Chicago and London. The Company (formerly Trinitech Systems, Inc.) was incorporated in New York in 1991 and is listed on the Nasdaq Stock Market under the symbol NYFX. Prior to March 6, 2000, the Company's common stock was traded on the American Stock Exchange under the ticker symbol NYF. Prior to October 25, 1999, the Company's common stock was traded on the American Stock Exchange under the ticker symbol TSI. The Company's goal is to become the leading provider of real-time electronic trade entry and routing systems and connectivity services to the global financial services industry. The Company offers its customers the ability to enter and route orders and executions electronically from "end-to-end," from the buy-side/retail institution or remote branch office through to the exchange floors and electronic exchanges. The Company's technology is being used by such major firms as Lehman Brothers, Deutsche Bank, Warburg Dillon Read, ING Barings and Merrill Lynch, among others. The Company's systems provide electronic order entry, order routing, tracking and risk monitoring capabilities, replacing existing paper and telephone based trading and eliminating a number of redundant steps in the order flow and execution reporting process. As the financial industry continues to move from a paper and voice driven tracking environment to real-time electronic-based trading, management believes NYFIX is well positioned to take advantage of this growing trend. Wall Street firms are recognizing the ability of electronic trading systems to enhance order and information flow and improve trading performance by eliminating trading errors and providing on-line risk management, in addition to the cost efficiencies associated with electronic trading. Numerous trading scandals have provided further impetus for the implementation of electronic trading systems with risk monitoring and audit tracking capabilities by financial risk managers. In September 1997, the Company launched its NYFIX Network, a FIX and Exchange Access Network designed to provide the financial community with a central electronic meeting place for routing real-time orders and other FIX messages. NYFIX provides the Company's equities customers access to its subscription-based quote, order and execution routing systems as well as providing connectivity between the buy-side, sell-side and exchange floor environments through the industry standard protocol, FIX. NYFIX offers financial firms the ability to utilize the Company's systems without having to invest in a communications infrastructure. Furthermore, the Company's NYFIX Data Centers offer the potential for an "any to any" relationship for routing orders and executions between and among firms, various exchanges and alternative sources of liquidity including Electronic Communications Networks (ECNs). The Company has made considerable progress implementing its subscription-based NYFIX business model throughout 1999 and management believes the Company is well positioned for further growth in 2000. NYFIX continues to provide the financial industry with complete systems, including the raw terminals (hardware manufactured by NYFIX), the software and the infrastructure (through its NYFIX Data Centers) to tie the trading industry together for the electronic entry and routing of orders and executions. All of the Company's products are available in flexible building blocks that can be sold as complete systems or separately to complement existing customer components. This has given the Company the ability to collect revenue from each "link" of the trading process. The Company also continues to expand and enhance its product portfolio with new and complementary software modules and connectivity services that allow the Company to collect revenue from multiple levels. The Company offers its trading systems on a subscription basis, with hardware, software and maintenance provided for a monthly fee. For the Company's customers, this pricing model offers minimal up-front investment in technology as well as an alternative to costly in-house development. For the Company, it offers a simplification of the sales cycle as well as significant recurring revenue. From time to time, the Company does offer 2 certain products (such as a custom enhancement) for a one-time fee. The Company as a whole is moving away from its previous capital sales model and now offers its systems, including the entire NYFIX product line, on a subscription basis. NYFIX Millennium, L.L.C. In October of 1999, the Company announced the formation of NYFIX Millennium, L.L.C. ("NYFIX Millennium"), which is a joint venture between NYFIX and Deutsche Bank, ING Barings, Lehman Brothers, Morgan Stanley Dean Witter, Sanford C. Bernstein & Co., Inc., SG Cowen Securities and Warburg Dillon Read. NYFIX Millennium is an "Integrated Alternative Trading System (ATS), Exchange Access and Intelligent `Best Execution' Order-Routing System." NYFIX Millennium will provide a state-of-the art execution facility for both listed and OTC securities. NYFIX Millennium is referred to as a Hybrid Market System because it combines the electronic execution technology of an ECN with the liquidity of traditional primary markets. Through real-time matching and automatic forwarding of unexecuted orders to the primary exchange markets, NYFIX Millennium plans to provide traders unparalleled access to liquidity. NYFIX Millennium plans to generate transaction-oriented revenue by providing documented "Price-Improvement" executions through its ATS and "Intelligent Order-routing" functions. NYFIX Millennium plans to operate as a Broker/Dealer in compliance with Regulation ATS and its Broker/Dealer application is currently on file with the SEC. The NYFIX Millennium ATS is currently under development with formal launch slated in the second half of 2000. Products Portfolio of Complete Electronic Trading Systems NYFIX supplies complete, standardized trading solutions that consist of hardware, proprietary software packages and network technology for the trading of equities and futures & options. In addition, the Company supports its customers in all aspects of planning and implementing these systems as well as providing on-going technical support. The Company has two principal business groups: The Equities Group and the Future & Options Group. Each group has built its business and technical management staff with expert knowledge so that their individual product segments are efficiently targeted to their respective customers. The Equities Group operates primarily out of the Company's Stamford and New York offices and the Future and Options Group operates primarily out of the Company's London and Chicago offices. However, each location has the opportunity to sell all of the Company's products. Equities Group-Products The Company has developed eight systems for equities trading: 1. Market Looks System 2. FloorReport 3. FIXTrader 4. NYFIX Network Services 5. Breakwatch 6. TradeWatch 7. NYFIX HandHeld 8. Nasdaq Trader Interface The NYFIX Market Looks System consists of the Trinitech Touchpad(R), a scanner, server and proprietary software. The touchpad was designed by the Company to simplify and expedite the entry of orders and information related to the trading of financial instruments. The Trinitech Touchpad(R), with its patented flat panel design, was developed to optimize critical trader/broker desktop real estate. Its proprietary open architecture offers seamless integration with all major industry operating systems, thereby allowing customers to freely choose between the most popular operating systems. The Market Looks Systems is comprised of two complementary software modules: FloorLook for the exchange floor booth and ImageViewer for the upstairs trader workstation. The Market Looks System solves the challenge faced by member firms in getting real-time quotes or "looks" on stocks directly from the exchange floor to 3 firms' upstairs trading operations. The Market Looks System operates by scanning handwritten quote slips called "looks" into a scanner by a floor clerk located at the member's booth. These scanned looks are instantly transmitted to upstairs traders at their workstations in multiple sites and remote offices. Implementation of the system results in the elimination of repetitive telephone traffic between clerks and traders. The Market Looks System helps firms reduce errors and disseminate information more efficiently. The NYFIX FloorReport System is a complete electronic order management system designed for member firms' exchange floor operations. Orders are received electronically from upstairs traders (via the FIX Protocol), with execution information routed back in the same efficient manner. FloorReport enables floor clerks to route execution information to sales and block traders in real time, enabling them to better service their customers. FloorReport organizes orders in a central blotter, helping clerks by tracking status and calculating average price in real-time. The NYFIX FIXTrader System is a complete order management system for upstairs traders, which allows the electronic entry and routing of orders and executions between buy-side institutions, sales and block desks and exchange floor booths. Traders enter orders quickly and efficiently through a Touchpad(R) (or a mouse and keyboard configuration) and which are then routed to the appropriate venue in seconds, with executions routed back in the same efficient manner. With the financial industry's adoption of FIX as the standard protocol for communicating electronically, FIXTrader offers an easy way for firms to gain FIX compliance. FIXTrader enables firms to receive orders from electronically from the buy-side as well as connect to back office systems helping firms achieve straight-through processing. The NYFIX Network is a Combined FIX and Exchange Access Network that link various companies throughout the financial industry for the electronic communication of trade information. Connecting buy-side, brokerage, exchange floor booths and various exchange systems, NYFIX is a private, secure network designed to provide firms with secure and reliable transmission of their electronic trade information. NYFIX provides a number of benefits to clients including reduced cost compared to maintaining one's own network, increased routing options and network management ensuring connectivity between parties. Breakwatch is NYFIX's application for identifying intra-day trade errors. This program helps firms identify potential trading errors, giving firms a chance to rectify mistakes on the day the trade takes place. Breakwatch also provides a link into the OCS system, simplifying reporting as per exchange trade reporting requirements. TradeWatch is NYFIX's application for monitoring an entire trading desk's positions. This application, used by head traders and/or risk managers, enables management to keep apprised of all the trading desk's positions by integrating data from all of the firm's FIXTrader workstations. The NYFIX HandHeld is the Company's Market Looks System, which runs on a handheld computer. This wireless, lightweight computer is used by exchange floor brokers to transmit looks from the specialist to their booth and directly to traders' workstations. Battery-powered, the NYFIX HandHeld enables the simultaneous transmission of looks to multiple traders as well as enabling traders to receive looks directly from "the crowd" on the trading floor. The Handheld units were rolled out during the first quarter of 2000. This rollout represents a productivity pilot, which will determine the final rollout phase for the remainder of 2000. NYFIX' Nasdaq Trader Interface is an application designed to accommodate order management and routing for the Nasdaq marketplace. Level II compliant, the Nasdaq Trader Interface will enable traders to communicate electronically with the Nasdaq market. The Nasdaq Trader Interface will be rolled out during the first quarter of 2000. This rollout represents a productivity pilot, which will determine the final rollout phase for the remainder of 2000. During 1999, the Company enhanced its product line by adding a number of auxiliary services, such as increased connectivity options and linkages as well as increased functionality. Product development continues to be focused on adding more features to the Company's existing product line, accommodating customer requests. 4 Product Pricing-Equities Group All of NYFIX' products for equities trading are sold on a subscription basis, with hardware, software and maintenance provided for a monthly subscription fee. Subscription agreements usually run from one to three years, with automatic multiple year renewal provisions included. Products are priced on a monthly basis per terminal. Product Penetration-Equities Group Building upon the Data Center established in late 1996, the Company launched NYFIX, its combined FIX and Exchange Access Network, in September 1997. The Network and data center, strategically located several blocks from the New York Stock Exchange, offers easy monthly subscription-based access to all of the Company's quote, order and execution routing systems. The NYFIX Network also allows smaller "two-dollar" and independent brokers access to the Company's systems. Firms no longer need a communications infrastructure to utilize the Company's systems, as they can simply subscribe to the service. During 1999, the Company has continued to invest in the NYFIX data center infrastructure to accommodate customer needs and growth of the service. Futures and Options Group-Products For the futures & options trading market, the Company markets its Futures and Options Order Book Management System ("OBMS"), which enables futures and options traders to enter, route and manage orders and executions in real-time. Global order routing between different international branches of the same firm and all the major global exchanges, both open outcry and electronic is supported by this comprehensive system. OBMS is offered utilizing the Company's patented Trinitech Touchpad(R) or in stand-alone software versions. Product Pricing-Futures and Options Group The Company offers OBMS on a subscription or transaction basis, with hardware, software and maintenance provided for a monthly fee. Subscription agreements usually run from one to three years with automatic multiple year renewal provisions included. When OBMS is sold on a transaction basis, the Company will receive a fee per futures contract traded through the system with a guaranteed monthly minimum payment. Product Penetration-Futures and Options Group OBMS has been utilized by a number of leading firms in the futures & options industry, including CS First Boston, Dresdner Kleinwort Benson, and Merrill Lynch, among others. Marketing Electronic Trading Systems The Company believes that the financial trading industry represents an ideal example of a uniform niche market. The characteristics of this market, particularly its low level of automation at the trade-entry or deal-making level, provide an excellent opportunity for the marketing of cost-effective and innovative technical solutions. The Company believes that this market is clearly defined, readily accessible, and accustomed to technological adjustment. As a single, coherent community, the trading industry allows the Company to market standardized products in a uniform manner in each of its market segments for equities and futures & options trading on a global basis. Management believes the Company's offering of products on a subscription or transaction basis through a data center solution will significantly aid in the roll-out of its products on an industry-wide basis, opening up new market segments for the Company's products. The Company continued its aggressive marketing efforts in 1999 and increased its global presence by exhibiting its products at numerous domestic and international technology and financial industry conferences. The Company also generated significant press coverage with respect to its FIX trading solutions and industry wide FIX and exchange connectivity network, NYFIX. The Company intends to continue its marketing initiatives in 2000. 5 Competition Electronic Trading Systems Competition exists in the Company's primary market. The Company believes that it competes favorably with its trading systems, gaining additional leverage through optimized integration of NYFIX's advanced systems and its large number of connectivity options. To further enhance the marketability of its systems, the Company is implementing its solutions on the most popular and well-established client server architectures. The Company believes that its technology offers unique advantages compared to alternative technologies utilized by competitors. The Company believes, based upon customer feedback, that its systems successfully fulfill their promise of immediate entry, routing and reporting of trading positions, operational savings, reduction of input error and improvement in reporting for compliance purposes. The Company also believes that its management and staff have an in-depth knowledge of the inner-workings of trading rooms, exchange floors, and the overall marketplace, thus facilitating its ability to serve client needs with technological hardware and software adaptations. Product Production The Company designs, develops and produces its proprietary software and hardware products at its facility in Stamford, Connecticut. The Company is not dependent upon any one supplier, vendor or subcontractor for any of its manufacturing components. Rule 123 Amendment NYFIX is aware of amendments on file with the SEC to change certain regulations governing the recording and transmission of orders to and on the NYSE floor. The first phase of such regulations calls for all orders received on the NYSE floor to be input into an electronic order management system for better monitoring and tracking of trades. The second phase calls for all orders to the exchange to be sent electronically. The Company believes this regulation is positively impacting NYFIX's business. The Company already produces systems capable of meeting and exceeding regulatory requirements with many additional features designed to reduce errors and maximize customer efficiency. Management believes that this "regulatory push" continues to provide NYFIX an even greater opportunity to capture market share both on the exchange floor and on the upstairs trading desks. Employees As of March 17, 2000 the Company had 80 full-time employees. Risk Factors: Forward Looking Statements The management discussion and analysis and the information provided elsewhere in this Form 10-K contain forward looking statements regarding the Company's future plans, objectives and expected performance. Those statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company's actual results to differ materially from those expressed in the forward looking statements referred to above. These factors include, among others, the Company's ability to further penetrate the financial services market with a full range of the Company's products and the highly competitive market in which the Company operates. 6 ITEM 2. PROPERTIES The Company maintains its executive offices and production facilities in leased premises at 333 Ludlow Street, Stamford, CT 06902 and its European Sales Office in London, England. The Company's US headquarters consists of approximately 8,600 square feet at a current annual rental of approximately $185,000, expiring on May 31, 2002. The Company's London office signed a new lease in 1999, expiring on June 6, 2009, at an approximate yearly rental of $137,000, excluding local taxes. The annual rental income is approximately $37,000, excluding local taxes. The Company also rents office space at 100 Wall Street, New York, NY 10005 and at 20 North Wacker Drive, Chicago, IL 60606 for an annual rental of approximately $150,000 and $19,000, respectively and approximately 4,800 square feet and 1,000 square feet, respectively. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings that are currently pending or, to the Company's knowledge, contemplated against the Company or to which it is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS (a) The special meeting of shareholders was held on October 21, 1999. (b) Matters voted on at the meeting and the number of votes cast.
Votes Against Broker Voted For Or Withheld Abstentions Non-Votes --------- ----------- ----------- --------- (1) Approval of 8,840,234 35,562 7,379 - Amendment to the Company's Certificate of Incorporation to change the name of the Company from Trinitech Systems, Inc. to NYFIX, Inc. (2) Approval of 5,996,876 348,337 12,219 - Amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of common stock, $.001 par value of the Company from 15,000,000 to 60,000,000 and increase the number of authorized shares of preferred stock, $1.00 par value of the Company from 1,000,000 to 5,000,000
7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's Common Stock is traded on Nasdaq Stock Market under the symbol NYFX. Prior to March 6, 2000, the Company's common stock was traded on the American Stock Exchange under the ticker symbol NYF. Prior to October 25, 1999, the Company's common stock was traded on the American Stock Exchange under the ticker symbol TSI. The following table sets forth the high and low sales prices for the Common Stock, for the periods presented, as reported by the AMEX. Prices of Common Stock High Low 1999 Fiscal Year * First Quarter $6.33 $4.58 Second Quarter $12.25 $4.25 Third Quarter $20.00 $9.58 Fourth Quarter $31.75 $16.67 1998 Fiscal Year * High Low - ---------------- ---- --- First Quarter $5.75 $4.00 Second Quarter $5.17 $3.83 Third Quarter $5.33 $3.67 Fourth Quarter $6.33 $3.83 1997 Fiscal Year * High Low - ---------------- ---- --- First Quarter $4.67 $3.42 Second Quarter $4.25 $3.71 Third Quarter $6.63 $5.83 Fourth Quarter $6.00 $5.17 *Restated for 3 for 2 stock split in the form of a stock dividend effective 11/15/99 (b) Holders At March 23, 2000 the records of the Company's transfer agent indicated that there were 457 holders of record of the Company's Common Stock. (c) Dividends Stockholders of the Company's Common Stock are entitled to dividends if and when declared by the Board of Directors out of funds legally available. The Company has not paid or declared any dividends on any class of its capital stock since its organization and has no present intention of paying cash dividends on its Common Stock. The Company intends to utilize any earnings it may achieve for the development of its business and for working capital purposes. 8 ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Net Revenue $ 12,209,451 $ 6,235,393 $ 5,006,017 $ 7,013,605 $ 5,044,647 Net Earnings (loss) from Operations 1,194,166 (2,226,337) (2,712,109) (518,781) 15,515 Net Earnings (loss) Per Common Share: Basic 0.07 (0.17) (0.21) (0.04) 0.01 Diluted 0.06 (0.17) (0.21) (0.04) 0.01 At Year End: Assets - Total 38,828,025 12,997,519 7,547,263 7,473,336 5,869,925 Long Term Debt 2,000,000 1,800,000 45,855 31,065 29,167 Current Debt 500,000 -- 47,709 770,994 16,667
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto. Historical results and percentage relationships are not necessarily indicative of the operating results for any future period. The Company commenced its present business operations in January 1991 through the acquisition of a software license for its Guided-Input(R) Touchpad system. Since that time, the Company has transitioned from a hardware vendor to a software development company focusing exclusively on applications for the financial marketplace. The Company provides a complete line of workstation products for the financial trading desk environment and its systems provide order management and routing software for firms engaged in financial trading. During 1999 the Company achieved its first full year of profitability since the launch of its NYFIX subscription business model in late 1997. The Company currently offers its trading products (integrated systems including hardware and software) together with linkage through its NYFIX data center. The data center is a communication infrastructure known as the "NYFIX network"enabling the Company to provide its customers with global electronic connectivity for order routing and allows NYFIX to deploy and monitor its systems and services from a single location. Customers subscribe to various products, paying a monthly fee per terminal for the Company's integrated software systems. Most contracts provide the customer with a basic system or infrastructure, via the Company's NYFIX data center and are entered into by the customer with the intention to expand the level of services subscribed to, once the basic system and infrastructure are operational. Subscription revenue contracts are generally for an initial period of one or two years with one to three year renewal periods. The Company begins recording subscription revenue once installation is complete. Management has continued to apply a considerable effort to the expansion of its operations and the development of various product enhancements to its trading systems. The development of the NYFIX network has enabled the Company to improve its market share. The Company believes that its expansion of personnel, facilities, product portfolio and subscription-based model has positioned the Company for steady future growth. On October 27, 1999, the Company announced the formation of NYFIX Millennium L.L.C. ("NYFIX Millennium") with a consortium of seven leading international investment banks and brokerage firms. NYFIX Millennium is registering as a Broker/Dealer and plans to operate in compliance with Regulation ATS. NYFIX Millennium is an "Integrated ATS, Exchange Access and Intelligent `Best Execution' Order-Routing System" designed to provide the financial community with "Best-Execution." NYFIX Millennium is built upon NYFIX's proprietary "Super FIX Engine" technology and existing NYFIX network infrastructure. NYFIX Millennium is a Hybrid Market System leveraging new regulation and technology with the power of the traditional markets. 9 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenues Subscription revenue for 1999 exceeded the Company's total revenue recognized during 1998. The increase in subscription sales is partly due to a number of new products enhancements and order routing services introduced during 1999 as well as the Company's continued increase in new orders. Consistent with the Company's objectives, recurring revenue has generally been increasing on a quarter-to-quarter and year-to-year basis. Recurring contractual revenue is accounting for a greater share of the Company's total revenue. Recurring contractual revenue is comprised of subscription revenue and service contracts. Recurring contractual revenue for the Company increased by approximately 137% for the year ended December 31, 1999 (from $3,582,000 to $8,494,000) over the comparable 1998 period. During the year ended December 31, 1999, subscription revenues and service contracts were approximately 79% and 21% of recurring contractual revenue, respectively, as compared to 64% and 36%, respectively, during the comparable 1998 period. The increase in recurring contractual revenue is due principally to the Company's strategy of offering its products and services on a subscription basis rather than capital sales coupled with increased service agreements. Sales revenue is comprised of software sales and capital equipment sales. Sales revenue for the Company increased by approximately 40% for the year ended December 31, 1999 over the comparable 1998 period (from $2,653,000 to $3,715,000). During the year ended December 31, 1999, software sales and capital equipment revenue were approximately 81% and 19% of sales revenues, respectively, as compared to 61% and 39%, respectively, during the year ended December 31, 1998. The increase in sales revenue is due principally to the demand of its OBMS (derivatives) products. Revenue from export sales approximated $733,000 (approximately 6% of revenue) during the year ended December 31, 1999 as compared to approximately $234,000 (approximately 4% of revenue) during the comparable period in 1998. Total revenue for the Stamford/New York location increased by approximately 121% for the year ended December 31, 1999 as compared to the year ended December 31, 1998. This increase was principally due to increased subscription revenue recognized throughout 1999. Total revenue for the London location increased by approximately 32% for the year ended December 31, 1999 over the comparable 1998 period. This increase was primarily due to an increase in software sales, partially offset by a decrease in hardware sales. Total revenue for the Chicago location increased by approximately 823% for the year ended December 31, 1999 as compared to the year ended December 31, 1998 (from $31,000 to $286,000). The increase was directly attributable to the growth of the Company's subscription-based business model. Cost of Sales and Service and Gross Profit The Company's cost of recurring contracts and sales are principally comprised of labor, materials, overhead, subscription communication lines, amortization of capitalized product enhancement costs and depreciation of subscription-based equipment. Gross profit, as a percentage of total revenue was approximately 69% and 59% during 1999 and 1998, respectively. The increase in gross profit percentage experienced by the Company during fiscal 1999 principally resulted from an increase in the amount of higher margin software installations and subscription agreements. The Company obtains its materials and supplies from a variety of vendors in the US and Far East. During 1999, the Company did not experience any significant price increases in its component parts purchased. Included in cost of sales is amortization expense for product enhancement costs of approximately $719,000 and $479,000 for 1999 and 1998, respectively. Also included in cost of sales is depreciation expense for subscription-based equipment of approximately $586,000 and $291,000 for 1999 and 1998, respectively. Selling, General and Administrative During fiscal 1999, selling, general and administrative expenses increased 20% (from $5,494,000 to $6,587,000) when compared to fiscal year 1998. These increases reflect the continued expansion of the development teams both in the U.S. and in London. The expansion in development efforts relates to the Company's plans of providing an increased number of new and enhanced services. These services relate to offering subscription and transaction-based order routing, via the Company's data center, to multiple exchange-floors and between the "Buy-side" and "Sell-side" 10 industry. As a result, the Company experienced increases in salaries and related personnel costs, travel expenses and various office expenses. During the past three years the Company added personnel principally to its technical, programming, service, support and accounting staff. During 1999, the Company added 25 new employees. The Company's recruitment effort continues to strengthen the Company's infrastructure and position the Company to respond to increasing market and revenue opportunities. The Company, during the past several years, has spent a considerable effort in developing and enhancing a variety of "trader desk-top" and "exchange-floor" trading systems. Management believes that the continued investment in development of the new NYFIX data center, and its services, are designed to better leverage the existing products together with providing additional sources of revenue. The Company decreased its marketing programs during 1999 from 1998 and will continue to market its products in 2000 however; a greater emphasis will be placed on its newer products & product enhancements. Research and development (new explorative research) expenses for the year ended December 31, 1999 and 1998 were approximately $297,000 and $537,000, respectively, (a decrease of 45%) and are included in selling, general and administrative expenses. Depreciation Depreciation expense increased by approximately 45% for the year ended December 31, 1999 over the comparable 1998 period (from $457,000 to $663,000). Such increases principally reflect the continued investment in the Company's infrastructure in its NYFIX data center on Wall Street. Other (Expense) Income Financing and interest expense increased in fiscal 1999 principally because of higher balances outstanding on the Company's new line of credit and the cost of warrants issued to a non-employee for the guarantee of the amounts outstanding under the credit facility. Other income includes interest income and other miscellaneous non-operating items. Interest income in 1999 and 1998 approximated $113,000 and $92,000, respectively. The 20% increase in interest income was principally because of higher average cash balances maintained by the Company during the year ended December 31, 1999 versus the comparable period in 1998. Net Earnings/(Loss) Net earnings for fiscal 1999 was approximately $960,000 ($0.07 per share) compared to a net loss of $2,234,000 ($0.17 per share) for fiscal 1998. The change in profitability resulted from the increase in subscription type revenue and the increase in software capital sales. See "Revenues", "Cost of Sales and Service and Gross Profit" and "Selling, General and Administrative" above. Management continues to make a considerable effort with respect to expansion of its operations, development of various trading systems, which began in 1993 and continues into 1999 and changes to its business model to that of a subscription-based product offering. The Company believes that this expansion of personnel, facilities, product portfolio and subscription-based model has positioned the Company for future growth. At December 31, 1999, the Company had net operating loss carryforward balance of approximately $4,300,000, which expire between 2014 and 2019. These carryforwards may be significantly limited under the Internal Revenue Code of 1986, as amended, as a result of ownership changes resulting from the Company's equity offerings. A valuation allowance of approximately $2,010,300 was established at December 31, 1999 to offset any benefit from the net operating loss carryforwards. 11 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues The increase in revenues for the year ended December 31, 1998 over the comparable 1997 period was principally due to the Company's changing its strategy to electronic order routing which it began executing in late 1997. In addition to the conversion from capital sales to subscription sales, a number of new products and order routing services under the NYFIX umbrella are contributing to the Company's continued increase in new orders and corresponding recurring revenues. Consistent with the Company's objectives, recurring revenue has generally been increasing on a quarter-to-quarter and year-to-year basis. Recurring contractual revenue is accounting for a greater share of the Company's total revenue. Recurring contractual revenue is comprised of subscription revenue and service contracts. Recurring contractual revenue for the Company increased by approximately 172% for the year ended December 31, 1998 (from $1,318,000 to $3,582,000) over the comparable 1997 period. During the year ended December 31, 1998, subscription revenues and service contracts were approximately 64% and 36% of recurring contractual revenue, respectively, as compared to 21% and 79%, respectively, during the comparable 1997 period. The increase in recurring contractual revenue is due principally to the Company's strategy of offering its products and services on a subscription basis rather than capital sales coupled with increased service agreements. Sales revenue is comprised of capital equipment sales and software sales. Sales revenue for the Company decreased by approximately 28% for the year ended December 31, 1998 over the comparable 1997 period (from $3,688,000 to $2,653,000). During the year ended December 31, 1998, capital equipment sales and software revenue were approximately 39% and 61% of sales revenues, respectively, as compared to 66% and 34%, respectively, during the year ended December 31, 1997. The decrease in sales revenue is due principally to the Company's strategy of offering its products and services on a subscription basis rather than capital sales. Revenue from export sales approximated $234,000 (approximately 4% of revenue) during the year ended December 31, 1998 as compared to approximately $1,283,000 (approximately 26% of revenue) during the comparable period in 1997. During fiscal 1998, sales to two customers accounted for approximately 26% of total revenue. Total revenue for the Stamford/New York location increased by approximately 19% for the year ended December 31, 1998 as compared to the year ended December 31, 1997. This increase was principally due to higher levels of subscription and service revenue partially offset by a decrease in sales revenue resulting from the Company's efforts to market its products on a subscription basis. Total revenue for the London location increased by approximately 55% for the year ended December 31, 1998 over the comparable 1997 period. This increase was also due to higher levels of subscription and service revenue together with an increase in software sales, partially offset by a decrease in hardware sales. Total revenue for the Chicago location decreased by approximately 81% for the year ended December 31, 1998 as compared to the year ended December 31, 1997 (from $167,000 to $31,000). The decrease was directly attributable to the change in the Company's business model from capital sales to an emphasis on subscription-based revenue. Cost of Sales and Service and Gross Profit The Company's cost of recurring contracts and sales are principally comprised of labor, materials, overhead, subscription communication lines, amortization of capitalized product enhancement costs and depreciation of subscription-based equipment. Gross profit, as a percentage of total revenue was approximately 59% and 46% during 1998 and 1997, respectively. The increase in gross profit percentage experienced by the Company during fiscal 1998 principally resulted from an increase in the amount of higher margin software installations and subscription agreements. The Company obtains its materials and supplies from a variety of vendors in the US and Far East. During 1998, the Company did not experience any significant price increases in its component parts purchased. Included in cost of sales is amortization expense for product enhancement costs of approximately $479,000 and $373,000 for 1998 and 1997, respectively. Also included in cost of sales is depreciation expense for subscription-based equipment of approximately $291,000 and $111,000 for 1998 and 1997, respectively. 12 Selling, General and Administrative During fiscal 1998, selling, general and administrative expenses increased 14% (from $4,830,000 to $5,494,000) when compared to fiscal year 1997. These increases reflect the continued expansion of the development teams both in the U.S. and in London. The expansion in development efforts relates to the Company's plans of providing an increased number of new additional services. These services relate to offering subscription and transaction-based order routing, via the Company's data center, to multiple exchange-floors and between the "Buy-side" and "Sell-side" industry. As a result, the Company experienced increases in salaries and related personnel costs, travel expenses and various office expenses. During the past two years the Company added personnel principally to its technical, programming, service, support and accounting staff. During 1998, the Company added 7 new employees. The Company's recruitment effort continues to strengthen the Company's infrastructure and position the Company to respond to increasing market and revenue opportunities. The Company, during the past several years, has spent a considerable effort in developing a variety of "trader desk-top" and "exchange-floor" trading systems. Management believes that the investment in development of the new NYFIX data center, and its services, are designed to better leverage the existing products together with providing additional sources of revenue. The Company has continued its marketing programs in 1998 primarily focusing on public relations activities, production of various product brochures, and representation at technological exhibitions planned throughout the year. The Company will continue to expand these programs during 1999. Research and development (new explorative research) expenses for the year ended December 31, 1998 and 1997 were approximately $537,000 and $322,000, respectively, (an increase of 67%) and are included in selling, general and administrative expenses. Depreciation Depreciation expense increased by approximately 145% for the year ended December 31, 1998 over the comparable 1997 period (from $186,000 to $457,000). Such increases principally reflect the continued investment in the Company's infrastructure in its state of the art NYFIX data center on Wall Street. Other (Expense) Income Financing and interest expense increased in fiscal 1998 principally because of higher balances outstanding on the Company's new line of credit and the cost of warrants issued to a non-employee for the guarantee of the amounts outstanding under the credit facility. Other income includes interest income and other miscellaneous non-operating items. Interest income in 1998 and 1997 approximated $92,000 and $133,000, respectively. The 31% decrease in interest income was principally because of lower average cash balances maintained by the Company during the year ended December 31, 1998 versus the comparable period in 1997. The Company previously leased a portion of its corporate office facility under a three-year sublease, which expired on April 30, 1997. Due to the continuing expansion of operations, (see "Selling, General and Administrative" above) the Company has decided not to renew the sublease and incorporated such space into its existing corporate facility. Sublease rental income earned during 1997 approximated $13,000. Net Loss Net loss for fiscal 1998 was $2,234,000 ($0.17 per share) compared to a net loss of $2,594,000 ($0.21 per share) for fiscal 1997. The decrease in net loss principally resulted from the increase in subscription type revenue and the increase in software capital sales. See "Revenues", "Cost of Sales and Service and Gross Profit" and "Selling, General and Administrative" above. Management has made a considerable effort with respect to an expansion of its operations, development of various trading systems, which began in 1993 and continues into 1998 and changes to its business model to that of a subscription-based product offering. The Company believes that this expansion of personnel, facilities, product portfolio and subscription-based model will better position the Company and facilitate its future growth. However, in spite of its optimism, management is also cautioning that the Company's aggressive conversion from a capital sales model to subscription-based model is causing revenue recognition from subscription-based orders to be realized over a longer period of time than the previous capital sales model. At December 31, 1998, the Company had net operating loss carry forwards of approximately $5,270,000, which expire between 2008 and 2013. These carry forwards may be significantly limited under the Internal Revenue Code of 1986, as amended, as a result of ownership changes resulting from the Company's equity offerings. A valuation allowance of 13 approximately $2,400,000 has been established at December 31, 1998 to offset any benefit from the net operating loss carry forwards, as it cannot be determined when or if the Company will be able to utilize the net operating losses. Liquidity and Capital Resources The Company's primary source of liquidity has been equity capital and draw downs from its line of credit. In November of 1998 NYFIX raised approximately $3,450,000 and in September of 1999 raised approximately $2,547,000 from private placements of its securities. At December 31, 1999, cash balances decreased to $1,566,000 from $3,948,000 at December 31, 1998 as a result of the Company's working capital needs and continued desire to strengthen its NYFIX and subscription infrastructure. The Company at December 31, 1999 had total debt of $2,500,000, which represents amounts drawn down from its line of credit. See discussion below. In addition, at December 31, 1999, the Company had no material commitments for capital expenditures or inventory purchases. On July 13, 1998, the Company entered into a three-year $3 million line of credit agreement (the "Agreement") with a financial institution with advances on such agreement available to the Company during the first 18 months. The Agreement is primarily intended to finance existing and future equipment expenditures. The Agreement bears interest at either LIBOR plus 1.25% or the Bank's Prime rate. The rate used is management's discretion. The Company drew down an aggregate of $1,800,000 under the agreement during 1998 and an additional $700,000 during August of 1999. The Agreement requires monthly payments of interest only until January 30, 2000. Principal drawdowns under the Agreement cannot be prepaid in the first eighteen months. Repayment of principal commences on July 30, 2000 with twelve monthly installments of $83,333 with the remaining balance due on July 30, 2001. A Company shareholder and the Company's president personally secure the debt. In consideration for securing the Agreement, the said shareholder and president received 150,000 and 25,000 warrants respectively, to purchase the Company's common stock at $6.375 per share, which was the market value of the Company's common stock on the date such warrants were issued. Expense related to the warrants issued to the non-employee shareholder will be recognized over the three-year term of the Agreement. In association with obtaining the $3 million line of credit facility, the Company terminated its previous $500,000 line of credit agreement (revised from $1 million line of credit agreement in June 1998) and repaid all outstanding term loans. In addition, the Company has warrants outstanding for the purchase of 367,500 shares of its Common Stock. Assuming the exercise of all such outstanding warrants, the Company would receive approximately $1,512,000 in gross proceeds. On October 27, 1999, NYFIX announced the formation of NYFIX Millennium, with a consortium of seven leading international banks and brokerage firms. NYFIX Millennium intends to operate as an alternative trading system. All of the members of the consortium, including NYFIX, Inc. have invested $2,000,000 each in NYFIX Millennium. In addition, each of the seven non-NYFIX members received 187,500 shares of common stock of NYFIX totaling 1,312,500 shares of common stock (adjusted for stock split). Working Capital At December 31, 1999 and 1998 the Company had working capital of approximately $4,488,000 and $5,970,000, respectively. The Company's present capital resources include proceeds from its 1999 and 1998 private placement of Common Stock and drawdowns from its bank credit facility. Cash Used in Operating Activities During fiscal 1999, net cash earned from operations was approximately $1,583,000 as compared to cash used in operations in fiscal 1998 of approximately $1,159,000. The increase from fiscal 1998 to fiscal 1999 is primarily attributable to the change in profitability from a loss of approximately $2,234,000 in 1998 to net income of approximately $960,000. 14 Cash Used in Investing Activities During fiscal 1999 and fiscal 1998, net cash used in investing activities was approximately $7,907,000 and $3,152,000, respectively, and principally represents the Company's investment in NYFIX Millennium, along with payments for the increased purchases of equipment related to the Company's data center and subscription equipment and payments related to product enhancement costs for the Company's product portfolio. Proceeds From Financing Activities During fiscal 1999 and fiscal 1998, proceeds from financing activities were approximately $3,942,000 and $6,117,000, respectively. Such increase in fiscal 1999 primarily resulted from the issuance of Common Stock through the issuance of common stock for the investment of NYFIX Millennium and the exercise of warrants and stock options totaling approximately $874,000, and borrowings under our credit line of approximately $700,000. Year 2000 Compliance NYFIX completed a Year 2000 plan consisting of several phases which include, risk assessment, manual and automated review of programming code, baseline testing, unit testing, integrated testing and a review of third party products. Our systems, both internal and external, were fully functional during and after the calendar year and leap year transitions. The Company will continue to monitor critical business systems for possible Year 2000 system issues. Seasonality The Company believes that its operations are not significantly effected by seasonality. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards for the accounting and reporting for derivative instruments and for hedging activities and requires the recognition of all derivatives as assets or liabilities measured at their fair value. Gains or losses resulting from changes in the fair value of derivatives would be recognized in earnings in the period of change unless certain hedging criteria are met. We do not expect the Statement to have a material impact on our consolidated financial statements. The statement is effective for fiscal years beginning after June 15, 1999. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk principally with changes in interest rates. Interest rate exposure is principally limited to the $2.5 million of long-term debt outstanding at December 31, 1999, under the Company's line of credit agreement. Borrowings under the line of credit agreement bear interest at rates that float with the market. Assuming a change of 100 basis points in the interest rates on the line of credit agreement, interest expense and cash flows would be affected by approximately $25,000 on an annual basis. The Company does not use derivative financial instruments for any purpose. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See index to Financial Statements on Page 19. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the Section entitled "Proposal No. 1. -Election of Directors" and "Executive Compensation" in the Company's Proxy Statement for the June 5, 2000 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission no later than April 30, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Section entitled "Executive Compensation and Transactions with Management" in the Company's Proxy Statement for the June 5, 2000 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission no later than April 30, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Sections entitled "Principal Holders of Voting Securities" and "Security Ownership of Officers and Directors" of the Company's Proxy Statement for the June 5, 2000 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission no later than April 30, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Section entitled "Executive Compensation and Transactions with Management" in the Company's Proxy Statement for the June 5, 2000 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission no later than April 30, 2000. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report (1) Financial Information See index to Financial Statements on Page 19 (2) Financial Statement Schedules Supplemental schedules are omitted because they are not required, inapplicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits * 3.1 Articles of Incorporation of NYFIX, Inc. (Exhibit 3.1 to Registrant's Form 10 filed March 5, 1993). 3.2 Certificate of Amendment to Articles of Incorporation of NYFIX, Inc. (Exhibit 3.3 to Registrant's form S-3 Filed December 30, 1999) 16 3.3 By-Laws of NYFIX, Inc. (Exhibit 3.2 to Registrant's Form 10 filed March 5, 1993). 4.1 Certificate of Designation of Series A Preferred Stock (Exhibit 4.1 to Registrant's Form 10 filed March 5, 1993). 4.2 Specimen - Common Stock Certificate (Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.3 1991 Incentive and Nonqualified Stock Option Plan of NYFIX, Inc. (Exhibit 4.3 to Registrant's Form S-8 Filed on October 19, 1994.) 4.4 Amendment No. 1 to Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan (Exhibit 4.4 to Registrant's Form S-8 Filed January 21, 2000) 10.1 Employment Agreement with Peter Kilbinger Hansen dated January 1, 1991 (Exhibit 3.2 to Registrant's Form 10 filed March 5, 1993). 10.2 Revolving Credit Agreement, dated July 13, 1998, between Chase Manhattan Bank and NYFIX, Inc. (Exhibit 10.4 to the Company Form 8K dated July 13, 1998.) 10.3 Amended and Restated 1991 Incentive Stock Option Plan of NYFIX, Inc. (Exhibit 10.3 to Company's Annual Report on Form 10-KSB for the year ended December 31, 1996). 10.4 Limited Liability Company Operating Agreement of NYFIX Millennium, L.L.C.** 21.1 Subsidiaries of the Registrant (Exhibit 21.1 to Company's Annual Report on Form 10-KSB for the year ended December 31, 1994). 24.1 Consent of Independent Public Accountants.** 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information purposes only and not filed. * - Except as noted, all exhibits have been previously filed. ** - Filed herewith. (b) Reports on Form 8-K On October 25, 1999 the Company filed a current report on Form 8-K relating to the change of its name to NYFIX, Inc. On October 28, 1999 the Company filed a current report on Form 8-K relating to the formation of NYFIX Millennium. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed this 30th day of March, 2000 on its behalf by the undersigned, thereunto duly authorized. NYFIX, INC. By:/s/ Peter Kilbinger Hansen -------------------------- Peter Kilbinger Hansen Chairman of the Board and President (Chief Executive Officer) POWER OF ATTORNEY NYFIX, Inc. and each of the undersigned do hereby appoint Peter Kilbinger Hansen and Richard A. Castillo, and each of them severally, its or his true and lawful attorney to execute on behalf of NYFIX, Inc. and the undersigned any and all amendments to this Annual Report on Form 10-K and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission; each of such attorneys shall have the power to act hereunder with or without the other. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Peter Kilbinger Hansen Chairman of the Board March 30, 2000 - ------------------------------ (Principal Executive Peter Kilbinger Hansen Officer) /s/ Richard A. Castillo Chief Financial Officer March 30, 2000 - ------------------------------ & Secretary (Principal Richard A. Castillo Accounting Officer) /s/ Dean G. Stamos Executive Vice President March 30, 2000 - ------------------------------ & Director Dean G. Stamos /s/ Dr. John H. Chapman Director March 30, 2000 - ------------------------------ Dr. John H. Chapman /s/ Craig M. Shumate - ------------------------------ Director March 30, 2000 Craig M. Shumate /s/ Carl E. Warden Director March 30, 2000 - ------------------------------ Carl E. Warden 18 Index to Financial Statements Page Report of Independent Public Accountants.....................................20 Financial Statements: Consolidated Balance Sheets at December 31, 1999 and 1998.................21 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997.....................................22 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.....................................23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.....................................24 Notes to Consolidated Financial Statements...................................25 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of NYFIX, Inc.: We have audited the accompanying consolidated balance sheets of NYFIX, Inc. (a New York corporation) and subsidiary (formerly Trinitech Systems, Inc.) as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NYFIX, Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation and qualifying accounts (note 16) is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /S/ ARTHUR ANDERSEN LLP Stamford, Connecticut March 29, 2000 20 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
1999 1998 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,565,649 $ 3,948,004 Accounts receivable - less allowance of $125,000 and $92,986, respectively 7,088,820 3,417,418 Inventories, net 1,303,658 1,279,302 Prepaid expenses and other current assets 478,641 283,912 Due from NYFIX Millennium 861,970 -- Receivable from officers 156,992 120,583 ------------ ------------ Total Current Assets 11,455,730 9,049,219 EQUIPMENT, net 5,873,037 2,854,131 INVESTMENT IN NYFIX MILLENNIUM 19,500,000 -- OTHER ASSETS 1,999,258 1,094,169 ------------ ------------ TOTAL ASSETS $ 38,828,025 $ 12,997,519 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,845,996 $ 873,817 Accrued expenses 1,269,070 635,943 Current portion of debt 500,000 -- Advance billings 3,178,636 1,489,057 Payroll and other taxes payable 149,043 79,953 ------------ ------------ Total Current Liabilities 6,942,745 3,078,770 LONG TERM DEBT 2,000,000 1,800,000 ------------ ------------ TOTAL LIABILITIES 8,942,745 4,878,770 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY 10% Convertible preferred stock - par value $1.00; 5,000,000 shares authorized; zero issued and outstanding -- -- Common Stock - par value $.001; 60,000,000 authorized; 15,903,302 and 9,408,530 shares issued and outstanding 15,903 9,409 Warrants 189,509 125,513 Additional paid-in capital 35,681,437 14,767,116 Accumulated deficit (5,369,945) (6,330,364) Due from officers and directors (631,624) (452,925) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 29,885,280 8,118,749 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,828,025 $ 12,997,519 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 21 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- REVENUES: Sales $ 3,715,479 $ 2,653,100 $ 3,688,041 Subscription revenue 6,732,928 2,278,447 273,771 Service contracts 1,761,044 1,303,846 1,044,205 ------------ ------------ ------------ Total Revenues 12,209,451 6,235,393 5,006,017 ------------ ------------ ------------ COST OF REVENUES 3,765,587 2,532,709 2,680,138 ------------ ------------ ------------ GROSS PROFIT 8,443,864 3,702,684 2,325,879 ------------ ------------ ------------ EXPENSES: Selling, general and administrative 6,587,161 5,494,025 4,815,437 Depreciation and amortization 662,537 474,996 222,551 ------------ ------------ ------------ Total Expenses 7,249,698 5,969,021 5,037,988 ------------ ------------ ------------ EARNINGS (LOSS) FROM OPERATIONS 1,194,166 (2,266,337) (2,712,109) Interest expense (221,711) (108,465) (13,463) Interest income 112,807 91,715 133,491 Other income 11,166 61,744 12,965 ------------ ------------ ------------ NET EARNINGS (LOSS) BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 1,096,428 (2,221,343) (2,579,116) PROVISION FOR INCOME TAXES 94,400 12,466 14,924 ------------ ------------ ------------ NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 1,002,028 (2,233,809) (2,594,040) ------------ ------------ ------------ CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 41,609 -- -- ------------ ------------ ------------ NET EARNINGS (LOSS) $ 960,419 $ (2,233,809) $ (2,594,040) ============ ============ ============ BASIC EARNINGS (LOSS) PER COMMON SHARE BEFORE AND AFTER CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.07 $ (0.17) $ (0.21) ============ ============ ============ BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,501,722 13,241,895 12,154,995 ============ ============ ============ DILUTED EARNINGS (LOSS) PER COMMON SHARE BEFORE AND AFTER CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.06 $ (0.17) $ (0.21) ============ ============ ============ DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 15,537,941 13,241,895 12,154,995 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 22 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock Additional Due from Total ---------------------------- Paid-in Accumulated Officers Stockholders Description Shares Amount Warrants Capital Deficit and Directors Equity - ---------------------------- ------------ ------------- ---------- ------------ ------------- ------------- ------------ BALANCE, DECEMBER 31, 1996 7,375,030 $ 7,375 $ -- $ 6,088,975 $ (1,502,515) $ (50,000) $ 4,543,835 Stock issued from exercise of options and warrants 349,500 350 -- 816,588 -- -- 816,938 Common stock, net of issuance costs 800,000 800 -- 3,514,200 -- -- 3,515,000 Due from officers and directors -- -- -- -- -- (380,000) (380,000) Net loss -- -- -- -- (2,594,040) -- (2,594,040) --------- ---------- -------------- ------------ ------------- ------------- ------------- BALANCE, DECEMBER 31, 1997 8,524,530 $ 8,525 -- $10,419,763 $ (4,096,555) $ (430,000) $ 5,901,733 Stock issued from exercise of options and warrants 284,000 284 -- 983,466 -- -- 983,750 Common stock, net of issuance costs 600,000 600 -- 3,449,400 -- -- 3,450,000 Warrants issued -- -- 125,513 (85,513) -- -- 40,000 Due from officers and directors -- -- -- -- -- (22,925) (22,925) Net loss -- -- -- -- (2,233,809) -- (2,233,809) ----------- ------------ -------------- ------------ ------------- ------------- ------------- BALANCE, DECEMBER 31, 1998 9,408,530 $ 9,409 $ 125,513 $14,767,116 $(6,330,364) $ (452,925) $ 8,118,749 Three-for-two common stock split effected in the form of a 50% stock dividend 4,704,265 4,704 -- (4,704) -- -- -- Stock issued from exercise of options and warrants 290,507 290 -- 873,650 -- -- 873,940 Common stock, net of issuance costs 1,500,000 1,500 -- 20,045,375 -- -- 20,046,875 Warrants issued -- -- 63,996 -- -- -- 63,996 Due from officers and directors -- -- -- -- -- (178,699) (178,699) Net earnings -- -- -- -- 960,419 -- 960,419 ----------- ------------ ------------- ------------ ------------- -------------- ------------ BALANCE, DECEMBER 31, 1999 15,903,302 $ 15,903 $ 189,509 $ 35,681,437 $ (5,369,945) $ (631,624) $ 29,885,280 =========== ============ ============ ============ ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements. 23 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 960,419 $ (2,233,809) $ (2,594,040) Adjustments to reconcile net earnings (loss) to net cash provided (used) in operating activities: Depreciation 1,244,818 747,664 297,672 Amortization 738,581 497,552 409,346 Provision for bad debts 44,758 50,922 144,269 Provision for inventory obsolescence -- -- 82,000 Noncash financing charges 63,996 40,000 -- Changes in assets and liabilities: Accounts receivable (3,716,160) (1,609,039) 1,798,794 Inventory (24,356) 31,681 (136,186) Due from NYFIX Millennium (861,970) -- -- Prepaid expenses and other current assets (194,729) (181,412) 90,634 Receivable from officers (36,409) (28,986) (18,820) Accounts payable 972,179 (53,855) (458,634) Accrued expenses 633,127 246,769 (136,479) Advance billings 1,689,579 1,317,643 21,739 Payroll and other taxes payable 69,090 16,247 (2,102) ------------ ------------ ------------ Net cash provided by (used in) operating activities 1,582,923 (1,158,623) (501,807) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Payments for equipment (4,263,724) (2,342,698) (1,224,742) Investment in NYFIX Millennium (2,000,000) -- -- Payments for software development costs and other assets (1,643,670) (809,243) (574,317) ------------ ------------ ------------ Net cash used in investing activities (7,907,394) (3,151,941) (1,799,059) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 700,000 2,300,000 75,000 Repayment of borrowings -- (593,564) (783,495) Issuance of common stock, net of issuance costs 3,242,116 4,410,825 3,951,938 ------------ ------------ ------------ Net cash provided by financing activities 3,942,116 6,117,261 3,243,443 ------------ ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,382,355) 1,806,697 942,577 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,948,004 2,141,307 1,198,730 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,565,649 $ 3,948,004 $ 2,141,307 ============ ============ ============ SUPPLEMENTAL INFORMATION: Cash paid during the year for interest $ 149,777 $ 69,044 $ 16,404 Cash paid during the year for income taxes $ 39,150 $ 12,466 $ 14,924 Common stock issued for investment in NYFIX Millennium $ 17,500,000 $ -- $ -- The accompanying notes to consolidated financial statements are an integral part of these statements.
24 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 1. ORGANIZATION AND PRESENTATION NYFIX, Inc. and subsidiary (formerly known as Trinitech Systems, Inc., the "Company") develops and markets advanced electronic trading systems to brokerage firms, international banks and global exchanges trading in equities and futures & options. The Company's NYFIX Network, a combined FIX (Financial Information Exchange protocol) and Exchange Access Network, enables users to electronically communicate trade data among the buy-side, sell-side, and exchange floor environments. In addition, the Company offers a range of related information technology services and maintenance support. The Company is headquartered in Stamford, Connecticut and maintains operations in New York, Chicago and London. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of NYFIX, Inc. and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain 1998 and 1997 balances have been reclassified to conform to the 1999 presentation. Cash and Cash Equivalents The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Inventories Inventories consist of parts, finished goods and minor materials and are stated at the lower of cost, determined on an average cost basis, or market. 25 Equipment Equipment is stated at cost less accumulated depreciation. Included in equipment are certain payroll costs related to the development of the NYFIX network and other long-lived assets to support the Company's subscription and service based businesses. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from two to eight years. The estimated useful lives for subscription and service based equipment is generally two to three years. In the fourth quarter of 1998, the Company extended the life of certain subscription equipment from two to three years. The change decreased depreciation expense by approximately $20,000. Other Assets Other assets consist principally of patents, deferred product enhancements costs (capitalized based on time incurred for enhancements of products which have achieved technological feasibility), and deposits. Product enhancement costs are being amortized using the straight-line method over three years. Patent costs are being amortized over seventeen years. Long-Lived Assets Long-lived assets, primarily equipment, other assets and the investment in NYFIX Millennium are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. The fair value of an asset is calculated based upon the present value of expected future cash flows. There has been no impairment in long-lived assets through December 31, 1999. Revenue Recognition Sales are generally recorded upon shipment of the product to and acceptance by customers. Subscription revenue is recognized ratably over the life of the subscription agreements with customers. Installation revenue is recognized at time of installation. Revenue from service contracts is recognized ratably over the period the services are performed. Amounts billed in advance for service, installation and subscription contracts are deferred and reflected as advance billings. Research and Development Research and development costs are expensed as incurred. Advertising The Company expenses advertising costs as incurred. Advertising expense was approximately $159,000, $294,000 and $320,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 26 Foreign Currency Translation The Company's functional currency is the U.S. dollar. Accordingly, the monetary assets and liabilities of the London sales office are translated at year-end exchange rates while non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates in effect during the year, except for depreciation and cost of sales, which are translated at historical rates. The resulting currency translation gain or loss is included in the results of operations for the periods presented. Net Earnings (Loss) Per Common Share The Company accounts for earnings (loss) per common share under Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per share." The weighted average number of common shares outstanding used for calculating earnings (loss) per share is based upon the number of shares outstanding at the end of each period. Diluted earnings (loss) per share are not presented in either 1998 or 1997 because the effect of the Company's common stock equivalents (employee stock options and warrants) is antidilutive. Cumulative Effect of a Change in Accounting Principle In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." The SOP requires costs of start-up activities and organization costs to be expensed as incurred. The Company adopted the SOP in 1999 and recognized a charge for the cumulative effect of accounting change of approximately $42,000. Income Taxes The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." The Company uses different methods of accounting for financial reporting and tax purposes, principally through the utilization of accelerated depreciation methods for income tax purposes, certain valuation allowances and net operating loss carry-forwards. Deferred taxes are provided on the basis of such differences. Financial Instruments The carrying value for all current assets and current liabilities approximates fair value because of their short-term nature. The carrying value of the Company's long-term debt also approximates its fair value based on prevailing interest rates. Impact of Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards for the accounting and reporting for derivative instruments and for hedging activities and requires the recognition of all derivatives as assets or liabilities measured at their fair value. Gains or losses resulting from changes in the fair value of derivatives would be recognized in earnings in the period of change unless certain hedging criteria are met. The Company does not expect the Statement to have a material impact on the consolidated financial statements. The Financial Accounting Standards Board issued SFAS No. 137, which deferred the effective date for SFAS No. 133, to all fiscal quarters of all fiscal years beginning after June 15, 2000. 27 3. INVENTORY Inventory consists of the following:
December 31, ------------------------------- 1999 1998 ---- ---- Parts, including minor materials $ 828,259 $ 823,429 Finished goods 557,399 537,873 ---------- ---------- 1,385,658 1,361,302 Less: Allowance for obsolescence 82,000 82,000 ---------- ---------- Total $1,303,658 $1,279,302 ========== ==========
4. EQUIPMENT Equipment consists of the following:
December 31, ------------------------------- 1999 1998 ---- ---- Computer software $ 424,022 $ 389,090 Leasehold improvements 169,755 116,002 Furniture and equipment 1,463,694 1,087,174 Subscription and service bureau equipment 6,514,267 2,715,747 ---------- ---------- 8,571,738 4,308,013 Less: Accumulated depreciation 2,698,701 1,453,882 ---------- ---------- Total $5,873,037 $2,854,131 ========== ==========
Included in other assets are unamortized deferred product enhancement costs aggregating approximately $1,811,000 and $974,000 as of December 31, 1999 and 1998, respectively. Amounts deferred are based upon an analysis of payroll and other costs directly related to the enhancement of existing products. Included in cost of sales is amortization expense for product enhancement costs of approximately $719,000, $479,000 and $373,000 for 1999, 1998 and 1997, respectively. Also included in cost of sales is depreciation expense for subscription-based equipment of approximately $586,000, $291,000 and 111,000 for 1999, 1998 and 1997, respectively. 5 EARNINGS PER SHARE The Company's basic EPS is calculated based on net earnings available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and stock warrants. 28
Twelve Months Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 ------------- ------------- ------------- Net Earnings (Loss) $ 960,419 $(2,233,809) $ (2,594,040) ------------ ----------- ------------ Basic Weighted Average Shares Outstanding 14,501,722 13,241,895 12,154,995 ============ =========== ============ Basic Earnings (Loss) per Common Share $ 0.07 $ (0.17) $ (0.21) ============ =========== ============ Dilutive Options 870,686 -- -- Dilutive Warrants 165,533 -- -- ------------ ----------- ------------ Dilutive Weighted Average Shares Outstanding 15,537,941 13,241,895 12,154,995 ============ =========== ============ Dilutive Earnings (Loss) per Common Share $ 0.06 $ (0.17) $ (0.21) ============ =========== ============
Stock options and warrants were excluded from the earnings (loss) per share calculation for 1998 and 1997 since the amounts would be anti-dilutive. 6. CAPITAL STOCK On October 21, 1999, shareholders approved an increase in the authorized shares of the Company's common and preferred stock. Common shares were increased from 15 million to 60 million shares and preferred shares from 1 million to 5 million shares. Along with this increase, the Board of Directors authorized a 3 for 2 stock split in the form of a 50% stock dividend to all shareholders of record on November 1, 1999, and was paid on November 15, 1999. On September 7, 1999, the Company completed a private placement of 187,500 shares of Common Stock (adjusted for stock split) to an institutional investment firm at a price equal to the average closing price of the stock for the 30-day period prior to the closing date on September 1, 1999. This approximated the fair market value of the stock at $13.583 per share (adjusted for stock split) for an aggregate value of $2,546,875. On November 24, 1998, the Company completed a private placement of 900,000 shares of Common Stock, (adjusted for stock split) at a price of $4.00 per share, for an aggregate value of $3,600,000. Costs related to this offering amounted to approximately $150,000 resulting in net proceeds to the Company of approximately $3,450,000. On March 7, 1997, the Company completed a private placement of 1,200,000 shares of Common Stock, (adjusted for stock split) at a price of $3.00 per share, for an aggregate value of $3,600,000. Costs related to this offering amounted to approximately $85,000 resulting in net proceeds to the Company of approximately $3,515,000. On September 1, 1997, the Board of Directors declared a dividend distribution of one Preference Share Purchase right (a "Right") for each outstanding share of Common Stock, par value $.001 per share, of the Company to stockholders of record on September 19, 1997. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Preference Stock, par value $.001 per share, of the Company, at a price of $40 per one one-hundredth of a Preference Share, subject to adjustment, upon change of control in the Company, as defined in the rights agreement. Due to the nature of the Preference Shares' dividend liquidation and voting rights, the value of a Preference Share should approximate the value of one share of Common Stock. 29 During 1999, approximately 121,000 warrants and 169,000 options were exercised for approximately 290,000 shares of Common Stock (adjusted for stock split). The Company received approximately $186,000 from the warrant exercises and approximately $532,000 from the option exercises. 7. MAJOR CUSTOMERS AND EXPORT SALES For the year ended December 31, 1999 two customers accounted for 24% of total sales. For the year ended December 31, 1998, two customers accounted for approximately 26% of total sales. For the year ended December 31, 1997, one customer accounted for approximately 17% of total sales. Export sales amounted to approximately $733,000, $234,000 and $1,283,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 8. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses for the years ended December 31, 1999, 1998 and 1997 totaled approximately $297,000, $537,000 and $322,000, respectively and are included in selling, general and administrative expenses. 9. DEBT On July 13, 1998, the Company entered into a three-year $3 million line of credit agreement (the "Agreement") with a financial institution with advances on such agreement available to the Company during the first eighteen months. The Agreement is primarily intended to finance existing and future equipment expenditures. The Agreement bears interest at either LIBOR plus 1.25% or the Bank's Prime rate. The rate used is at management's discretion. The Company drew down an aggregate of $1,800,000 under the Agreement during 1998 and an additional $700,000 during 1999. The weighted average outstanding borrowings during 1999 were approximately $2,059,000 at a weighted average interest rate of 7.43%. The Agreement requires monthly payments of interest only until January 30, 2000. Principal drawdowns under the Agreement cannot be prepaid in the first eighteen months. Repayment of principal commences on July 30, 2000, with twelve monthly installments of $83,333 with the remaining balance due on July 30, 2001. The debt is personally secured by a Company non-employee shareholder and the Company's president. In consideration for securing the Agreement, the said shareholder and president received 225,000 and 37,500 warrants respectively (adjusted for stock split), to purchase the Company's common stock at $4.25 per share, which was the market value of the Company's common stock on the date such warrants were issued. The expense related to the warrants issued to the non-employee shareholder will be recognized over the three-year term of the Agreement. The following is a schedule of principal payments as of December 31, 1999: 2000 $ 500,000 2001 2,000,000 In association with obtaining the $3 million line of credit facility, the Company terminated its previous $500,000 line of credit agreement and repaid all outstanding term loans. The weighted average outstanding borrowings under the previous credit line during 1998 approximated $74,000 at a weighted average interest rate of 9.50%. 30 10. COMMITMENTS AND CONTINGENCIES At December 31, 1999, the Company was committed under operating leases for offices, production facilities and equipment for terms expiring through June 6, 2009. Future minimum annual rental payments are as follows: Year Amount - ---- ------ 2000 $772,144 2001 483,916 2002 365,088 2003 280,266 2004 293,883 Thereafter 693,496 Aggregate rental expense amounted to approximately $780,000, $623,000 and $229,000 for the years ended December 31, 1999, 1998 and 1997, respectively. In 1991, the Company entered into an employment agreement with its President. The agreement calls for a base salary of $114,000 for the first year, with such base salary to be reviewed on an annual basis thereafter by the Compensation Committee of the Board of Directors. The Company may be subject to legal proceedings, which arise in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not materially affect the Company's financial statements. 11. RELATED PARTIES Certain executive officers and directors of the Company have amounts due to the Company for the exercise of warrants for capital stock. Such amounts aggregated $631,624 and $452,925 as of December 31, 1999 and 1998, respectively, and have been shown as a reduction to stockholders' equity. At December 31, 1999 and 1998, the Company had amounts receivable from officers of $156,992 and $120,583, respectively. 12. DEFINED CONTRIBUTION PLAN The Company sponsors a 401(k) retirement plan (the "Plan") covering substantially all of its U.S. employees who meet eligibility requirements. The Plan permits participants to contribute up to a maximum of 15% of their annual compensation, as defined, not to exceed the federal limit of $10,000 in 1999. The Plan permits the Company to match employees' tax deferred contributions up to a maximum of 3% of employees' compensation provided the Company employs the employee at the end of the year. Remaining contributions under the Plan are discretionary. Total contribution under the Plan approximated $80,000, $57,000 and $52,000 in 1999, 1998 and 1997, respectively. 13. STOCK WARRANTS AND STOCK OPTION PLAN On March 30, 1999, the Board of Directors formally approved the second amendment to the Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan. Under this amendment, the number of options reserved for issuance has been increased from 1,500,000 shares to 2,500,000 shares of common stock. This amendment was approved at the Company's Annual Meeting of Shareholders held on June 7, 1999. In 31 connection with the aforementioned stock split paid on November 15, 1999, the number of shares reserved for issuance was increased to 3,750,000. At December 31, 1999, 1998, and 1997, the following options and warrants had been granted and were outstanding:
Weighted Weighted Average Average Stock Exercise Stock Exercise Options Price Warrants Price ------- ----- -------- ----- Outstanding at December 31, 1996 435,000 $ 2.04 813,880 $ 1.83 Granted 1,128,750 $ 3.30 42,375 $ 3.00 Exercised (63,750) $ 2.05 (460,500) $ 1.49 Forfeited (72,000) $ 2.90 -- -- ---------- ----------- Outstanding at December 31, 1997 1,428,000 $ 3.01 395,755 $ 2.34 Granted 602,550 $ 4.46 300,000 $ 4.22 Exercised (301,500) $ 2.37 (124,500) $ 2.18 Forfeited (114,600) $ 4.35 (82,500) $ 1.88 ---------- ----------- Outstanding at December 31, 1998 1,614,450 $ 3.56 488,755 $ 3.61 Granted 964,425 $ 9.88 -- -- Exercised (169,302) $ 3.57 (121,256) $ 2.25 Forfeited (41,250) $ 4.03 -- -- ----------- ----------- Outstanding at December 31, 1999 2,368,323 $ 6.13 367,500 $ 4.11 =========== ===========
The following table summarizes the options and warrants exercisable at December 31, 1999, 1998 and 1997 and the weighted average fair value of warrants and options granted during the years then ended:
Exerciseable Options Exercisable Warrants -------------------- -------------------- Weighted Weighted Weighted Weighted Average Average Average Average Exercise Fair Value Exercise Fair Value Options Price of Grants Warrants Price of Grants Shares exercisable at December 31, 1997 359,250 $ 2.03 $ 2.03 302,005 $ 2.14 $ 1.45 Shares exercisable at December 31, 1998 366,750 $ 2.97 $ 2.57 110,005 $ 2.10 $ 1.95 Shares exercisable at December 31, 1999 678,371 $ 3.37 $ 19.87 367,500 $ 4.11 $ 3.44
The following table summarizes information about stock options and warrants outstanding at December 31, 1999:
Weighted Weighted Weighted Range of Outstanding at Average Remaining Average Exercisable at Average Exercise Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price --------------- ----------------- ---------------- -------------- ----------------- -------------- $1.50 - $2.00 61,500 4.18 $ 1.87 61,500 $ 1.87 $2.42 - $3.42 821,000 6.76 $ 3.13 440,000 $ 3.08 $3.75 - $5.42 1,142,473 7.74 $ 4.36 544,371 $ 4.29 $5.83 - $10.17 99,000 7.82 $ 8.49 -- -- $10.25 - $26.87 611,850 8.25 $ 12.29 -- -- --------- --------- 2,735,823 1,045,871 ========= =========
32 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: o Risk free interest rates range from 4.18% to 6.42% o Expected dividend yields of 0% o Expected lives of 3 to 5 years and o Expected volatility of 65%, 63% and 66%, respectively The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" to account for its stock plans. Except for certain warrants granted to non-employees during 1998, no compensation cost has been recognized for any option grants in the accompanying income statement. Had compensation costs been recorded, the net earnings (loss) and basic and diluted earnings (loss) per share would have been reduced from the following as reported amounts to the following pro forma amounts:
1999 1998 1997 ---- ---- ---- Net Earnings (loss): As reported $ 960,419 $ (2,233,809) $ (2,594,040) Pro forma $ (831,791) $ (3,215,042) $ (3,335,625) Basic earnings (loss) per common share: As reported $ 0.07 $ (0.17) $ (0.21) Pro forma $ (0.06) $ (0.24) $ (0.27) Diluted earnings (loss) per common share: As reported $ 0.06 $ (0.17) $ (0.21) Pro forma $ (0.05) $ (0.24) $ (0.27)
14. BUSINESS SEGMENT INFORMATION The Company has two principal business groups: Equities and Futures & Options. The Equities Group operates primarily out of Stamford/New York offices, while the Futures & Options Group operates primarily out of the London and Chicago offices. However, each office has the opportunity to sell all of the Company's products. The Company views each office as its own business segment, measures its performance based on the revenues of each location. The Company makes decisions on each segment based on gross profit. Foreign operation revenues amounted to approximately $2,636,000, $2,001,000 and $1,293,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Intersegment sales are accounted for at cost. Identifiable assets by segment include assets directly identifiable with those operations. Other assets consist primarily of corporate cash and cash equivalents and fixed assets associated with non-segment activities. Summarized financial information by business segment for 1999, 1998 and 1997 is as follows (in 000's): 33
1999 1998 1997 ---- ---- ---- Revenues: Stamford / New York $ 9,287 $ 4,203 $ 3,546 London 2,636 2,001 1,293 Chicago 286 31 167 Inter-Segment Sales 78 95 189 Inter-Segment Elimination (78) (95) (189) -------- -------- -------- Total revenues $ 12,209 $ 6,235 $ 5,006 Gross Profit: Stamford / New York $ 5,897 $ 1,936 $ 1,185 London 2,288 1,745 1,074 Chicago 259 22 67 -------- -------- -------- Gross Profit $ 8,444 $ 3,703 $ 2,326 Identifiable assets at December 31: Stamford / New York $ 34,313 $ 7,284 $ 4,013 London 2,411 1,472 1,130 Chicago 346 57 142 Corporate 1,758 4,184 2,262 -------- -------- -------- Total identifiable assets $ 38,828 $ 12,997 $ 7,547 Additions to fixed assets: Stamford / New York $ 4,184 $ 2,259 $ 1,165 London 31 81 44 Chicago 49 3 16 -------- -------- -------- Total additions to fixed assets $ 4,264 $ 2,343 $ 1,225 Depreciation: Stamford / New York $ 1,198 $ 676 $ 262 London 39 69 35 Chicago 8 3 1 -------- -------- -------- Total depreciation $ 1,245 $ 748 $ 298
15. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liability recognized as of December 31, 1999 and 1998 are presented below: 34
December 31, ------------------------------ 1999 1998 ------------------------------ Deferred tax assets: Bad debt expense $ 50,000 $ 37,200 Inventory obsolescence 32,800 32,800 Product development costs 218,700 199,000 Other 50,500 53,000 Operating loss carry forward 1,721,000 2,110,100 ---------- ---------- Total deferred tax asset 2,073,000 2,432,100 Less valuation allowance 2,010,300 2,400,400 ---------- ---------- Net deferred tax assets 62,700 31,700 Deferred tax liability: Depreciation 62,700 31,700 ---------- ---------- Total deferred tax liability 62,700 31,700 ---------- ---------- Net deferred tax amount $ -- $ -- ========== ==========
At December 31, 1999 and 1998, the Company had net operating loss carry-forwards of approximately 35 $4,300,000 and $5,270,000, respectively. These losses expire between 2014 and 2019. The tax benefit of such operating loss carry-forwards will be credited to income when realization is considered more likely than not. In addition, these amounts may be limited under Internal Revenue Code Section 382 as a result of ownership changes resulting from the Company's equity offerings. Significant components of the provision (benefit) for income taxes are as follows for the years ended:
December 31, ---------------------------------------------- 1999 1998 1997 ---------------------------------------------- Current $ 94,400 $ 12,466 $ 14,924 Deferred: Federal 321,800 (727,000) (918,000) State and foreign 68,300 (128,000) (102,400) (Decrease) Increase in valuation allowance (390,100) 855,000 1,020,400 ----------- ----------- ----------- Total deferred -- -- -- ----------- ----------- ----------- Total provision for income taxes $ 94,400 $ 12,466 $ 14,924 =========== =========== ===========
The reconciliation between the federal statutory income tax rate and the Company's income tax provision (benefit) is as follows:
December 31, ------------------------------ 1999 1998 1997 ------------------------------ Statutory tax rate 34% (34%) (34%) State and local taxes, net of federal benefit 6 (6) (6) Alternative minimum tax and other 3 -- -- Valuation allowance (34) 40 40 --- --- --- 9% 0% 0%
36 16 VALUATION AND QUALIFYING ACCOUNTS
Additions Balance Charged to Balance at Beginning Costs and Deductions of Year Expenses Write-offs End of Year ------------ ---------- ------------ ----------- Allowance for doubtful accounts: December 31, 1998 $144,000 $ 50,922 $101,936 $ 92,986 ======== ======== ======== ======== December 31, 1999 $ 92,986 $ 44,758 $ 12,744 $125,000 ======== ======== ======== ========
17. JOINT VENTURE On October 27, 1999, the Company announced the formation of NYFIX Millennium, L.L.C. ("NYFIX Millennium") with a consortium of seven leading international investment banks and brokerage firms. NYFIX owns 50% of the joint venture and the seven other investors own the remaining 50%. NYFIX Millennium intends to operate as an alternative trading system for institutional investors. All of the members of the consortium, including the Company, have invested $2,000,000 each in NYFIX Millennium. In return for their investment, each non-NYFIX, Inc. partner received 187,500 shares of common stock of the Company for an aggregate 1,312,500 shares (adjusted for stock split). NYFIX's total investment in the 37 joint venture of $19,500,000 consists of (1,312,500 shares x $13.33) $17,500,000 plus the capital cash contribution of $2,000,000. Pursuant to the Operating Agreement, the first $14,000,000 in losses will be allocated to the seven non-NYFIX, Inc. investors, which equals the extent of their capital investment in NYFIX Millennium. The Company retains the option to buy back the units up to no more than 80% of the total membership interest. The Company may exercise the option through the exchange of one share of the Company's common stock for each unit to be purchased, subject to adjustments in the event of any split, combination, reclassification or other adjustments to the capital structure of the Company. The Company has incurred operating and capital costs on behalf of NYFIX Millennium. Such costs are reflected as due from NYFIX Millennium Joint Venture on the Company's balance sheet. 18. SUBSEQUENT EVENTS On March 14, 2000, the Company announced a 3 for 2 stock split in the form of a 50% stock dividend to all shareholders of record on March 24, 2000, payable on April 4, 2000. The Company has 16,021,762 common shares outstanding prior to the split and will have 24,032,643 shares outstanding following the split. On March 16, 2000, Trinitech Systems International, Inc., a wholly owned subsidiary of the Company announced a straight through processing joint venture with Rolfe and Nolan PLC, to provide advanced web-based client order management systems and back office interfaces for the global market. 38 EX-10.4 2 LIMITED LIABILITY COMPANY OPERATING AGREEMENT LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF NYFIX MILLENNIUM, L.L.C. (a Delaware limited liability company) LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF NYFIX MILLENNIUM, L.L.C. This Limited Liability Company Operating Agreement of the above, a limited liability company organized pursuant to the Act (as hereinafter defined), shall be effective as of the Effective Date (as hereinafter defined), by and among the Company and the persons executing this Agreement (each a "Member"). ARTICLE I DEFINITIONS For purposes of this Agreement, unless the context clearly indicates otherwise, terms used herein shall have the meaning set forth in the Act and the following terms shall have the following meanings: 1.1 Act. The Delaware Limited Liability Company Act and all amendments thereto. 1.2 Affiliate. Affiliate shall have the meaning ascribed to such term in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. 1.3 Agreement. This Limited Liability Company Operating Agreement including all amendments adopted in accordance with this Agreement and the Act. 1.4 Articles. The Articles of Organization of the Company, as amended from time to time, and filed with the Secretary of State of the State of Delaware. 1.5 Assignee. A transferee of any Unit of Membership Interest who has not been admitted as a Substitute Member. 1.6 BHCA. The Bank Holding Company Act of 1956, as amended. 1.7 BHCA Member. A BHCA Member shall be any Member who is subject to Section 4 of the BHCA (and shall include the BHCA Special Member). 1.8 BHCA Special Member. The BHCA Special Member shall be the Member designated as such on the signature pages hereto. 1.9 Board of Director or Board. Board of Directors or Board shall mean the Board of Directors of the Company. 1.10 By-Laws. By-Laws shall mean the By-Laws of the Company. 1.11 Capital Accounts. Capital Accounts shall mean the capital account of a Member as described herein. 1.12 Capital Contribution. Any contribution of Property or services made by or on behalf of a Member, Substitute Member or Assignee. 1.13 Commitment. The Capital Contribution that a Member is obligated to make pursuant to this Agreement. 1.14 Company. The company named at the beginning of this Agreement, a limited liability company formed under the laws of the State of Delaware, and any successor limited liability company. 1.15 Disability. The inability to perform a substantial portion of the Member's services to the Company as the result of a mental or physical illness which has continued or can reasonably be expected to continue for a period of not less than six months or has continued or can reasonably be expected to continue for an aggregate of not less than 180 days in any 365-day period. 1.16 Effective Date. The date of filing of the Articles or such other date as set forth in the Articles. 1.17 Fiscal Period. Each fiscal quarter. 1.18 Initial Member. Trinitech and each other Member who became a Member on or prior to October 31, 1999. There shall not be permitted more than seven Initial Members, in addition to Trinitech. 1.19 Membership Interest. The rights of a Member to distributions (liquidating or otherwise) and allocations of the Profits, Losses, gains, deductions and credits of the Company and, to the extent permitted by this Agreement, to possess and exercise voting rights. 1.20 Property. Any property, real or personal, tangible or intangible including, without limitation, money, and any legal or equitable interest in such property, but excluding services and promises to perform services in the future. -2- 1.21 Substitute Member. An Assignee who has been admitted to all of the rights of membership pursuant to Section 10.3 of the Agreement. 1.22 Special Dividend. A dividend of cash in an amount equal to 20% of the Company's Profits in the fiscal quarter immediately prior to payment of such dividend. 1.23 Tax Characterization and Additional Tax Terms. It is intended that the Company be characterized and treated as a partnership for, and solely for, federal, state and local income tax purposes. For such purpose, (i) the Company shall be subject to all of the provisions of Subchapter K of Chapter 1 of Subtitle A of the Code, (ii) all references to a "Partner," to "Partners" and to the "Partnership" in this Agreement (including the provisions of Article VIII) and in the provisions of the Code and Tax Regulations cited in this Agreement shall be deemed to refer to a Member, the Members and the Company, respectively. In addition, the following terms shall have the following meanings: (a) Code shall mean the Internal Revenue Code of 1986, as amended. (b) Adjusted Capital Account Deficit shall mean, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Period, after giving effect to the following adjustments: (i) Credit to such Capital Account the minimum gain chargeback that such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Tax Regulations; and (ii) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6) of the Tax Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Tax Regulations and shall be interpreted consistently therewith. (c) Nonrecourse Deductions has the meaning set forth in Section 1.704-2(b)(1) of the Tax Regulations. (d) Nonrecourse Liability has the meaning set forth in Section 1.704-2(b)(3) of the Tax Regulations. (e) Partner Nonrecourse Debt has the meaning set forth in Section 1.704-2(b)(4) of the Tax Regulations. -3- (f) Partner Nonrecourse Debt Minimum Gain means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Tax Regulations. (g) Partner Nonrecourse Deductions has the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Tax Regulations. (h) Partnership Minimum Gain has the meaning set forth in Sections 1.704- 2(b)(2) and 1.704-2(d) of the Tax Regulations. (i) Profits and Losses shall mean, for each Fiscal Period, an amount equal to the Company's taxable income or loss for such Fiscal Period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.22 shall be added to such taxable income or loss; (ii) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Tax Regulations, and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.18, shall be subtracted from such taxable income or loss; (j) Tax Regulations shall mean the federal income tax regulations promulgated by the United States Treasury Department under the Code as such Tax Regulations may be amended from time to time. All references herein to a specific section of the Tax Regulations shall be deemed also to refer to any corresponding provision of succeeding Tax Regulations. 1.24 Trinitech. Trinitech shall mean Trinitech Systems, Inc., a New York corporation. 1.25 Unit. One of the units of Membership Interest that are authorized to be issued under this Agreement. Each Unit represents a Membership Interest with an initial ratio of one divided by the total number of Units issued hereunder, subject to adjustment as provided herein. A Unit is divisible into fractional parts. References to Units herein shall be solely for the purpose of certificating the Membership Interests authorized hereunder. Voting, the granting or withholding of consents or approvals, and allocation of Profits and Losses and distributions shall be made pursuant to the applicable provisions of this Agreement without reference to the number of Units held by Members. -4- ARTICLE II FORMATION 2.1 Organization. The Members hereby organize the Company as a Delaware limited liability company pursuant to the provisions of the Act. 2.2 Agreement. For and in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Members executing this Agreement hereby agree to the terms and conditions of the Agreement, as it may from time to time be amended. Except as otherwise provided herein, it is the express intention of the Members that the Agreement shall be the sole source of agreement of the parties and, except to the extent a provision of the Agreement expressly incorporates federal income tax rules by reference to sections of the Code or Tax Regulations or is expressly prohibited or ineffective under the Act, the Agreement shall govern, even when inconsistent with, or different than, the provisions of the Act or any other law or rule. To the extent any provision of the Agreement is prohibited or ineffective under the Act, the Agreement shall be deemed to be amended to the least extent necessary in order to make the Agreement effective under the Act. In the event the Act is subsequently amended or interpreted in such a way to make any provision of the Agreement that was formerly invalid valid, such provision shall be considered to be valid from the effective date of such interpretation or amendment. 2.3 Name. The name of the Company is the name set forth at the beginning of this Agreement and all business of the Company shall be conducted under that name. 2.4 Term. The Company shall be dissolved and its affairs wound up in accordance with the Act and the Agreement on December 31, 2049 unless the term shall be extended by amendment to the Agreement and the Articles, or unless the Company shall be sooner dissolved and its affairs wound up in accordance with the Act or the Agreement. 2.5 Executive and Administrative Offices. The executive office (the "Executive Office") of the Company shall be located at 100 Wall Street, New York, New York, 10005 and the administrative office (the "Administrative Office") of the Company shall be located at 333 Ludlow Street, Stamford, Connecticut 06902. The Board of Directors may, from time to time, change the location of the Executive Office or the Administrative Office. 2.6 Registered Agent and Office. The name and address of the registered agent for the service of process shall be National Corporate Research, Ltd., 9 East Loockerman Street, Dover, Delaware 19901. The Board of Directors, may, from time to time, change the registered agent or office through appropriate filings with the Department of State of the State of Delaware. In the event the registered agent ceases to act as such for any reason or the registered office shall change, the Board of Directors shall promptly designate a replacement registered agent or file a notice of change of address, as the case may be. -5- ARTICLE III PURPOSE; NATURE OF BUSINESS The business purpose of the Company is to create and operate an Alternative Trading System ("ATS") to be registered as a Broker Dealer in compliance with Regulation ATS. The authority granted to the Board of Directors hereunder to bind the Company shall be limited to actions necessary or convenient to this business. ARTICLE IV ACCOUNTING AND RECORDS The Board of Directors, at the Company's expense, shall prepare and timely file income tax returns of the Company in all jurisdictions where such filings are required, and the Company shall prepare and deliver to each Member, as soon as practicable following the expiration of each Fiscal Period, and at the Company's expense, all information returns and reports required by the Code and Tax Regulations and information in respect of the Company necessary for the preparation of the Members' federal income tax returns. ARTICLE V NAMES AND ADDRESSES OF MEMBERS The names and addresses of the Members are as set forth on each Member's signature page hereto. ARTICLE VI BOARD OF DIRECTORS 6.1 Powers of the Board. (a) The business affairs of the Company shall be managed by the Board of Directors in accordance with this Agreement and the By-Laws. The Board may exercise all such powers of the Company and do all such lawful acts and things as are not by statute, this Agreement or the By-Laws directed or required to be exercised or done by the Members. (b) Except as otherwise provided in this Agreement or the By-Laws, the Board of Directors may delegate any or all of its powers to committees of the Board established pursuant to the By-Laws, and to officers and agents elected or designated by the Board or a duly constituted committee thereof. 6.2 Board Members. The Board of Directors of the Company shall initially consist of (i) three (3) voting directors (collectively, the "Voting Directors") to be designated by Trinitech, and (ii) a number of advisory board members (collectively, the "Advisory Directors") equal to the -6- number of Members other than Trinitech (the "Non-Trinitech Members"), such that one Advisory Director shall be designated by each Non-Trinitech Member. The Voting Directors shall initially be Peter Kilbinger Hansen, Dean Stamos and a representative of the Company's legal counsel, as may be changed by Trinitech from time to time. Each Advisory Director appointed to the Board of Directors shall have the right to attend all board meetings and to participate in all discussions regarding the management of the Company and make recommendations to the Voting Directors. All decisions relating to the management and operations of the Company shall be made solely through a majority vote of the Voting Directors, subject to the provisions of Section II(4) of the Subscription Agreements between the Company, Trinitech and each of the other Initial Members. 6.3 Records to be Maintained. The Board of Directors of the Company shall maintain, or cause to be maintained, the following records at the Administrative Office: (a) A current list of the full name and last known business or residence address of each Member and former Member and the Capital Account of each Member associated with their respective Membership Interests, as of a recent practicable date; (b) A copy of the Certificate and all amendments thereto, together with executed copies of any powers of attorney pursuant to which the Certificate has been executed; (c) Copies of the Company's federal, foreign, state and local income tax returns and reports, if any, for the seven most recent years; (d) Copies of this Agreement, including all subsequent amendments thereto; and (e) Copies of all financial statements of the Company for the seven most recent years. 6.4 Reports to Members. The Board of Directors shall provide (or cause the Company to provide) reports at least annually to the Members at such time (but not later than 90 days after the end of each fiscal year of the Company, unless good cause is shown) and in such manner as it shall reasonably determine, which reports shall include (i) a balance sheet of the Company as of the close of the last completed fiscal year, a statement of income showing the results of operation of the Company during such year, and a cash flow statement showing the cash receipts and disbursements of the Company during such year, each prepared in accordance with GAAP, (ii) a statement showing each Member's share of Profit or Loss of the Company for such year, and (iii) such other information as the Board deems appropriate. The Board shall provide (or cause the Company to provide) all Members with the information returns required by the Code and the laws of any applicable state in a timely manner. -7- ARTICLE VII CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS 7.1 Capital Contributions. Each Member shall, no later than upon his execution and delivery of this Agreement, make the Capital Contribution set forth on his respective signature page hereto, in consideration of which each Member shall receive the Membership Interest set forth on its respective signature page; provided, however, Trinitech shall receive a Membership Interest equal to the aggregate Membership Interest of all other Initial Members, to be adjusted as appropriate such that Trinitech shall have a Membership Interest equal to 50% of the Units granted to all Initial Members, including Trinitech. No Member shall have the right to withdraw or be repaid any Capital Contribution except as provided in this Agreement. 7.2 Capital Account. A separate Capital Account shall be maintained for each Member throughout the term of the Company in accordance with the rules of Section 1.704-1(b)(2)(iv) of the Tax Regulations as in effect from time to time and, to the extent not inconsistent therewith, to which the following provisions apply: (a) To each Member's Capital Account there shall be credited (i) the amount of money contributed by such Member to the Company (including liabilities of the Company assumed by such Member as provided in Section 1.704-1(b)(2)(iv)(c) of the Tax Regulations); (ii) the fair market value of any Property contributed to the Company by such Member (net of liabilities secured by such contributed Property that the Company is considered to assume or take subject to under Section 752 of the Code); and (iii) such Member's share of Profits and items of income and gain. (b) To each Member's Capital Account there shall be debited: (i) the amount of money distributed to such Member by the Company (including liabilities of such Member assumed by the Company as provided in Section 1.704-1(b)(2)(iv)(c) of the Tax Regulations) other than amounts which are in repayment of debt obligations of the Company to such Member; (ii) the fair market value of Property distributed to such Member (net of liabilities secured by such distributed Property that such Member is considered to assume or take subject to under Section 752 of the Code); and (iii) such Member's share of Losses or items of loss or deduction that are specially allocated. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Section 1.704-1(b) of the Tax Regulations and Section 704(c) of the Code and shall be interpreted and applied in a manner consistent with such Tax Regulations. In the event the Members shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities that are secured by contributed or distributed Property or that are assumed by the Company or any Member), are computed in order to comply with such Tax Regulations, the Members may make such modification, provided that it is not likely to have a -8- material effect on the amounts distributable to any Member pursuant to Article XI hereof upon the dissolution of the Company. 7.3 Withdrawal. A Member shall not be entitled to withdraw any part of its Capital Account or to receive any distribution from the Company, except as specifically provided in the Agreement, and no Member shall be entitled to make any Capital Contribution to the Company other than in respect of his respective Commitment. 7.4 Interest. No Member shall be entitled to interest on such Member's Capital Contribution or on any Profits retained by the Company. 7.5 Additional Members. At any time up to October 31, 1999, the Board of Directors may, in its sole discretion, from time to time, admit to the Company one or more persons as additional Initial Members; provided, however, that the number of Initial Members, other than Trinitech, shall not exceed seven. Each additional Initial Member shall execute a counterpart of this Agreement and such other instruments as the Board of Directors may require to confirm the undertaking of such person to be bound by all the terms and provisions of this Agreement. At any time subsequent to October 31, 1999, the Company may from time to time, with the prior written consent of both (i) two-thirds of the Members, such two-thirds calculated on the basis of the total number of Members without regard to the Members' respective Membership Interests, and (ii) Trinitech, admit to the Company one or more persons as additional Members. Each such additional Member shall execute a counterpart of this Agreement and such other instruments as the Board of Directors may require to confirm the undertaking of such person to be bound by all the terms and provisions of this Agreement. With respect to any such additional Member admitted to the Company on or after October 31, 1999, the Capital Accounts of Members other than such additional Member shall be adjusted, i.e. "booked up" or "booked down" as the case may be, in accordance with Section 1.704-1(b)(2)(iv)(f) of the Tax Regulations to reflect the Commitment of the additional Member, except as otherwise determined by consent of the Members and Trinitech as provided above. ARTICLE VIII ALLOCATIONS AND DISTRIBUTIONS 8.1 Profits and Losses. Profits and Losses, and each item of Company income, gain, loss, deduction, credit and tax preference with respect thereto, for each Fiscal Period (or shorter period in respect of which such items are to be allocated) shall be allocated among the Members as provided in this Article VIII. (a) Profits. After giving effect to the special allocations set forth in Sections 8.3, 8.4 and 8.6, Profits for any Fiscal Period shall be allocated: 80% to Trinitech and 20% to the Non- Trinitech Members in accordance with Section 8.5. -9- (b) Losses. After giving effect to the special allocations set forth in Sections 8.4 and 8.5, Losses shall be allocated in the following order of priority: (i) first, as to the first Losses up to the product of (x) $2,000,000 multiplied by (y) the number of Initial Members (other than Trinitech), to the Non- Trinitech Members, in proportion to their respective Membership Interests, but only to the extent of their respective Capital Account balances; (ii) second, to Trinitech to the extent of its Capital Account balance; and (iii) then, the balance, if any, among the Members in proportion to their respective Membership Interests. 8.2 Distributions. (a) Dividends. Distributions shall be made (i) to the Non-Trinitech Members in an amount equal to 20% of the Profits for any Fiscal Period, which distribution shall be the Special Dividend allocated and paid pursuant to the provisions set forth in Section 8.2(b) below and (ii) to Trinitech in an amount equal to 80% of the Profits for any Fiscal Period. The distributions to Trinitech shall be made at such time or times as the Board of Directors shall determine consistent with the provisions of this Agreement. (b) Non-Trinitech Member Dividends. Dividends to the Non-Trinitech Members as provided in Section 8.2(a) above shall be paid as a Special Dividend no later than 45 days following the end of any fiscal quarter in which the Company shows a Profit. Such Special Dividend shall be distributed amongst the Non-Trinitech Members according to the fraction, the numerator of which is the aggregate order flow volume measured in Company eligible shares of each Non- Trinitech Member during such fiscal quarter, and the denominator of which is aggregate order flow volume measure in Company eligible shares for all Non-Trinitech Members during such fiscal quarter. For example, if the Profits for a fiscal quarter are $25 million, and a Non-Trinitech Member puts through 50 million aggregate order flow volume measured in Company eligible shares during such fiscal quarter, while all Non-Trinitech Members put through 100 million aggregate order flow volume measured in Company eligible shares during such fiscal quarter, then such Member shall receive one-half of the available Special Dividend, or $2.5 million. No such Special Dividend shall be payable following any fiscal quarter in which the Company has not shown a Profit, nor shall such Special Dividend be payable to the Non-Trinitech Member(s), if any, who fail to effectuate any trades with the Company during the fiscal quarter for which a Special Dividend relates. 8.3 Special Allocations. The following special allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704- 2(f) of the Tax Regulations, notwithstanding any other provision of this Article VIII, if there is a net decrease in Partnership Minimum Gain during any Fiscal Period, each Member shall be specially -10- allocated items of Company income and gain for such Fiscal Period (and, if necessary, subsequent Fiscal Periods) in an amount equal to such Member's share of the net decrease in Partnership Minimum Gain, determined in accordance with Section 1.704-2(g) of the Tax Regulations. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Tax Regulations. This Section 8.3(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Tax Regulations and shall be interpreted consistently therewith. (b) Partner Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Tax Regulations, notwithstanding any other provision of this Article VIII, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Period, each Member who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Tax Regulations, shall be specially allocated items of Company income and gain for such Fiscal Period (and, if necessary, subsequent Fiscal Periods) in an amount equal to such Member's share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704- 2(i)(4) of the Tax Regulations. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704- 2(j)(2) of the Tax Regulations. This Section 8.3(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Tax Regulations and shall be interpreted consistently therewith. (c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), Section 1.704- 1(b)(2)(ii)(d)(5), or Section 1.704-1(b)(2)(ii)(d)(6) of the Tax Regulations, items of Company income and gain shall be specially allocated to the Member in an amount and manner sufficient to eliminate, to the extent required by the Tax Regulations, the Adjusted Capital Account Deficit of the Member as quickly as possible, provided that an allocation pursuant to this Section 8.3(c) shall be made only if and to the extent that the Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article VIII have been tentatively made as if this Section 8.3(c) were not in this Agreement. (d) Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Fiscal Period which is in excess of the sum of the amounts such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Tax Regulations, each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 8.3(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article VIII have been made as if Section 8.3(c) and this Section 8.3(d) were not in this Agreement. -11- (e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Period shall be specially allocated among the Members in proportion to their Membership Interests. (f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal Period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Section 1.704-2(i)(1) of the Tax Regulations. (g) Mandatory Allocations Under Section 704(c) of the Code. Notwithstanding the foregoing provisions of this Section 8.3, in the event Section 704(c) of the Code or Section 704(c) of the Code principles applicable under Section 1.704-1(b)(2)(iv) of the Tax Regulations require allocations of Profits or Losses in a manner different than that set forth above, the provisions of Section 704(c) of the Code and the Tax Regulations thereunder shall control such allocations among the Members. Any item of Company income, gain, loss and deduction with respect to any property (other than cash) that has been contributed by a Member to the capital of the Company or which has been revalued for Capital Account purposes pursuant to Section 1.704-l(b)(2)(iv) of the Tax Regulations) and which is required or permitted to be allocated to such Member for income tax purposes under Section 704(c) of the Code so as to take into account the variation between the tax basis of such property and its fair market value at the time of its contribution shall be allocated solely for income tax purposes in the manner so required or permitted under Section 704(c) of the Code using the "traditional method" described in Section 1.704-3(b) of the Tax Regulations; provided, however, that curative allocations consisting of the special allocation of gain or loss upon the sale or other disposition of the contributed property shall be made in accordance with Section 1.704-3(c) of the Tax Regulations to the extent necessary to eliminate any disparity, to the extent possible, between the Members' book and tax Capital Accounts attributable to such property; further provided, however, that any other method allowable under applicable Tax Regulations may be used for any contribution of property as to which there is agreement between the contributing Member and the other Members. 8.4 Curative Allocations. The allocations set forth in Sections 8.3 (a) through (g) (the "Regulatory Allocations") are intended to comply with certain requirements of the Tax Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss, or deduction pursuant to this Section 8.4. Therefore, notwithstanding any other provision of this Article VIII (other than the Regulatory Allocations), the Members shall make such offsetting special allocations of Company income, gain, loss, or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement and all Company items were allocated pursuant to Sections 8.2 and 8.3. The Members (i) shall take into account future Regulatory Allocations under Sections 8.3(a) and 8.3(b) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 8.3(e) and 8.3(f) and (ii) may reallocate Profits and Losses for prior open years (or items of gross income and deduction of the Company for such years) among the Members to the extent it is not possible to achieve such result -12- with allocations of items of income (including gross income) and deduction for the current year and future years. This Section 8.4 shall control notwithstanding any reallocation or adjustment of taxable income, taxable loss, or items thereof by the Internal Revenue Service or any other taxing authority. 8.5 Allocations Relating to Non-Trinitech Member Dividends. (a) Any Non-Trinitech Member allocated a Special Dividend pursuant to Section 8.2 shall also be allocated that percentage of the Profits for the fiscal quarter that relates to such Non- Trinitech Member's Special Dividend. (b) The amount of any Special Dividend shall be charged against and shall reduce the Capital Accounts of the Non-Trinitech Members in accordance with the distributions to each such Non-Trinitech Member pursuant to Section 8.2(b). 8.6 Other Allocation Rules. (a) For purposes of determining the Profits, Losses, or any other item allocable to any period (including allocations to take into account any changes in any Member's Membership Interest during a Fiscal Period and any transfer of any interest in the Company), Profits, Losses, and any such other item shall be determined on a daily, monthly, or other basis, as determined by the Members using any permissible method under Section 706 of the Code and the Tax Regulations thereunder. (b) The Members are aware of the income tax consequences of the allocations made by this Article VIII and hereby agree to be bound by the provisions of this Article VIII in reporting their shares of Company income and loss for income tax purposes. ARTICLE IX TAXES 9.1 Tax Matters Partner. Trinitech shall be the Tax Matters Partner of the Company pursuant to Section 6231(a)(7) of the Code. Such Member shall not resign as the Tax Matters Partner unless, on the effective date of such resignation, the Company has designated another Member as Tax Matters Partner and such Member has given its consent in writing to its appointment as Tax Matters Partner. The Tax Matters Partner shall receive no additional compensation from the Company for its services in that capacity, but all expenses incurred by the Tax Matters Partner in such capacity shall be borne by the Company. The Tax Matters Partner is authorized to employ such accountants, attorneys and agents as he, in his sole discretion, determines is necessary to or useful in the performance of its duties. In addition, such Member shall serve in a similar capacity with respect to any similar tax related or other election provided by state or local laws. -13- 9.2 Section 754 Election. The Board of Directors may agree to have the Company make the election permitted by Section 754 of the Code with respect to adjustments to the basis of Property of the Company. The cost of preparing such election, and any additional accounting expenses of the Company occasioned by such election, shall be borne by the transferees or distributees of the interest in the Company. ARTICLE X TRANSFER OF MEMBERSHIP INTEREST 10.1 Compliance with Securities Laws. No Unit of Membership Interest has been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any applicable state securities laws. A Member may not transfer (a transfer, for purposes of this Agreement, shall be deemed to include, but not be limited to, any sale, transfer, assignment, pledge, creation of a security interest or other disposition) all or any part of such Member's Units of Membership Interest, except upon compliance with the applicable federal and state securities laws. The Members shall have no obligation to register any Member's Units of Membership Interest under the Securities Act or under any applicable state securities laws, or to make any exemption therefrom available to any Member. 10.2 Transfer of Economic Interest. The right to receive allocations of Profits and Losses and to receive distributions may not be transferred, in whole or in part, unless the following terms and conditions have been satisfied: (a) Members (including the transferring Member) holding at least 51% of the Membership Interests shall have consented in writing to the transfer, which consent may be arbitrarily withheld by any such Member; (b) The transferor shall have assumed all costs incurred by the Company in connection with the transfer; (c) The transferor shall have furnished the Company with a written opinion of counsel, satisfactory in form and substance to counsel for the Company, that such transfer complies with applicable federal and state securities laws and the Agreement and that such transfer, for federal income tax purposes, will not cause the termination of the Company under Section 708(b) of the Code, cause the Company to be treated as an association taxable as a corporation for income tax purposes or otherwise adversely affect the Company or the Members; and (d) The transferor shall have complied with such other conditions as the Board may reasonably require from time to time. Transfers will be recognized by the Company as effective only upon the close of business on the last day of the calendar month following satisfaction of the above conditions. Any transfer in -14- contravention of this Article X and any transfer which if made would cause a termination of the Company for federal income tax purposes under Section 708(b) of the Code shall be void ab initio and without force and effect and shall not bind the Company or the other Members. Transfers by Members to Affiliates shall not be subject to the provisions of Section 10.2(a) hereof. 10.3 Transfer of Membership Interest and Admission of Substitute Member. Except for the right to receive allocations of Profits and Losses and to receive distributions, a Membership Interest of any Member may not be transferred, in whole or in part, and a transferee shall not have a right to become a Member unless, in addition to satisfying the terms and conditions of Sections 10.2 (b), (c) and (d), the following terms and conditions have been satisfied: (a) Members (including the transferring Member) holding at least 51% of the Membership Interests shall have consented in writing to the transfer and substitution, which consent may be arbitrarily withheld by any such Member; (b) The transferee shall have assumed the obligations, if any, of the transferor to the Company, including the obligation to fulfill the pro rata portion of the transferor's then existing or subsequently arising Commitment allocable to the transferred Unit of Membership Interest or portion thereof; and (c) The transferor and the transferee shall have complied with such other requirements as the Board may reasonably impose including, without limitation, the conditions that the transferee: (i) adopt and approve in writing all the terms and provisions of the Agreement then in effect; and (ii) pay such fees as may be reasonable to pay the costs of the Company in effecting such substitution. Transfers by Members to Affiliates shall not be subject to the provisions of Section 10.3(a) hereof. 10.4 Status of Transferee. Except as otherwise provided herein, a transferee of a Unit of Membership Interest who is not a Substitute Member shall be entitled only to receive that share of Profits, Losses and distributions, and the return of Capital Contributions, to which the transferor would otherwise be entitled with respect to the interest transferred, and shall not have the rights of a Member of the Company under the Act or this Agreement including, without limitation, the right to obtain any information on account of the Company's transactions, to inspect the Company's books or to vote with the Members on, or to grant or withhold consents or approvals of, any matter. The Company shall, however, if a transferee and transferor jointly advise the Company in writing of a transfer of the Unit of Membership Interest, furnish the transferee with pertinent tax information at the end of each Fiscal Period. -15- 10.5 Transfer of Membership Interest of a BHCA Special Member and other BHCA Related Provisions. (a) A BHCA Special Member's Membership Interest shall be held by any assignee or other transferee of such BHCA Special Member's Membership Interest in the same capacity, provided that any such assignee or transferee shall have full voting rights with regard to such Membership Interest, without regard to the limitation set forth in Section 13.1, if they are transferred (i) to the public in an offering registered under the Securities Act of 1933, as amended (the "Securities Act"), (ii) in a transaction pursuant to Rules 144 or 144A under the Securities Act in which no person acquires more than 2% of the Company's outstanding Membership Interests or (iii) in a single transaction to a third party who acquires a majority of the Company's outstanding Membership Interests without regard to the transfer of such BHCA Special Member's Membership Interests. In the event of a change in the law governing a BHCA Special Member the effect of which is to permit any such BHCA Special Member to transfer such Membership Interests in any other manner, the foregoing shall be deemed modified to permit a transfer of such Membership Interests in such other manner. (b) No transfer of a Unit of Membership Interest by a BHCA Special Member shall confer on such transferee a greater Membership Interest than such BHCA Special Member had after giving effect to the limitations imposed pursuant to the BHCA unless such transferor certifies to the Board of Directors that the transfer, taking into account the increase in Membership Interest resulting therefrom, is consistent with applicable banking law, including the BHCA. (c) If at any time the percentage Membership Interest owned by a BHCA Member or its Affiliates exceeds 24.99% of the total issued and outstanding Membership Interests of the Company (the "Ownership Threshold"), such BHCA Member, or its Affiliate, as the case may be, shall be permitted to transfer that portion of its Membership Interest as is necessary to reduce its percentage ownership to the Ownership Threshold, notwithstanding any contrary provision limiting transfer herein or in any agreement among the Members, and the Company shall cooperate to the extent reasonably request by the BHCA Member at the BHCA Member's expense in the discovery of a purchaser for such portion of such BHCA Member's Membership Interests; provided, however, that if such BHCA Member, or its Affiliate, as the case may be, is unable within 60 days to transfer such portion of its Membership Interests, the Company will take such action as such BHCA Member may reasonably request to reduce such BHCA Member's percentage ownership to the Ownership Threshold, at the BHCA Member's expense. 10.6 Legend on Certificates. The certificates representing the Units shall bear the following legend: "THE UNITS OF MEMBERSHIP INTEREST REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN OPERATING AGREEMENT, A COPY OF WHICH IS ON FILE AT THE ADMINISTRATIVE OFFICE OF THE COMPANY. THE UNITS OF MEMBERSHIP INTEREST MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, -16- HYPOTHECATED, OR OTHERWISE DISPOSED OF EXCEPT AS EXPRESSLY PROVIDED BY THE TERMS OF THE OPERATING AGREEMENT." 10.7 Dispositions Not in Compliance with this Article Void. Any attempted disposition of a Unit of Membership Interest, or any part thereof, not in compliance with this Article X shall be void ab initio and without force and effect and shall not bind the Company or the other Members. ARTICLE XI DISSOLUTION AND WINDING UP 11.1 Dissolution. The Company shall be dissolved and its affairs wound up, upon the first to occur of any of the following events (each of which shall constitute a Dissolution Event): (a) the expiration of the term of the Agreement, unless the Company is continued with the consent of Members holding at least a majority of the Membership Interests; or (b) the unanimous written consent of all of the Members, without regard to whether or not a Member is a BHCA Member. 11.2 Effect of Dissolution. Upon dissolution, the Company shall not be terminated and shall continue until the winding up of the affairs of the Company is completed and a certificate of cancellation has been filed with the Office of the Secretary of State of the State of Delaware. 11.3 Distribution of Assets on Dissolution. Upon the winding up of the Company, the Members acting together (or such Person(s) designated by the Members representing at least a majority of the Membership Interests) shall take full account of the assets and liabilities of the Company, shall liquidate the assets (unless the Members determine that a distribution of any Company Property in-kind would be more advantageous to the Members than the sale thereof) as promptly as is consistent with obtaining the fair value thereof, and shall apply and distribute the proceeds therefrom in the following order: (a) first, to the payment of the debts and liabilities of the Company to creditors, including Members who are creditors, to the extent permitted by law, in satisfaction of such debts and liabilities, and to the payment of necessary expenses of liquidation; (b) second, to the setting up of any reserves which the Members may deem necessary or appropriate for any anticipated obligations or contingencies of the Company arising out of or in connection with the operation or business of the Company. Such reserves may be paid over by the Members to an escrow agent or trustee selected by the Members to be disbursed by such escrow agent or trustee in payment of any of the aforementioned obligations or contingencies and, if any balance remains at the expiration of such period as -17- the Members shall deem advisable, shall be distributed by such escrow agent or trustee in the manner hereinafter provided; (c) third, to the Members pro rata in accordance with and to the extent of their positive Capital Account balances, if any; (d) then, to the Members in accordance with their Membership Interests. Liquidation proceeds shall be paid within 60 days of the end of the Company's taxable year in which the liquidation occurs. Such distributions shall be in cash or Property (which need not be distributed proportionately) or partly in both, as determined by the Board. If at the time of liquidation the Members shall determine that an immediate sale of some or all Company Property would cause undue loss to the Members, the Members may, in order to avoid such loss, defer liquidation. 11.4 Winding Up and Filing Certificate of Cancellation. Upon the commencement of the winding up of the Company, a certificate of cancellation shall be delivered by the Company to the Secretary of State of the State of Delaware for filing. The certificate of cancellation shall set forth the information required by the Act. The winding up of the Company shall be completed when all debts, liabilities and obligations of the Company have been paid and discharged or reasonably adequate provision therefor has been made, and all of the remaining Property of the Company has been distributed to the Members. ARTICLE XII TRINITECH STOCK ISSUANCE AND PURCHASE OPTION 12.1 Trinitech Stock Issuance. As consideration for the Option (as defined in Section 12.2 below) Trinitech shall, no later than upon its execution and delivery of this Agreement, deliver to each Non-Trinitech Member the number of shares of common stock of Trinitech set forth on such Member's respective signature page hereto. Such shares will not initially be registered under the Securities Act, and shall bear a legend to such effect, in the form determined by Trinitech. 12.2 Trinitech Purchase Option. Trinitech shall have the option (the "Option"), at any time and from time to time, to purchase the Units of Membership Interest of the Non-Trinitech Members, such that Trinitech may increase its Membership Interest to no more than 80% of the total Membership Interest. Trinitech may exercise the Option through the exchange of one share of Trinitech for each Unit to be purchased, subject to adjustment in the event of any split, combination, reclassification or other adjustment to the capital structure of Trinitech. Any Units purchased pursuant to the Option shall be considered purchased pro rata from the Non-Trinitech Members according to their Membership Interests. -18- ARTICLE XIII MISCELLANEOUS 13.1 BHCA Membership Interest. Except as otherwise provided herein, for the purposes of calculating the percentage Membership Interest in connection with any vote required herein, each BHCA Member shall be deemed to have a Membership Interest which shall be the lesser of (i) such BHCA Member's Membership Interest or (ii) 4.99% of the total Membership Interest. Neither a BHCA Member nor its Affiliates may request that such BHCA Member's Membership Interest be increased unless such increase is permissible under the BHCA and the Company may rely on a representation made by a BHCA Member to the Company to such effect. Notwithstanding the foregoing, a BHCA Member's Membership Interest shall never exceed such Member's Membership Interest. 13.2 Notices. Notices to the Company shall be sent to the Administrative Office of the Company. Notices to the Members shall be sent to the addresses set forth on their respective signature page. Any Member may require notices to be sent to a different address by giving notice to the other Members in accordance with this Section 13.2. Any notice or other communication required or permitted hereunder shall be in writing, and shall be deemed to have been given with receipt confirmed if and when delivered personally, given by prepaid telegram or mailed first class, postage prepaid, delivered by courier, or sent by facsimile, to such Members at such address. 13.3 Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes any prior agreement or understanding between them respecting the subject matter of this Agreement. 13.4 Saving Clause. If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby. 13.5 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.6 Governing Law. The Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 13.7 No Rights of Creditors and Third Parties under Agreement. The Agreement is entered into among the Company and the Members for the exclusive benefit of the Company, its Members and their successors and assignees. The Agreement is expressly not intended for the benefit of any creditor of the Company or any other person. Except and only to the extent provided by applicable statute, no such creditor or any third party shall have any rights under the Agreement or any agreement between the Company and any Member with respect to any Capital Contribution or otherwise. -19- 13.8 General Interpretive Principles. For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Agreement include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (b) accounting terms not otherwise defined herein have the meanings given to them in the United States in accordance with GAAP consistently applied; (c) references herein to "Sections," "paragraphs" and other subdivisions without reference to a document are to designated Sections, paragraphs and other subdivisions of this Agreement; (d) a reference to a paragraph without further reference to a Section is a reference to such paragraph as contained in the same Section in which the reference appears, and this rule shall also apply to other subdivisions; (e) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and (f) the term "include" or "including" shall mean without limitation by reason of enumeration. -20- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. INVESTOR* UBS (USA) Inc. /s/ R.H. Mills, Managing Director - --------------------------------- /s/ Per Dyrvik - -------------- Address: 677 Washington Boulevard Stamford, CT 06912 USA Membership Interest: 25,000 Units Capital Contribution: $2,000,000 Number of Shares of Trinitech Systems, Inc. issued in exchange for the Option 125,000 Shares ------- *BHCA SPECIAL MEMBER NYFIX MILLENNIUM, L.L.C. By: /s/ Peter K. Hansen ----------------------- Peter K. Hansen Chairman -21- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. INVESTOR /s/ Illegible - ----------------------------- Address: ING Barings LLC 55 East 52nd Street New York, New York 10055 Membership Interest: 25,000 Units Capital Contribution: $2,000,000 Number of Shares of Trinitech Systems, Inc. issued in exchange for the Option 125,000 Shares ------- NYFIX MILLENNIUM, L.L.C. By: /s/ Peter K. Hansen ---------------------------- Peter K. Hansen Chairman -22- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. INVESTOR* SOCIETE GENERAL INVESTMENT CORPORATION /s/ Illegible - -------------------------------- Address: 1221 Avenue of the Americas New York, New York 10020 Membership Interest: 25,000 Units Capital Contribution: $2,000,000 Number of Shares of Trinitech Systems, Inc. issued in exchange for the Option 125,000 Shares ------- *BHCA SPECIAL MEMBER NYFIX MILLENNIUM, L.L.C. By: /s/ Peter K. Hansen ---------------------------- Peter K. Hansen Chairman -23- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. INVESTOR LEHMAN BROTHERS INC. By: /s/ Robert Shafir ------------------------------- Name: Robert Shafir Title: Managing Director Address: 3 World Financial Center 200 Vesey Street New York, New York 10285 Membership Interest: 25,000 Units Capital Contribution: $2,000,000 Number of Shares of Trinitech Systems, Inc. issued in exchange for the Option 125,000 Shares ------- NYFIX MILLENNIUM, L.L.C. By: /s/ Peter K. Hansen ----------------------------- Peter K. Hansen Chairman -24- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. INVESTOR MSDW Equity Investments Ltd. By: /s/ Daniel H. Hallahan ------------------------------- Daniel H. Hallahan Address: MSDW Equity Investments Ltd. Maples Calder Ugland House P.O. Box 309 Cayman Island Membership Interest: 25,000 Units Capital Contribution: $2,000,000 Number of Shares of Trinitech Systems, Inc. issued in exchange for the Option 125,000 Shares ------- NYFIX MILLENNIUM, L.L.C. By: /s/ Peter K. Hansen ----------------------------- Peter K. Hansen Chairman -25- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. INVESTOR DB U.S. FINANCIAL MARKETS HOLDING CORPORATION By: /s/ Gary T. Handel By: /s/ James O. Wilhelm -------------------------------- ---------------------------- Gary T. Handel James O. Wilhelm Vice President and Treasurer Assistant Secretary Address: 31 West 52nd Street New York, New York 10019 Attn: Tom Curtis, Legal Dept. Membership Interest: 25,000 Units Capital Contribution: $2,000,000 Number of Shares of Trinitech Systems, Inc. issued in exchange for the Option 125,000 Shares ------- NYFIX MILLENNIUM, L.L.C. By: /s/ Peter K. Hansen -------------------------------- Peter K. Hansen Chairman -26- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. INVESTOR SANDFORD C. BERNSTEIN & CO., INC. By: /s/ Lewis A. Sanders ------------------------------- Lewis A. Sanders Chairman Address: 767 Fifth Avenue New York, New York 10153 Membership Interest: 25,000 Units Capital Contribution: $2,000,000 Number of Shares of Trinitech Systems, Inc. issued in exchange for the Option 125,000 Shares ------- NYFIX MILLENNIUM, L.L.C. By: /s/ Peter K. Hansen ----------------------------- Peter K. Hansen Chairman -27- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the Effective Date. NYFIX, INC. (formerly Trinitech Systems, Inc.) By: /s/ Peter Kilbinger Hansen --------------------------------------- Name: Peter Kilbinger Hansen Title: Chairman of the Board and President Address: 333 Ludlow Street Stamford, CT 06902 Membership Interest: 175,000 Capital Contribution: $2,000,000 NYFIX MILLENNIUM, L.L.C. By: /s/ Peter Kilbinger Hansen ---------------------------------------- Name: Peter Kilbinger Hansen Title: Chairman -28- EX-24.1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-95285. /s/ Arthur Andersen LLP Stamford, Connecticut March 29, 2000 EX-27 4 ARTICLE 5 FDS FOR 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,565,649 0 7,213,820 125,000 1,303,658 11,455,730 8,571,738 2,698,701 38,828,025 6,942,745 0 15,903,302 0 0 29,869,377 38,828,025 3,715,479 12,209,451 3,765,587 11,015,285 0 0 221,711 1,096,428 94,400 1,002,028 0 0 41,609 960,419 .07 .06
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