-----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, SVo69eDH6Z4zdNUALuKb16LWrvgJ3yo5qYn5nXtt2yo8lOO8IISDoABeU+nJCZyk FYvxWT5mYBW8rdbs+7syPw== 0000950123-01-503131.txt : 20010604 0000950123-01-503131.hdr.sgml : 20010604 ACCESSION NUMBER: 0000950123-01-503131 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20010601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NYFIX INC CENTRAL INDEX KEY: 0000099047 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 061344888 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-60314 FILM NUMBER: 1652253 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 S-3/A 1 y49620a1s-3a.txt NYFIX INC 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 2001 REGISTRATION NO. 333-60314 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NYFIX, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK STAMFORD HARBOR PARK 06-1344888 (STATE OR OTHER JURISDICTION OF 333 LUDLOW STREET (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) STAMFORD, CONNECTICUT 06902 IDENTIFICATION NUMBER) (203) 425-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------ PETER K. HANSEN CHIEF EXECUTIVE OFFICER NYFIX, INC. STAMFORD HARBOR PARK 333 LUDLOW STREET STAMFORD, CONNECTICUT 06902 (203) 425-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS) ------------------------ COPIES TO: ROBERT L. FROME, ESQ. LUCIANA FATO, ESQ. OLSHAN GRUNDMAN FROME DAVIS POLK & WARDWELL ROSENZWEIG & WOLOSKY LLP 450 LEXINGTON AVENUE 505 PARK AVENUE NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022 (212) 450-4000 (212) 753-7200
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this prospectus in not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JUNE 1, 2001 PROSPECTUS 3,000,000 SHARES [NYFIX LOGO] COMMON STOCK This is an offering of common stock by NYFIX, Inc. - -------------------------------------------------------------------------------- Our common stock is traded on the Nasdaq National Market under the symbol NYFX. On May 30, 2001, the last reported sale price of our common stock on the Nasdaq National Market was $26.04 per share. - --------------------------------------------------------------------------------
PER SHARE TOTAL ---------- ---------- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to NYFIX, before expenses.......................... $ $
The selling shareholders have granted the underwriters an option for a period of 30 days to purchase up to 450,000 additional shares of common stock. - -------------------------------------------------------------------------------- INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. JPMORGAN UBS WARBURG ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY , 2001 [GRAPHIC TO COME] 3 [THE COVER ART IS TITLED "NYFIX PROVIDES ELECTRONIC TRADING INFRASTRUCTURE & TECHNOLOGIES TO THE BROKERAGE INDUSTRY." THE ARTWORK CONSISTS OF A CENTRAL CIRCULAR GRAPHIC WITH THREE PICTURES (PHOTOS) SURROUNDING THE CENTER. THE CIRCULAR GRAPHIC CONTAINS THE COMPANY LOGO AND HAS CONCENTRIC CIRCLES AROUND THIS GRAPHIC THAT CONTAIN THE NAMES OF THE COMPANY'S VARIOUS PRODUCTS. THE THREE ADDITIONAL PICTURES THAT SURROUND THE CENTER ARE TITLED AND CONTAIN SUBTEXT AS FOLLOWS: BUYSIDE BROKER: BUYSIDE MONEY MANAGERS UTILIZE THE NYFIX NETWORK TO TRANSMIT ORDER INFORMATION TO SELLSIDE BROKERS; SELLSIDE BROKER: SELLSIDE BROKERS UTILIZE NYFIX APPLICATIONS TO ENTER, MANAGE AND ROUTE TRADE INFORMATION. TRADERS USE NYFIX'S RISK MANAGEMENT AND ONLINE TRADE DATA STORAGE SYSTEMS TO MANAGE FIRM-WIDE TRADE DATA; EXECUTION VENUES: NYFIX EXCHANGE SYSTEMS COMPRISE STATIONARY FLOOR BOOTH APPLICATIONS AND WIRELESS HANDHELD SYSTEMS FOR ORDER MANAGEMENT AND ROUTING OF LOOKS AND REAL-TIME MARKET INFORMATION. THESE SERVICES PROVIDE ACCESS TO EXCHANGE PROVIDED EXECUTION FACILITIES AND STREAMLINE CUSTOMER ACCESS BY PROVIDING REAL-TIME CONVERSION FROM THE FIX PROTOCOL TO EXCHANGE PROPRIETARY ACCESS PROTOCOLS.] 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 5 Forward-Looking Statements.................................. 10 Use of Proceeds............................................. 11 Dividend Policy............................................. 11 Market Price of Our Common Stock............................ 11 Capitalization.............................................. 12 Selected Consolidated Financial Data........................ 13 Management's Discussion and Analysis of Financial Condition 15 and Results of Operations................................. Business.................................................... 21 Management.................................................. 36 Certain Relationships and Related Transactions.............. 42 Principal Shareholders...................................... 44 Description of Capital Stock................................ 46 Shares Eligible for Future Sale............................. 50 Underwriting................................................ 52 Legal Matters............................................... 54 Experts..................................................... 54 Where You Can Find More Information......................... 54 Incorporation of Certain Documents by Reference............. 54 Index to Consolidated Financial Statements.................. F-1
Unless otherwise indicated, all references in this prospectus to "NYFIX," "we," "us" and "our" refer to NYFIX, Inc., a New York corporation, and our subsidiary, NYFIX Overseas Inc., formerly known as Trinitech Systems International, Inc. References to NYFIX Millennium refer to NYFIX Millennium, L.L.C., our affiliate. "BreakWatch," "FixTrader," "FloorReport," "Guided Input," "NYFIX" and "NYFIX Millennium" are some of our registered trademarks. "E-Blotter," "Intelligent Order Routing," "Market Looks System," "Touchpad" and "TradeWatch" are some of our unregistered trademarks. 5 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the information under "Risk Factors" beginning on page 5, the information incorporated by reference herein and the consolidated financial statements beginning on page F-1, before making an investment decision. NYFIX, INC. We are a leading provider of electronic trading infrastructure and technologies to the professional trading segment of the brokerage community. With our desktop solutions, stationary and wireless exchange floor systems, electronic automation systems and straight-through processing, we streamline data entry, routing and execution and eliminate many processing inefficiencies. Our infrastructure, which consists of an extensive network of electronic circuits, links industry participants across equities and derivatives markets. Our technology is being used by over 200 customers, many of which are the largest and most respected firms in the industry and we have entered into agreements with over 50% of the New York Stock Exchange (NYSE) member firms. We processed an average NYSE daily volume of 212 million shares in the first quarter of 2000, a number which has grown to 456 million shares in the first quarter of 2001, with daily volumes reaching as high as 843 million shares. Our products and services are broadly categorized into electronic trading infrastructure and applications and provide our customers a complete solution to enter, manage and route orders and execution data electronically. The NYFIX network is a proprietary centralized electronic infrastructure linking various market participants to provide efficient, secure and reliable order routing. A single dedicated circuit between our customers and the NYFIX network enables connectivity to buyside and sellside institutions and major international exchanges and alternative execution venues such as electronic communication networks (ECNs) and alternative trading systems (ATSs). We also have developed and offer an integrated portfolio of modular desktop trading applications, exchange floor automation and exchange access applications for trading domestic and international equities, futures and options. Our outsourced application solutions reside upon our centralized system and are delivered through the NYFIX network. Our products and services operate using the industry standard Financial Information Exchange (FIX) protocol. We have been profitable since the first quarter of 1999 and have had nine quarters of increasing profitability. Our net income increased to $5,676,000 in the year ended December 31, 2000 from a net loss of $2,234,000 in the year ended December 31, 1998. Our net income increased to $1,464,000 in the first quarter of 2001 from $764,000 in the first quarter of 2000. Our total revenues increased to $23,980,000 in the year ended December 31, 2000 from $6,235,000 in the year ended December 31, 1998, representing a compound annual growth rate of 96%. Our total revenues increased 92% to $8,422,000 in the first quarter of 2001 from $4,380,000 in the first quarter of 2000. We principally derive our revenues from long-term subscriptions, product sales and services. In addition to developing our subscription revenues, we plan to develop transaction based revenues. We are well positioned to distribute order routing terminals in certain domestic and international market segments seeking more direct exchange and execution access and trade processing services in return for per share based transaction fees. We believe there is a substantial market for these types of transaction revenue streams. Our order routing connectivity capabilities and technology platform also enable us to support transaction revenue generation in our affiliate, NYFIX Millennium, of which we currently own 50% and have the option to purchase an additional 30%. The large quantity of orderflow processed by the NYFIX network has uniquely positioned us to develop, together with our affiliate NYFIX Millennium, an ATS that functions similarly to an ECN in that it matches buy and sell orders. NYFIX Millennium can match either buy and sell orders or pass them through to the exchange or execution venue of the trader's choice, in real-time, which we believe is a unique feature and key differential from other ATSs and ECNs that rely on captive order liquidity. NYFIX Millennium augments traditional auction markets by combining the electronic execution technology of an ECN with the liquidity of traditional primary markets. Institutional traders benefit from the order invisibility and anonymity provided by NYFIX Millennium, which eliminates the negative price impact associated with displaying large blocks of shares. We are currently focusing on generating a critical mass of orderflow from the NYFIX network to NYFIX Millennium. 1 6 Our goal is to become the leading provider of real-time electronic trade entry, routing and execution solutions to the global financial services industry. To achieve this, we plan to: - increase the number of participants in the NYFIX network and continue to expand the suite of products and services available to our customers; - develop transaction revenue streams in NYFIX Millennium; - develop transaction revenue streams from our electronic trading infrastructure and technologies; - establish and expand orderflow through NYFIX Millennium and leverage strategic partnerships; - expand the universe of securities being traded through our network; and - continue to protect our customers' roles in the distribution market. Our headquarters are located at Stamford Harbor Park, 333 Ludlow Street, Stamford, Connecticut 06902 and our telephone number at that address is (203) 425-8000. We also maintain operations in New York, Chicago and London. Our international operations are conducted through our subsidiary, NYFIX Overseas Inc., formerly known as Trinitech Systems International, Inc. We maintain a Web site at www.nyfix.com. Information contained on our Web site is not a part of this prospectus. 2 7 THE OFFERING Common stock being offered by NYFIX....3,000,000 shares Common stock to be outstanding after this offering..........................28,577,818 shares Use of proceeds........................We intend to use the net proceeds for working capital and general corporate purposes, including possible acquisitions. See "Use of Proceeds." Nasdaq National Market symbol..........NYFX ------------------------------ This information is based on the number of shares outstanding as of May 18, 2001, and excludes: - 4,513,194 shares subject to options outstanding, at a weighted average exercise price of $12.14 per share; - 231,876 shares available for future issuance under our Amended and Restated 1991 Incentive Stock Option Plan; and - warrants to purchase 56,250 shares of common stock at a weighted average exercise price of $2.83 per share. Unless otherwise noted, the information in this prospectus: - reflects a 3-for-2 stock split, which took place in November 1999; - reflects a 3-for-2 stock split, which took place in April 2000; and - assumes that the over-allotment option of 450,000 shares granted to the underwriters by the selling shareholders has not been exercised. ------------------------------ Our fiscal year ends on December 31 of each calendar year. 3 8 SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth summary consolidated financial data as of the dates and for the periods presented. You should read the following information in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------- ----------------------- 1998 1999 2000 2000 2001 ----------- ----------- ----------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Total revenues..................... $ 6,235,393 $12,209,451 $23,980,167 $4,380,008 $8,422,151 Gross profit....................... 3,702,684 8,443,864 17,602,815 3,229,960 6,481,735 Earnings (loss) from operations.... (2,226,337) 1,194,166 6,474,494 897,853 2,504,539 Net earnings (loss)................ (2,233,809) 960,419 5,676,427 763,760 1,463,542 Net earnings (loss) per common share: Basic.............................. $ (0.11) $ 0.04 $ 0.23 $ 0.03 $ 0.06 Diluted............................ $ (0.11) $ 0.04 $ 0.21 $ 0.03 $ 0.05
The As Adjusted balance sheet data summarized below reflects our receipt of the estimated net proceeds from our sale of 3,000,000 shares of common stock in this offering at an assumed offering price of $26.04 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
AT MARCH 31, 2001 ----------------------------- ACTUAL AS ADJUSTED ----------- -------------- BALANCE SHEET DATA: Cash and cash equivalents............................. $ 4,724,419 $ 77,016,619 Working capital....................................... 10,074,746 82,366,946 Property and equipment, net........................... 12,115,449 12,115,449 Total assets.......................................... 63,672,939 135,965,139 Long-term debt, including current portion............. 3,900,715 3,900,715 Shareholders' equity.................................. 48,142,626 120,434,826
4 9 RISK FACTORS You should carefully consider the risks described below before making an investment decision. If any of the following circumstances occur, our business, financial condition or results of operations could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may lose part or all of your investment. RISKS RELATED TO OUR BUSINESS ANY SLOWDOWN OR FAILURE OF OUR COMPUTER SYSTEMS COULD CAUSE US TO LOSE REVENUES AND CUSTOMERS AND SUBJECT US TO LIABILITY FOR CUSTOMER LOSSES. Our services depend on our ability to store, retrieve, process and manage significant databases and to electronically receive and process trade orders. Our systems or data centers could slow down significantly or fail for a variety of reasons, including undetected errors in our internal software programs or computer systems or heavy stress placed on our systems during peak trading times. We constantly monitor system loads and performance and regularly implement system upgrades to handle estimated increases in demand for capacity. However, we may not be able to accurately predict future volume increases or volatility and our systems may not be able to accommodate these demand increases or volatility without failure or degradation. In addition, our redundant systems or backup computer facility may not be able to protect us in the event of significant system failures. Any significant degradation or failure of our computer systems or any other systems in the clearing or trading processes could cause our broker-dealer customers and their customers to suffer delays in business processing, which could cause substantial losses to our broker-dealer customers and their customers, damage our reputation, increase our service costs, cause us to lose revenues and customers or divert our technical resources. We might not be able to defend ourselves adequately to enforce our contractual liability disclaimers in the event we are subjected to claims from our broker-dealer customers and their customers for losses, including litigation claiming fraud or negligence. Our electronic systems and data centers could be materially adversely affected by general power or telecommunications failures, computer viruses or natural disasters. They are also vulnerable to damage or failure due to human error and sabotage, both external and internal. WE RELY ON MULTIPLE TELECOMMUNICATIONS CARRIERS FOR DATA DELIVERY. ANY DISRUPTIONS TO THESE SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. We depend on the proper and timely function of complex telecommunications systems maintained and operated by third parties, securities exchanges, clearing brokers and other data providers. Natural disasters or failures, or inadequate or slow performance of any of these systems could adversely affect our ability to provide our services. In addition, such disruptions could lead to the loss of customers, damage our reputation and negatively impact our revenues and profitability. BECAUSE OUR OPERATING RESULTS FLUCTUATE FROM QUARTER TO QUARTER, THE PRICE OF OUR COMMON STOCK MAY BE UNSTABLE. Our revenues, cost of revenues, operating expenses and results of operations have fluctuated in the past and will continue to fluctuate in the future on a quarterly basis due to a number of factors. Some factors may be outside of our control and could have a negative effect on our results of operations, such as: - the timing and size of purchase orders from our customers; - unexpected delays in introducing new or enhanced products; - changes in the costs of telecommunication circuits and costs of data center equipment; and - the timing and size of expenses, including expenses for research and development of new products. 5 10 WE WERE UNPROFITABLE FROM OUR INCEPTION IN 1991 THROUGH 1998 AND WE MAY NOT REMAIN PROFITABLE IN THE FUTURE. We commenced operations in June 1991 and incurred net losses through 1998. Although we have been profitable commencing in the first quarter of 1999 after introducing the NYFIX network, we cannot assure you that we will continue to successfully implement our business strategy and continue to maintain profitable operations. WE FACE SUBSTANTIAL COMPETITION IN OUR INDIVIDUAL PRODUCT AREAS FROM COMPANIES THAT HAVE LARGER AND GREATER FINANCIAL, TECHNICAL AND MARKETING CAPABILITIES, WHICH MAY HINDER OUR ABILITY TO COMPETE SUCCESSFULLY. We operate in a highly competitive market. Certain of our competitors may have: - longer operating histories; - significantly greater financial, technical and marketing resources; - more extensive customer bases; and - extensive knowledge of the industry. We expect competition to intensify in the future. Competitive pressures we face may reduce our market share and materially adversely affect our business, operating results and financial condition. WE MAY EXPERIENCE DELAYS IN ENHANCING OUR EXISTING PRODUCTS AND SERVICES AND IN DEVELOPING NEW PRODUCTS AND SERVICES, WHICH MAY AFFECT OUR COMPETITIVENESS AND CAUSE US TO LOSE MARKET SHARE. Our competitiveness and ability to maintain or increase our market share will depend, in part, on our ability to develop, test, sell and support enhancements to our current and new products and services on a timely basis in response to changing customer needs, competition, market conditions, technological developments and emerging standards in the financial trading industry. Our failure to successfully adapt our products and services to this rapidly changing market could reduce our revenue and cause our operating results to suffer. We may not successfully identify new product opportunities or develop and bring new and enhanced products and services to the market in a cost-effective and timely manner. If we fail to release new products and upgrades on time or if they fail to achieve market acceptance, we may experience customer dissatisfaction, cancellation of orders and loss of customers and revenues. WE MUST MANAGE OUR GROWTH IN ORDER TO ACHIEVE OUR BUSINESS OBJECTIVES. We have experienced a period of significant growth in our business that may place a strain upon our management systems and resources. We intend to continue to grow in the foreseeable future and to pursue existing and potential market opportunities. Our growth has placed, and will continue to place, significant demands on our management and operational resources, particularly with respect to: - recruiting, training, supervising and retaining skilled technical, marketing and management personnel in an environment where there is intense competition for skilled personnel; - implementing new and enhanced communications and information systems; - maintaining and expanding a cutting edge research and development staff; - expanding our sales and marketing efforts; - expanding our facilities and other infrastructure in a timely manner to accommodate a significantly larger workforce; - developing and managing a larger, more complex international organization; and - expanding our treasury and accounting functions. In order to manage our growth effectively, we must also develop more sophisticated operational systems, procedures and controls. If we fail to develop these systems, procedures and controls on a timely basis, it could impede our ability to deliver products in a timely fashion and fulfill existing customer commitments and, as a result, our business, financial condition and operating results could be materially adversely affected. In 6 11 addition, our revenue may not continue to grow at a pace that will support our planned costs and expenditures. To the extent that our revenue does not increase at a rate commensurate with these additional costs and expenditures, our results of operations and liquidity would be materially adversely affected. OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES AND GROW OUR BUSINESS COULD BE SIGNIFICANTLY IMPAIRED IF WE LOSE THE SERVICES OF KEY PERSONNEL. Our business is highly dependent on a number of key executive officers, including Peter K. Hansen, our Chief Executive Officer and President, and Lars Kragh, our Chief Information Officer. The loss of the services of any of our key personnel could have a material adverse effect on our business and results of operations. Our future success will also depend on our ability to recruit, train and retain other qualified personnel. Competition for key personnel and other highly qualified technical and managerial personnel in our industry is intense. WE RELY, IN PART, ON OTHERS TO SUPPLY THE UNDERLYING SOFTWARE AND SYSTEMS WE USE TO PROVIDE OUR SERVICES. IF WE ARE UNABLE TO OBTAIN THIRD PARTY SUPPORT AND DELIVERY ON A TIMELY AND RELIABLE BASIS, OUR ABILITY TO PERFORM SERVICES COULD BE HINDERED AND THE RELATIONSHIPS WE HAVE WITH OUR CUSTOMERS COULD BE HARMED. We rely on a number of third parties to supply underlying software and systems, as well as equipment and related maintenance. If, in the future, enhancements or upgrades of third party software and systems cannot be integrated with our technologies or if the technologies on which we rely fail to respond to industry standards or technological changes, we may be required to redesign our proprietary systems. Software products may contain defects or errors, especially when first introduced or when new versions or enhancements are released. The inability of third parties to supply us with underlying software and systems on a reliable, timely basis could harm our relationships with our customers and our ability to achieve our projected level of growth. OUR PRODUCTS MAY SUFFER FROM DEFECTS OR ERRORS, WHICH MAY HARM OUR REPUTATION OR SUBJECT US TO PRODUCT LIABILITY CLAIMS. The products we offer are inherently complex. Despite testing and quality control, current versions, new versions or enhancements of our products may contain errors. Any errors, slowdown or failure in our products may harm our reputation or subject us to product liability claims. Significant technical challenges also arise with our products because our customers purchase and integrate them with a number of third party computer applications and software. Such integration may not always be successful. Any defects or errors that are discovered after commercial release could result in the loss of revenue or delay in market acceptance of our products. Moreover, we could face higher development costs if our products contain undetected errors, or if we fail to meet our customers' expectations. Although we maintain general liability insurance coverage, this coverage may not continue to be available on reasonable terms or at all. In addition, a product liability claim, whether or not successful, could harm our business by increasing our costs and distracting our management. WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. We rely on trade secrets, copyright, trademark and patent law to protect our proprietary technology. We are currently exploring obtaining additional patents for some of our proprietary technology and know-how. Notwithstanding the precautions we take to protect our intellectual property rights, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs to us and diversions of our resources and the attention of management, either of which could negatively 7 12 affect our business. Additionally, our failure or inability to enforce our intellectual property rights or protect our trade secrets could negatively impact our business prospects and/or our financial results. CONDUCTING BUSINESS IN INTERNATIONAL MARKETS SUBJECTS US TO ADDITIONAL RISKS. For the year ended December 31, 2000 and the first three months ended March 31, 2001, approximately 11% and 19%, respectively, of our revenues were derived from our international operations. Thus, we are subject to risks inherent in doing business in international markets, including: - difficulties in recruiting and retaining personnel and managing international operations; - a high degree of costs associated with servicing smaller national markets; and - fluctuations in currency exchange rates. Any of the above could affect the profitability of our international operations or hinder our ability to expand further internationally. RISKS RELATED TO NYFIX MILLENNIUM NYFIX MILLENNIUM HAS A LIMITED OPERATING HISTORY AND IF IT FAILS TO BECOME PROFITABLE, WE MAY HAVE TO WRITE OFF OUR INVESTMENT IN NYFIX MILLENNIUM. NYFIX Millennium was formed in September 1999 and since that time has been in the development stage and has incurred aggregate net losses of $11,346,000 through March 31, 2001, primarily in connection with development and start-up activities. Our investment in NYFIX Millennium involves a high degree of business and financial risks and could result in a write-off of our investment in NYFIX Millennium. NYFIX Millennium's prospects must be considered in light of the risks, expenses, delays, problems and difficulties frequently encountered in the establishment of a new business in an emerging and evolving industry. NYFIX Millennium may not be successful in its business, and profitability may never be attained. NYFIX MILLENNIUM FACES SUBSTANTIAL COMPETITION THAT COULD MAKE IT DIFFICULT TO GAIN MARKET SHARE AND HARM ITS FINANCIAL PERFORMANCE. The financial services industry is very competitive and we expect competition to intensify in the future. NYFIX Millennium faces competition from traditional stock exchanges, other ATSs and ECNs. Many financial service providers with which NYFIX Millennium competes are substantially larger than NYFIX Millennium and have substantially greater financial, technical, marketing and other resources. Existing companies may seek to expand their own businesses to compete with NYFIX Millennium because of the ongoing growth of the securities markets, the interrelationship between information and trading, and the importance of technology in creating efficient trading systems. These potential competitors could include companies that enable customers to trade products and services other than securities, such as telecommunications capacity, as well as software companies, information and media companies, and other companies that are not currently in the brokerage business. NYFIX Millennium may not be able to compete effectively with its competitors. NYFIX MILLENNIUM'S REVENUE AND GROWTH COULD BE ADVERSELY AFFECTED BY DECLINES IN TRADING VOLUME IN THE SECURITIES MARKETS. NYFIX Millennium, as an ATS, will primarily generate its revenue by charging customers a fee for each trade passed through its system. The number of transactions that the NYFIX Millennium system handles generally corresponds directly to the volume of trading throughout the various securities markets. Consequently, a widespread decline in overall trade volume in the securities markets could cause a decline in NYFIX Millennium's trading volume, resulting in stagnant or declining revenues. THE SECURITIES BROKERAGE INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. IF NYFIX MILLENNIUM FAILS TO COMPLY WITH THESE REGULATIONS, IT MAY BE SUBJECT TO DISCIPLINARY OR OTHER ACTION BY REGULATORY ORGANIZATIONS. The securities industry is subject to extensive regulation under both federal and state laws. In addition to these laws, NYFIX Millennium must comply with rules of the Securities and Exchange Commission (SEC), 8 13 including Regulation ATS, and The National Association of Securities Dealers, Inc. (NASD), various stock exchanges, state securities commissions and other regulatory bodies charged with safeguarding the integrity of the securities markets and other financial markets and protecting the interests of investors participating in these markets. As a registered broker-dealer, NYFIX Millennium is subject to numerous regulations covering the securities business, including: - marketing practices; - capital structure, including net capital requirements; - record keeping; and - conduct of directors, officers and employees. Any failure to comply with these regulations could subject NYFIX Millennium to censure, fines, the issuance of cease-and-desist orders or the suspension, and/or disqualification of its officers, directors or employees. NYFIX MILLENNIUM'S COMPLIANCE AND RISK MANAGEMENT METHODS MAY NOT BE EFFECTIVE. NYFIX Millennium's ability to comply with regulations depends largely on the establishment and maintenance of an effective compliance system, as well as its ability to attract and retain qualified compliance personnel. NYFIX Millennium could be subject to disciplinary or other actions due to claimed noncompliance with regulations in the future. If a claim of noncompliance is made by a regulatory authority, the efforts of the management of NYFIX Millennium could be diverted to responding to such a claim and NYFIX Millennium could be subject to a range of possible consequences, including the payment of fines, civil lawsuits and the suspension of one or more portions of its business. In addition, its mode of operation and profitability may be directly affected by: - additional legislation; - changes in rules promulgated by the SEC, the NASD, the Board of Governors of the Federal Reserve System, the various stock exchanges or other self-regulatory organizations; or - changes in the interpretation or enforcement of existing laws and rules. In addition, NYFIX Millennium's status as a recognized ATS requires that its trade execution and communication systems be able to handle anticipated present and future peak trading volumes. If any of our systems and/or NYFIX Millennium's systems become disabled, the ability to process trades and handle peak trading volumes will be compromised. The status of NYFIX Millennium as an SEC registered broker-dealer and NASD member is conditioned, in part, on its ability to process and settle trades. RISKS RELATED TO THIS OFFERING OUR MANAGEMENT HAS BROAD DISCRETION IN USING THE PROCEEDS FROM THIS OFFERING AND THE PROCEEDS MIGHT NOT BE USED IN WAYS THAT INCREASE OUR OPERATING RESULTS OR MARKET VALUE. We estimate that the net proceeds from this offering will be approximately $72.3 million, after deducting underwriting discounts and commissions and estimated expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders in this offering if the over-allotment option is exercised. Our management will have broad discretion in how we use these net proceeds, including uses that do not increase our operating results or market value. In addition to using these proceeds for general corporate purposes, including capital expenditures and working capital, we are likely to consider using a portion of the net proceeds for the future acquisition of companies, technologies or services that complement our business, or for strategic alliances with, or investments in, companies that provide complementary products and services. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. See "Use of Proceeds." 9 14 THERE IS A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK. Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock and impair our ability to raise capital through a public offering of equity securities in the future. We and our executive officers, directors and certain shareholders holding 4,777,653 shares of our common stock have agreed, with limited exceptions, not to sell shares of our common stock without the prior written consent of J.P. Morgan Securities Inc. during the period commencing on the date of this prospectus and continuing to and including the date that is 120 days from such date. For more information, see "Shares Eligible for Future Sale." FORWARD-LOOKING STATEMENTS This prospectus includes or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "intend," "project," "seek," "predict," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. 10 15 USE OF PROCEEDS We estimate that the net proceeds from the sale of 3,000,000 shares of common stock that we are offering will be approximately $72.3 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders if the over-allotment option granted to the underwriters is exercised. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds for acquisitions of businesses, products and technologies or the establishment of joint ventures that are complementary to our business. While we are exploring certain opportunities, there are no current agreements with respect to any transactions. The amount actually used for working capital purposes will depend on a number of factors. Accordingly, we will retain broad discretion in the allocation of the net proceeds of this offering. Pending these uses, we will invest the net proceeds of this offering in interest-bearing, investment-grade securities. DIVIDEND POLICY We have never paid dividends on our common stock. We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. MARKET PRICE OF OUR COMMON STOCK Our common stock is quoted on the Nasdaq National Market under the symbol NYFX. Prior to March 6, 2000, our common stock was quoted on the American Stock Exchange under the symbol NYF. Prior to October 25, 1999, our common stock was quoted on the American Stock Exchange under the symbol TSI. The following table sets forth, for the periods indicated, the high and low reported sales prices per share of our common stock.
HIGH LOW ------ ------ 1999 First Quarter............................................... $ 4.22 $ 3.06 Second Quarter.............................................. $ 8.17 $ 2.83 Third Quarter............................................... $13.33 $ 6.39 Fourth Quarter.............................................. $21.17 $11.11 2000 First Quarter............................................... $43.67 $14.17 Second Quarter.............................................. $44.38 $20.69 Third Quarter............................................... $46.31 $29.63 Fourth Quarter.............................................. $45.81 $18.00 2001 First Quarter............................................... $34.88 $19.88 Second Quarter (through May 30, 2001)....................... $32.00 $16.75
On May 30, 2001, the last reported sale price of our common stock on the Nasdaq National Market was $26.04 per share. As of the close of business on May 18, 2001 we had 406 holders of record of our common stock. 11 16 CAPITALIZATION The following table summarizes our capitalization as of March 31, 2001 on an actual basis and on an as adjusted basis to reflect our receipt of the estimated net proceeds from our sale of 3,000,000 shares of common stock in this offering at an assumed offering price of $26.04 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. You should read this table together with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
AT MARCH 31, 2001 ---------------------------------- ACTUAL AS ADJUSTED ----------- --------------- (IN THOUSANDS, EXCEPT SHARE DATA) Cash and cash equivalents................................... $ 4,724 $ 77,017 ======= ======== Current portion of long-term debt, including capital lease obligations............................................... 2,628 2,628 ======= ======== Capital lease obligations -- long-term portion.............. 1,272 1,272 ------- -------- Shareholders' equity: Preferred stock, $1.00 par value; 5,000,000 shares authorized, none issued.............................. - - Common stock, $.001 par value; 60,000,000 shares authorized, 25,352,038 shares issued and outstanding, 28,352,038 shares outstanding, as adjusted........... 25 28 Additional paid-in capital.................................. 47,018 119,307 Retained earnings........................................... 1,770 1,770 Due from officers and directors............................. (670) (670) ------- -------- Total shareholders' equity...................... 48,143 120,435 ------- -------- Total capitalization......................... $49,415 $121,707 ======= ========
This information excludes: - 4,479,074 shares subject to options outstanding, at a weighted average exercise price of $12.15 per share; - 303,776 shares available for future issuance under our Amended and Restated 1991 Incentive Stock Option Plan; and - warrants to purchase 56,250 shares of common stock at a weighted average exercise price of $2.83 per share. 12 17 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data as of the dates and for the periods presented. You should read the following information in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. Our consolidated financial statements included elsewhere in this prospectus for the years ended December 31, 1998 and 1999 have been audited by Arthur Andersen LLP, independent auditors. The statement of operations data for the years ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1999 have been derived from these consolidated financial statements. The statement of operations data for the years ended December 31, 1996 and 1997 and the balance sheet data as of December 31, 1996, 1997 and 1998 are derived from our consolidated financial statements for the years then ended, which have been audited by Arthur Andersen LLP, independent auditors, but are not included elsewhere in this prospectus. Our consolidated financial statements included elsewhere in this prospectus for the year ended December 31, 2000 have been audited by Deloitte & Touche LLP, independent auditors. Deloitte & Touche LLP were appointed our independent auditors on April 27, 2000. The statement of operations data for the year ended December 31, 2000 and the balance sheet data as of December 31, 2000 are derived from these consolidated financial statements. Our consolidated financial statements included elsewhere in this prospectus for the three months ended March 31, 2000 and 2001 and as of March 31, 2001 are unaudited. The statement of operations data for the three months ended March 31, 2000 and March 31, 2001 and the balance sheet data as of March 31, 2001 are derived from such consolidated financial statements, which in the opinion of management include all adjustments, consisting of normal recurring adjustments, that are necessary to present fairly our results of operations and financial position for the periods and at the date indicated. The results are not necessarily indicative of our future performance.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------------ ----------------------- 1996 1997 1998 1999 2000 2000 2001 ---------- ----------- ----------- ----------- ----------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Total revenues......... $7,013,605 $ 5,006,017 $ 6,235,393 $12,209,451 $23,980,167 $4,380,008 $8,422,151 Gross profit........... 2,867,115 2,325,879 3,702,684 8,443,864 17,602,815 3,229,960 6,481,735 Earnings (loss) from operations........... (518,781) (2,712,109) (2,226,337) 1,194,166 6,474,494 897,853 2,504,539 Net earnings (loss).... (445,285) (2,594,040) (2,233,809) 960,419 5,676,427 763,760 1,463,542 Net earnings (loss) per common share: Basic............... $ (0.03) $ (0.14) $ (0.11) $ 0.04 $ 0.23 $ 0.03 $ 0.06 Diluted............. $ (0.03) $ (0.14) $ (0.11) $ 0.04 $ 0.21 $ 0.03 $ 0.05
13 18
AT DECEMBER 31, ----------------------------------------------------------------- AT MARCH 31, 1996 1997 1998 1999 2000 2001 ---------- ---------- ----------- ----------- ----------- ------------ BALANCE SHEET DATA: Cash and cash equivalents......... $1,198,730 $2,141,307 $ 3,948,004 $ 1,565,649 $ 4,866,629 $ 4,724,419 Working capital....... 3,522,756 3,803,403 5,970,449 4,512,985 9,158,936 10,074,746 Property and equipment, net...... 434,638 1,361,707 2,854,131 5,873,037 11,472,473 12,115,449 Total assets.......... 7,473,336 7,547,263 12,997,519 38,828,025 57,558,350 63,672,939 Long-term debt, including current portion............. 802,059 93,564 1,800,000 2,500,000 3,822,919 3,900,715 Shareholders' equity.............. 4,543,835 5,901,733 8,118,749 29,885,280 42,227,734 48,142,626
14 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of the operating results for any future period. OVERVIEW We commenced operations in January 1991, initially focusing on capturing trade order information via our Guided-Input Touchpad system, and since then we have transitioned to become a provider of infrastructure, systems, software and wireless trading technologies to the brokerage industry. We provide electronic trading and straight-through trade processing solutions to various participants in the brokerage industry such as brokerage firms, international banks and global exchanges trading in equities, futures and options. Our deployment of products and services via the NYFIX network has resulted in our processing an average NYSE daily volume of 212 million shares in the first quarter of 2000, a number which has grown to 456 million in the first quarter of 2001, with daily volumes reaching as high as 843 million shares. By 1996, the financial services industry had adopted the Financial Information Exchange Protocol, commonly referred to as the FIX protocol, which provides the brokerage industry with a common underlying language to enable electronic trading and communications. In late 1997, we built a communication infrastructure known as the NYFIX network utilizing the FIX protocol, which provides each customer with dedicated circuits into the NYFIX network, and provides global electronic connectivity for trade order routing. We currently offer our services, consisting of integrated hardware and software systems, together with linkage through our data center. Our customers typically subscribe to our services by paying a monthly fee per terminal for use of our integrated infrastructure and software systems. Beginning in late 1997, we focused primarily on selling our products and services on a subscription basis with ongoing monthly subscription fees rather than a software and capital equipment sales model with one-time, upfront fees. Since making this transition, total revenues have increased to $23,980,000 in 2000 from $5,006,000 in 1997, representing a compound annual growth rate of 69%. We have been profitable since the first quarter of 1999 and have had eight consecutive quarters of increasing profitability. Our revenues are comprised of subscription, sales and service contract revenue. Consistent with our transition to a subscription sales model from a hardware and software sales model, subscription fees represent a majority and increasing share of our total revenues. Subscription revenue contracts are primarily with brokerage firms, international banks and global exchanges trading in equities, and are generally for an initial period of one to three years, with one to three year renewal periods. Subscription revenue is recognized ratably over the lives of the subscription agreements with customers and begin once installation is complete. Sales revenue, which is comprised of software sales and capital equipment sales, is generated primarily by sales to customers in the futures and options trading market, and is expected to decrease in both aggregate dollar amounts and as a percentage of total revenues as we continue to shift our focus to servicing those markets using a subscription fee model. Sales revenue is recognized upon shipment of the product and acceptance by the customer. Service contract revenue is comprised of maintenance contracts for capital sales and subscriptions and is recognized ratably over the period that the service is provided. Service contract revenue on subscription contracts is charged to customers as a fixed percentage of such contracts. Cost of revenues principally consists of subscription communication lines, amortization of capitalized product enhancement costs and depreciation of subscription-based equipment, labor, materials and overhead. Selling, general and administrative expenses account for the majority of our operating expenses and consist of salaries and benefits, rent and office expenses, non-customer specific communication fees, provisions for doubtful accounts and marketing expenses. During the past several years, we have expanded our efforts to support an increasing number of services and to increase the number of exchanges, brokerage firms and buyside institutions connecting to the NYFIX network. We believe that our continued investment in the development of our system and its associated applications and services has increased orderflow, which in turn should facilitate both revenue growth and further distribution of our products. 15 20 Research and development expenses relate to developing new products and technologies to meet the current and future needs of our customers. These costs consist primarily of salaries and costs related to technical and programming personnel. Depreciation and amortization expense consists of depreciation and amortization of equipment and software used to operate our systems. On October 27, 1999, we announced the formation of NYFIX Millennium, a consortium of us and seven international investment banks and brokerage firms, consisting of Deutsche Bank, ING Barings, Lehman Brothers, Morgan Stanley, Sanford C. Bernstein & Co., SG Cowen Securities Corp. and UBS Warburg. Each partner, including us, invested $2.0 million in NYFIX Millennium. Each of our partners received 25,000 units of NYFIX Millennium, collectively owning 50% of NYFIX Millennium, and we owned the remaining 50%. In addition, we purchased an option to buy from our partners an additional 30% ownership in NYFIX Millennium, for which we paid each of our partners 281,250 shares of our common stock. If we exercise this option, we will issue an aggregate of an additional 236,250 shares of our common stock to our partners for units of NYFIX Millennium owned by such partners. In March 2001, NYFIX Millennium added Bank of America, First Union Securities, J.P. Morgan & Co. and J.P. Morgan H&Q (formerly Chase H&Q) as new partners. Pursuant to the terms of the operating agreement of NYFIX Millennium, each new partner contributed $2.0 million to NYFIX Millennium, and we maintained our 50% ownership interest in NYFIX Millennium in exchange for reducing certain of our rights to share in future dividend distributions of NYFIX Millennium. We issued 94,000 shares of our common stock to each new partner in return for the same option rights noted above. If we exercise this option, we will issue an aggregate of an additional 60,000 shares of our common stock to our new partners for units of NYFIX Millennium owned by such new partners. NYFIX Millennium commenced the roll-out of its ATS on a limited basis to our existing customers in the fourth quarter of 2000 and is allowing them to use the system without charging for orders executed. Although the number of users and orders passing through NYFIX Millennium has been increasing, we currently do not anticipate that NYFIX Millennium will generate revenue until it has completed the first phase of its strategy to convert the large existing NYFIX network orderflow into liquidity available for executions in NYFIX Millennium. Once sufficient liquidity is established in the system, NYFIX Millennium intends to generate revenue by charging for each transaction on a fee per share basis. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Revenues. Subscription revenue increased 98% to $5,788,000 for the three months ended March 31, 2001, from $2,917,000 for the same period in 2000, principally due to increased desktop placements among existing customers, and also the addition of new customers and new product offerings sold to existing and new customers. As a percentage of total revenues, subscription revenue increased to 69% in the three months ended March 31, 2001 from 67% in the same period in 2000. Sales revenue increased 84% to $1,705,000 for the three months ended March 31, 2001, from $925,000 for the same period in 2000. The increase in sales revenue is principally due to customer demand for our order book management system (OBMS) derivatives trading software products. As a percentage of total revenues, sales revenue decreased to 20% in the three months ended March 31, 2001, from 21% in the same period in 2000, which is consistent with our transition to a subscription-based model, with software sales comprising the majority of sales revenue. Service contract revenue increased 73% to $929,000 for the three months ended March 31, 2001, from $538,000 for the same period in 2000, principally due to an increase in subscription contract revenue. In the three months ended March 31, 2001, service contract revenues comprised 11% of total revenue, as compared to 12% in the same period in 2000. Cost of Revenues and Gross Profit. Gross profit as a percentage of total revenues increased to 77% for the three months ended March 31, 2001, from 74% for the same period in 2000. The increase in gross profit percentage principally resulted from an increase in the amount of higher margin OBMS software installations, 16 21 which was offset somewhat by increased communication charges relating to increased desktop connections and higher labor costs due to increased service contract revenues. We obtain our materials and supplies from a variety of vendors in the U.S. and Far East and did not experience any significant price increases in our component parts purchased during the first quarter of 2001. Included in cost of revenues was amortization expense of product enhancement costs of $358,000 and $241,000 for the three months ended March 31, 2001 and 2000, respectively. Also included in cost of revenues was depreciation expense for subscription-based equipment of $453,000 and $231,000 for the three months ended March 31, 2001 and 2000, respectively. Selling, General and Administrative. Selling, general and administrative expenses increased 69% to $3,382,000 for the three months ended March 31, 2001, from $2,001,000 for the same period in 2000, but decreased as a percentage of total revenues to 40% in the current period from 46% in the prior period. The dollar increase reflects increased salaries, related personnel costs, recruiting fees, rent expense and various office expenses due to personnel increases to support our growth. Research and Development. Research and development expenses decreased 24% to $78,000 for the three months ended March 31, 2001, from $102,000 for the same period in 2000, primarily as a result of our focusing on enhancing our existing product line in the three months ended March 31, 2001 as opposed to developing new products in the three months ended March 31, 2000. Depreciation and Amortization. Depreciation and amortization expenses increased 127% to $517,000 for the three months ended March 31, 2001, from $228,000 for the same period in 2000, reflecting principally the continued investment in our infrastructure, in addition to administrative support equipment and leasehold improvements to support our growth. Interest Expense. Interest expense increased 68% to $111,000 for the three months ended March 31, 2001, from $66,000 for the same period in 2000, principally as a result of interest on capital lease obligations of $57,000 during the current period. Interest Income. Interest income increased 92% to $48,000 for the three months ended March 31, 2001, from $25,000 for the same period in 2000, principally due to higher average cash balances maintained by us during the current period versus the comparable period in 2000. Provision for Income Taxes. The provision for income taxes increased to $969,000 for the three months ended March 31, 2001, from $93,000 for the same period in 2000. Commencing in 2001, we are subject to full statutory income tax rates as compared to the prior period in which we utilized the benefits of available net operating loss carryforwards. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Revenues. Subscription revenue increased 137% to $15,955,000 in 2000, from $6,733,000 in 1999, principally due to increased desktop placements among existing customers, and also the addition of new customers and new product offerings sold to existing and new customers. As a percentage of total revenues, subscription revenue increased to 67% in 2000, from 55% in 1999. Sales revenue increased 37% to $5,089,000 in 2000, from $3,715,000 in 1999. The increase in sales revenue is principally due to customer demand for our OBMS derivatives trading software products. As a percentage of total revenues, sales revenue decreased to 21% in 2000, from 30% in 1999, which is consistent with our transition to a subscription-based model, with software sales comprising the majority of sales revenue. Service contract revenue increased 67% to $2,936,000 in 2000, from $1,761,000 in 1999, principally due to an increase in subscription contract revenue. In 2000, service contract revenue comprised 12% of total revenues, as compared to 14% in 1999. Cost of Revenues and Gross Profit. Gross profit as a percentage of total revenues increased to 73% in 2000, from 69% in 1999. The increase in gross profit percentage principally resulted from an increase in the amount of higher margin software installations and improved pricing on communication charges relating to subscription agreements. We obtain our materials and supplies from a variety of vendors in the U.S. and Far 17 22 East and did not experience any significant price increases in our component parts purchased during 2000. Included in cost of revenues was amortization expense of product enhancement costs of $1,185,000 and $719,000 for 2000 and 1999, respectively. Also included in cost of revenues was depreciation expense for subscription-based equipment of $1,257,000 and $586,000 for 2000 and 1999, respectively. Selling, General and Administrative. Selling, general and administrative expenses increased 50% to $9,419,000 in 2000, from $6,290,000 in 1999, but decreased as a percentage of total revenues to 39% in 2000, from 52% in 1999. The dollar increase reflects increased salaries, related personnel costs, rent expense and various office expenses due to personnel increases to support our growth. Also increasing were non-recoverable communication fees, and bad debt expense primarily due to certain independent brokers going out of business during 2000. Research and Development. Research and development expenses increased 53% to $454,000 in 2000, from $297,000 in 1999, as we continued to research ways to expand our product portfolio. Depreciation and Amortization. Depreciation and amortization expenses increased 89% to $1,255,000 in 2000, from $663,000 in 1999, principally due to our continued investment in our infrastructure. Interest Expense. Interest expense increased 50% to $333,000 in 2000, from $222,000 in 1999, principally as a result of capital lease obligations entered into during the period and higher average balances outstanding on our line of credit due to the draw down of an additional $700,000 in August 1999, offset in part by repayment of the principal of $83,000 a month commencing in July 2000. Interest Income. Interest income increased 38% to $156,000 in 2000, from $113,000 in 1999, principally due to higher average cash balances maintained by us during the year ended December 31, 2000 compared to the comparable period in 1999. Provision for Income Taxes. The provision for income taxes increased to $601,000 in 2000, from $94,000 in 1999. As of December 31, 1999, we established a full valuation allowance of $2,010,000 for our deferred tax assets based upon our determination of the amount that would ultimately be realized. Based upon our continued profitability during 2000 as well as expected future profitability, we determined as of December 31, 2000, that a valuation allowance was no longer required. At December 31, 2000, we had a net operating loss carryforward balance for federal income tax purposes of $3,776,000, expiring in 2014 through 2019. This carryforward balance may be significantly limited under the Internal Revenue Code as a result of ownership changes resulting from our equity offerings. In the event that we continue to be profitable, as we have been since the first quarter of 1999, we will have income taxes on our earnings. These taxes will have an effect on our future reported net earnings and cash flows. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenues. Subscription revenue increased 196% to $6,733,000 in 1999, from $2,278,000 in 1998. The increase in subscription revenue is principally due to our transition from offering our products and services on a capital sales basis to a subscription basis. The increase in subscription revenue is also partly due to a number of new product enhancements and order routing services introduced during the year as well as our continued increase in new orders. Sales revenue increased 40% to $3,715,000 in 1999, from $2,653,000 in 1998. The increase in sales revenue was principally due to increased demand for our OBMS derivatives trading software. Service contract revenue increased 35% to $1,761,000 in 1999, from $1,304,000 in 1998, primarily due to the increase in subscription contract revenue. In 1999, service contract revenue comprised 14% of total revenues, as compared to 21% in 1998. Cost of Revenues and Gross Profit. Gross profit as a percentage of total revenues increased to 69% in 1999, from 59% in 1998, principally due to an increase in the amount of higher margin software installations and subscription agreements. During 1999, we did not experience any significant price increases in component 18 23 parts purchased. Included in cost of sales was amortization expense for product enhancement costs of $719,000 and $479,000 for 1999 and 1998, respectively. Also included in cost of sales was depreciation expense for subscription-based equipment of $586,000 and $291,000 for 1999 and 1998, respectively. Selling, General and Administrative. Selling, general and administrative expenses increased 27% to $6,290,000 in 1999, from $4,957,000 in 1998. This increase reflected increases in salaries and related personnel costs, travel expenses and various office expenses resulting from continued expansion both in the U.S. and in London. Research and Development. Research and development expenses decreased 45% to $297,000 in 1999, from $537,000 in 1998, primarily as a result of our focusing on enhancing our existing product line in 1999 as opposed to developing new products in 1998. Depreciation and Amortization. Depreciation and amortization expenses increased 40% to $663,000 in 1999, from $475,000 in 1998, reflecting principally our continued investment in our infrastructure and data center. Interest Expense. Interest expense increased 106% to $222,000 in 1999, from $108,000 in 1998. This increase was principally a result of higher balances outstanding on our new line of credit and the cost of warrants issued for the guarantee of the amounts outstanding under the line of credit. Interest Income. Interest income increased 23% to $113,000 in 1999, from $92,000 in 1998, principally as a result of higher cash balances maintained by us during the year ended December 31, 1999 compared to the comparable period in 1998. LIQUIDITY AND CAPITAL RESOURCES Prior to achieving our present levels of profitability, our primary source of liquidity had been equity capital and drawdowns from our line of credit agreement. In November 1998 and in September 1999, we raised $3,450,000 and $2,547,000, respectively, from private placements of securities. At March 31, 2001, our cash and cash equivalents balance decreased to $4,724,000, from $4,867,000 at December 31, 2000, as a result of capital expenditures and the acquisition of other assets to support our infrastructure and repayments under our line of credit and capital lease obligations, partially offset by cash provided by operating activities, repayments of advances by NYFIX Millennium and the exercise of stock options. At March 31, 2001, we had total debt of $3,901,000, which represents amounts outstanding under our line of credit and capital lease obligations. At March 31, 2001, we had no material commitments for capital expenditures or inventory purchases. On July 13, 1998, we entered into a three-year $3 million line of credit agreement with a financial institution with advances on such agreement available to us during the first 18 months. The credit agreement was primarily intended to finance equipment expenditures. Outstanding indebtedness under the credit agreement bears interest at either LIBOR plus 1.25% or the bank's prime rate, at our discretion. We drew down an aggregate of $1,800,000 under the credit agreement during 1998 and an additional $700,000 during 1999. The credit agreement prohibited us from making principal repayments prior to February 1, 2000. Repayment of principal commenced on July 30, 2000, with twelve monthly installments of $83,333 with the remaining balance due on July 30, 2001. A non-employee shareholder of ours and our president personally secured the debt. In consideration for securing the indebtedness under the credit agreement, the non-employee shareholder and our president received 337,500 and 56,250 warrants, respectively, to purchase our common stock at $2.83 per share, which was the market value of our common stock on the date such warrants were issued. Expenses related to the warrants are being recognized over the three-year term of the credit agreement. We believe that we have sufficient liquidity, including cash generated from operations and issuances of common stock, to support our cash needs in the year 2001. Working Capital. At December 31, 2000 and March 31, 2001, we had working capital of $9,159,000 and $10,075,000, respectively, representing a 10% improvement. Our present capital resources include proceeds from internal operations and from issuances of common stock. 19 24 Cash Provided by Operating Activities. During the three months ended March 31, 2001, net cash provided by operations was $1 million as compared to net cash provided by operations for the three months ended March 31, 2000 of $2.6 million. The decrease is primarily due to an increase in accounts receivable of $1.9 million in the current quarter, offset by a 92% increase in net earnings, to $1,464,000 for the three months ended March 31, 2001, from $764,000 for the three months ended March 31, 2000. Cash Used in Investing Activities. During the three months ended March 31, 2001 and 2000, net cash used in investing activities was $1,151,000 and $1,460,000, respectively. The decrease represents payments for purchases of equipment related to our data center and subscription equipment and payments related to product enhancement costs for our product portfolio, offset by repayments of advances made to NYFIX Millennium. Proceeds From Financing Activities. During the three months ended March 31, 2001, net cash used in financing activities was $14,000, compared to net proceeds from financing activities of $1,366,000 for the three months ended March 31, 2000. During the current year's quarter, repayments under the credit line of $250,000 and principal payments under capital lease obligations of $196,000 were partially offset by proceeds of $432,000 from the exercise of stock options. During the three months ended March 31, 2000, proceeds from the exercise of warrants and stock options generated cash of $1,366,000. SEASONALITY We believe that our operations are not significantly affected by seasonality. NYFIX Millennium's revenues and our transaction revenues may be affected by the trading volume seasonality inherent in the underlying markets. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. We adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a significant impact on our financial position, results of operations, or cash flows. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The adoption of SAB 101 did not have an effect on our consolidated financial statements. In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation. FIN 44, an interpretation of Accounting Principles Bulletin 25 (APB 25), Accounting for Stock Issued to Employees, provides guidance on the application of APB 25 for stock compensation involving employees. The adoption of FIN 44 did not have an effect on our consolidated financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk generally represents the risk of loss that may be expected to result from the potential change in value of a financial instrument as a result of fluctuations in credit ratings of the issuer, equity prices, interest rates or foreign currency exchange rates. We are exposed to market risk principally through changes in interest rates and foreign currency exchange rates. Our interest rate exposure is principally limited to the $2.0 million of current portion of long-term debt outstanding at December 31, 2000, under our line of credit agreement. Borrowings under the line of credit agreement bear interest at rates that float with the market. The impact of a 100 basis point change in the interest rate on the line of credit agreement would not be material to earnings, cash flows or fair value. The financial statements of our London sales office are remeasured into U.S. dollars using the U.S. dollar as the functional currency. The market risk associated with foreign currency exchange rates is not material in relation to our consolidated financial position, results of operations or cash flows. We do not use derivative financial instruments for any purpose. 20 25 BUSINESS OVERVIEW We are a leading provider of electronic trading infrastructure and technologies to the professional trading segment of the brokerage industry. We provide electronic trading desktop solutions, stationary and wireless exchange floor systems, electronic access automation systems and straight-through processing to brokerage firms and international banks trading in equities, futures and options. We are the leading order routing network for NYSE listed equity trading, where we processed an average of 212 million shares per day in the first quarter of 2000, a number which has grown to 456 million shares in the first quarter of 2001, with daily volumes reaching as high as 843 million shares. Our technology is currently being used by over 200 customers, many of which are the largest and most respected firms in the industry and we have signed agreements with over 50% of the NYSE member firms. Through the NYFIX network, we provide the infrastructure for trade communication and global order routing between buyside and sellside institutions, numerous exchange floors, as well as other electronic trade execution venues, such as ECNs and ATSs. The NYFIX network currently includes more than 1,000 high-speed frame-relay circuits, alternative routes, fiber optics and sonnet-network infrastructure, providing an efficient, secure and reliable method for electronic trade communication. We have built and operate large scale, redundant data-centers to support communications though the NYFIX network. We also have developed and offer an integrated portfolio of modular desktop trading applications, exchange floor automation and exchange access applications for trading in domestic and international equities, futures and options. All of our applications reside on our centralized system and are delivered through the NYFIX network. By seamlessly integrating our proprietary infrastructure and software applications, we provide our customers a complete solution to enter, manage and route orders and execution data electronically. Our systems are based upon the industry standard FIX protocol and are typically offered on a subscription basis, with infrastructure, software and maintenance provided for a monthly fee. The large quantity of orderflow we process has uniquely positioned us to develop, together with our affiliate NYFIX Millennium, an ATS that functions similarly to an ECN in that it matches buy and sell orders. NYFIX Millennium is a highly automated execution venue designed to reduce the overall transaction costs and to maximize efficiency and quality of executions for institutional brokerage firms by providing increased liquidity and price improvement. By using NYFIX Millennium, the negative price impact associated with large trades is eliminated because orders are placed anonymously and invisibly. We are headquartered in Stamford, Connecticut and maintain operations in New York, Chicago and London. Our goal is to become the leading provider of real-time electronic trade entry, routing and execution solutions to the global financial services industry. INDUSTRY OVERVIEW Inefficiencies in the Traditional Market Historically, stock markets operated physical trading floors with trades being executed by open outcry. Prior to 1995, the trading industry, in both equities and derivatives, relied substantially upon intra-day handwritten trading tickets and manually recorded trading blotters. Voice communication by telephone was the primary method of communicating orders and executions between institutional customers, traders at brokerage firms and brokers operating on the exchange floors. The NYSE continues to operate a physical trading floor where member firm floor brokers deliver orders to a specialist, an intermediary that makes a market in the stocks listed on the exchange. In addition to processing inefficiencies, the presence of an intermediary results in pricing that does not always represent the true value of a security at any given point in time. A specialist or market maker can generate mark up or mark down profits through sales or purchases of that intermediary's own inventory, which creates an inherent conflict with its duty to establish and maintain a truly efficient and liquid market. Further concerns of price distortion arise from the intermediary being the sole keeper of customer buy and sell intentions and the potential leakage of trading intentions to other brokers. By compromising the anonymity and intent of an investor, further distortion of security valuations can result as other third party market participants 21 26 could profit from information about their counterpart's intent and purchase or sell before them, many times even when such third party had no prior interest in the security. Growth in Trading Volume Trading volume in equities and derivatives has grown significantly in major markets around the world. In the U.S., the average daily share volume on the NYSE increased to 1.2 billion in the first quarter of 2001, from 674 million in 1998, while the average daily share volume on Nasdaq increased to 2.1 billion in the first quarter of 2001, from 787 million in 1998. International equity and derivative markets have also experienced significant growth. As an example, average daily trading volume on the London Stock Exchange increased to 1.9 billion shares in 2000 from 914 million shares in 1995 and on the Tokyo Stock Exchange to 702 million shares in 2000 from 370 million shares in 1995. Similarly, the trading volume in exchange-listed equity options in the U.S. has increased dramatically to 673 million contracts in 2000 from 111 million contracts in 1990. Development of Electronic Trading Technologies As trading volume and market volatility continue to increase in both the listed and over-the-counter (OTC) markets, brokerage firms are increasingly seeking to utilize technology solutions to route, track and manage orderflow, while at the same time reducing errors and maintaining controls on their operations. While technology offering the benefits of trade automation has been available since the early 1990s, the departure from handwritten trade tickets did not gain acceptance until the mid-1990s. The lack of order routing and connectivity standards, as well as the entrenched role of the trader in the brokerage industry, were partially the cause for the delayed acceptance of electronic systems. A series of major trading scandals during the 1990s, however, prompted investment firms, brokerage firms and regulators to accept that the pace, volume and volatility in the markets had reached a level where real-time computerized electronic tracking of trading activities was necessary. As a major step toward industry standardization for electronic order routing, the financial services industry began to adopt the FIX protocol as the industry standard by the mid 1990s. The FIX protocol provides the brokerage industry with a common underlying language to enable electronic trading and communications and is now considered the globally adopted standard for electronic order routing. Today, many firms and regulators in the securities trading industry recognize the necessity of implementing straight-through processing solutions, which integrate all aspects of trading from the front office, middle office and back office, in order to reduce settlement cycles, costly errors and the cost to process transactions. Prolonged growth in the market is expected as the industry replaces legacy systems and in-house proprietary systems with more modern industry and FIX compliant systems. Many firms will also need to continually upgrade their systems because of the general evolution in computer operating systems, networking and storage systems technologies. New regulations governing the recording and transmission of orders to and on the NYSE floor were adopted in early 2001. These regulations are known as Rule 123. The first phase of Rule 123 requires all orders received on the NYSE floor to be input into an electronic order management system for better monitoring and tracking of trades. The second phase of Rule 123 requires all orders sent to the NYSE to be sent electronically. Rule 123 requires that all NYSE member firms adopt electronic order management systems by September 10, 2001. Development of the Equity Market Structure The advent of high-speed electronic data communication networks and computerized trading has highlighted the potential for more efficient interaction between buyers and sellers in the financial markets. The U.S. equities markets have seen the introduction of new regulations paving the way for ECNs and ATSs to compete with traditional exchanges such as the NYSE and the American Stock Exchange (Amex) in the listed market and Nasdaq in the OTC market. These ECNs and ATSs seek to provide more efficient trading mechanisms while bringing buyers and sellers directly together without an intermediary. 22 27 As almost every traditional exchange floor in Europe and Asia has been replaced by electronic systems, much debate continues in the U.S. relating to the role of the specialist and the efficiency of the NYSE, the world's largest exchange floor in terms of its listed companies' market capitalization. The debate has increased with the recent introduction of decimal trading. While decimalization was designed and recently implemented to make price quotes more understandable for consumers, an unexpected side effect of decimalization has been an increase in the trading activity of the specialists competing with the buyers and sellers, resulting in the reluctance of institutional investors to expose block orders on the books of the specialists. The marketplace saw a number of ECNs and ATSs emerge during the late 1990s. The challenge for these new trading venues is to attract sufficient trading liquidity, also known as orderflow, which is transaction volume being entered into these trading venues. ECNs have captured a significant portion of the OTC market-share in executed volume in a relatively short period of time. Due in large part to a lack of access to the electronic infrastructure carrying listed orderflow, ECNs have only captured a small amount of the executed daily volume in the listed equity market. The goal of ATSs and ECNs is to bring buyers and sellers together directly in more efficient electronic execution venues. However, the introduction of multiple venues in addition to the traditional exchanges has created a new problem of market fragmentation. Each market or execution venue represents a separate liquidity pool and the available liquidity and pricing among the different pools is not synchronized. In addition to the technological problem of establishing connectivity between the multiple liquidity pools, the trading community is faced with the constant problem of trading in one liquidity pool while a better price may be available in another venue. Need for Outsourced Solutions While trading volume has increased and the need for direct access trading technologies has become evident, investors themselves have become more sophisticated and focused on the overall quality of execution and transaction cost of trades. Sophisticated trading strategies, particularly those involving multiple securities or types of financial instruments, are difficult to execute without both direct and rapid market access and a system that provides easy to use order entry, management and execution. Many companies are realizing that they cannot continue to internally develop systems to keep pace with current technological developments, nor can they afford adequate investment to independently maintain connectivity infrastructure and redundant systems to participants in the evolving trading market, and have therefore been driven to outsource these functions. Institutional traders are seeking solutions that offer direct access, speed of delivery, quality of execution and full integration between traditional exchanges and modern ECNs and ATSs. OUR SOLUTION We are a leading provider of electronic trading infrastructure and technologies to the professional trading segment of the brokerage industry. We provide electronic trading desktop solutions, stationary and wireless exchange floor systems, electronic access automation and straight-through processing to brokerage firms and international banks trading in equities, futures and options. Our product portfolio is well positioned to meet the current and developing needs of our customers, providing: - High-speed, Redundant FIX Connectivity to Major Global Market Participants. The NYFIX network is designed to provide the financial community with a central electronic infrastructure. Through over 1,000 circuits and alternative routes, we currently connect buyside and sellside institutions, domestic and international exchanges and various ATSs, ECNs and third markets. Communications are processed through our NYFIX Super FIX engine, which is one of the industry's largest and most advanced FIX processing engines. As a result, this broad connectivity has enabled us to process a significant portion of listed equity volume each trading day. Due to our reach and access to the global marketplace, we are increasingly being regarded as the common industry electronic meeting point, which encourages new participants or those evaluating changing their existing solutions to seek connectivity to our network. - Easy-to-Use, Integrated Electronic Trading Products. We offer an integrated suite of desktop trading, exchange floor automation and exchange access applications, as well as straight-through processing for trading in domestic and international equities, futures and options. All of our products are available 23 28 as modules that can be delivered as either complete systems or as components to complement our customers' existing solutions and needs. We continually focus on speed of applications, intuitive, easy-to-use designs and close and immediate integration with the NYFIX network. By seamlessly integrating our proprietary infrastructure and software applications, we provide our customers a complete solution to enter, manage and route orders and execution data electronically. - Fully Outsourced Flexible Solution. As an alternative to developing technology in-house, customers can outsource to NYFIX to serve as a common and neutral meeting place for financial information exchange. Our offerings consist of a widely deployed network, managed data center and telecommunications services, and a modular suite of applications, which enable our major brokerage customers to achieve both strategic advantages and cost savings. Our affiliated NASD registered broker-dealer, NYFIX Millennium, operates a highly automated execution venue designed to reduce overall transaction costs and maximize execution quality for institutional brokerage firms. NYFIX Millennium is referred to as a hybrid market system because it works to augment traditional auction markets and combines the electronic execution technology of an ECN with the liquidity of traditional primary markets. NYFIX Millennium provides increased liquidity and price improvement, while eliminating negative price impact for institutional size trades. It is designed to mitigate the current problems caused by market fragmentation and the inter-positioning of specialists and market makers in the transaction process. The key advantages of NYFIX Millennium are: - Invisible and Anonymous Matching. Institutions are highly motivated to conceal their trading intentions and to protect their anonymity. In the primary market for listed equities, when institutions enter large orders or disclose their trading intent, such actions cause others to react, which impacts the stock price before the institutions complete their purchases or sales. A key feature of NYFIX Millennium is its capability to invisibly expose and anonymously match orders, enabling institutions to trade in and out of block positions in real-time, without causing counterproductive price swings. - Integrated Access to Liquidity. Most ECNs lack access to liquidity in the listed market and fragment the market by creating separate pools of liquidity. By integrating NYFIX Millennium directly into the NYFIX network, customers have simultaneous access to liquidity in both NYFIX Millennium and the traditional listed markets. While NYFIX Millennium has the capability to instantly match orders entered in the system, a key attraction is its ability to let unmatched orders travel in real-time through the NYFIX network to the exchange or market center of the traders' choice. - Ease of Use and Seamless Integration. NYFIX Millennium is accessible from the trader's existing order management system or trading station, and automatically integrates the flow between customer orders, NYFIX Millennium and execution reports. While competitors generally need to install a dedicated terminal or application and establish a distribution network, NYFIX Millennium can leverage the operational NYFIX distribution network without the need for additional dedicated or specialized screen installations. Traders do not have to change the way they enter orders, which we believe eliminates a significant barrier to entry and further contributes to the efficiency of straight-through processing. OUR STRATEGY Our goal is to become the leading provider of real-time electronic trade entry, routing and execution solutions to the global financial services industry. We consistently monitor the industry to analyze and determine an efficient and effective schedule for new product introductions, marketing and organizational growth initiatives in order to meet the needs of the changing markets. We plan to: - Increase the Number of Participants in the NYFIX Network and Continue to Expand the Suite of Products and Services Available to Our Customers. To further increase our subscription based revenues and our orderflow base, we plan to focus our sales and marketing efforts on connecting not only sellside broker-dealers but also buyside and international exchanges to the NYFIX network. We will continue to address the requirements of the trading community by introducing new core and complimentary applications, including advanced analytical and risk management applications, OTC services, multi-currency facilities across our product line, stock allocation and clearing services. The enhancement of our current product line, along with the addition of new products, will help us increase our presence in the institutional marketplace and allow us to sell higher margin products to existing customers. We plan 24 29 to continue to develop and own all of the underlying intellectual property rights associated with our existing and future products. - Develop Transaction Revenue Streams in NYFIX Millennium. The large quantity of orderflow processed through the NYFIX network has uniquely positioned NYFIX Millennium to develop transaction based revenue. We plan to develop transaction revenue streams in NYFIX Millennium by focusing on generating a critical mass of orderflow from the NYFIX network to NYFIX Millennium. - Develop Transaction Revenue Streams from Our Electronic Trading Infrastructure and Technologies. As the markets converge, we are well positioned to introduce a number of offerings competing effectively with and replacing the role of certain brokers in certain target segments. In some areas of international and to some degree domestic correspondent brokerage business, we can effectively compete for business with little or no conflict with our existing client base. In the correspondent brokerage business, one brokerage firm generally services a much smaller or specialized brokerage firm and charges a transaction based per share fee for providing access to exchange executions. As the markets are becoming completely automated, providing customers with effective desktop order capturing and electronic access technology is emerging as the most important marketing parameter. Current test marketing has demonstrated that we are well positioned to develop market share in this area. We are evaluating both acquisitions and equity partnerships with certain specialized brokerage companies to gain the direct exchange membership access to capture the full gross margin potential from development of transaction-based revenue streams. - Establish and Expand Orderflow Through NYFIX Millennium and Leverage Strategic Partnerships. We plan to further leverage the cooperation of our equity and strategic partners to increase transaction revenues in NYFIX Millennium. This cooperation includes automatic and manual submission of orderflow to NYFIX Millennium, leveraging their trading expertise in explaining and developing electronic methods to address inefficiencies in the current market and developing and supporting suitable marketing strategies. The equity partners in NYFIX Millennium include Deutsche Bank, ING Barings, Lehman Brothers, Morgan Stanley, Sanford C. Bernstein & Co., SG Cowen Securities Corp., UBS Warburg, First Union Securities, J.P. Morgan & Co., J.P. Morgan H&Q (formerly Chase H&Q) and Bank of America, as announced in October 1999 and April 2001. - Expand the Universe of Securities Being Traded Through the NYFIX Network. The NYFIX network and NYFIX Millennium matching engine can be used to trade and match basically any financial instrument, from equities to futures, commodities or other derivative instruments. We plan to expand our presence in OTC, futures and options trading. We plan to increase our market share in international markets by expanding our direct connectivity to more international exchanges in both equities and derivatives. - Continue to Protect Our Customers' Roles in the Distribution Market. Many market observers believe that equity markets will become completely electronic. The fear of a diminishing role and loss of revenues has caused the broker-dealer community to largely withhold support for any market modernization system that can be accessed directly by buyside institutions and other investors. It is an important element of our strategy to introduce our business model in a manner that does not ultimately threaten our customers' role in the distribution channel. We believe this strategy provides us with a significant advantage over our competitors whose initiatives may ultimately eliminate the broker from the trading process. PRODUCTS & SERVICES The NYFIX Network The NYFIX network provides a central electronic infrastructure that links buyside institutions and sellside brokers with various execution venues utilizing the FIX protocol. Built in late 1997, the NYFIX network provides our customers with global connectivity for trade order routing through a single dedicated circuit into the NYFIX network. Access to the NYFIX network private order routing and financial information communications infrastructure is offered to our customers on a subscription basis and is supported by large scale redundant data centers. 25 30 The NYFIX network currently includes over 1,500 circuits and alternative routes to connect sellside and buyside institutions, as well as a number of domestic and international exchanges, buyside networks, ATSs and ECNs specified in the table below.
- ----------------------------------------------------------------------------------------------------------------- Domestic Exchanges - NYSE - Pacific Stock Exchange - Amex - Nasdaq - Boston Stock Exchange - CME (Chicago Mercantile Exchange) - Chicago Stock Exchange - CBOT (Chicago Board of Trade) - Philadelphia Stock Exchange - ----------------------------------------------------------------------------------------------------------------- International Exchanges* - Liffe (London International - SFE (Sydney Futures Exchange) Financial Futures and Options - TIFFE (Tokyo International Exchange) Financial Futures Exchange) - Deutsche Bourse Xetra/Eurex - OSE (Osaka Securities Exchange) - Matif (Marche A Terme - TSE (Toronto Stock Exchange) d'Instruments Financiers)/Monep - KSE (Korea Stock Exchange) - SIMEX (Singapore International - Euronext Monetary Exchange) - OM - HKFE (Hong Kong Futures Exchange) - ----------------------------------------------------------------------------------------------------------------- Buyside Networks - Macgregor - Reuters - Thompson TradeRoute - Royalblue - MFN (Merrin Financial Network) - Autex - Bridge Information Systems - Versus Technologies - The Longview Group - Bloomberg - Triad - Transaction Network Services - ----------------------------------------------------------------------------------------------------------------- ATSs/ECNs - NYFIX Millennium - REDIBook ECN - Archipelago - Instinet - Bloomberg Tradebook - POSIT - Island ECN - ----------------------------------------------------------------------------------------------------------------- Allocation Delivery Systems - ADP - FIX Allocation - Pershing - Wexford - OASYS - Rolfe & Nolan - Sungard Phase III - GL Net - Beta Systems - -----------------------------------------------------------------------------------------------------------------
* While we have not yet deployed our own circuits in all of the international exchanges, we, at a minimum, offer interface systems to each international exchange. 26 31 NYFIX Trading Products We provide an integrated portfolio of modular desktop trading applications and exchange floor automation and exchange access applications for trading in domestic and international equities, futures and options. We offer both trader workstation products and exchange system products as outlined in the tables below.
- ------------------------------------------------------------------------------------------------------------------------ TRADER WORKSTATIONS: PRODUCT DESCRIPTION: TARGET CUSTOMER: - ------------------------------------------------------------------------------------------------------------------------ FIXTrader Workstations Complete order management and routing system Institutional brokerage equity traders - ------------------------------------------------------------------------------------------------------------------------ Order Book Management System (broker Real-time order management system for derivative Institutional brokerage module) instruments including futures and options derivatives traders - ------------------------------------------------------------------------------------------------------------------------ Nasdaq Agency Workstation Nasdaq Level II workstation electronic order Institutional brokerage equity entry and routing to Nasdaq liquidity sources traders - ------------------------------------------------------------------------------------------------------------------------ TradeWatch Integrates data from individual FIXTraders and Institutional brokerage traders provides monitoring of the entire trading desk's and risk managers positions in real-time - ------------------------------------------------------------------------------------------------------------------------ Correspondent Order Management Real-time equity order management system for Correspondent brokers System brokerage firms to distribute to their correspondent customers - ------------------------------------------------------------------------------------------------------------------------ E-Blotter Real-time equity order management system Smaller brokerage buyside and money management traders - ------------------------------------------------------------------------------------------------------------------------ International Universal Browser Enables browser-based order entry and routing International brokerage buyside Front-end service for both equities and derivatives on a and money management traders global basis - ------------------------------------------------------------------------------------------------------------------------ Market Looks System (ImageViewer Enables digital transmission of real-time Institutional brokerage equity Module) "looks" from an exchange floor to upstairs traders traders - ------------------------------------------------------------------------------------------------------------------------ Market Data Server: P&L Module, VWAP Profit and loss tracking and volume weighted Institutional brokerage equity average price execution capability traders - ------------------------------------------------------------------------------------------------------------------------ Online Data Storage & Research Tool Currently in development, this is a Institutional brokerage firms browser-based trade history research tool that and trading and compliance will enable customers to migrate from paper to departments electronic storage according to SEC requirements - ------------------------------------------------------------------------------------------------------------------------
27 32
- ------------------------------------------------------------------------------------------------------------------------ EXCHANGE SYSTEMS: PRODUCT DESCRIPTION: TARGET CUSTOMER: - ------------------------------------------------------------------------------------------------------------------------ Market Looks System (floor look Enables digital transmission of real-time looks Exchange floor brokers and module) from an exchange floor to upstairs traders clerks - ------------------------------------------------------------------------------------------------------------------------ NYFIX Handheld Enables order management and digital Exchange floor brokers transmission of real-time looks from the specialist post or crowd to upstairs traders - ------------------------------------------------------------------------------------------------------------------------ FloorReport Exchange floor booth order management and Exchange floor brokers and routing system clerks - ------------------------------------------------------------------------------------------------------------------------ BreakWatch Online trade comparison system for identifying Exchange floor clerks/data intra-day trade errors and breaks entry staff - ------------------------------------------------------------------------------------------------------------------------ Exchange Access Products Translation to and from various exchange Brokerage firms protocols to FIX protocol - ------------------------------------------------------------------------------------------------------------------------
TRADER WORKSTATION PRODUCTS Our trader workstations provide order routing to a variety of liquidity sources, including major regional exchanges, ECNs and ATSs. The workstations enable traders to monitor and manage the flow and execution of equity orders. FIXTrader Workstation Our FIXTrader system provides a complete order management solution for upstairs traders that allows the electronic entry and routing of orders and executions between buyside institutions, sales and block desks and exchange floor booths. Traders enter orders quickly and efficiently through Touchpad, or a mouse and keyboard configuration, which are then routed to the appropriate order execution venue in seconds, with completed executions routed back in the same efficient manner. With the financial industry's adoption of FIX as the standard protocol for communicating electronically, FIXTrader offers an easy way for firms to gain FIX compliance. FIXTrader enables firms to receive orders electronically from the buyside, as well as connect to back office systems helping firms achieve straight-through processing. Futures and Options OBMS Our Futures and Options OBMS offers traders the ability to enter, route and manage orders and executions in real-time. Global order routing between different international branches of the same firm and the major global exchanges, both open outcry and electronic, is supported by this comprehensive system. OBMS provides real-time ticketless order capture, global order routing with interfaces to exchange supported systems and user-friendly 24-hour order management in one complete open system. Nasdaq Agency Workstation Our Nasdaq Agency Workstation enables electronic order entry and routing to all Nasdaq liquidity sources. This system integrates with our customers' FIXTrader workstation, giving users the ability to trade listed and OTC securities from a single terminal. The functionality of our Nasdaq Agency Workstation includes a central order blotter for managing and tracking order status, complete recapping functionality, average price calculation, filters for easy viewing, convenient allocation and archiving capability. Users can access buyside institutions, market makers, exchange brokers, major and regional exchange systems and a variety of ATSs for streamlined order and execution routing. Our Nasdaq Agency Workstation is fully FIX compliant. 28 33 TradeWatch Our TradeWatch product equips head traders and risk managers with an application to keep appraised of all trading desk positions at the trader's or manager's firm. TradeWatch consolidates and integrates information from FIXTrader workstations in real-time and allows a head trader or risk manager to obtain an essential overview of all trading activities. Correspondent Order Management System Our Correspondent Order Management System facilitates the transmission of order and execution information between correspondents. Correspondent customers can enter and route orders to the broker and the broker, in turn, can route those orders to a number of execution venues including exchanges, Direct Order Turnaround (DOT) and a variety of ECNs and ATSs. The system is available through Web browsers and provides order entry and routing, risk management and compliance, active trade management, administrative functionality, allocation, average pricing and clearing support. E-Blotter Our E-Blotter system is a browser driven, real-time U.S. equity order management system designed for the broker-dealer community. E-Blotter uses a central screen to track all initiated and executed orders, enabling users to view all positions at a glance. E-Blotter's functionality includes a central order blotter for managing and tracking order status, recapping functionality, average price calculation, filters for easy viewing, convenient allocation and archiving capability. E-Blotter is Order Audit Trail System (OATS), Automated Confirmation Transaction (ACT) and FIX compliant. International Universal Browser Front-End Our International Browser front-end facilitates all aspects of global equities and derivatives trading, including multi-currency capability for price marking of international trades. While we have already sold this front-end to several large global brokerage operations for their internal deployment, we plan to commence the distribution of this product through the NYFIX network this year. Market Looks System (ImageViewer Module) Our Market Looks System is comprised of two complementary software modules: ImageViewer for the upstairs trader workstations and FloorLook for the exchange floor booths. ImageViewer enables traders to electronically receive real-time quotes on stocks directly from the exchange floor. Our Market Looks System is operated by a floor clerk located at the member's booth or through a NYFIX Handheld wireless computer scanning handwritten quote slips, called looks, into a scanner. These scanned looks are instantly transmitted to upstairs traders at their workstations in multiple sites and remote offices. Implementation of the system results in the elimination of repetitive telephone traffic between upstairs traders and floor staff. Our Market Looks System helps firms reduce errors and disseminate information more efficiently. Market Data Server: P&L Module, VWAP Capability We are in the process of building a market data server process, which will enable the distribution of real-time market data to customers. This functionality will be leveraged to deliver on-demand updates of profit and loss information to FIXTrader blotters, as well as live updates of volume-weighted average price (VWAP) information, for selected securities. In addition, handheld devices on the floor of the NYSE will be able to request recent time and sales information, as well as volume-weighted average price data. As part of the market data server initiative, we have applied to the NYSE for market data vendor privileges. Online Data Storage and Research Tool We are developing an optical disc storage solution that meets SEC storage, access and retention requirements for trade data. The product will be supported by a user-friendly, browser-based trade history research tool. We anticipate that this application will remove a significant burden from our customers, as they will be able to migrate from paper to electronic storage. 29 34 EXCHANGE SYSTEMS Our exchange systems are comprised of stationary floor booth applications and wireless handheld systems for order management and routing of looks and real-time market information. Our exchange systems also provide access services to exchange provided execution facilities. We streamline customer access by providing real-time conversion from the FIX protocol to exchange proprietary access protocols. Market Looks System Our Market Looks System enables member firms to get real-time quotes, or looks, on stocks directly from the exchange floor to the firms' upstairs trading desk. Our Market Looks System helps firms reduce errors and disseminate information more efficiently. Our NYFIX FloorLook product transmits real-time images directly to the trading community from the stationary floor booth systems and wireless handheld systems. NYFIX Handheld Our NYFIX Handheld product allows floor brokers to effectively communicate with floor exchange booths and upstairs trading desks regardless of their physical location on the floor of a stock exchange. The wireless handheld computer transmits looks from the floor broker positioned near a specialist post to upstairs traders, thereby greatly improving communications and flow of information from the market to the trading desk. The NYFIX Handheld product conforms to Rule 123 and is designed to be compatible with the NYSE's reporting systems. FloorReport Our FloorReport system provides brokerage firms with a complete electronic order management system for exchange trading and floor operations. Complete trade and execution information is available at a glance. The system allows firms to track the status of orders and time-stamped printed tickets, reduce paperwork and enable booth staff to manage orders more effectively, increasing floor productivity. FloorReport reduces errors and simplifies floor operations through such features as real-time average price calculation and automatic tracking of trade execution status. FloorReport is both Rule 123 and FIX compliant. BreakWatch Our BreakWatch product is a post-trade product that identifies internal trade breaks, or errors, on an intra-day basis, thus protecting firms from the exposure of costly trading errors. BreakWatch provides important functionality in the trade reporting process, enabling firms to electronically transmit written execution report information to the Online Comparison System (OCS), as well as comparing verbal execution reports from FloorReport with written reports transmitted to the OCS. Exchange Access Products We developed and offer software to enable our customers to communicate with various exchange provided execution facilities. Many firms use systems that are based on legacy technology, as well as protocols used by other exchanges. To simplify access to all trading venues, we developed translation applications that enable our customers to access FIX protocol from legacy systems, including DOT, which is used by the NYSE and Amex. NYFIX MILLENNIUM NYFIX Millennium is designed to offer users access to multiple liquidity points through a single terminal, complete anonymity and invisibility, Intelligent Order Routing and the opportunity for price improvement and liquidity enhancement. NYFIX Millennium provides an efficient way for major financial institutions and traders to obtain the best match available for their transactions in the listed equities marketplace. NYFIX Millennium resides in the NYFIX network and offers matching of the following two categories of orders: - Pass-through orders are those orders that pass through NYFIX Millennium in route to another execution venue, typically the NYSE. The pass-through feature provides the trader with real-time exposure to 30 35 orders that reside in NYFIX Millennium, which can lead to potential price improvement and liquidity enhancement. - Conditional orders are anonymous and invisible orders that reside in the NYFIX Millennium matching engine. Orders are electronically pegged to the price of the underlying market center of the trader's choice, such as NYSE bid/offer or national best bid price or offer (NBBO). To attract matches, the trader can offer a small price improvement while still trading between the bid and offer offered in the underlying market. In addition, to optimize on the trading outcome, the trader can put a number of restrictions on an order to temporarily suspend such order automatically when unfavorable conditions occur and add conditions designed to improve trading results. Examples of such conditions are size of execution per price increment, maximum tolerable spread, maximum price tolerance from last execution in the market, high or low price limits and other trade restrictions. The scope of most ECNs and ATSs is limited to matching conditional orders against one another. A significant advantage the NYFIX Millennium model has over these competing ECNs and ATSs is its ability to also execute against the pass-through orders being routed through the NYFIX network. This increases the access to liquidity and the likelihood of successful trade matches. NYFIX Millennium is currently in the first phase of its marketing strategy. This first phase focuses on converting the large existing NYFIX network orderflow to liquidity available for executions in NYFIX Millennium. The second phase will focus on NYFIX Millennium users entering conditional orders. Through the interaction of the system's various order types, such as conditional and pass-through, and continued growth of the NYFIX network share volume, we believe that NYFIX Millennium will be able to provide superior results in trade execution quality for existing NYFIX customers, as well as new NYFIX Millennium participants. SALES AND MARKETING Our sales operation employs 32 people and is structured in four teams, including customer sales, account management, project management and central help desk operations. The manager and senior members of each team have been with us for three years or more and have a track-record of team-building, successful sales delivery and on-going customer operations support. We have been experiencing a shortening of sales cycles as the industry increasingly employs electronic trading technology and new regulations require intra-day electronic compliance reporting. For new accounts, the sales cycle is generally one to six months with add-on sales of additional services to existing clients being shorter. We generally provide our products and services on three year subscription agreements with automatic annual renewals at the end of the initial term. We focus on developing customer acceptance of our product lines with access to general upgrades rather than individual client customization. Our sales team works closely with our product development team and several of our products and enhancements have been developed based on user-group consensus. We maintain an in-house marketing department covering all aspects of exhibition, collateral marketing materials planning and production. We focus primarily on direct marketing efforts designed to reach our target segment of customers rather than mass marketing, which we believe results in a significantly more effective return on our marketing investment. In connection with the broadening of industry awareness of NYFIX Millennium, we expect to participate in some supporting mass marketing initiatives. TECHNOLOGY Our technology is designed to meet our customers' business needs for consistently available, expandable, and cost efficient infrastructure and software. We apply what we believe to be industry best practices in areas such as strategic planning, implementation partnerships, operating procedures, documentation and application development methodology. Our infrastructure technologies provide market participants with highly reliable connectivity and liquidity pools, while our software applications provide an easy to use integrated suite of desktop applications and exchange floor systems. Throughout our operating history, we have experienced excellent retention of our technical employees. We believe that this has enabled us to attract and develop staff, managers and project leaders with extensive technical and brokerage industry experience. 31 36 Infrastructure Technologies Our underlying infrastructure is implemented to a modular or building block standard. A building block standard consists of the amount of storage, processing and network capacity necessary to support a set of customers. As we add customers to our system, building blocks can be easily inserted into our architecture to accommodate continued network growth and we expect the average cost per customer to decline. Our building block architecture relies upon advanced technology standards, including storage area networking, high availability code and metropolitan area networking using fiber optic cable. We believe that we are a technology leader in our industry in that we maintain two fully active production data centers, either of which can support all of our current production requirements, providing 100% real-time redundancy. Later this year, we expect to implement a storage side area network using dense wave multiplexing. Dense wave multiplexing allows multiple channels and protocols of data to run over a single pair of fiber optic cables and will enable us to increase capacity between our data centers without a significant increase in cost. Our systems and data centers are continuously monitored by an automated system that logs the performance of communication lines, equipment and systems. To achieve the highest level of availability, we rely on multiple telecommunication carriers for data transport between core data centers and customers, including AT&T, Sprint, Worldcom, Metromedia Fiber Networks and Verizon. Our data volume is sufficient to allow us to diversify across carriers, decreasing our reliance on any single telecommunication service provider, without losing the benefit of economies of scale. Our equipment and systems are co-located in two independent Comdisco, Inc. data center facilities in Carlstadt and North Bergen, New Jersey. By co-locating equipment, we derive operating economies while obtaining the highest quality of service available in a physical plant. Comdisco's around-the-clock facilities are protected by state-of-the-art fire suppression and heating ventilation air conditioning (HVAC) systems and have multiple, uninterruptible sources of power, including backup generators and fully redundant power distribution units. Security personnel, procedures and video surveillance protect against unauthorized physical access to our equipment. Application Development We work closely with our customers and business partners to develop managed software services that will address unfulfilled market needs. We establish a business case for each potential new offering and major software update to ensure that any new initiative meets strategic, operational, technical and economic criteria. We have implemented methodology tools and procedures that have enhanced our ability to author quality products and applications. Our development team uses Rational software tools to formalize work plans and coordinate highly complex development tasks. Our software is authored to take advantage of the FIX protocol and has been written in object oriented ANSI C++ language, which can run on various operating system platforms, including UNIX and Microsoft Windows. We maintain a library of reusable program code and use naming conventions, which facilitates rapid application development and provides a homogenous and familiar look and feel to our customers. Our standardized approach greatly enhances the quality of our programs and products. Our quality control department has a dedicated laboratory, which simulates the NYFIX system. All of our new product releases are tested under load and stress conditions using automated tools for reliability, interoperability and defects. Our sales support, customer training and technical engineering group provides ongoing feedback from our customer base to our product development team and quality control department. This allows us to continuously refine and enhance our products to better serve our customers' needs. COMPETITION The electronic order management and delivery industry is highly competitive and constantly evolving through technological and regulatory change. Our competition varies widely and we encounter different categories of competitors to each of our product and service offerings. We also face competition from potential customers who choose to maintain their own infrastructure and develop their own in-house proprietary order management software systems. 32 37 Competition within our industry is based on a variety of factors, including product features, product functionality and performance; product quality and reliability; price; and technical support and customer service. Based on our experience, we believe that we compete effectively in each of these categories. We face competition in the following three areas: - Network Services. Transaction Network Services and Global Crossing (who recently purchased IXnet) are large fiber optic networks capable of carrying multiple types of financial information. Both of these companies provide basic connectivity offerings for order routing. However, we believe the NYFIX network provides more value added connectivity, with its embedded FIX protocol communication and its sophisticated execution provider links. - Exchange Floors. We are a leading provider of exchange floor automation technology, including stationary and wireless trading technologies. While we have technology deployed and offer access to numerous exchanges, our most significant presence is in the U.S. listed equity market. Member firms operate approximately 1,600 booths on the NYSE. Most of these firms are in the process of automating their floor operations and to date we have signed agreements with over 50% of the member firms and have installed more than 450 stationary systems and deployed over 150 handheld devices on the NYSE exchange floor. The NYSE itself also offers floor technology to member firms and there are several other smaller competitors in this area, including Tradeware. - Desktop Products. We face competition from vendors who produce desktop solutions for traders who are not on the floor, including several vendors in listed equities such as Brass, Royalblue Group and Bloomberg. These competitors either have or are building data centers for a service bureau offering and have the ability to pass listed orderflow through their systems to the exchange floors, including the NYSE. We believe that we compete effectively with these vendors by offering easy-to-use, seamless integration with our exchange floor products and extensive electronic market connectivity. NYFIX Millennium faces competition from traditional stock exchanges, other ATSs and ECNs offering a variety of execution services and methods, some focusing on retail orderflow rather than institutional orderflow. INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS Despite the precautions we take to protect our intellectual property rights, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe upon our proprietary rights. It is also possible that third parties may independently develop technologies similar to ours. It may be difficult for us to prevent unauthorized use of our intellectual property and we cannot assure you that the steps we take will prevent misappropriation of our technology. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation, whether or not successful, could result in substantial costs and diversions of resources. We may in the future receive notices of claims of infringement of other parties' proprietary rights. We cannot assure you that claims of infringement or invalidity, or claims for indemnification resulting from infringement claims, will not be asserted or prosecuted against us. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources or require us to enter into royalty or licensing agreements. We cannot assure you that these royalties or licenses would be available on reasonable terms, if at all. GOVERNMENT REGULATION The U.S. securities industry is subject to extensive regulation under both federal and state laws. In addition, the SEC, the NASD, other self regulatory organizations, commonly known as SROs, such as the various stock exchanges, and other regulatory bodies, such as state securities commissions, require strict compliance with their rules and regulations. As a matter of public policy, regulatory bodies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of investors participating in those markets, not protecting creditors or stockholders of broker-dealers. Companies that operate in the securities industry are subject to regulation concerning many aspects of their business, including trade practices, capital structure, record retention and the conduct of directors, officers and 33 38 employees. Failure to comply with any of these laws, rules or regulations could result in censure, fine, the issuance of cease-and-desist orders or the suspension or disqualification of our directors, officers or employees. Neither we nor any of our directors, officers or employees are currently subject to any cease-and-desist orders, suspensions or disqualifications under the rules of any of these regulatory organizations. An adverse ruling in the future against us or our directors, officers or employees, including censure or suspension, could result in us, our directors, officers and other employees being required to pay a substantial fine or settlement, and could result in their suspension or expulsion. The regulatory environment in which we operate is subject to change. Our profitability may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or the NASD. We may also be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and the NASD. Additional regulation, changes in existing laws and rules, or changes in interpretations or enforcement of existing laws and rules often directly affect the method of operation and profitability of securities firms. We cannot predict what effect any such changes might have. Our business, both directly and indirectly, relies on the Internet and other electronic communications gateways. We intend to expand our use of these gateways. To date, the use of the Internet has been relatively free from regulatory restraints. However, the SEC, SROs and states are beginning to address regulatory issues that may arise in connection with the use of the Internet. Accordingly, new regulations or interpretations may be adopted that constrain our own and our customers abilities to transact business through the Internet or other electronic communications gateways. New regulations governing the recording and transmission of orders to and on the NYSE floor were adopted in early 2001. These regulations are known as Rule 123. The first phase of Rule 123 requires all orders received on the NYSE floor to be input into an electronic order management system for better monitoring and tracking of trades. The second phase of Rule 123 requires all orders sent to the NYSE to be sent electronically. Rule 123 requires that all NYSE member firms adopt electronic order management systems by September 10, 2001. We believe that Rule 123 regulations will have a positive impact on our business because we already produce systems capable of meeting and exceeding the regulatory requirements, with many additional features designed to reduce error and maximize customer efficiency. NET CAPITAL REQUIREMENTS As a registered broker-dealer and member of the NASD, NYFIX Millennium is subject to SEC imposed net capital requirements. Failure to maintain the required net capital may subject NYFIX Millennium to suspension or revocation of its registration by the SEC and suspension or expulsion by the NASD and other regulatory bodies and, if not cured, could ultimately require NYFIX Millennium's liquidation. EMPLOYEES As of May 1, 2001, we had 124 full-time employees, of whom 80 were in technology support and development, 32 were in sales and marketing and 12 were in finance and administration. Of our 124 full-time employees, 105 are employed in the U.S. and 19 are employed in London. Our employees are not represented by any collective bargaining organization or covered by a collective bargaining agreement. We believe that our relationships with our employees are good. PROPERTIES Our headquarters and production facility are located in approximately 14,000 square feet of office space in Stamford, Connecticut. We lease this space through a combination of two leases, one of which expires on April 30, 2002 and the other, a sublease, which expires on February 28, 2005. Payments under the Stamford lease are $348,000 per year. We are currently negotiating a lease for an additional 7,100 square feet of office space in the same building. Payments for this new space will be $266,000 in the first year and are subject to annual escalation. This lease will also extend the expiration of our original office lease from April 30, 2002 until February 28, 2005 and annual rent payments under the original lease will be subject to annual escalation. Our London office has approximately 5,490 square feet for which we pay approximately L85,000 per year and receive rental income of approximately L23,000. The London lease expires on March 25, 2009. In addition, we 34 39 rent office space at 100 Wall Street in New York City and at 111 West Jackson Boulevard in Chicago for annual rental amounts of $732,000 and $72,000, respectively, for approximately 21,900 square feet and 2,900 square feet, respectively. NYFIX Millennium personnel use approximately one-half of our space at 100 Wall Street, for which we charge them approximately $366,000 in annual rent. We also lease office space of approximately 3,700 square feet at 33 Union Square in New York City for an annual rental amount of $162,000, expiring on November 30, 2001. Under a management agreement with NYFIX Millennium, NYFIX Millennium occupies the space at 33 Union Square and reimburses us for the total annual rental payment amount. We believe that the facilities described above are adequate for our current needs. LEGAL PROCEEDINGS We may be subject to various claims and legal actions arising in the ordinary course of business from time to time. We are not currently a party to any legal proceedings. 35 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors are as follows:
NAME AGE POSITION - ---- --- -------- Peter K. Hansen(1).............................. 40 President, Chief Executive Officer and Chairman of the Board Richard A. Castillo............................. 43 Chief Financial Officer and Secretary Lars Kragh...................................... 40 Chief Information Officer George O. Deehan(1)(2).......................... 58 Director William J. Lynch(2)............................. 58 Director Carl E. Warden(1)(2)............................ 62 Director
- ------------------------------ (1) Member of Compensation Committee (2) Member of Audit Committee Peter K. Hansen, our founder, has served as our President, Chief Executive Officer and Chairman of the board of directors since our inception in June 1991. Mr. Hansen also serves as a member of the compensation committee. Prior to founding NYFIX, Mr. Hansen served for three years as managing director of Business Line A/S, a Danish company, where he was responsible for the introduction and sales of trading communication systems to over 30 international banks. Prior to joining Business Line A/S, for four years Mr. Hansen was the Sales and Marketing Director for Mark Computer Systems, where he was responsible for developing the business plan for and launching its turnkey LAN-based broker communication system. Richard A. Castillo has served as our Chief Financial Officer and Secretary since November 1998. Prior to joining us, Mr. Castillo held financial management positions involving strategic planning, business analysis and operations responsibility. From 1988 to 1998, Mr. Castillo held several positions with American Airlines, including Controller for the Dallas, Fort Worth and Chicago airports. From 1981 to 1987, Mr. Castillo served in various financial capacities at Datapoint, a networking technology company. Lars Kragh has served in various technology positions in our company since our inception in 1991 and is currently our Chief Information Officer, directly responsible for the management of all of our network and infrastructure operations. Prior to joining us, Mr. Kragh developed network systems for the banking industry involving numerous system integrations with global market data providers. He also developed an accounting and ticketing system for SAS-Airlines and a personal computing network communication system for the shipping industry. Mr. Kragh has developed integration software that is utilized in the daily operations of more than 300 companies in Europe, the Far East and the U.S. George O. Deehan has served as a director of our company since August 2000. Mr. Deehan serves as a member of the audit committee and as a member of the compensation committee of the board of directors. Since November 2000, Mr. Deehan has served as President of eOriginal, Inc., a software development company. From August 1998 to October 2000, Mr. Deehan served as chief executive officer of Advanta Leasing Services, LLC. Prior to joining Advanta, Mr. Deehan served in various capacities for AT&T Capital Corporation, most recently as chief operating officer. Prior to joining AT&T Capital, Mr. Deehan was chief executive officer of Metlife Capital and Credit Corporation and Litton Financial Services. William J. Lynch has served as a director of our company since June 2000. Mr. Lynch serves as Chairman of the audit committee of the board of directors. Since January 2001, Mr. Lynch has been a venture partner of Catterton Partners, a private equity fund. From 1996 through December 2000, Mr. Lynch served as Managing Director of Capstone Partners, LLC, a venture capital firm. Mr. Lynch also serves as a director of Edgewater Technologies, a publicly traded company. Carl E. Warden has served as a director of our company since August 1993. Mr. Warden also serves as Chairman of the compensation committee and a member of the audit committee of our board of directors. Mr. Warden, who retired from a career in investment banking focusing on emerging growth companies, has been a self-employed private investor for over five years. During his career, Mr. Warden financed several 36 41 environmental companies, including Allwaste, Inc., Sanifill, Inc. and U.S. Liquids, Inc., all of which devise solutions to meet the disposal needs of the U.S. Mr. Warden has also served as chief executive officer and was a member of the board of directors of several emerging growth companies. OTHER KEY EMPLOYEES Andrew M. Wilson serves as our Executive Vice President, Sales and Marketing, and has been with us since 1996. Mr. Wilson is involved in the business direction of our trading technology with emphasis on trade order management and customer connectivity. Prior to joining us, Mr. Wilson spent five years on trading desks at Yamaichi International and Schroder & Co. Joseph P. Vernon serves as our Chief Technology Officer and is responsible for management of the development teams for our desktop trading, exchange floor automation and exchange access applications as well as the NYFIX Millennium ATS. He has been with us since March 2000. Prior to joining us, Mr. Vernon served as Director of Equities Technology for Schroder & Co. where he was responsible for the selection, implementation and management of all trading-related technology. In addition, in 1995, Mr. Vernon worked for NatWest Markets as Vice President of Equities Technology. In that role, he managed a team of developers and technicians who provided support to the firm's investment banking, research and equities groups. It was at NatWest that Mr. Vernon first became acquainted with our product line and implemented our automated FloorLook system. Prior to that, Mr. Vernon spent seven years on the Bankers Trust global information systems team. Mr. Vernon has spent the last 13 years working in the securities technology arena and has spent time on both the business and technology sides in the broker-dealer business. Jon Steward serves as the managing director of our subsidiary, NYFIX Overseas Inc. Mr. Steward has been involved in the development and marketing of systems within the financial markets for over 15 years, including responsibility for the successful implementation of custody and settlement, stock lending, exchange traded derivatives and treasury order capture systems. Prior to joining our subsidiary, Mr. Steward held various positions with some of the major technology companies in the financial markets, including Telerate and Automatic Data Processing (ADP). Mr. Steward introduced our Order Book Management System, which was first launched in 1995 in conjunction with leading financial institutions to provide the sales desk and their clients with a central electronic order book with connectivity to the global derivative exchanges. BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD Our board of directors currently consists of four directors. Each director holds office until that director's term expires or until a successor is duly elected and qualified. All of the officers identified above serve at the discretion of the board of directors. Audit Committee. The audit committee of the board of directors reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the recommendation of our auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of our independent auditors and our accounting practices. The members of the audit committee are George O. Deehan, William J. Lynch and Carl E. Warden. Each member is independent as independence is defined in Rule 4200(a)(15) of the NASD listing standards. Compensation Committee. The compensation committee of the board of directors recommends, reviews and oversees the salaries, benefits and stock option plans of our employees, consultants, directors and other individuals compensated by us. The compensation committee also administers our compensation plans. The members of the compensation committee are Peter K. Hansen, George O. Deehan and Carl E. Warden. DIRECTOR COMPENSATION As compensation for their services as members of the board of directors for 2000, and pursuant to a formula plan, certain members of our board received options to purchase our common stock at an exercise price equal to the closing price of our common stock on the date of grant, ranging from $14.75 to $30.94. The options granted to existing board members at the beginning of 2000, exercisable into an aggregate of 90,000 shares of our common stock, vest in two equal portions on December 31, 2000 and June 1, 2001, so long as the director completes service for such respective years. One director added during 2000 was granted options exercisable into 30,000 shares on June 2, 2000, and another director added during 2000 was granted options 37 42 exercisable into 30,000 shares on August 10, 2000. Both such grants vest ratably over a three-year period on the anniversary of such grants, provided that the director completes service for such periods. No director compensation was granted in 1999 or 1998. Non-employee directors are reimbursed for reasonable expenses in connection with serving as a director and member of a committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Our compensation committee currently consists of Peter K. Hansen, George O. Deehan and Carl E. Warden. None of our executive officers or directors serve as a member of the board of directors or compensation committee of any other company that has one or more executive officers or directors serving as a member of our board of directors or compensation committee. EXECUTIVE COMPENSATION The following table sets forth all compensation received during fiscal years 1998, 1999 and 2000 by our chief executive officer and our other two most highly compensated executive officers whose salary and bonus exceeded $100,000 during the year ended December 31, 2000, whom we refer to in this prospectus collectively as the "named executive officers." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------- ------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) STOCK OPTIONS - --------------------------- ---- -------- ------ --------------- ------------- Peter K. Hansen...................... 2000 $150,000 - - 545,000 President and Chief Executive 1999 $134,519 - - 67,500 Officer 1998 $115,000 - - - Richard A. Castillo.................. 2000 $129,712 - - 15,000 Chief Financial Officer 1999 $115,000 - - 11,250 1998 $ 11,058 - - 67,500 Lars Kragh........................... 2000 $139,654 - - - Chief Information Officer 1999 $121,815 $1,000 - 56,250 1998 $110,000 $5,000 - -
- ------------------------------ (1) The aggregate amount of perquisites and other personal benefits paid to each of the individuals listed on this table did not exceed the lesser of ten percent (10%) of such officer's annual salary and bonus for each fiscal year indicated or $50,000. 38 43 OPTION GRANTS IN FISCAL YEAR 2000 The following table sets forth in formation regarding stock options granted to the named executive officers during the year ended December 31, 2000. These grants are also reflected in the Summary Compensation Table above.
POTENTIAL REALIZABLE NUMBER OF PERCENTAGE VALUE AT ASSUMED SECURITIES OF TOTAL ANNUAL RATES OF STOCK UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION STOCK GRANTED TO PRICE PER FOR STOCK OPTIONS(2) OPTIONS EMPLOYEES SHARE EXPIRATION ------------------------ NAME GRANTED(#) IN 2000 ($)(1) DATE 5%($) 10%($) - ---- ----------- ---------- --------- ---------- ---------- ----------- Peter K. Hansen.......... 345,000(3) 17.2% $14.75 1/25/10 $3,200,315 $ 8,109,941 200,000(4) 10.0% $33.00 6/5/10 $4,150,740 $10,518,420 Richard A. Castillo...... 15,000(5) 0.8% $14.75 1/25/10 $ 139,144 $ 352,606 Lars Kragh............... - - - - - -
- ------------------------------ (1) The exercise price of the options granted was equal to the fair market value of the underlying common stock on the date of grant. (2) The potential realizable value portion of the foregoing table illustrates values that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded annual rates of appreciation on our common stock over the term of the options. These numbers do not take into account provisions of certain options providing for termination of the option following termination of employment, non-transferability or differences in vesting periods. Regardless of the theoretical value of an option, its ultimate value will depend upon the market value of our common stock at a future date, and that value will depend on a variety of factors, including the overall condition of the stock market and our results of operations and financial condition. There can be no assurance that the values reflected in this table will be achieved. (3) Represents options to purchase shares of our common stock granted on January 25, 2000. The options granted vest as to 22,500 shares on December 31, 2000, as to an additional 150,000 shares on January 25, 2001, as to an additional 22,500 shares on June 1, 2001 and as to the remaining 150,000 shares on January 25, 2002. (4) Represents options to purchase shares of our common stock granted on June 5, 2000. The options granted vest as to 100,000 shares on June 5, 2003 and as to the remaining 100,000 shares on June 5, 2004. (5) Represents options to purchase shares of our common stock granted on January 25, 2000. The options granted vest as to 6,000 shares on January 25, 2001, as to an additional 4,500 shares on January 25, 2002, and as to the remaining 4,500 shares on January 25, 2003. 39 44 AGGREGATE OPTION EXERCISES IN FISCAL YEAR 2000 AND OPTION VALUES AT DECEMBER 31, 2000 The following table sets forth information with respect to the named executive officers concerning option and warrant exercises during the year ended December 31, 2000, and the value of exercisable and unexercisable options and warrants held at December 31, 2000.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR-END(#) YEAR-END($)(1) SHARES ----------------- ---------------------- ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ----------------- ---------------------- Peter K. Hansen Options................... - - 478,125/747,500 $10,185,421/$7,990,782 Warrants.................. - - 56,250/- $1,201,359/- Richard A. Castillo Options................... 22,500 $537,500 11,250/37,500 $193,984/$615,782 Lars Kragh Options................... - - 154,125/127,125 $3,336,524/$2,655,461
- ------------------------------ (1) Options and warrants are in-the-money if the market price of our common stock on December 31, 2000 exceeded the exercise price of such options and warrants. The value of such options and warrants is calculated by determining the difference between the aggregate market price of the common stock underlying the options and warrants on December 31, 2000 and the aggregate exercise price of such options. The closing price of a share of our common stock on December 31, 2000 as reported on the Nasdaq National Market was $24.19. STOCK OPTION AND OTHER COMPENSATION PLANS Stock Incentive Plan. As a result of the 3-for-2 stock split effected on April 21, 2000, the number of shares available under our stock incentive plan increased to 5,625,000. In June 2000, the plan was amended to increase the number of shares available under the plan to 6,625,000. The purpose of the stock incentive plan is to provide incentives for key employees, officers, consultants and directors to promote our success and to enhance our ability to attract and retain the services of such persons. Options granted under the stock incentive plan may be either options intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986 or nonqualified stock options. The stock incentive plan is administered by our compensation committee, which has the authority to interpret the stock incentive plan and take other action as it deems equitable. The compensation committee has absolute discretion under the stock incentive plan to determine to which employees and key persons stock incentives shall be granted, when these grants shall be made and the number of shares of common stock subject to these grants. The compensation committee determines, at the time of the grant, when options issued under the plan can be exercised. The compensation committee also determines the exercise price for options issued under the plan. Options issued under the plan expire 10 years after the date of grant, unless the compensation committee sets an earlier date. Exercise prices for incentive stock options may not be less than the fair market value per share of common stock on the date of grant, or 110% of the fair market value in the case of incentive stock options granted to any person who owns our stock possessing 10% or more of the total voting power of all of our capital stock. Exercise prices for non-qualified stock options may be less than the fair market value per share, but must be at least $0.01 per share. As of May 18, 2001, options to purchase 4,513,194 shares of our common stock were outstanding under the stock incentive plan at exercise prices ranging from $1.14 to $44.00. 1,879,932 shares of common stock have been issued upon exercise of options granted under the stock incentive plan. The plan expires on June 23, 2001. 40 45 On March 13, 2001, in anticipation of the expiration of our current stock incentive plan, our Board of Directors adopted a new stock incentive plan under which options to purchase 2,000,000 shares of our common stock will be available. Our shareholders will be asked to approve the adoption of this new plan at our annual meeting of shareholders to be held on June 4, 2001. The terms of this new plan are substantially similar to those of the expiring plan. The compensation committee will have absolute discretion to determine which employees and key persons may be granted stock incentives, when these grants shall be made and the number of shares of common stock subject to these grants. Options granted under the new plan may qualify as either incentive stock options or nonqualified stock options. At the time of the grant, the compensation committee will also determine the term of the options, when the options can be exercised, and the exercise price of such options. Options issued under the new plan may not be exercised after 10 years from the date of grant. 401(k) Plan. We maintain a 401(k) Profit Sharing Plan and Trust covering our eligible employees. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code, so that contributions to the 401(k) plan by our employees or by us and the investment earning thereon are not taxable to the employees until withdrawn. If our 401(k) plan qualifies under Section 401(k) of the U.S. tax code, our contributions will be deductible by us when made. Our employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit of up to $10,500 and to have those funds contributed to the 401(k) plan. Our plan permits us to match employees' tax deferred contributions up to a maximum of 3% of employees' compensation provided the employee is employed at the end of the year. We may make additional contributions to participants' 401(k) plans each year at the discretion of our board of directors. EMPLOYMENT AGREEMENTS Mr. Hansen serves as our President and Chief Executive Officer pursuant to an employment agreement, dated January 1, 1991. This agreement was for a term of five years and renews automatically on January 1 of each year thereafter as mutually agreed upon. Pursuant to the terms of the agreement, Mr. Hansen is paid a base salary plus such bonus or additional compensation as the board of directors or the compensation committee deems appropriate. Effective June 7, 1999, the board of directors set Mr. Hansen's base salary at $150,000. In addition, Mr. Hansen is entitled to receive a sales commission of 7.5% of the gross sales of any of our products which are sold through his direct sales effort. In the event Mr. Hansen is terminated by us for any reason other than a material breach by him of the agreement, he is entitled to receive an amount equal to four times his then current base salary and prorated payment of any bonus, cash or stock earned. Mr. Castillo serves as our Chief Financial Officer pursuant to an employment agreement, dated November 4, 1998. This agreement was for a term of one year and renews automatically on November 23 of each year thereafter as mutually agreed upon. Pursuant to the terms of the agreement, Mr. Castillo is paid a base salary plus such bonus or additional compensation as the board of directors or the compensation committee deems appropriate. Effective January 1, 2001, our board of directors set Mr. Castillo's base salary at $150,000. Mr. Kragh serves as our Chief Information Officer pursuant to an employment agreement, dated January 1, 1991. This agreement was for a term of five years and renews automatically on January 1 of each year thereafter as mutually agreed upon. Pursuant to the terms of the agreement, Mr. Kragh is paid a base salary plus such bonus or additional compensation as the board of directors or the compensation committee deems appropriate. Effective January 1, 2001, our board of directors set Mr. Kragh's base salary at $175,000. LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS As permitted by the New York Business Corporation Law, our certificate of incorporation provides that neither a director nor officer is personally liable to us or our shareholders for damages for any breach of duty in his capacity as a director or officer unless a judgment or other final adjudication adverse to such director or officer establishes that such director or officer is liable for negligence or misconduct in the performance of his duties. The provisions of our certificate of incorporation are intended to afford our directors and officers protection, and limit their potential liability, to the fullest extent permitted by New York law. As a result of the 41 46 inclusion of such provisions, shareholders may be unable to recover monetary damages against directors or officers for actions taken by them that constitute negligence or, in some cases, gross negligence or that are in violation of certain of their fiduciary duties. This provision does not affect a director's or officer's responsibilities under any other laws, such as the federal securities laws. We have obtained directors' and officers' insurance for our directors and officers for specified liabilities. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On December 1, 2000, we loaned $70,000 to Richard A. Castillo, our Chief Financial Officer, the proceeds of which were used to pay us the purchase price of an option he exercised for 22,500 shares of our common stock (at an exercise price of $3.11 per share). The loan bears interest at 7.5% per annum and is secured by the 22,500 shares. On December 13, 1999, we loaned $70,000 to Mr. Castillo, the proceeds of which were used to pay to us the purchase price of an option he exercised for 22,500 shares of our common stock (at an exercise price of $3.11 per share). This loan bears interest at 6% per annum and is secured by the 22,500 shares. The outstanding balance of principal plus interest on the loans to Mr. Castillo, as of December 31, 2000, was $144,865. On June 30, 1999, we loaned $16,875 to Peter K. Hansen, our President and Chief Executive Officer, the proceeds of which were used to pay us the purchase price of warrants he exercised for 16,875 shares of our common stock (at an exercise price of $1.00 per share). This loan bears interest at 6% per annum and is secured by the 16,875 shares. The outstanding balance of principal plus interest on the loan as of December 31, 2000 was $18,403. On December 30, 1997, we loaned $230,000 to Mr. Hansen, the proceeds of which were used to pay us the purchase price of warrants he exercised for 258,750 shares of our common stock (at an exercise price of $0.89 per share). This loan originally bore interest at 6% per annum and is secured by the 258,750 shares. This loan was renewed on December 30, 2000, at an interest rate of 7.5% per annum. The outstanding balance of principal plus interest on the loan as of December 31, 2000 was $271,533. On December 31, 1996, we loaned $50,000 to Mr. Hansen, the proceeds of which were used to pay us the purchase price of an option he exercised for 112,500 shares of our common stock (at an exercise price of $0.44 per share). This loan bears no interest and is secured by the 112,500 shares. The outstanding balance of principal on the loan as of December 31, 2000 was $50,000. In addition, Mr. Hansen had an aggregate of $185,030 in travel and salary advances at December 31, 2000. On December 30, 1997, we loaned $150,000 to Lars Kragh, our Chief Information Officer, the proceeds of which were used to pay us the purchase price of warrants he exercised for 168,750 shares of our common stock (at an exercise price of $0.89 per share). This loan originally bore interest at 6% per annum and is secured by the 168,750 shares. This loan was renewed on December 30, 2000, at an interest rate of 7.5% per annum. The outstanding balance of principal plus interest on the loan as of December 31, 2000 was $177,086. On July 13, 1998, we entered into a three-year $3 million line of credit agreement with a financial institution. The debt is personally secured by Jerome Belson, a beneficial owner of more than 5% of our common stock, and Peter K. Hansen, our Chief Executive Officer and President. In consideration for securing this agreement, Messrs. Belson and Hansen received warrants to purchase 337,500 and 56,250 shares of our common stock, respectively, at an exercise price of $2.83 per share, which was the market value of our common stock on the date such warrants were issued. The warrants vested over two years and expire on July 30, 2001. Mr. Belson has exercised all of his warrants and Mr. Hansen has exercised none. On October 27, 1999, we announced the formation of NYFIX Millennium, a consortium of us and seven international investment banks and brokerage firms, consisting of Deutsche Bank, ING Barings, Lehman Brothers, Morgan Stanley, Sanford C. Bernstein & Co., SG Cowen Securities Corp. and UBS Warburg. Each partner, including us, invested $2.0 million in NYFIX Millennium. Each of our partners received 25,000 units of NYFIX Millennium, collectively owning 50% of NYFIX Millennium, and we owned the remaining 50%. In addition, we purchased an option to buy from our partners an additional 30% ownership in NYFIX Millennium, for which we paid each of our partners 281,250 shares of our common stock. If we exercise this option, we will issue an aggregate of an additional 236,250 shares of our common stock to our partners for units of NYFIX Millennium owned by such partners. 42 47 In March 2001, NYFIX Millennium added Bank of America, First Union Securities, J.P. Morgan & Co. and J.P. Morgan H&Q (formerly Chase H&Q) as new partners. Pursuant to the terms of the operating agreement of NYFIX Millennium, each new partner contributed $2.0 million to NYFIX Millennium, and we maintained our 50% ownership interest in NYFIX Millennium in exchange for reducing certain of our rights to share in future dividend distributions of NYFIX Millennium. We issued 94,000 shares of our common stock to each new partner in return for the same option rights noted above. If we exercise this option, we will issue an aggregate of an additional 60,000 shares of our common stock to our new partners for units of NYFIX Millennium owned by such new partners. 43 48 PRINCIPAL SHAREHOLDERS The following table sets forth information known to us regarding the beneficial ownership of our common stock as of May 18, 2001, as adjusted to reflect the sale of shares of common stock in this offering, by: - each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding common stock; - each director; - each of our named executive officers; and - all of our directors and executive officers as a group. Except as otherwise noted, the address of each person listed in the table is c/o NYFIX, Inc., Stamford Harbor Park, 333 Ludlow Street, Stamford, Connecticut 06902. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to shares. To our knowledge, except as otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares shown as beneficially owned. The applicable percentage of ownership for each shareholder is based on 25,577,818 shares of common stock outstanding as of May 18, 2001 and 28,577,818 shares outstanding after the completion of this offering, in each case together with applicable options and warrants for that shareholder. Shares of common stock issuable upon exercise of options, warrants and other rights beneficially owned that are exercisable within 60 days are deemed outstanding for the purpose of computing the percentage ownership of the person holding those options, warrants and other rights but are not deemed outstanding for computing the percentage ownership of any other person.
PERCENTAGE OF PERCENTAGE OF SHARES SHARES SHARES BENEFICIALLY BENEFICIALLY BENEFICIALLY OWNED PRIOR OWNED PRIOR TO OWNED AFTER THE NAME AND ADDRESS TO THE OFFERING THE OFFERING OFFERING - ---------------- --------------- -------------- --------------- Peter K. Hansen.................................... 2,444,663(1) 9.3% 8.3% Jerome Belson 495 Broadway, 6th Floor New York, NY 10012.............................. 1,670,800(2) 6.5% 5.8% Carl E. Warden..................................... 721,440(3) 2.8% 2.5% Lars Kragh......................................... 696,375(4) 2.7% 2.4% Richard A. Castillo................................ 61,250(5) * * George O. Deehan................................... -(6) - - William J. Lynch................................... 10,000(7) * * All directors and executive officers as a group (6 persons)........................................ 3,933,728 14.7% 13.3%
- ------------------------------ * less than 1% of our outstanding common stock. (1) Includes warrants and options to purchase 56,250 and 763,125 shares, respectively, of our common stock held by Mr. Hansen, all of which are currently exercisable. Does not include 462,500 shares of our common stock issuable upon exercise of options which are not currently exercisable. If the over-allotment option granted to the underwriters is exercised in full, Mr. Hansen will sell 350,000 shares of our common stock. (2) Includes 310,200 shares of our common stock held by The Jerome Belson Foundation, of which Mr. Belson is the trustee. Does not include an aggregate of 246,950 shares of our common stock held by adult family members of Mr. Belson. (3) Includes 45,000 shares of our common stock issuable upon exercise of currently exercisable options. (4) Includes 218,250 shares of our common stock issuable upon exercise of currently exercisable options. Does not include 63,000 shares of our common stock issuable upon exercise of options which are not 44 49 currently exercisable. If the over-allotment option granted to the underwriters is exercised in full, Mr. Kragh will sell 100,000 shares of our common stock. (5) Includes 16,250 shares of our common stock issuable upon exercise of currently exercisable options. Does not include 38,750 shares of our common stock issuable upon exercise of options which are not currently exercisable. (6) Does not include 30,000 shares of our common stock issuable upon exercise of options which are not currently exercisable. (7) Includes 10,000 shares of our common stock issuable upon exercise of currently exercisable options. Does not include 20,000 shares of our common stock issuable upon exercise of options which are not currently exercisable. 45 50 DESCRIPTION OF CAPITAL STOCK The following information describes our common stock and certain provisions of our certificate of incorporation and our bylaws. This description is only a summary. You should refer to the certificate of incorporation and bylaws, which have been filed with the SEC and are incorporated by reference herein. Our authorized capital stock consists of 60,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $1.00 per share. COMMON STOCK As of May 18, 2001, there were 25,577,818 shares of our common stock outstanding held by 406 shareholders of record. Based upon the number of shares outstanding and giving effect to the issuance of the 3,000,000 shares of common stock offered hereby, there will be 28,577,818 shares of common stock outstanding upon the closing of this offering. The holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the shareholders and do not have any cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of our common stock are entitled to receive proportionally any dividends declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all assets remaining after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. All outstanding shares of our common stock are validly issued, fully paid and nonassessable. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that we may designate and issue in the future. PREFERRED STOCK Under the terms of our certificate of incorporation, our board of directors is authorized to issue shares of preferred stock in one or more series without shareholder approval. The board has discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series of preferred stock. The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a shareholder vote on specific issuances. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, a majority of our outstanding voting stock. As of the date hereof, there are no shares of preferred stock outstanding. Series A Preference Stock Of our 5,000,000 authorized shares of preferred stock, 100,000 shares have been designated as Series A Preference Stock. Each share of Series A Preference Stock is entitled to cumulative quarterly dividends, prior to any distributions to the holders of our common or any other junior stock, in an amount per share equal to the greater of: - $1.00, or - 100 times the amount of all dividends, other than a dividend payable in shares of common stock, declared on the common stock since the immediately preceding quarter. Should we declare or pay a dividend on the common stock, payable in shares of common stock, or create a subdivision, combination or consolidation of outstanding common stock which results in either a greater or lesser number of shares of common stock, then the dividend payable to holders of the Series A Preference 46 51 Stock must be adjusted by multiplying it by a fraction, the numerator of which is the number of shares of common stock outstanding immediately after such an event and the denominator of which is the number of shares of common stock that were outstanding immediately prior to such an event. In the event of our liquidation, dissolution or winding up, holders of our Series A Preference Stock are entitled to, prior to any distribution made to the holders of common stock or any other junior stock, $100 per share, plus an amount equal to all accrued and unpaid dividends. In the event of a merger or consolidation where common stock is exchanged for some other non-cash consideration, the holders of our Series A Preference Stock are entitled to a distribution per share equal to 100 times the aggregate amount of consideration into which each share of common stock is changed or exchanged. These figures are subject to the same anti-dilution adjustments set forth above. Each share of our Series A Preference Stock is entitled to 100 votes on all matters submitted to stockholders, subject to the same anti-dilution adjustments set forth above. Except as provided by law, the holders of shares of our common stock and Series A Preference Stock shall vote together as a single class. WARRANTS There are presently outstanding warrants to purchase 56,250 shares of our common stock with an exercise price of $2.83 per share. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF NEW YORK LAW, OUR CERTIFICATE OF INCORPORATION, BYLAWS AND RIGHTS AGREEMENT General Provisions of New York law, our certificate of incorporation, bylaws and rights agreement could make it more difficult or delay the acquisition of us by means of a tender offer, a proxy contest or otherwise and the removal of incumbent directors. These provisions are intended to discourage coercive takeover practices and inadequate takeover bids, even though such a transaction may offer our shareholders the opportunity to sell their common stock at a price above the prevailing market price. They may also encourage persons seeking to acquire control of us to negotiate with us first. New York Takeover Statute We are subject to the business combination provisions of Section 912 of the New York Business Corporation Law and expect to continue to be so subject if and for so long as we have a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended. Section 912 provides, with certain exceptions, that a New York corporation may not engage in a business combination, such as merger, consolidation, recapitalization or disposition of stock, with any "interested shareholder" for a period of five years from the date that such person first became an interested shareholder unless: (i) the transaction resulting in a person becoming an interested shareholder was approved by the board of directors of the corporation prior to that person becoming an interested shareholder; (ii) the business combination is approved by the board of directors of the corporation prior to that person becoming an interested shareholder; (iii) the business combination is approved by the disinterested shareholders at a meeting called no earlier than five years after the date such person became an interested shareholder; or (iv) the price paid to all shareholders is at least equal to the higher of the price paid by the interested shareholder for his shares or the market value of such shares, which is computed as the higher of its value when acquired by the interested shareholder or when the announcement of the business combination was made. An interested shareholder is defined as any person that is the beneficial owner of 20% or more of the outstanding voting stock of a New York corporation or is an affiliate or associate of the corporation that at any time during the prior five years was the beneficial owner, directly or indirectly, of 20% or more of the then outstanding voting stock. A business combination includes mergers, asset sales and other transactions resulting in a financial benefit to the interested shareholder. 47 52 This statute could prohibit or delay the accomplishment of mergers, tender offers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. The stock acquisition date, with respect to any person and any New York corporation, means the date that such person first becomes an interested shareholder of such corporation. Special Meetings of Shareholders Our bylaws provide that special meetings of shareholders can only be called by a majority of the board of directors, the Chairman of the Board, the President or the holders of a majority of the outstanding shares of stock entitled to vote at the meeting. Authorized But Unissued Shares Our authorized but unissued shares of common stock and preferred stock, including the Series A Preference Stock, are available for future issuance without shareholder approval, subject to certain limitations imposed by the Nasdaq National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. Shareholders' Rights Agreement Our board of directors has declared a dividend of one preferred share purchase right for each share of our common stock. Each share purchase right entitles the registered holder to purchase from us one one-hundredth (1/100) of a share of our Series A Preference Stock at a price of $40.00 per one one-hundredth of a share. The exercise price and the number of shares of Series A Preference Stock issuable upon exercise are subject to adjustments from time to time to prevent dilution. The share purchase rights are not exercisable until the earlier to occur of (1) 10 days following a public announcement that a person or group of affiliated or associated persons, referred to as an acquiring person, has acquired beneficial ownership of 20% or more of our outstanding common stock or (2) 10 business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer which would result in an acquiring person beneficially owning 20% or more of our outstanding shares of common stock. If we are acquired in a merger or other business combination, or if 50% or more of our consolidated assets or earning power is sold after a person or group has become an acquiring person, proper provision will be made so that each holder of a share purchase right, other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void, will have the right to receive, upon exercise of the share purchase right at the then current exercise price, the number of shares of common stock of the acquiring company which at the time of the transaction have a market value of two times the share purchase right exercise price. If any person or group becomes an acquiring person, the board of directors may exchange the share purchase rights, other than share purchase rights beneficially owned by the acquiring person, which will thereafter be void, in whole or in part, at an exchange ratio of one common share, or one one-hundredth (1/100) of a share of a Series A Preference Stock, per share purchase right. Before the date the share purchase rights are exercisable, the share purchase rights may not be detached or transferred separately from the common stock. The share purchase rights will expire on September 19, 2007, unless that expiration date is extended or unless the share purchase rights are redeemed or exchanged by us. At any time before an acquiring person acquires beneficial ownership of 20% or more of our outstanding common stock, our board of directors may redeem the share purchase rights in whole, but not in part, at a price of $.01 per share purchase right. Immediately upon any share purchase rights redemption, the exercise rights terminate, and the holders will only be entitled to receive the redemption price. A more detailed description and terms of the share purchase rights are set forth in a rights agreement between us and Chase Mellon Shareholder Services, L.L.C. (now known as Mellon Investor Services), as rights agent. This rights agreement could have the effect of discouraging tender offers or other transactions that might otherwise result in our shareholders receiving a premium over the market price for their common stock. 48 53 TRANSFER AGENT AND REGISTRAR Mellon Investor Services is the transfer agent and registrar of our common stock. NASDAQ NATIONAL MARKET LISTING Our shares of common stock are listed on the Nasdaq National Market under the symbol NYFX. 49 54 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock and our ability to raise capital through a public offering of equity securities. After this offering, we will have 28,577,818 shares of our common stock outstanding. Of these shares, all of the 3,000,000 shares sold in this offering will be freely tradable without restriction under the Securities Act, unless these shares are purchased by our affiliates. Of the outstanding shares of our common stock, 1,646,894 are "restricted securities" as that term is defined in Rule 144 under the Securities Act. If the over-allotment option is exercised in full, 1,196,894 shares will be "restricted securities." Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which rules are summarized below. There are also outstanding currently exercisable options and warrants to purchase 4,569,444 shares of our common stock. RULE 144 In general, under Rule 144, a person who has beneficially owned restricted securities for at least one year is entitled to sell publicly, within any three-month period, a number of shares that is not more than the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately 285,778 shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks before a notice of the sale on Form 144 is filed with the SEC. Sales under Rule 144 must also comply with manner of sale provisions and notice requirements and are subject to the availability of current public information about us. RULE 144(K) Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days before a sale, and who has beneficially owned the restricted securities for at least two years, is entitled to sell the securities without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. RULE 701 In general, under Rule 701, any of our employees, consultants or advisors who purchases or receives shares of common stock from us in connection with a stock option plan or other written agreement will be eligible to resell those shares beginning 90 days after the date of this prospectus in reliance on Rule 144. Non-affiliates will be able to sell those shares without complying with the holding period, public information, volume limitation or notice provisions of Rule 144. Affiliates will be able to sell those shares without complying with the holding period requirements of Rule 144. LOCK-UP AGREEMENTS In connection with this offering, our executive officers, directors and certain shareholders holding 4,777,653 shares of our common stock will sign lock-up agreements under which they will agree not to transfer or dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 120 days after the date of this prospectus. J.P. Morgan Securities Inc. may, however, in its sole discretion, release all or any portion of the shares of common stock subject to the lock-up agreements. REGISTRATION RIGHTS After this offering, the holders of 376,000 shares of our common stock will be entitled to specified rights with respect to the registration of their shares under the Securities Act. After any sale of shares of common 50 55 stock pursuant to a registration statement, these shares will be freely tradeable without restriction under the Securities Act. These sales could cause the market price of our common stock to decline. Certain of these holders have agreed not to exercise their registration rights prior to the date that is 120 days after the date of this prospectus. 51 56 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below, through their representatives, J.P. Morgan Securities Inc., UBS Warburg LLC, Robertson Stephens, Inc. and U.S. Bancorp Piper Jaffray Inc. have severally agreed to purchase from NYFIX, Inc. the following respective number of shares of common stock:
NUMBER OF NAME SHARES - ---- ---------------- J.P. Morgan Securities Inc. ................................ UBS Warburg LLC............................................. Robertson Stephens, Inc. ................................... U.S. Bancorp Piper Jaffray Inc. ............................ --------- Total............................................. 3,000,000 =========
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and our independent auditors. The underwriters are committed to purchase all of the shares of common stock offered by us if they purchase any shares. The per share and total underwriting discounts and commissions we will pay to the underwriters are and , respectively. If the over-allotment option is exercised, the underwriters discounts and commissions with respect to those shares will be paid by the selling shareholders. We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $750,000. The underwriters propose to offer the shares of common stock directly to the public initially at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. The underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Certain shareholders have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered hereby. These shareholders will be obligated, pursuant to the option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of shares of common stock offered by us. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of these liabilities. Our executive officers and directors and certain shareholders holding 4,777,653 shares of our common stock have agreed that they will not, without the prior written consent of J.P. Morgan Securities Inc., sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of capital stock, options or warrants to acquire shares of capital stock or any securities convertible into or exchangeable for or any other rights to purchase or acquire shares of capital stock owned by them for a period of 120 days following the date of this prospectus. We have agreed that we will not, 52 57 without the prior written consent of J.P. Morgan Securities Inc., sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of capital stock, options or warrants to acquire shares of capital stock or securities convertible into or exchangeable for shares of capital stock for a period of 120 days following the date of this prospectus. We have been advised by the representatives that, pursuant to Regulation M under the Securities Act, some persons participating in the offering may engage in transactions, including syndicate covering transactions, stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "syndicate covering transaction" is a bid for or the purchase of common stock on behalf of the underwriters to reduce a syndicate short position incurred by the underwriters in connection with the offering. The underwriters may create a syndicate short position by making short sales of our common stock and may purchase our common stock in the open market to cover syndicate short positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in the offering. Short sales can be either "covered" or "naked." "Covered" short sales are sales made in an amount not greater than the underwriters' over-allotment option to purchase additional shares from us in the offering. "Naked" short sales are sales in excess of the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. If the underwriters create a syndicate short position, they may choose to reduce or "cover" this position by either exercising all or part of the over-allotment option to purchase additional shares from us or by engaging in "syndicate covering transactions." The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. The underwriters must close out any naked short position by purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of our common stock. A "penalty bid" is an arrangement that permits the representatives to reclaim the selling concession from an underwriter or a syndicate member when shares of common stock sold by such underwriter or syndicate members are purchased by the representatives in a syndicate covering transaction and therefore have not been effectively placed by the underwriter or syndicate member. We have been advised by the representatives that these transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Similar to other purchase activities, these activities may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. One or more members of the underwriting selling group may make copies of the preliminary prospectus available over the Internet to customers or though its or their website. In connection with this offering, certain underwriters and selling group members, if any, who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in our common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Affiliates of J.P. Morgan Securities Inc. are members of NYFIX Millennium. In addition, from time to time in the ordinary course of their respective businesses, the underwriters and their affiliates have engaged in and may in the future engage in commercial and/or investment banking transactions with us. 53 58 LEGAL MATTERS The validity of the shares of common stock offered in this offering will be passed upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York, New York. Legal matters will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York. Partners of Olshan Grundman Frome Rosenzweig & Wolosky LLP beneficially own an aggregate of approximately 127,000 shares of our common stock. EXPERTS The consolidated financial statements as of and for the year ended December 31, 2000, included and incorporated by reference in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is included and incorporated by reference herein, and have been so included and incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The audited financial statements as of December 31, 1999 and for each of the two years in the period ended December 31, 1999, included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-3 with the SEC for our common stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make references in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for the copies of the actual contract, agreement or other document. You may read our SEC filings, including the registration statement, over the Internet at the SEC's Web site at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and later information filed with the SEC will update and supersede this information. We incorporate by reference our Annual Report on Form 10-K for the year ended December 31, 2000, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934, as amended. You may request a copy of these filings, at no cost, by writing or telephoning us at NYFIX, Inc., Stamford Harbor Park, 333 Ludlow Street, Stamford, Connecticut 06902, Attention: Chief Financial Officer, telephone (203) 425-8000. 54 59 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Report of Independent Public Accountants.................... F-3 Financial Statements: Consolidated Balance Sheets at December 31, 1999 and 2000, and at March 31, 2001 (unaudited)................ F-4 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000, and for the Three Month Periods Ended March 31, 2000 and 2001 (unaudited)............................................ F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1999 and 2000, and for the Three Month Period Ended March 31, 2001 (unaudited)............................................ F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000, and for the Three Month Periods Ended March 31, 2000 and 2001 (unaudited)............................................ F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 60 INDEPENDENT AUDITORS' REPORT To the Board of Directors NYFIX, Inc. Stamford, Connecticut We have audited the accompanying consolidated balance sheet of NYFIX, Inc. and subsidiary as of December 31, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of NYFIX, Inc. and subsidiary as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Stamford, Connecticut March 2, 2001 (March 14, 2001 as to Note 18) F-2 61 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of NYFIX, Inc.: We have audited the accompanying consolidated balance sheet of NYFIX, Inc. (a New York corporation) and subsidiary as of December 31, 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, 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 the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Stamford, Connecticut March 29, 2000 F-3 62 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- MARCH 31, ASSETS 1999 2000 2001 - ------ ----------- ----------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................ $ 1,565,649 $ 4,866,629 $ 4,724,419 Accounts receivable -- less allowance of $125,000, $421,000 and $518,000.................................. 7,088,820 12,058,370 13,885,208 Inventory, net........................................... 1,303,658 1,742,823 1,691,819 Prepaid expenses and other current assets................ 478,641 646,814 783,743 Due from NYFIX Millennium................................ 861,970 1,985,081 1,192,172 Receivable from officers................................. 156,992 200,441 196,437 Deferred income taxes.................................... - 1,859,000 1,859,000 ----------- ----------- ----------- Total current assets............................ 11,455,730 23,359,158 24,332,798 Property and equipment, net................................. 5,873,037 11,472,473 12,115,449 Investment in NYFIX Millennium.............................. 19,500,000 19,500,000 23,500,000 Deferred income taxes....................................... - 237,000 237,000 Other assets................................................ 1,999,258 2,989,719 3,487,692 ----------- ----------- ----------- Total assets.................................... $38,828,025 $57,558,350 $63,672,939 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 1,845,996 $ 2,915,167 $ 2,048,040 Accrued expenses......................................... 1,418,113 2,444,825 3,187,678 Current portion of capital lease obligations............. - 692,525 878,454 Current portion of long-term debt........................ 500,000 2,000,000 1,750,000 Advance billings......................................... 3,178,636 6,147,705 6,393,880 ----------- ----------- ----------- Total current liabilities....................... 6,942,745 14,200,222 14,258,052 Long-term portion of capital lease obligations.............. - 1,130,394 1,272,261 Long-term debt.............................................. 2,000,000 - - ----------- ----------- ----------- Total liabilities............................... 8,942,745 15,330,616 15,530,313 ----------- ----------- ----------- Commitments and contingencies (See Notes) Shareholders' equity: Preferred stock -- par value $1; 5,000,000 shares authorized; none issued................................ - - - Common stock -- par value $.001; 60,000,000 authorized; 23,854,953, 25,109,550 and 25,352,038 shares issued and outstanding............................................ 23,855 25,110 25,352 Additional paid-in capital............................... 35,862,994 42,558,040 47,017,720 Retained earnings (accumulated deficit).................. (5,369,945) 306,482 1,770,024 Due from officers and directors.......................... (631,624) (661,898) (670,470) ----------- ----------- ----------- Total shareholders' equity...................... 29,885,280 42,227,734 48,142,626 ----------- ----------- ----------- Total liabilities and shareholders' equity...... $38,828,025 $57,558,350 $63,672,939 =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 63 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------- ------------------------- 1998 1999 2000 2000 2001 ----------- ----------- ----------- ----------- ---------- (UNAUDITED) Revenues: Sales........................ $ 2,653,100 $ 3,715,479 $ 5,089,412 $ 925,441 $1,705,223 Subscription revenue......... 2,278,447 6,732,928 15,954,989 2,916,500 5,788,398 Service contracts............ 1,303,846 1,761,044 2,935,766 538,067 928,530 ----------- ----------- ----------- ----------- ---------- Total revenues............ 6,235,393 12,209,451 23,980,167 4,380,008 8,422,151 ----------- ----------- ----------- ----------- ---------- Cost of revenues: Cost of sales................ 726,927 545,963 669,878 171,937 167,508 Cost of subscription revenue.................... 1,373,466 2,664,077 5,032,064 842,134 1,521,031 Cost of service contracts.... 432,316 555,547 675,410 135,977 251,877 ----------- ----------- ----------- ----------- ---------- Total cost of revenues.... 2,532,709 3,765,587 6,377,352 1,150,048 1,940,416 ----------- ----------- ----------- ----------- ---------- Gross profit.................... 3,702,684 8,443,864 17,602,815 3,229,960 6,481,735 ----------- ----------- ----------- ----------- ---------- Operating expenses: Selling, general and administrative............. 4,956,679 6,289,686 9,419,182 2,001,493 3,382,121 Research and development..... 537,346 297,475 454,362 102,335 78,318 Depreciation and amortization............... 474,996 662,537 1,254,777 228,279 516,757 ----------- ----------- ----------- ----------- ---------- Total operating expenses................ 5,969,021 7,249,698 11,128,321 2,332,107 3,977,196 ----------- ----------- ----------- ----------- ---------- Earnings (loss) from operations.................... (2,266,337) 1,194,166 6,474,494 897,853 2,504,539 Interest expense................ (108,465) (221,711) (332,750) (66,082) (111,095) Interest income................. 91,715 112,807 155,947 24,665 48,246 Other (expense) income.......... 61,744 11,166 (20,009) 142 (9,323) ----------- ----------- ----------- ----------- ---------- Earnings (loss) before provision for income taxes and cumulative effect of a change in accounting principle....... (2,221,343) 1,096,428 6,277,682 856,578 2,432,367 Provision for income taxes...... 12,466 94,400 601,255 92,818 968,825 ----------- ----------- ----------- ----------- ---------- Earnings (loss) before cumulative effect of a change in accounting principle....... (2,233,809) 1,002,028 5,676,427 763,760 1,463,542 Cumulative effect of a change in accounting principle.......... - (41,609) - - - ----------- ----------- ----------- ----------- ---------- Net earnings (loss)............. $(2,233,809) $ 960,419 $ 5,676,427 $ 763,760 $1,463,542 =========== =========== =========== =========== ========== Basic earnings (loss) per common share before cumulative effect of a change in accounting principle..................... $ (0.11) $ 0.05 $ 0.23 $ 0.03 $ 0.06 =========== =========== =========== =========== ========== Basic earnings (loss) per common share......................... $ (0.11) $ 0.04 $ 0.23 $ 0.03 $ 0.06 =========== =========== =========== =========== ========== Basic weighted average common shares outstanding............ 19,862,843 21,752,583 24,480,356 24,036,321 25,195,953 =========== =========== =========== =========== ========== Diluted earnings (loss) per common share before and after cumulative effect of a change in accounting principle....... $ (0.11) $ 0.04 $ 0.21 $ 0.03 $ 0.05 =========== =========== =========== =========== ========== Diluted weighted average common shares outstanding............ 19,862,843 23,306,912 26,425,130 26,247,618 26,920,089 =========== =========== =========== =========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 64 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RETAINED COMMON STOCK ADDITIONAL EARNINGS DUE FROM TOTAL -------------------- PAID-IN (ACCUMULATED OFFICERS SHAREHOLDERS' DESCRIPTION SHARES AMOUNT CAPITAL DEFICIT) AND DIRECTORS EQUITY - ----------- ---------- ------- ----------- ------------ ------------- ------------- Balance at January 1, 1998............. 19,180,193 $19,180 $10,409,108 $(4,096,555) $(430,000) $ 5,901,733 Stock issued from exercise of options and warrants......................... 639,000 639 983,111 - - 983,750 Common stock, net of issuance costs.... 1,350,000 1,350 3,448,650 - - 3,450,000 Warrants issued........................ - - 40,000 - - 40,000 Due from officers and directors........ - - - - (22,925) (22,925) Net loss............................... - - - (2,233,809) - (2,233,809) ---------- ------- ----------- ----------- --------- ----------- Balance at December 31, 1998........... 21,169,193 21,169 14,880,869 (6,330,364) (452,925) 8,118,749 Stock issued from exercise of options and warrants......................... 435,760 436 873,504 - - 873,940 Common stock, net of issuance costs.... 2,250,000 2,250 20,044,625 - - 20,046,875 Warrants issued........................ - - 63,996 - - 63,996 Due from officers and directors........ - - - - (178,699) (178,699) Net earnings........................... - - - 960,419 - 960,419 ---------- ------- ----------- ----------- --------- ----------- Balance at December 31, 1999........... 23,854,953 23,855 35,862,994 (5,369,945) (631,624) 29,885,280 Payment for fractional shares.......... - - (3,770) - - (3,770) Stock issued from exercise of options and warrants......................... 1,254,597 1,255 3,988,268 - - 3,989,523 Warrants issued........................ - - 75,548 - - 75,548 Due from officers and directors........ - - - - (30,274) (30,274) Tax benefit from exercise of stock options.............................. - - 2,635,000 - - 2,635,000 Net earnings........................... - - - 5,676,427 - 5,676,427 ---------- ------- ----------- ----------- --------- ----------- Balance at December 31, 2000........... 25,109,550 25,110 42,558,040 306,482 (661,898) 42,227,734 Stock issued from exercise of options and warrants (unaudited)............. 54,488 54 440,981 - - 441,035 Warrants issued (unaudited)............ - - 18,887 - - 18,887 Due from officers and directors (unaudited).......................... - - - - (8,572) (8,572) Common stock issued (unaudited)........ 188,000 188 3,999,812 - - 4,000,000 Net earnings (unaudited)............... - - - 1,463,542 - 1,463,542 ---------- ------- ----------- ----------- --------- ----------- Balance at March 31, 2001 (unaudited).. 25,352,038 $25,352 $47,017,720 $ 1,770,024 $(670,470) $48,142,626 ========== ======= =========== =========== ========= ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 65 NYFIX, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS YEARS ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- ------------------------- 1998 1999 2000 2000 2001 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net earnings (loss).................. $(2,233,809) $ 960,419 $ 5,676,427 $ 763,760 $ 1,463,542 Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities: Depreciation...................... 747,664 1,244,818 2,507,636 458,724 967,014 Amortization...................... 497,552 738,581 1,189,003 242,030 360,242 Deferred income taxes............. - - (585,300) - - Provision for bad debts........... 50,922 44,758 415,802 28,451 103,259 Noncash financing charges......... 40,000 63,996 75,548 18,887 18,887 Changes in assets and liabilities: Accounts receivable............ (1,609,039) (3,716,160) (5,385,352) 196,470 (1,930,097) Inventory...................... 31,681 (24,356) (439,165) 79,888 51,004 Prepaid expenses and other current assets.............. (181,412) (194,729) (168,173) (125,195) (136,929) Receivable from officers....... (28,986) (36,409) (43,449) 17,160 4,004 Accounts payable............... (53,855) 972,179 1,069,171 198,305 (867,127) Accrued expenses............... 263,016 702,217 2,151,012 174,211 742,853 Advance billings............... 1,317,643 1,689,579 2,969,069 574,850 246,175 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities........................... (1,158,623) 2,444,893 9,432,229 2,627,541 1,022,827 ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures................. (2,342,698) (4,263,724) (6,084,180) (820,413) (1,086,040) Investment in NYFIX Millennium....... - (2,000,000) - - - Due from NYFIX Millennium............ - (861,970) (1,123,111) (194,815) 792,909 Payments for product enhancement costs and other assets............ (809,243) (1,643,670) (2,179,464) (444,702) (858,215) ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities... (3,151,941) (8,769,364) (9,386,755) (1,459,930) (1,151,346) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Principal payments under capital lease obligations................. - - (199,973) - (196,154) Proceeds from borrowings............. 2,300,000 700,000 - - - Repayment of borrowings.............. (593,564) - (500,000) - (250,000) Issuance of common stock, net of issuance costs.................... 4,410,825 3,242,116 3,955,479 1,365,654 432,463 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities........................... 6,117,261 3,942,116 3,255,506 1,365,654 (13,691) ----------- ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents........................... 1,806,697 (2,382,355) 3,300,980 2,533,265 (142,210) Cash and cash equivalents, beginning of period................................ 2,141,307 3,948,004 1,565,649 1,565,649 4,866,629 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period................................ $ 3,948,004 $ 1,565,649 $ 4,866,629 $ 4,098,914 $ 4,724,419 =========== =========== =========== =========== =========== Supplemental Information: Cash paid during the period for interest.......................... $ 69,044 $ 149,777 $ 274,490 $ 47,518 $ 36,992 Cash paid during the period for income taxes...................... 12,466 39,150 286,634 28,900 22,905 Capital lease obligations incurred... - - 2,022,892 - 523,950 Common stock issued for investment in NYFIX Millennium.................. - 17,500,000 - - 4,000,000
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 66 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRESENTATION NYFIX, Inc. and subsidiary (the "Company") operates as a financial technology company focusing on electronic trading infrastructure and technologies. The Company provides desktop solutions, stationary and wireless exchange floor systems, electronic automation systems and straight-through processing to the professional trading segment of the brokerage community. The Company is headquartered in Stamford, Connecticut and maintains operations in New York, Chicago and London. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of NYFIX, Inc. and its subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain 1998 and 1999 balances have been reclassified to conform to the 2000 presentation. Cash and Cash Equivalents The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Inventory Inventory consists of parts, finished goods and materials and is stated at the lower of cost, determined on an average cost basis, or market. Property and Equipment Property and equipment is stated at cost less accumulated depreciation. Included in equipment are certain costs related to the development of the NYFIX network to support the Company's subscription and service-based businesses. Depreciation is provided using the straight-line method over the estimated useful lives of the assets ranging from two to eight years. The estimated useful lives for subscription and service-based equipment are generally two to three years. Other Assets Other assets consist principally of 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 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 March 31, 2001. F-8 67 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Revenue from service contracts is recognized ratably over the period the services are performed. Amounts billed in advance for service and subscription contracts are deferred and reflected as advance billings. Research and Development The Company expenses research and development costs as incurred. Advertising The Company expenses advertising costs as incurred. Advertising expense was $294,000, $159,000 and $170,000 for the years ended December 31, 1998, 1999 and 2000, respectively. Foreign Currency Translation The Company's functional currency is the U.S. dollar. Accordingly, the monetary assets and liabilities of the London sales office are translated at year-end exchange rates while non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates in effect during the year, except for depreciation and cost of sales, which are translated at historical rates. The resulting currency translation gain or loss is included in the results of operations. Cumulative Effect of a Change in Accounting Principle In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up Activities. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The Company adopted the SOP in 1999 and recognized a charge for the cumulative effect of accounting change of $42,000. Income Taxes Deferred income taxes have been provided for temporary differences between the Company's financial statement and income tax basis of the Company's assets and liabilities using presently enacted tax rates. Financial Instruments The carrying value for all current assets and current liabilities approximates fair value because of their short-term nature. The carrying value of the Company's long-term debt also approximates its fair value based on prevailing interest rates. Accrued Expenses Included in accrued expenses is sales tax payable of $595,000 and $1,542,000 at December 31, 1999 and 2000, respectively. Comprehensive Income For all years presented, comprehensive income was equal to net earnings. Impact of Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. F-9 68 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The adoption of SAB 101 did not have an effect on Company's consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation. FIN 44, an interpretation of Accounting Principles Bulletin 25 (APB 25), Accounting for Stock Issued to Employees, provides guidance on the application of APB 25 for stock compensation involving employees. The adoption of FIN 44 did not have an effect on the Company's consolidated financial statements. Interim Financial Information (unaudited) The historical consolidated financial information for the three months ended March 31, 2000 and March 31, 2001 and as of March 31, 2001 have been derived from the Company's unaudited consolidated financial statements, which in the opinion of management include all adjustments (consisting of normal recurring adjustments) that are necessary to present fairly the results of operations and financial position for the periods and the date presented. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. 3. INVENTORY Inventory consists of the following:
DECEMBER 31, ------------------------ MARCH 31, 1999 2000 2001 ---------- ---------- ----------- (UNAUDITED) Parts and materials.................................... $ 828,259 $1,174,727 $1,245,068 Work in process........................................ - 39,629 - Finished goods......................................... 557,399 620,467 538,451 ---------- ---------- ---------- 1,385,658 1,834,823 1,783,519 Less: Allowance for obsolescence....................... 82,000 92,000 91,700 ---------- ---------- ---------- Total...................................... $1,303,658 $1,742,823 $1,691,819 ========== ========== ==========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------------- 1999 2000 ---------- ----------- Computer software........................................... $ 424,022 $ 458,939 Leasehold improvements...................................... 169,755 558,356 Furniture and equipment..................................... 1,463,694 2,428,962 Subscription and service bureau equipment................... 6,514,267 11,161,438 Service bureau equipment under capital leases............... - 2,022,892 ---------- ----------- 8,571,738 16,630,587 Less: Accumulated depreciation.............................. 2,698,701 5,158,114 ---------- ----------- Total........................................... $5,873,037 $11,472,473 ========== ===========
F-10 69 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Included in accumulated depreciation at December 31, 2000 is depreciation on leased service bureau equipment of $123,000. Included in cost of revenues is depreciation expense of $291,000, $586,000 and $1,257,000 for 1998, 1999 and 2000, respectively. 5. OTHER ASSETS Included in other assets are unamortized deferred product enhancement costs of $1,811,000 and $2,378,000 as of December 31, 1999 and 2000, 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 revenues is amortization expense for product enhancement costs of $479,000, $719,000 and $1,185,000 for 1998, 1999 and 2000, respectively. Included in depreciation and amortization expense is amortization expense for other deferred assets of $19,000, $20,000 and $4,000 for 1998, 1999 and 2000, respectively. 6. EARNINGS PER SHARE The Company's basic earnings per common share ("EPS") is calculated based on net earnings (loss) available to common shareholders and the weighted-average number of shares outstanding during the reported period. Diluted EPS includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of outstanding stock options and warrants.
THREE MONTH PERIODS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------- -------------------------- 1998 1999 2000 2000 2001 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Net earnings (loss)............ $(2,233,809) $ 960,419 $ 5,676,427 $ 763,670 $ 1,463,542 =========== =========== =========== =========== =========== Basic weighted average shares outstanding.................. 19,862,843 21,752,583 24,480,356 24,036,321 25,195,953 =========== =========== =========== =========== =========== Basic earnings (loss) per common share................. $ (0.11) $ 0.04 $ 0.23 $ 0.03 $ 0.06 =========== =========== =========== =========== =========== Basic weighted average shares outstanding.................. 19,862,843 21,752,583 24,480,356 24,036,321 25,195,953 Dilutive options............. - 1,306,029 1,911,485 2,088,313 1,691,423 Dilutive warrants............ - 248,300 33,289 122,984 32,713 ----------- ----------- ----------- ----------- ----------- Diluted weighted average shares outstanding.................. 19,862,843 23,306,912 26,425,130 26,247,618 26,920,089 =========== =========== =========== =========== =========== Diluted earnings (loss) per common share................. $ (0.11) $ 0.04 $ 0.21 $ 0.03 $ 0.05 =========== =========== =========== =========== ===========
Stock options and warrants were excluded from the EPS calculation for 1998 since their inclusion would be anti-dilutive. 7. 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 to 60 million from 15 million shares and preferred shares to 5 million from 1 million shares. Along with this increase, the Board of Directors authorized a 3 for 2 stock split in the form of a 50% stock dividend to all shareholders of record on November 1, 1999, which was paid on November 15, 1999. On March 13, 2000, the Board of Directors authorized a 3 for 2 stock split in the form of a 50% stock dividend to all shareholders of record on March 24, 2000, which was paid April 4, 2000. All per share and share data in the consolidated financial statements and notes thereto have been restated to reflect the stock splits. F-11 70 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On September 7, 1999, the Company completed a private placement of 281,250 shares of common stock to an institutional investment firm at a price equal to the average closing price of the stock for the 30-day period prior to the closing date on September 1, 1999. This approximated the fair market value of the stock at $9.0555 per share for an aggregate value of $2,546,875. On November 24, 1998, the Company completed a private placement of 1,350,000 shares of common stock, at a price of $2.6666 per share, for an aggregate value of $3,600,000. Costs related to this offering amounted to $150,000 resulting in net proceeds to the Company of $3,450,000. On September 1, 1997, the Board of Directors declared a dividend of a preference share purchase right (a "Right") for each outstanding share of common stock of the Company held by shareholders of record on September 19, 1997. Each share of common stock issued by the Company after such record date has the same Right attached thereto. Each Right entitles the registered holder to purchase from the Company, at any time after a shareholder acquires 20% or more of the Company's outstanding common stock, as set forth in the Rights Agreement, shares of the Company's Series A Preferred Stock ("Preference Stock"). The purchase price is $40 per one one-hundredth of a share of Preference Stock, subject to adjustment as set forth in the Rights Agreement. During 2000, 495,000 warrants and 760,000 options were exercised for 1,255,000 shares of common stock. The Company received $1,337,000 from the warrant exercises and $2,652,000 from the option exercises. 8. MAJOR CUSTOMERS For the year ended December 31, 1998, one customer accounted for 13% of total revenues and 26% of accounts receivable, and another customer accounted for 13% of total revenues and 16% of accounts receivable. For the year ended December 31, 1999, one customer accounted for 13% of total revenues and another customer accounted for 11% of accounts receivable. For the year ended December 31, 2000, no customer accounted for more than 10% of total revenues or accounts receivable. 9. DEBT AND CAPITAL LEASE OBLIGATIONS On July 13, 1998, the Company entered into a three-year $3 million line of credit agreement with a financial institution with advances on such agreement available to the Company during the first eighteen months. The credit agreement was primarily intended to finance equipment expenditures. The credit agreement bears interest at either LIBOR plus 1.25% or at the bank's prime rate, at the Company's discretion. The Company drew down an aggregate of $1,800,000 under the credit agreement during 1998 and an additional $700,000 during 1999. The weighted average outstanding borrowings during 2000 were approximately $2,398,000 at a weighted average interest rate of 7.48%. The weighted average outstanding borrowings during 1999 were $2,059,000 at a weighted average interest rate of 7.43%. The credit agreement prohibited the Company from making principal repayments prior to February 1, 2000. Repayment of principal commenced on July 30, 2000, with twelve monthly installments of $83,333 with the remaining balance due on July 30, 2001. A non-employee shareholder of the Company and the Company's president personally secured the debt. In consideration for securing the indebtedness under the credit agreement, the non-employee shareholder and president received 337,500 and 56,250 warrants, respectively, to purchase the Company's common stock at approximately $2.83 per share, which was the market value of the Company's common stock on the date such warrants were issued. Expenses related to the warrants issued are being recognized over the three-year term of the credit agreement. 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 borrowing under the previous credit line was $74,000 during 1998 at a weighted average interest rate of 9.50%. At December 31, 2000, the Company was committed under capital lease obligations with interest rates ranging from 8.28% to 13.04% for maturities ranging from January 2, 2003 to December 31, 2003. At December 31, 2000, the amount of the obligation was $1,823,000, with $693,000 classified as current. F-12 71 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Capital lease obligations at December 31, 2000 are payable as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ---------- 2001........................................................ $ 865,000 2002........................................................ 865,000 2003........................................................ 366,000 ---------- Total....................................................... 2,096,000 Less portion of lease payments representing interest........ 273,000 ---------- Present value of minimum lease payments..................... $1,823,000 ==========
Capital leases generally provide that the Company pay property taxes and operating costs. Certain service bureau equipment under capital lease obligations is leased to NYFIX Millennium, L.L.C. See Note 18. 10. COMMITMENTS AND CONTINGENCIES At December 31, 2000, the Company was committed under operating leases for offices, production facilities and equipment for terms expiring through March 25, 2009. Future minimum annual rental payments are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------ ---------- 2001.................................................. $1,856,000 2002.................................................. 1,663,000 2003.................................................. 1,580,000 2004.................................................. 1,581,000 2005.................................................. 1,357,000 Thereafter............................................ 1,641,000
Aggregate rental expense amounted to $623,000, $780,000 and $959,000 for the years ended December 31, 1998, 1999 and 2000, respectively. The Company has an employment agreement with its President, which calls for a base salary of $150,000, with such base salary to be reviewed on an annual basis by the Compensation Committee of the Board of Directors. 11. RELATED PARTY TRANSACTIONS Certain executive officers and directors of the Company have amounts due to the Company for the exercise of warrants and options for common stock, with interest at rates ranging from 0% to 7.5%, for maturities ranging from December 1, 2001 to December 30, 2003. Such amounts aggregated $631,624 and $661,898 as of December 31, 1999 and 2000, respectively, and have been shown as a reduction of shareholders' equity. At December 31, 1999 and 2000, the Company had amounts receivable from officers for travel and payroll advances of $156,992 and $200,441, 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 $10,500 in 2000. The Plan permits the Company to match employees' tax-deferred contributions up to a maximum of 3% of employees' compensation provided the Company employs the employee at the end of the year. Remaining contributions under the Plan are discretionary. Total Company contributions under the Plan were $57,000, $80,000 and $143,000 in 1998, 1999 and 2000, respectively. F-13 72 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCK WARRANTS AND STOCK OPTION PLAN On March 30, 1999, the Board of Directors 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 was increased from 3,375,000 shares to 5,625,000 shares of common stock. This amendment was approved at the Company's Annual Meeting of Shareholders held on June 7, 1999. On March 29, 2000, the Board of Directors approved the third amendment to the Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan. Under this amendment, the number of options reserved for issuance was increased from 5,625,000 shares to 6,625,000 shares of common stock. This amendment was approved at the Company's Annual Meeting of Shareholders held on June 5, 2000. All stock options granted were at fair market value at the date of grant, and expire ten years from the date of grant. The Plan expires on June 23, 2001. At December 31, 1998, 1999 and 2000, the following options and warrants had been granted and were outstanding:
WEIGHTED WEIGHTED STOCK AVERAGE STOCK AVERAGE OPTIONS EXERCISE PRICE WARRANTS EXERCISE PRICE --------- -------------- -------- -------------- Outstanding at January 1, 1998............ 2,142,000 $ 2.01 593,633 $1.56 Granted................................ 903,825 2.97 450,000 2.81 Exercised.............................. (452,250) 1.58 (186,750) 1.45 Forfeited.............................. (171,900) 2.90 (123,750) 1.25 --------- -------- Outstanding at December 31, 1998.......... 2,421,675 2.37 733,133 2.41 Granted................................ 1,446,638 6.59 - - Exercised.............................. (253,953) 2.38 (181,883) 1.50 Forfeited.............................. (61,875) 2.69 - - --------- -------- Outstanding at December 31, 1999.......... 3,552,485 4.09 551,250 2.74 Granted................................ 2,007,063 28.00 - - Exercised.............................. (759,713) 3.75 (495,000) 2.70 Forfeited.............................. (270,448) 12.41 - - --------- -------- Outstanding at December 31, 2000.......... 4,529,387 11.50 56,250 2.83 ========= ========
The weighted average fair value of stock options granted during the years ended December 31, 1998, 1999 and 2000 was $1.71, $13.25 and $16.02, respectively. The weighted average fair value of warrants granted during the year ended December 31, 1998 was $1.30. The following table summarizes the options and warrants exercisable at December 31, 1998, 1999 and 2000 and the weighted average fair value of warrants and options granted during the years then ended:
EXERCISABLE OPTIONS EXERCISABLE WARRANTS -------------------------- ------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS EXERCISE PRICE WARRANTS EXERCISE PRICE --------- -------------- -------- -------------- Shares exercisable at December 31, 1998... 550,125 $1.98 165,008 $1.40 Shares exercisable at December 31, 1999... 1,017,557 $2.25 551,250 $2.74 Shares exercisable at December 31, 2000... 1,376,321 $3.16 56,250 $2.83
F-14 73 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options and warrants outstanding at December 31, 2000:
GRANTED EXERCISABLE ----------------------------------------- -------------------------- NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE EXERCISE AT DECEMBER 31, REMAINING EXERCISE AT DECEMBER 31, EXERCISE PRICES 2000 LIFE (YEARS) PRICE 2000 PRICE - --------------- --------------- ------------ -------- --------------- -------- $ 1.14 - $ 1.61 147,500 4.37 $ 1.42 147,500 $ 1.42 2.00 - 2.20 928,374 6.01 2.12 604,375 2.11 2.50 - 3.61 831,662 7.61 2.93 497,208 2.90 3.89 - 6.94 620,188 8.55 6.72 117,750 6.60 10.11 - 18.75 1,211,213 9.03 14.50 65,738 12.25 21.33 - 33.00 456,200 9.38 25.76 - - 33.13 - 44.00 390,500 9.54 36.27 - - --------- --------- 4,585,637 1,432,571 ========= =========
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 1998, 1999 and 2000: - Risk free interest rates range from 4.18% to 6.42%, - Expected dividend yields of 0%, - Expected lives of 3 to 5 years, and - Expected volatility of 63%, 65% and 70%, respectively. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations to account for its stock plans. Except for certain warrants granted to non-employees during 1998, no compensation cost has been recognized for any option grants in the accompanying consolidated statements of operations. Had compensation costs been determined in accordance with the fair value method as defined in SFAS No. 123, Accounting for Stock-Based Compensation, the net earnings (loss) and basic and diluted earnings (loss) per share would have been reduced from the following as reported amounts to the following pro forma amounts:
YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 ----------- --------- ----------- Net earnings (loss): As reported....................................... $(2,233,809) $ 960,419 $ 5,676,427 =========== ========= =========== Pro forma......................................... $(3,215,042) $(831,791) $(1,650,000) =========== ========= =========== Basic earnings (loss) per common share: As reported....................................... $ (0.11) $ 0.04 $ 0.23 =========== ========= =========== Pro forma......................................... $ (0.16) $ (0.04) $ (0.07) =========== ========= =========== Diluted earnings (loss) per common share: As reported....................................... $ (0.11) $ 0.04 $ 0.21 =========== ========= =========== Pro forma......................................... $ (0.16) $ (0.04) $ (0.07) =========== ========= ===========
F-15 74 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. BUSINESS SEGMENT INFORMATION The Company has adopted the disclosure requirements of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes standards for additional disclosure about operating segments for interim and annual financial statements. This standard requires financial and descriptive information be disclosed for segments whose operating results are reviewed by the Company for decisions on resource allocation. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in a single industry segment as a financial technology company focusing on electronic trading infrastructure and technologies. The Company provides desktop solutions, stationary and wireless exchange floor systems, electronic automation systems and straight-through processing to the professional trading segment of the brokerage community. The Company has offices in Stamford, Connecticut, New York, Chicago and London. Each office has the opportunity to sell or enter into subscriptions for any of the Company's products and services. However, the operating results of the Company's products and services are not individually reported nor are they managed or evaluated individually by the Chief Executive Officer, who is the Company's chief decision maker. As such, the Company does not segment its business by products and services. Identifiable assets by geographic location include assets directly identifiable with those locations. Corporate assets consist primarily of cash and cash equivalents and fixed assets associated with non-operating activities. F-16 75 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Summarized financial information by geographic location is as follows (in 000's):
DECEMBER 31, MARCH 31, ----------------------------- ---------------- 1998 1999 2000 2000 2001 ------- ------- ------- ------ ------ (UNAUDITED) Revenues: Stamford and New York..................... $ 4,203 $ 9,287 $18,111 $3,517 $6,221 London.................................... 2,001 2,636 2,678 725 1,597 Chicago................................... 31 286 3,191 138 604 Inter-location sales...................... 95 78 5 5 - Inter-location elimination................ (95) (78) (5) (5) - ------- ------- ------- ------ ------ Total revenues............................... $ 6,235 $12,209 $23,980 $4,380 $8,422 ======= ======= ======= ====== ====== Gross profit: Stamford and New York..................... $ 1,936 $ 5,897 $12,263 $2,467 $4,448 London.................................... 1,745 2,288 2,236 640 1,460 Chicago................................... 22 259 3,104 123 574 ------- ------- ------- ------ ------ Total gross profit........................... $ 3,703 $ 8,444 $17,603 $3,230 $6,482 ======= ======= ======= ====== ====== Identifiable assets at December 31: Stamford and New York..................... $ 7,284 $34,313 $45,554 London.................................... 1,472 2,411 2,857 Chicago................................... 57 346 2,122 Corporate................................. 4,184 1,758 7,025 ------- ------- ------- Total identifiable assets.................... $12,997 $38,828 $57,558 ======= ======= ======= Capital expenditures: Stamford and New York..................... $ 2,259 $ 4,184 $ 5,925 London.................................... 81 31 26 Chicago................................... 3 49 133 ------- ------- ------- Total capital expenditures................... $ 2,343 $ 4,264 $ 6,084 ======= ======= ======= Depreciation: Stamford and New York..................... $ 676 $ 1,198 $ 2,436 London.................................... 69 39 29 Chicago................................... 3 8 43 ------- ------- ------- Total depreciation........................... $ 748 $ 1,245 $ 2,508 ======= ======= =======
F-17 76 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 2000 are presented below:
DECEMBER 31, ------------------------ 1999 2000 ---------- ---------- Deferred tax assets: Bad debt expense......................................... $ 50,000 $ 181,500 Inventory obsolescence................................... 32,800 39,600 Product development costs................................ 218,700 375,500 Operating loss carryforward.............................. 1,721,000 1,511,000 AMT credit carryforward.................................. - 78,000 Other.................................................... 50,500 69,000 ---------- ---------- Total deferred tax assets............................. 2,073,000 2,254,600 Less valuation allowance.................................... 2,010,300 - ---------- ---------- Net deferred tax assets............................... 62,700 2,254,600 Less deferred tax liability: Depreciation and amortization............................ 62,700 158,600 ---------- ---------- Net deferred tax amount............................... $ - $2,096,000 ========== ==========
As of December 31, 1999, the Company established a full valuation allowance for its deferred tax assets based upon management's determination of the amount that would ultimately be realized. Based upon the continued profitability of the Company during 2000 as well as expected future profitability, management determined as of December 31, 2000, that a valuation allowance was no longer required. At December 31, 2000, the Company had net operating loss carryforwards for federal income tax purposes of $3,776,000 expiring in 2014 through 2019. In addition, the net operating loss carryforwards may be significantly limited in the future under Internal Revenue Code Section 382 as a result of ownership changes resulting from the Company's equity offerings. The exercise of non-qualified stock options and the disqualifying dispositions of incentive stock options under the Company's stock option plans gives rise to compensation which is includable in the taxable income of the recipients and deductible by the Company for federal and state income tax purposes. The tax benefit recognized from the utilization of such deductions increased paid-in capital by $2,635,000 during the year ended December 31, 2000. The reconciliation between the federal statutory income tax rate and the Company's income tax provision (benefit) is as follows:
YEAR ENDED DECEMBER 31, -------------------- 1998 1999 2000 ---- ---- ---- Statutory tax rate.......................................... (34)% 34% 34% State and local taxes, net of federal benefit............... (6) 6 2 Alternative minimum tax and other........................... - 3 1 Valuation allowance......................................... 40 (34) (27) --- --- --- 0% 9% 10% === === ===
F-18 77 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of the provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1999 2000 --------- --------- ----------- Current: Federal............................................. $ - $ - $ 1,020,555 State and Foreign................................... 12,466 94,400 166,000 --------- --------- ----------- Total current.............................. 12,466 94,400 1,186,555 --------- --------- ----------- Deferred: Federal............................................. (727,000) 321,800 1,200,000 State and Foreign................................... (128,000) 68,300 225,000 Increase (decrease) in valuation allowance.......... 855,000 (390,100) (2,010,300) --------- --------- ----------- Total deferred............................. - - (585,300) --------- --------- ----------- Total provision for income taxes........... $ 12,466 $ 94,400 $ 601,255 ========= ========= ===========
16. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BEGINNING CHARGED TO COSTS DEDUCTIONS BALANCE AT OF YEAR AND 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 ======== ======== ======== ======== December 31, 2000......................... $125,000 $415,802 $119,802 $421,000 ======== ======== ======== ======== Inventory reserve: December 31, 1998......................... $ 82,000 $ - $ - $ 82,000 ======== ======== ======== ======== December 31, 1999......................... $ 82,000 $ - $ - $ 82,000 ======== ======== ======== ======== December 31, 2000......................... $ 82,000 $ 10,000 $ - $ 92,000 ======== ======== ======== ========
17. EXPORT SALES Revenue from export sales, principally software sales revenue, was $234,000, $733,000 and $2,419,000 for the years ended December 31, 1998, 1999 and 2000, respectively. 18. INVESTMENT IN NYFIX MILLENNIUM On October 27, 1999, the Company announced the formation of NYFIX Millennium, L.L.C. ("NYFIX Millennium") with seven international investment banks and brokerage firms (the "Consortium"). The Company owns 50% of NYFIX Millennium and the Consortium owns the remaining 50%. NYFIX Millennium intends to operate as an alternative trading system. All of the partners of the Consortium, and the Company, invested $2,000,000 each in NYFIX Millennium. Each Consortium partner received 281,250 shares of common stock of the Company, for an aggregate 1,968,750 shares, in return for granting the Company the option to purchase up to an additional 30% of NYFIX Millennium. The Company may exercise the option through the exchange of one share of the Company's common stock for each NYFIX Millennium 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. In March 2001, NYFIX Millennium added four new partners. Pursuant to the terms of the Operating Agreement of NYFIX Millennium, each new partner contributed $2,000,000 to NYFIX Millennium, and the F-19 78 NYFIX, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company maintained its 50% ownership interest in NYFIX Millennium in exchange for reducing certain of its rights to share in future divided distributions of NYFIX Millennium. The Company issued 94,000 shares of its common stock to each new partner in return for the same option rights noted above. As of March 31, 2001, 188,000 shares were issued to two of the new partners with the remaining 188,000 shares issued to the other two new partners in early April 2001. The Company's total investment in NYFIX Millennium of $23,500,000 at March 31, 2001, consists of $21,500,000 (1,968,750 shares in 1999 of Company stock x $8.89 and 188,000 shares in March 2001 of Company stock x $21.28) and a capital cash contribution of $2,000,000. Pursuant to the Operating Agreement, the first $14,000,000 in losses will be allocated to the Consortium investors, which equals the extent of their capital investment in NYFIX Millennium. Losses in excess of $14,000,000, if any, will be allocated to the new partners up to an additional $8,000,000, which equals the extent of their capital investment in NYFIX Millennium. No portion of these losses will be borne by the Company. The Company has temporarily funded certain operating costs and capital expenditures on behalf of NYFIX Millennium until its operations commence. Such costs are reflected as Due from NYFIX Millennium on the Company's consolidated balance sheets. The Company leases computer and office space to NYFIX Millennium on a month-to-month basis pursuant to a management agreement with NYFIX Millennium. Future payments from NYFIX Millennium for such leases are expected to be as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------ -------- 2001.................................................. $849,000 2002.................................................. 700,000 2003.................................................. 227,000 2004.................................................. 69,000 2005.................................................. 34,000
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS PERIODS ENDED ------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ---------- ---------- ---------------- --------------- 1999: Total revenues............................. $2,405,162 $3,041,566 $2,996,589 $3,776,134 ========== ========== ========== ========== Gross profit............................... $1,742,271 $2,064,617 $2,093,979 $2,542,997 ========== ========== ========== ========== Net earnings............................... $ 30,177 $ 150,165 $ 367,668 $ 412,409 ========== ========== ========== ========== Basic earnings per common share............ $ 0.00 $ 0.01 $ 0.02 $ 0.02 ========== ========== ========== ========== Diluted earnings per common share.......... $ 0.00 $ 0.01 $ 0.02 $ 0.02 ========== ========== ========== ========== 2000: Total revenues............................. $4,380,008 $5,534,328 $6,510,825 $7,555,006 ========== ========== ========== ========== Gross profit............................... $3,229,960 $3,996,419 $4,760,880 $5,615,556 ========== ========== ========== ========== Net earnings............................... $ 763,760 $1,077,059 $1,665,378 $2,170,230 ========== ========== ========== ========== Basic earnings per common share............ $ 0.03 $ 0.04 $ 0.07 $ 0.09 ========== ========== ========== ========== Diluted earnings per common share.......... $ 0.03 $ 0.04 $ 0.06 $ 0.08 ========== ========== ========== ==========
F-20 79 [THE BACK COVER ART IS TITLED "NYFIX INC. -- ELECTRONICALLY CONNECTING THE BROKERAGE COMMUNITY." THE ARTWORK CONSISTS OF A CENTRAL CIRCULAR GRAPHIC WITH SIX LINKED CIRCLES SURROUNDING IT. THE CENTER CIRCLE IS LABELED "NYFIX MILLENNIUM" AND IS SURROUNDED BY A RING LABELED "NYFIX NETWORK." THE SIX LINKED CIRCLES ARE TITLED AS FOLLOWS: BROKER DEALERS; INSTITUTIONAL MONEY MANAGEMENT FIRMS; EXCHANGE FLOORS (NYSE, AMEX, CBOT, NASDAQ); REGIONAL EXCHANGES (PACIFIC STOCK EXCHANGE, PHILADELPHIA STOCK EXCHANGE, BOSTON STOCK EXCHANGE); ECNS & ATSS (ARCHIPELAGO, INSTINET, POSIT, REDIBOOK ECN); INTERNATIONAL BOURSES (LIFFE, DEUTSCHE BOURSE, SIMEX, MATIF)] 80 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3,000,000 SHARES [NYFIX LOGO] COMMON STOCK JPMORGAN UBS WARBURG ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY , 2001 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE U.S. TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE U.S. ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 81 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of common stock being registered. All amounts are estimated except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID ----------- SEC registration fee........................................ $ 21,545.25 NASD filing fee............................................. $ 9,118.10 Printing and engraving...................................... $ 60,000.00 Accounting fees and expenses................................ $200,000.00 Legal fees and expenses..................................... $420,000.00 Blue sky fees and expenses (including legal fees)........... $ 5,000.00 Transfer agent fees......................................... $ 3,500.00 Miscellaneous............................................... $ 30,836.65 ----------- Total............................................. $750,000.00 ===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The New York Business Corporation Law, or BCL, provides that if a derivative action is brought against a director or officer of a corporation, the corporation may indemnify him or her against amounts paid in settlement and reasonable expenses, including attorneys' fees incurred by him or her, in connection with the defense or settlement of such action, if such director or officer acted in good faith for a purpose which he or she reasonably believed to be in the best interests of the corporation, except that no indemnification shall be made without court approval in respect of a threatened action, or a pending action settled or otherwise disposed of, or in respect of any matter as to which such director or officer has been found liable to the corporation. In a nonderivative action or threatened action, the BCL provides that a corporation may indemnify a director or officer against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees incurred by him or her in defending such action, if such director or officer acted in good faith for a purpose which he or she reasonably believed to be in the best interests of the corporation. Under the BCL, a director or officer who is successful, either in a derivative or nonderivative action, is entitled to indemnification as outlined above. Under any other circumstances, such director or officer may be indemnified only if certain conditions specified in the BCL are met. The indemnification provisions of the BCL are not exclusive of any other rights to which a director or officer seeking indemnification may be entitled pursuant to the provisions of the certificate of incorporation or the bylaws of a corporation or, when authorized by such certificate of incorporation or bylaws, pursuant to a shareholders' resolution, a directors' resolution or an agreement providing for such indemnification. The above is a general summary of certain provisions of the BCL and is subject, in all cases, to the specific and detailed provisions of Sections 721-725 of the BCL. Section 726 of the BCL also contains provisions authorizing a corporation to obtain insurance on behalf of any director and officer against liabilities, whether or not the corporation would have the power to indemnify against such liabilities. We maintain insurance coverage under which our directors and officers are insured, subject to the limits of the policy, against certain losses, as defined in the policy, arising from claims made against such directors and officers by reason of any wrongful acts as defined in the policy, in their respective capacities as directors or officers. The underwriting agreement filed as an exhibit hereto contains provisions pursuant to which each underwriter severally agrees to indemnify us, any person controlling us within the meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended, each director of ours, and each officer of ours who signs this registration statement with respect to information relating to such II-1 82 Underwriter furnished in writing by or on behalf of such Underwriter expressly for use in this registration statement. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 1.1** Form of Underwriting Agreement. 3.1** Composite Certificate of Incorporation of the Registrant. 3.3(i) Bylaws of the Registrant. 4.1(ii) Specimen of Designation of Series A Preferred Stock. 4.2(iii) Specimen Certificate of the Registrant's Common Stock. 4.3(iv) Rights Agreement between Chase Mellon Shareholder Services, L.L.C. (now known as Mellon Investor Services) and the Registrant, dated September 1, 1997. 4.4(v) First Amendment to Rights Agreement between Chase Mellon Shareholder Services, L.L.C. and the Registrant, dated October 25, 1999. 5.1** Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP. 10.1(vi) Employment Agreement between Peter K. Hansen and the Registrant, dated June 24, 1991. 10.2(vii) Revolving Credit Agreement between Chase Manhattan Bank and the Registrant, dated July 13, 1998. 10.3(viii) Amended and Restated 1991 Incentive Stock Option Plan of the Registrant. 10.4(ix) Amendment No. 1 to Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan of the Registrant. 10.5(x) Amendment No. 2 to Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan of the Registrant. 10.6(xi) Limited Liability Company Operating Agreement of NYFIX Millennium, L.L.C. 16.1(xii) Letter from Arthur Andersen LLP to the Registrant re change in certifying accountant, dated April 24, 2000. 21.1(xiii) Subsidiaries of the Registrant. 23.1** Consent of Deloitte & Touche LLP. 23.2** Consent of Arthur Andersen LLP. 23.3** Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (contained in Exhibit 5.1). 24.1* Power of Attorney.
- --------------- * Previously Filed. ** Filed herewith. (i) Incorporated by reference from Exhibit 3.2 to the Form 10. (ii) Incorporated by reference from Exhibit 4.1 to the Form 10. (iii) Incorporated by reference from Exhibit 4.2 to the annual report on Form 10-KSB for the year ended December 31, 1993. (iv) Incorporated by reference from Exhibit 1 to the registration statement on Form 8-A12B filed September 10, 1997 (Registration No. 001-12292). (v) Incorporated by reference from Exhibit 3 to the registration statement on Form 8-A12B/A filed November 3, 1999 (Registration No. 001-12292). (vi) Incorporated by reference from Exhibit 3.2 to the Form 10 filed March 5, 1993. (vii) Incorporated by reference from Exhibit 10.4 to the current report on Form 8-K filed August 13, 1998. (viii) Incorporated by reference from Exhibit 10.3 to the annual report on Form 10-KSB for the year ended December 31, 1996. (ix) Incorporated by reference from Exhibit 10.4 to the annual report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"). (x) Incorporated by reference from Exhibit 10.5 to the 2000 Form 10-K. II-2 83 (xi) Incorporated by reference from Exhibit 10.4 to the annual report on Form 10-K for the year ended December 31, 1999. (xii) Incorporated by reference from Exhibit 16 to the current report on Form 8-K/A filed May 10, 2000. (xiii) Incorporated by reference from Exhibit 21.1 to the annual report on Form 10-KSB for the year ended December 31, 1994. (b) Financial Statement Schedules: None. Information required by such schedules is either included in the Registrant's Consolidated Financial Statements and Notes thereto or is not applicable. ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of an action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 84 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on the 31st day of May, 2001. NYFIX, INC. By: /s/ PETER K. HANSEN --------------------------------------- Peter K. Hansen Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - --------- ----- ---- /s/ PETER K. HANSEN Chief Executive Officer, President and May 31, 2001 - -------------------------------------------------------- Director (Principal Executive Officer) Peter K. Hansen * Chief Financial Officer (Principal May 31, 2001 - -------------------------------------------------------- Accounting Officer) Richard A. Castillo * Director May 31, 2001 - -------------------------------------------------------- George O. Deehan * Director May 31, 2001 - -------------------------------------------------------- William J. Lynch * Director May 31, 2001 - -------------------------------------------------------- Carl E. Warden *By /s/ PETER K. HANSEN --------------------------------------------------- Peter K. Hansen Attorney-in-Fact
II-4 85 INDEX TO EXHIBITS
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 1.1** Form of Underwriting Agreement. 3.1** Composite Certificate of Incorporation of the Registrant. 3.3(i) Bylaws of the Registrant. 4.1(ii) Specimen of Designation of Series A Preferred Stock. 4.2(iii) Specimen Certificate of the Registrant's Common Stock. 4.3(iv) Rights Agreement between Chase Mellon Shareholder Services, L.L.C. (now known as Mellon Investor Services) and the Registrant, dated September 1, 1997. 4.4(v) First Amendment to Rights Agreement between Chase Mellon Shareholder Services, L.L.C. and the Registrant, dated October 25, 1999. 5.1** Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP. 10.1(vi) Employment Agreement between Peter K. Hansen and the Registrant, dated June 24, 1991. 10.2(vii) Revolving Credit Agreement between Chase Manhattan Bank and the Registrant, dated July 13, 1998. 10.3(viii) Amended and Restated 1991 Incentive Stock Option Plan of the Registrant. 10.4(ix) Amendment No. 1 to Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan of the Registrant. 10.5(x) Amendment No. 2 to Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan of the Registrant. 10.6(xi) Limited Liability Company Operating Agreement of NYFIX Millennium, L.L.C. 16.1(xii) Letter from Arthur Andersen LLP to the Registrant re change in certifying accountant, dated April 24, 2000. 21.1(xiii) Subsidiaries of the Registrant. 23.1** Consent of Deloitte & Touche LLP. 23.2** Consent of Arthur Andersen LLP. 23.3** Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (contained in Exhibit 5.1). 24.1* Power of Attorney.
- --------------- * Previously Filed. ** Filed herewith. (i) Incorporated by reference from Exhibit 3.2 to the Form 10. (ii) Incorporated by reference from Exhibit 4.1 to the Form 10. (iii) Incorporated by reference from Exhibit 4.2 to the annual report on Form 10-KSB for the year ended December 31, 1993. (iv) Incorporated by reference from Exhibit 1 to the registration statement on Form 8-A12B filed September 10, 1997 (Registration No. 001-12292). (v) Incorporated by reference from Exhibit 3 to the registration statement on Form 8-A12B/A filed November 3, 1999 (Registration No. 001-12292). (vi) Incorporated by reference from Exhibit 3.2 to the Form 10 filed March 5, 1993. (vii) Incorporated by reference from Exhibit 10.4 to the current report on Form 8-K filed August 13, 1998. (viii)Incorporated by reference from Exhibit 10.3 to the annual report on Form 10-KSB for the year ended December 31, 1996. (ix) Incorporated by reference from Exhibit 10.4 to the annual report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"). (x) Incorporated by reference from Exhibit 10.5 to the 2000 Form 10-K. (xi) Incorporated by reference from Exhibit 10.4 to the annual report on Form 10-K for the year ended December 31, 1999. (xii) Incorporated by reference from Exhibit 16 to the current report on Form 8-K/A filed May 10, 2000. (xiii)Incorporated by reference from Exhibit 21.1 to the annual report on Form 10-KSB for the year ended December 31, 1994. EX-1.1 2 y49620a1ex1-1.txt FORM OF UNDERWRITING AGREEMENT 1 NYFIX, INC. 3,450,000 SHARES COMMON STOCK UNDERWRITING AGREEMENT _____ __, 2001 J.P. MORGAN SECURITIES INC. ROBERTSON STEPHENS INCORPORATED UBS WARBURG LLC US BANCORP PIPER JAFFRAY, INC. c/o J.P. Morgan Securities Inc. 60 Wall Street New York, NY 10260 Ladies and Gentlemen: NYFIX, Inc., a New York corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters listed in Schedule I hereto (the "UNDERWRITERS"), for whom you are acting as representatives (the "REPRESENTATIVES"), an aggregate of 3,000,000 shares of its authorized but unissued Common Stock, $0.001 par value (the "COMMON STOCK") (said 3,000,000 shares of Common Stock being herein called the "UNDERWRITTEN SHARES"). The shareholders of the Company named in Schedule II hereto (the "SELLING SHAREHOLDERS") propose to grant to the Underwriters an option to purchase up to 450,000 additional shares of Common Stock (the "OPTION SHARES"). The Option Shares and the Underwritten Shares are herein collectively called the "SHARES". The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company and the Selling Shareholders hereby confirm the agreements made with respect to the purchase of the Shares by the Underwriters (which term shall also include any underwriter purchasing Shares pursuant to Section 4(b) hereof). You hereby represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has prepared and filed with the Securities and Exchange Commission (the "COMMISSION") a registration 2 statement on Form S-3 (No. 333-60314), including the related preliminary prospectus, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (the "SECURITIES ACT") relating to the Shares. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term "REGISTRATION STATEMENT" as used in this agreement shall mean such registration statement, all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Shares (a "RULE 462(b) REGISTRATION STATEMENT"), and, in the event of any amendment thereto after the effective date of such registration statement (the "EFFECTIVE DATE"), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term "PROSPECTUS" as used in this Agreement shall mean the Prospectus in the form first used to confirm sales of the Shares. Any reference in this Agreement to the Registration Statement or any preliminary prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Form S-3 under the Securities Act, as of the Effective Date of the Registration Statement or the date of such preliminary prospectus or the Prospectus, as the case may be and any reference to "amend", "amendment", or "supplement" with respect to the Registration Statement, any preliminary prospectus or the Prospectus shall be deemed to refer to and include any documents filed after the Effective Date under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the "EXCHANGE ACT") that are deemed to be incorporated by reference therein. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each preliminary prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2 3 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) The Company hereby represents and warrants as follows: (i) no order preventing or suspending the use of any preliminary prospectus has been issued by the Commission, and each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; (ii) the Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of the Company, threatened by the Commission; and the Registration Statement and Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and did not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the date of the Prospectus and any amendment or supplement thereto, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented, if applicable, at the Closing Date (as hereinafter defined) or the Option Closing Date (as hereinafter defined), as the case may be, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that the foregoing representations and warranties shall not apply to any statements or omissions in the Registration Statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein; (iii) the documents incorporated by reference in the Prospectus, when they were filed with the Commission, conformed in all 3 4 material respects to the requirements of the Exchange Act, as applicable, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and any further documents so filed and incorporated by reference in the Prospectus, when such documents are filed with the Commission, will conform in all material respects to the requirements of the Exchange Act, and will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iv) the financial statements, and the related notes thereto, included in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the dates indicated and the results of its operations and changes in its cash flows for the periods specified; and said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis, and the supporting schedules included or incorporated by reference in the Registration Statement present fairly the information required to be stated therein; (v) each of the Company and its subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted as of the date hereof, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiary, taken as a whole ("MATERIAL ADVERSE EFFECT")); (vi) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change in the capital stock or long term debt of the Company or in the business, properties, financial condition or results of operations of the Company and its subsidiary, taken as a whole ("MATERIAL ADVERSE CHANGE"), whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary 4 5 course of business, neither the Company nor its subsidiary has entered into any material transaction not referred to in the Registration Statement and the Prospectus; (vii) this Agreement has been duly authorized, executed and delivered by the Company; (viii) the Company has an authorized capitalization as set forth in the Prospectus (except for subsequent issuances, if any, pursuant to the stock plans referred to in the Prospectus) and such authorized capital stock conforms as to legal matters to the description thereof set forth in the Prospectus, and all of the outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully-paid and non-assessable; and, except as described in or expressly contemplated by the Prospectus, there are no outstanding rights (including, without limitation, pre-emptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company, any such convertible or exchangeable securities or any such rights, warrants or options; (ix) the Shares to be sold by the Company have been duly authorized, and, when issued and sold to the Underwriters as provided herein, will be duly and validly issued, fully paid and non-assessable and are not subject to any pre-emptive or similar rights; the Shares conform to the description thereof in the Prospectus; and no further approval or authority of the shareholders or the board of directors of the Company will be required for the issuance and sale of the Shares by the Company as contemplated herein; (x) neither the Company nor its subsidiary is, or with the giving of notice or lapse of time or both would be, in violation of or in default under, its Certificate of Incorporation or By-Laws or any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it or any of its properties is bound, except for violations and defaults which individually and in the aggregate are not material to the Company and its subsidiary taken as a whole; the issue and sale of the Shares to be sold by the Company hereunder and the performance by the Company of its obligations under this Agreement and the consummation of the transactions contemplated herein will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or 5 6 other agreement or instrument to which the Company or its subsidiary is a party or by which the Company or its subsidiary is bound or to which any of the property or assets of the Company or its subsidiary is subject, nor will any such action result in any violation of the provisions of the Certificate of Incorporation or the By-Laws of the Company or its subsidiary or any applicable law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its subsidiary or any of their respective properties, except where such conflict, breach, default or violation would not have a Material Adverse Effect; and no consent, approval, authorization, order, license, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares to be sold by the Company hereunder or the consummation by the Company of the transactions contemplated by this Agreement, except such consents, approvals, authorizations, orders, licenses, registrations or qualifications as have been obtained and as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (xi) other than as set forth or contemplated in the Prospectus, there are no legal or governmental investigations, actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or its subsidiary or any of their respective properties, or to which the Company or its subsidiary is or may be a party or to which any property of the Company or its subsidiary is or may be subject which, if determined adversely to the Company or its subsidiary, could individually or in the aggregate have, or reasonably be expected to have, a Material Adverse Effect, and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (xii) neither the Company nor its subsidiary owns any real property; each of the Company and its subsidiary has good and marketable title to all other properties and assets owned by it and reflected in the financial statements, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus, (b) are reflected in the financial statements included in the Prospectus or (c) do not, singly or in the aggregate, materially and adversely affect the value of such property 6 7 and do not interfere with the use made and proposed to be made of such property by the Company or such subsidiary; and all of the leases and subleases material to the business of the Company and its subsidiary, and under which the Company or its subsidiary hold properties described in the Prospectus, are in full force and effect, and neither the Company nor its subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or its subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or its subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease; (xiii) no relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required by the Securities Act to be described in the Registration Statement and the Prospectus which is not so described; (xiv) except as described in the Prospectus, no person has the right to require the Company to register any securities for offering and sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or the issue and sale of the Shares to be sold by the Company hereunder; (xv) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be required to register as an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"); (xvi) Deloitte & Touche LLP and Arthur Anderson LLP, who have certified certain financial statements of the Company, are, to the Company's knowledge, independent public accountants as required by the Securities Act; (xvii) the Company and its subsidiary have filed all federal, state, local and foreign tax returns which have been required to be filed and have paid all taxes shown thereon and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith; and, except as disclosed in the Registration Statement and the Prospectus, there is no tax deficiency which has been or, to the Company's knowledge, might be asserted or threatened against the Company or its subsidiary; 7 8 (xviii) the Company has not taken nor will it take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock; (xix) the Company and its subsidiary own, possess or have obtained all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and have made all declarations and filings with, all federal, state, local and other governmental authorities (including foreign regulatory agencies), all self-regulatory organizations and all courts and other tribunals, domestic or foreign, necessary to own or lease, as the case may be, and to operate their respective properties and to carry on their respective businesses as conducted as of the date hereof, and neither the Company nor its subsidiary has received any actual notice of any proceeding relating to revocation or modification of any such license, permit, certificate, consent, order, approval or other authorization, except as described in the Registration Statement and the Prospectus; and the Company and its subsidiary are in compliance with all laws and regulations relating to the conduct of their respective businesses as conducted as of the date hereof, except to the extent that any failure to so comply would not have a Material Adverse Effect; (xx) there are no existing or, to the best knowledge of the Company, threatened labor disputes with the employees of the Company or its subsidiary which are likely to have a Material Adverse Effect; (xxi) the Company has not offered or sold any securities prior to the filing of the Registration Statement that would be integrated with the offer or sale of the Shares; (xxii) the Company and its subsidiary own or possess all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("INTELLECTUAL PROPERTY") necessary to conduct their respective businesses in the manner described in the Prospectus, and neither the Company nor its subsidiary has received any notice of infringement of or conflict with asserted rights of others with respect to any Intellectual Property that, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect; 8 9 (xxiii) each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is maintained, administered or contributed to by the Company for employees or former employees of the Company and its subsidiary has been maintained in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended, ("CODE"); no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code has occurred with respect to any such plan excluding transactions effected pursuant to a statutory or administrative exemption; and for each such plan which is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA no "accumulated funding deficiency" as defined in Section 412 of the Code has been incurred, whether or not waived, and the fair market value of the assets of each such plan (excluding for these purposes accrued but unpaid contributions) exceeded the present value of all benefits accrued under such plan determined using reasonable actuarial assumptions; (xxiv) prior to the Closing Date the Shares to be issued and sold by the Company will be authorized for listing on the Nasdaq National Market; (xxv) NYFIX Millennium, L.L.C. ("NYFIX MILLENNIUM") has been duly organized and is validly existing as a limited liability company, in good standing under the laws of the jurisdiction in which it is organized, has full power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not result in a Material Adverse Effect); and (xxvi) NYFIX Millennium is registered as a broker-dealer with the Commission under the Exchange Act and with state securities authorities in each state where it is required to be so registered. 3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each of the Selling Shareholders represents and warrants to and agrees with each of the Underwriters that: (a) this Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder; 9 10 (b) such Selling Shareholder is an individual, and the execution and delivery by such Selling Shareholder of, and the performance by such Selling Shareholder of its obligations under, this Agreement will not contravene or constitute a default under any provision of applicable law or any indenture, mortgage, deed of trust, loan agreement or other agreement, or any agreement or other instrument binding upon such Selling Shareholder or to which any of the property or assets of such Selling Shareholder is subject or any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Shareholder or the property of such Selling Shareholder, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Shareholder of its obligations under this Agreement, except such as have been obtained and as may be required by the state securities or blue sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (c) such Selling Shareholder has, and on the Option Closing Date will have, valid title to the Shares to be sold by such Selling Shareholder and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder; (d) delivery of the Shares to be sold by such Selling Shareholder pursuant to this Agreement will pass title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances; and (e) all information furnished by or on behalf of such Selling Stockholder for use in the Registration Statement and the Prospectus is, and on the Closing Date or the Option Closing Date, as the case may be, will be, true, correct and complete, and does not, and on the Closing Date or the Option Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they were made, not misleading. 10 11 4. PURCHASE OF THE SHARES BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company hereby agrees to issue and sell the Underwritten Shares to the several Underwriters and each of the Underwriters agrees to purchase from the Company the respective aggregate number of Underwritten Shares set forth opposite its name in Schedule I. The price at which such Underwritten Shares shall be sold by the Company and purchased by the several Underwriters shall be $___ per share, the "PURCHASE PRICE". In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in Sections 4(b) and 4(c), the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Shares specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 10 or 11 hereof) to purchase and pay for the number of Shares agreed to be purchased by such Underwriter or Underwriters, the non-defaulting Underwriters shall have the right within 24 hours after such default to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the Shares which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail to make such arrangements with respect to all such shares and portion, the number of the Shares which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such Shares exceeds 10% of the total number of Shares which all Underwriters agreed to purchase hereunder. If the total number of Shares which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date determined as provided in Section 6 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 6 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting 11 12 Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Selling Shareholders grant an option to the several Underwriters to purchase, severally and not jointly, up to 450,000 Option Shares at the same price per share as the Underwriters shall pay for the Underwritten Shares. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written notice by you to the Company and the Selling Shareholders setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option, the date and time when the Option is being exercised, and the date and time when the Option Shares are to be delivered and paid for, which date shall not be earlier than the Closing Date nor later than the tenth full Business Day after the date of such notice. Delivery of certificates for Option Shares, and payment therefor, shall be made as provided in Section 6 hereof. The number of Option Shares to be purchased by each Underwriter shall be the same percentage of the total number of Option Shares to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Shares, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 5. OFFERING BY UNDERWRITERS. The terms of the public offering by the Underwriters of the Shares to be purchased by them shall be as set forth in the Prospectus, as soon after the Registration Statement has become effective and the parties hereto have executed and delivered this Agreement, as in the judgment of the Representatives is advisable. The Underwriters may from time to time change the public offering price after the closing of the public offering and increase or decrease the concessions and discounts to dealers as they may determine. 12 13 6. DELIVERY OF AND PAYMENT FOR THE SHARES. (a) Delivery of certificates for the Underwritten Shares and the Option Shares (if the option granted by Section 4(c) hereof shall have been exercised not later than 10:00 a.m., New York City time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Davis Polk & Wardwell at 10:00 a.m., New York City time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 4(b) hereof) are herein called the "CLOSING DATE." (b) If the option granted by Section 4(c) hereof is exercised after 10:00 a.m. New York City time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Shares, and payment therefor, shall be made at the office of Davis Polk & Wardwell at 10:00 a.m. on the date specified in the notice described in Section 4(c) hereof or at such time on the same or on such other date, as shall be designated in writing by you. The date and hour of such delivery and payment are herein referred to as the "OPTION CLOSING DATE." (c) Payment for the Shares purchased from the Company shall be made to the Company in Federal or other funds immediately available in New York City and payment for any Option Shares purchased from the Selling Shareholders shall be made to each such Selling Shareholder in Federal or other funds immediately available in New York City. Such payment shall be made upon delivery of certificates for the Shares to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Shares to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least two business days before the Closing Date, in the case of Underwritten Shares, and at least two business days prior to the Option Closing Date, in the case of the Option Shares with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. Such certificates will be made available to the Underwriters for inspection, checking and packaging on the business day prior to the Closing Date or the Option Closing Date, as the case may be. 13 14 7. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any pre-effective or post-effective amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will advise the Representatives promptly, and will confirm such advice in writing, (A) when any amendment to the Registration Statement has been filed or becomes effective, (B) when any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof, (C) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for any additional information, (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus or the initiation or threatening of any proceeding for that purpose, and (E) of the receipt by the Company of any notification with respect to any suspension of the qualification of the Shares for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and to use commercially reasonable efforts to prevent the issuance of any such stop order, or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any order suspending any such qualification of the shares, or notification of any such order thereof and, if issued, to obtain as soon as possible the withdrawal thereof. (c) The Company will (i) on or before the Closing Date, deliver to you five signed copies of the Registration Statement as originally filed and of each amendment thereto filed prior to and including the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to each other Underwriter, a conformed copy of the Registration Statement (as originally filed) and each amendment thereto, in each case without exhibits but including the documents incorporated by reference therein, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in 14 15 which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If, at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Shares, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the first date of the public offering of the Shares by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation and if, in the opinion either of counsel for the Company or of counsel for the Underwriters, such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Shares in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. (e) The Company will cooperate, when and as requested by you, in the qualification of the Shares for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or where it would be subject to taxation as a foreign corporation. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to 15 16 continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Shares. (f) The Company agrees to make generally available to its security holders an earnings statement covering the twelve month period ending December 31, 2002 in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (g) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, including all costs and expenses incident to (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants and counsel for the Selling Shareholders in connection with the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. (the "NASD") of the Registration Statement, any preliminary prospectus and the Prospectus, including all printing costs associated therewith, (ii) the furnishing to the Underwriters of copies of any preliminary prospectus and of the several documents required by Section 7(c) to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in Section 7(d), (v) the listing of the Shares on the Nasdaq National Market, (vi) the furnishing to you and the Underwriters of the reports and information referred to in Section 7(f), (vii) the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon and the printing and issuance of share certificates, including any fees of any transfer agent, registrar or depositary and (viii) the investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered in connection with the road show. Except as set forth in Sections 7(g) and 7(h), the underwriters pay all of their own fees and expenses, including counsel fees and disbursements (excluding those set forth in Section 7(h)). (h) The Company agrees to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including reasonable counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in 16 17 qualifying the Shares under state securities or blue sky laws and in the review and qualification of the offering by the NASD. (i) The Company hereby agrees that, without the prior written consent of J.P. Morgan Securities Inc. on behalf of the Underwriters, the Company will not, for a period of 120 days from the effective date of the Registration Statement, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or any securities convertible into or exchangeable for or any rights to purchase or acquire Common Stock whether any such transaction described above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold to the Underwriters pursuant to this Agreement, (B) the grant of options to purchase Common Stock under the Company's Stock Incentive Plans and (C) the issuance of shares of Common Stock upon the exercise of an option or warrant outstanding on the date hereof of which the Underwriters have been advised in writing. (j) The Company agrees to use its best efforts to cause all directors, officers, and the holders of Common Stock listed on Schedule III hereto to (i) agree that, without the prior written consent of J.P. Morgan Securities Inc. on behalf of the Underwriters, such person or entity will not, for a period of 120 days from the effective date of the Registration Statement, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock or any securities convertible into or exchangeable for or any rights to purchase or acquire Common Stock whether any such transaction described above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise and (ii) agree to waive any rights held by such person or entity to sell shares of Common Stock or any other security issued by the Company pursuant to the Registration Statement and any rights to require the Company to register under the Securities Act such Common Stock or other securities issued by the Company and beneficially owned by them for a period of 120 days from the effective date of the Registration Statement. The foregoing sentence shall not apply to (A) the Shares to be sold to the Underwriters pursuant to this Agreement and (B) shares of Common Stock issued by the Company upon the exercise of an option or warrant outstanding on the date hereof of which the Underwriters have been advised in writing. 8. FURTHER AGREEMENTS OF THE SELLING SHAREHOLDERS. Each of the Selling Shareholders covenants and agrees to deliver to the Representatives prior to the Option Closing Date a properly completed and executed United States 17 18 Treasury Department Form W-9 (or other applicable form or statement specified by the Treasury Department regulations in lieu thereof) in order to facilitate the Underwriters' documentation of their compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated. 9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, the legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the indemnity agreements of the Company contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter expressly for use in any preliminary prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreements of the Company contained in this paragraph (a) and the representations and warranties of the Company contained in Section 2 hereof shall remain operative and in full 18 19 force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. (b) Each Selling Shareholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter, and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages or liabilities joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise, and to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, the legal or other expenses) incurred in connection with any suit, action or proceeding or any claim asserted incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but only with reference to information relating to such Selling Shareholder furnished in writing by or on behalf of such Selling Shareholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Shareholders, the officers of the Company who sign the Registration Statement, each of the directors of the Company, and each person (including each partner or officer thereof) who controls the Company or any Selling Shareholder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them 19 20 for any legal or other expenses (including, except as otherwise hereinafter provided, the legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) Each party indemnified under the provision of Sections 9(a), 9(b) and 9(c) agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, such person (the "INDEMNIFIED PARTY") will promptly give written notice (the "NOTICE") of such service or notification to the party or parties from whom indemnification may be sought hereunder (the "INDEMNIFYING PARTY"). No indemnification provided for in such paragraphs shall be available to any party who shall fail to so give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission to so notify such Indemnifying Party or parties of any such service or notification shall not relieve such Indemnifying Party or parties from any liability which it or they may have to the Indemnified Party for contribution or otherwise than on account of such indemnity agreement. Any Indemnifying Party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an Indemnified Party. Any Indemnifying Party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by 20 21 giving written notice (herein called the "NOTICE OF DEFENSE") to the Indemnified Party, to assume (alone or in conjunction with any other Indemnifying Party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the Indemnifying Party or parties, by counsel chosen by such Indemnifying Party or parties and reasonably satisfactory to the Indemnified Party or parties; provided, however, that (i) if the Indemnified Party or parties reasonably determine that there may be a conflict between the positions of the Indemnifying Party or parties and of the Indemnified Party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such Indemnified Party or parties different from or in addition to those available to the Indemnifying Party or parties, then counsel for the Indemnified Party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the Indemnified Party or parties and (ii) in any event, the Indemnified Party or parties shall be entitled to have counsel chosen by such Indemnified Party or parties participate in, but not conduct, the defense and, provided further, that it is understood that the Indemnifying Party shall not, in respect of the legal expenses of any Indemnified Party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel). If, within a reasonable time after receipt of the Notice, an Indemnifying Party gives a Notice of Defense and the counsel chosen by the Indemnifying Party or parties is reasonably satisfactory to the Indemnified Party or parties, the Indemnifying Party or parties will not be liable under paragraphs (a) through (c) of this Section 9 for any legal or other expenses subsequently incurred by the Indemnified Party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the Indemnifying Party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the Indemnifying Party or parties shall bear such other expenses as it or they have authorized to be incurred by the Indemnified Party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the Indemnifying Party or parties shall be responsible for any legal or other expenses incurred by the Indemnified Party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (e) If the indemnification provided for in this Section 9 is unavailable or insufficient to hold harmless an Indemnified Party under Sections 9(a), 9(b) or 9(c), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of the losses, claims, damages or liabilities referred to in Sections 9(a), 9(b) or 9(c), (i) in such proportion as is appropriate to reflect 21 22 the relative benefits received by each Indemnifying Party from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each Indemnifying Party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Shareholders and the Underwriters shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Shares received by the Company and the Selling Shareholders and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Shares. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each Indemnifying Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this Section 9(e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this Section 9(e). The amount paid by an Indemnified Party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this Section 9(e) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this Section 9(e). Notwithstanding the provisions of this Section 9(e), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 9(e) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve 22 23 the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in Section 9(d) of this Section 9). (f) Neither the Company nor any Selling Shareholder will, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 10. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Shares impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, The Nasdaq National Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 10, there shall be no liability of the Company or any Selling Shareholder to the Underwriters and no liability of the Underwriters to the Company or any Selling Shareholder; provided, however, that in the event of any 23 24 such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in Section 7(g) and 7(h) hereof. 11. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares shall be subject to the performance by the Company and the Selling Shareholders of all of their respective obligations to be performed hereunder at or prior to the Closing Date or to the Option Closing Date, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective no later than 4:00 p.m., New York City time, on the date hereof; no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission; the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Securities Act and in accordance with Section 7(a)(i) hereof; and all requests of the Commission for inclusion of additional information in the Registration Statement shall have been complied with to the satisfaction of the Representatives. (b) The legality and sufficiency of the sale of the Shares hereunder and the validity and form of the certificates representing the Shares, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Davis Polk & Wardwell, counsel for the Underwriters. (c) (i) You shall have received from Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel for the Company, an opinion, addressed to the Underwriters and dated the Closing Date, covering the matters set forth in Annex A hereto, and if Option Shares are purchased at any date after the Closing Date, additional opinions from such counsel, addressed to the Underwriters and dated the Option Closing Date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (ii) The Underwriters shall have received on the Option Closing Date, an opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel for the Selling Shareholders, dated the Option Closing Date concerning the matters set forth in Annex B hereto. 24 25 (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any Material Adverse Change or any development involving a prospective Material Adverse Change and, since such dates, except in the ordinary course of business, neither the Company nor its subsidiary has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) neither the Company nor its subsidiary has any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) the representations and warranties of the Company herein are true and correct as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and (vi) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Shares, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Shares are purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (v) of paragraph (d) of this Section 11 are true and correct; provided that each officer signing said certificate may rely upon the best of his knowledge as to proceedings threatened. (f) (i) The Underwriters shall have received, on each of the date hereof, the Closing Date and the Option Closing Date, a letter dated the date hereof, or the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Deloitte & Touche LLP confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published 25 26 rules and regulations thereunder and containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained or incorporated by reference in the Registration Statement and the Prospectus; provided that the letter delivered on the Closing Date or the Option Closing Date, as the case may be, shall use a "cut-off date" not earlier than three business days prior to the Closing Date or the Option Closing Date, as the case may be. (ii) The Underwriters shall have received, on the date hereof a letter dated the date hereof, in form and substance satisfactory to the Underwriters, from Arthur Anderson LLP, prior independent auditors to the Company, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained or incorporated by reference in the Registration Statement and the Prospectus. (g) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in Section 7(e) hereof. (h) Prior to the Closing Date, the Shares to be issued and sold by the Company shall have been duly authorized for listing by the Nasdaq National Market. (i) On or prior to the Closing Date, you shall have received from all directors, officers, and holders of Common Stock listed on Schedule III hereto, the lock-up agreements referred to in Section 7(j) hereof. (j) On or prior to the Closing Date or Option Closing Date, as the case may be, the Company shall have furnished to the Representatives such further certificates and documents as the Representatives shall reasonably request. (k) The Underwriters shall have received on the Closing Date an opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the Closing Date, covering those matters reasonably requested by the Representatives, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters. 26 27 All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Davis Polk & Wardwell, counsel for the Underwriters, shall be satisfied that they comply in form and scope. The opinions of Olshan Grundman Frome Rosenzweig & Wolosky LLP referred to in Sections 11(c)(i) and 11(c)(ii) shall be rendered to the Underwriters at the request of the Company or the Selling Shareholders, as the case may be, and shall so state therein. In case any of the conditions specified in this Section 11 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company and the Selling Shareholders. Any such termination shall be without liability of the Company or the Selling Shareholders to the Underwriters and without liability of the Underwriters to the Company or the Selling Shareholders; provided, however, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in Sections 7(g) and 7(h) hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company or any Selling Shareholder to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 12. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations under Section 9 of this Agreement, the Company hereby agrees to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 9 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 12 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them (together with interest at the prime rate) and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 27 28 13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company, the Selling Shareholders and the several Underwriters and, with respect to the provisions of Section 9 hereof, the several parties (in addition to the Company, the Selling Shareholders and the several Underwriters) indemnified under the provisions of said Section 9, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from any of the several Underwriters. 14. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by fax and, if to the Underwriters, shall be mailed, faxed or delivered to J.P. Morgan Securities Inc., 60 Wall Street, New York, NY 10260; if to the Company, shall be mailed, faxed or delivered to it at its office, Stamford Harbor Park, 333 Ludlow Street, Stamford, CT 06902, Attention: -; and if to the Selling Shareholders, shall be mailed, faxed or delivered to [ ] and if to the Company or the Selling Shareholders, in each case with a copy to Olshan Grundman Frome Rosenzweig & Wolosky LLP, 505 Park Avenue, New York, NY 10022, Attention: Robert L. Frome. 15. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, by or on behalf of the Company or its directors or officers, or by or on behalf of any Selling Shareholder and (c) delivery and payment for the Shares under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of Sections 7(i) and 7(j) hereof shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflicts of laws provisions thereof. 28 29 Please sign and return the enclosed duplicates of this letter, whereupon this letter will become a binding agreement among the Company, the Selling Shareholders and the several Underwriters in accordance with its terms. Very truly yours, NYFIX, Inc. By _________________________ Name: Title: SELLING SHAREHOLDERS: ____________________________ Peter K. Hansen ____________________________ Lars Kragh 29 30 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. J.P. MORGAN SECURITIES INC. UBS Warburg LLC Robertson Stephens, Inc. US Bancorp Piper Jaffray Inc. By J.P. Morgan Securities Inc. By________________________ Name: Title: Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 30 31 SCHEDULE I UNDERWRITERS
NUMBER OF UNDERWRITTEN UNDERWRITERS SHARES TO BE - ------------ ------------ J.P. Morgan Securities Inc.................................................. UBS Warburg LLC............................................................. Robertson Stephens, Inc..................................................... US Bancorp Piper Jaffray Inc................................................ --------- Total.............................................................. 3,000,000 =========
32 SCHEDULE II
SELLING SHAREHOLDER NUMBER OF OPTION SHARES TO BE SOLD - ------------------- ---------------------------------- Peter K. Hansen ....................................... 350,000 Lars Kragh ............................................ 100,000 ------- Total ................................................. 450,000 =======
33 SCHEDULE III List of Directors, Officers and Shareholders to sign Lock-up Agreements Peter K. Hansen Richard A. Castillo Lars Kragh George O. Deehan William J. Lynch Carl E. Warden Jerome Belson J.P. Morgan Securities Inc./Chase Securities Inc. First Union 2 EX-3.1 3 y49620a1ex3-1.txt COMPOSITE CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 COMPOSITE CERTIFICATE OF INCORPORATION OF NYFIX, INC. (As of April 23, 2001) --------------------------------- FIRST: The name of the Corporation shall be NYFIX, Inc. SECOND: The purposes for which it is to be formed are to do any and all things hereinafter set forth to the same extent as natural persons might or could do in any part of the world, namely: To act as consultants and advisors in the field of stereotronics, electronics and solid state physics. To design, assemble, manufacture, acquire, buy, sell, import, export, maintain, operate, install, construct, repair, service, experiment with, distribute, trade-in, lease, rent, license the use of as licensor and licensee, utilize, exploit, and otherwise generally trade and deal in and with as principal, agent, factor, commission merchant, distributor, jobber, or in any other lawful capacity and at wholesale and retail any and all kinds of stereotronic and electronic devices, appliances, and equipment, and any and all kinds of goods, wares, and merchandise, and without limiting the generality of the foregoing, television, radio, broadcasting, frequency modulation, receiving, electric, electro-magnetic, refrigerating, cooking, mixing, drying, threshing, heating, cooling, ventilating, recording, reproducing and transmitting, dynamic, phonographic, wire-recording, photographic, and thermostatic apparatus, appliances, amplifiers, batteries, radio, television, wire-recording, and phonographic combinations, and cabinets, and transistors, diodes, cathodes, coils, compressors, condensors, controls, devices, diaphragms, equipment, grids, instruments, machinery, motors, parts, products, screens, speakers, tools, transformers, tubes and other articles for or incidental or accessory to the creation, generation, production, direction, control, transmission, recording, reproduction and reception of sound, light, heat, cold, power, energy, force, signals, waves, images and communications of all sorts, now or hereafter invented or devised, and to create, install, operate and exploit circuits, networks, services, and systems of all or any thereof. To operate stores, departments, establishments, factories and warehouses for the purposes of the corporation. To own, operate, manage and conduct, directly through stock ownership, or otherwise, and to sell, lease, exchange, or otherwise dispose of, wholesale and retail 2 stores, chain-store systems, departments, establishments, sites, and mail-order systems for the sale and dealing in of goods, wares, and merchandise of any description. To acquire, by purchase or otherwise, and to own, develop and perfect domestic and foreign patents, patent rights, copyrights, licenses to manufacture or sell, or both, patented or copyrighted things or articles, and to develop, perfect, improve or to manufacture or to sell, lease or license the use of the same or otherwise dispose of the same. The acquire, by purchase or otherwise and to use, develop, finance, operate, sell, lease, license or sublicense or in any manner dispose of any and all inventions, improvements and processes and to carry on any business, manufacturing or otherwise, which may directly or indirectly effectuate these objects or any of them. To apply for, purchase, register, or in any manner to acquire, and to hold, own, use, operate and introduce, and to sell, lease, assign, pledge or in any manner dispose of, and in any manner deal with licenses, copyrights, trademarks and trade names, and to acquire, own, use or in any manner dispose of any and all inventions, improvements and processes, labels, designs, brands, or other rights, and to work, operate, or develop the same. The set-up, equip, outfit, maintain and conduct a laboratory or laboratories for research in connection with the manufacture of any of the products of the corporation, and to make analyses and inspections, invent and perfect formulae, carry on investigations of all kinds, and to buy, sell and generally deal in such machinery, tools, appliances, devices, equipment, and supplies necessary for the manufacture and perfection of any of the products of this corporation, and to do every other act or acts, thing or things, incidental or pertaining to or growing out of, or in connection with, the preparation, manufacture, distribution, application and sale of the products of this corporation. To manufacture, buy, sell, and generally deal in any article, product, or commodity produced as the result of or through the use of any such inventions, devices, processes, discoveries, formulae, improvement and/or modifications of any thereof, or any articles, products, commodities, supplies, and materials used or suitable to be used in connection therewith, or in any manner applicable or incidental thereto; to grant licenses, sublicenses, rights, interest, and/or privileges in respect of any of the foregoing, and to supervise or otherwise exercise such control over its licensees or grantees and the business conducted by them, as may be agreed upon in its contracts or agreements with such licensees or grantees for the protection of its rights and interests therein, and to secure to it the payment of agreed royalties or other considerations. -2- 3 To acquire by purchase, lease, gift, devise, or otherwise, and to own, use, hold, sell, convey, exchange, lease, mortgage, work, improve, develop, divide and otherwise handle, deal in and dispose of real estate, real property and any interest or right therein, whether as principal, agent, broker, or otherwise. To manage, operate, service, equip, furnish, alter, and keep in repair dwellings, apartment houses, hotels, office buildings and real and personal property of every kind, nature and description, whether as principal, agent, broker, or otherwise, and generally to do anything and everything necessary and proper and to the extent permitted by law in connection with the business of managing and operating real and personal property of any and all kinds. To lend money and make advances from time to time to such extent, to such borrowers, on such terms, and on such security, if any, as the Board of Directors of the Corporation may determine, but only to the extent permitted corporations organized under the Business Corporation Law. To purchase, exchange, hire, or otherwise acquire such personal property, chattels, rights, easements, permits, privileges and franchises as may be lawfully purchased, exchanged, hired, or acquired under the Business Corporation Law of the State of New York. To borrow money for its corporate purposes, and to make accept, endorse, execute and issue promissory notes, bills of exchange, bonds, debentures or other obligations from time to time, for the purchase of property or for any purpose in and about the business of the Corporation, and, if deemed proper, to secure the payment of any such obligations, by mortgage, pledge, deed of trust or otherwise. To underwrite, purchase, acquire, hold, pledge, hypothecate, exchange, sell, deal in and dispose of, alone or in syndicate or otherwise in conjunction with others, stocks, bonds, and other evidences of indebtedness and obligations of any corporation, association, partnership, syndicate, entity, person or governmental, municipal or public authority, domestic or foreign, and evidences of any interest, in respect of any such stocks, bonds and other evidences of indebtedness and obligations; to issue in exchange therefor its own stocks, bonds or other obligations: and while the owner or holder of any such, to exercise all the rights, powers and privileges of ownership in respect thereof, and to the extent now or hereafter permitted by law, to aid by loan, subsidy, guaranty, or otherwise those issuing, creating or responsible for any such stocks, bonds or other evidences of indebtedness or obligations or evidences of any interest in respect thereof. To purchase, hold, sell, transfer, reissue or cancel the shares of its own capital stock or any securities or other obligations of the Corporation in the manner and to the extent now or hereafter permitted to corporations organized under the laws of the State of New York; provided, that the corporation shall not use its funds or other assets for the -3- 4 purchase of its own shares of stock when such use would cause any impairment of the capital of the corporation, except as otherwise permitted by law, and provided further, that shares of its capital stock belonging to the corporation shall not be voted upon directly or indirectly. To apply for, purchase, register, or in any manner to acquire, and to hold, own, use, operate and introduce, and to sell, lease, assign, pledge, or in any manner dispose of, and in any manner deal with patents, patent rights, licenses, copyrights, trade-marks, tradenames, and to acquire, own, use or in any manner dispose of any and all inventions, improvements and processes, labels, designs, brands, or other rights, and to work, operate, or develop the same, and to carry on any similar business, manufacturing or otherwise, which may directly, or indirectly, effectuate these objects or any of them. To acquire and to take over as a going concern and thereafter to carry on the business of any person, firm or corporation engaged in any business which this corporation is authorized to carry on, and in connection therewith, to acquire the good will and any or all of the assets and to or otherwise provide for all or any of the liabilities of such business. To carry on the business at any place or places within the jurisdiction of the United States, and in any and all foreign countries, and to purchase, hold, mortgage, convey, lease, or otherwise dispose of and deal with real or personal property at any such place or places. To undertake, contract for and carry on any business incidental to or in aid of, or advantageous in pursuance of, any of the objects or purposes of the corporation. To do any of the things, hereinbefore enumerated for itself or for account of others and to make and perform and carry out contracts of every sought and kind which may be necessary and convenient for the business of this corporation, or business of a similar nature, with any person, corporation, private, public or municipal, body politic under the government of the United States or any state, territory or colony thereof, or any foreign government, so far as and to the extent that the same may be done and performed by corporations organized under Article Two of the Stock Corporation Law. To do all and everything necessary, suitable, or proper for the accomplishment of any of the purposes, the attainment of any of the objects or the furtherance of any of the powers hereinbefore set forth, either alone or in connection with other corporations, firms or individuals and either as principals, or agents, and to do every other act or acts, thing or things, incidental or appurtenant to or growing out of or in connection with the aforesaid objects, purposes or powers or any of them. -4- 5 The foregoing enumeration of specific powers shall not be deemed to limit or restrict in any manner the powers of the corporation, and the enjoyment and exercise thereof, as conferred by the laws of the State of New York upon corporations organized under the provisions of the Business Corporation Law. THIRD: The total number of shares that may be issued by the corporation is sixty million (60,000,000) shares of common stock, all of which shall have a par value of $.001, and five million (5,000,000) shares of preferred stock, all of which shall have a par value of $1.00; stockholders shall have no preemptive rights to subscribe for shares or other securities of the Corporation. Each share of common stock of the Corporation shall have one vote for all corporate purposes with no cumulative voting rights. Each share of preferred stock shall have such designations, privileges, preferences, and voting powers as shall be determined by the Board of Directors of the Corporation. Preference Stock: Section 1. Designation, Amount and Par Value. The series of Preference Stock shall be designated as "Series A Preference Stock" (the "Series A Preference Stock"), and the number of shares so designated shall be 100,000. The par value of each share of Preference Stock shall be $1.00. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preference Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preference Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of Preference Stock (or any similar stock) ranking prior and superior to the Series A Preference Stock with respect to dividends, the holders of shares of Series A Preference Stock, in preference to the holders of Common Stock, par value $.001 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preference Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately -5- 6 preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preference Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preference Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preference Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preference Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preference Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preference Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preference Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preference Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Preference Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preference Stock shall entitle the holder thereof to 100 votes on all matters submitted to -6- 7 a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preference Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Amendment creating a series of Preference Stock or any similar stock, or by law, the holders of shares of Series A Preference Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth in the Certificate of Incorporation herein, or as otherwise provided by law, holders of Series A Preference Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Reacquired Shares. Any shares of Series A Preference Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preference Stock and may be reissued as part of a new series of Preference Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation or in any other Certificate of Amendment creating a series of Preference Stock or any similar stock or as otherwise required by law. Section 5. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preference Stock unless, prior thereto, the holders of shares of Series A Preference Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preference Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preference Stock, except distributions made ratably on the Series A Preference Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or -7- 8 winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preference Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 6. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preference Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preference Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. No Redemption. The shares of Series A Preference Stock shall not be redeemable. Section 8. Rank. The Series A Preference Stock shall be of equal rank in respect of the preference as to dividends and to payments upon the liquidation, dissolution or winding up, whether voluntary or involuntary, of the Corporation, with all shares of Preference Stock of all series. Section 9. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preference Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preference Stock, voting together as a single class. -8- 9 FOURTH: The capital of the corporation shall be at least equal to the sum of the aggregate par value of all the issued shares having par value, plus the aggregate amount of consideration received by the corporation for the issuance of shares without par value, plus such amounts as, from time to time, by resolution of the Board of Directors, may be transferred thereto. The authorized shares of stock without par value may be issued by this corporation from time to time for such consideration as may be fixed from time to time by the Board of Directors; and any and all shares without par value so issued, the consideration for which so fixed has been paid or delivered, shall be fully paid stock and shall not be liable to any further call or assessment thereon, and the holders shall not liable for any further payments in respect of such shares. Whenever the Corporation shall have purchased or shall have otherwise reacquired shares of its common stock, the Board of Directors may eliminate any or all of said reacquired shares from the total authorized number of shares of the corporation or may restore said reacquired shares to the status of unauthorized but unissued shares in accordance with the provision of Section 29 of the Business Corporation Law. FIFTH: The office of the corporation is to be located in the City of New York, County of Queens, all in the State of New York. The address to which the Secretary of State shall mail a copy of the process in any action or proceeding against the corporation which may be served upon him is Trans-Aire Electronics, Inc., c/o Murray E. Winnick, Esq., 295 Madison Avenue, New York 17, New York. SIXTH: The duration of the corporation is to be perpetual. SEVENTH: The number of directors shall not be less than three nor more than seven. Directors need not be stockholders. EIGHTH: The names and post-office addresses of the directors until the first annual meeting of the stockholders are as follows:
NAMES POST-OFFICE ADDRESSES ----- --------------------- Frank M. Vurckio 1160 Utica Avenue Brooklyn, 3, New York Charles R. Giaquinto 1160 Utica Avenue Brooklyn, 3, New York Shirley Strauss 1160 Utica Avenue Brooklyn, 3, New York
-9- 10 NINTH: The names and post-office addresses of each subscriber to this certificate and the number of shares of stock which each agrees to take are as follows:
NAMES POST-OFFICE ADDRESSES NO. OF SHARES ----- --------------------- ------------- Frank M. Vurckio 1160 Utica Avenue 1 Brooklyn, 3, New York Charles R. Giaquinto 1160 Utica Avenue 1 Brooklyn, 3, New York Shirley Strauss 1160 Utica Avenue 1 Brooklyn, 3, New York
TENTH: All of the subscribers of the Certificate of Incorporation are of full age, at least two-thirds of them are citizens of the United States of America, and at least one of them is a resident of the State of New York, and at least one of the persons named as a director, is a citizen of the United States of America and a resident of the State of New York. ELEVENTH: The Secretary of State is hereby designated as the agent of the corporation upon whom process is any action or proceeding against it may be served. TWELFTH: The following provisions are inserted for the regulation and conduct of the affairs of the corporation, and it is expressly provided that they are intended to be in furtherance and not in limitation or exclusion of the powers conferred by law. No contract or other transaction between the corporation and any other firm or corporation shall be affected or invalidated by reason of the fact that any one or more of the directors or officers of the corporation is or are interested in, or is a member, stockholder, director, or officer, or are members, stockholders, directors, or officers of such other firm or corporation; and any director or officer or officers, individually or jointly, may be a party or parties to, or may be interested in, any contract or transaction of this corporation or in which this corporation is interested, and no contract, act, or transaction of this corporation with any person, persons, firm, association or corporation, shall be affected or invalidated by the reason of the fact that any director or directors or officer or officers of this corporation is a party or are parties to, or interested in, such contract, act or transaction, or in any way connected with such person or persons, firm, association or corporation, and each and every person who may become a director or officer of this corporation is relieved from any liability that might otherwise exist from thus contracting with this corporation for the benefit of himself or any firm, association or corporation in which he may be in anywise interested. Subject to such restrictions and regulations contained in By-Laws adopted by the stockholders, the Board of Directors may make, alter, amend and rescind the By-Laws, and may provide therein for the appointment of an executive committee from their own members, to exercise all or any of the powers of the Board, which may be lawfully delegated when not in session. The By-Laws may be amended or repealed, at any time, by the stockholders. -10- 11 The Board of Directors shall have the power, in its discretion, to provide for and to pay to directors rendering unusual or exceptional services to the corporation special compensation appropriate to the value of such services. By resolution duly adopted by the holders of not less than a majority of the shares of stock then issued and outstanding and entitled to vote at any regular or special meeting of the stockholders of the corporation duly called and held as provided in the By-Laws of the corporation, any director or directors of the corporation may be removed from office at any time or times, with or without cause. The Board of Directors may at any time remove any officer of the corporation with or without cause. Any person made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was a director, officer or employee of the corporation or of any corporation which he served as such at the request of the corporation shall be indemnified by the corporation against the reasonable expenses, including attorney's fees, actually and necessarily incurred by him in connection with the defense of such action, suit or proceeding, or in connection with any appeal therein, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such officer, director or employee is liable for negligence or misconduct in the performance of his duties. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which any officer or director or employee may entitled apart from the provisions of this section. The corporation may use and apply its surplus earnings or accumulated profits, not otherwise by law to be reserved, to the purpose and acquisition of property and to the purchase or acquisition of its own capital stock from time to time and to such extent and in such manner and upon such terms as its Board of Directors shall determine; and neither the property nor the capital stock so acquired or purchased, nor any of its own capital stock taken in payment of satisfaction of any debt due to the corporation, shall be regarded as profits for the purpose of declaration or payment of dividends, unless otherwise determined by a majority of the Board of Directors. THIRTEENTH: The corporation reserves the right to amend, alter or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this reservation. -11- EX-5.1 4 y49620a1ex5-1.txt OPINION OF OLSHAN GRUNDMAN ET AL. 1 May 31, 2001 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: NYFIX, INC. ----------- Gentlemen: We have acted as counsel to NYFIX, Inc., a New York corporation (the "Company"), in connection with the filing of its registration statement on Form S-3 (the "Registration Statement") relating to 3,000,000 shares (the "Shares") of its Common Stock, $.001 par value (the "Common Stock"), and 450,000 additional shares of Common Stock which are subject to an over-allotment option granted to the underwriters by certain shareholders of the Company (the "Over-Allotment Shares"), all as more particularly described in the Registration Statement. In our capacity as counsel to the Company, we have examined the Company's Certificate of Incorporation and By-Laws, each as amended to date, the Registration Statement and such other documents as we have considered appropriate for purposes of this opinion. With respect to factual matters, we have relied upon statements and certificates of officers of the Company. We have also reviewed such other matters of law and examined and relied upon such other documents, records and certificates as we have deemed relevant hereto. In all such examinations we have assumed conformity with the original documents of all documents submitted 2 May 31, 2001 Page -2- to us as conformed or photostatic copies, the authenticity of all documents submitted to us as originals and the genuineness of all signatures on all documents submitted to us. On the basis of the foregoing, we are of the opinion that the Over-Allotment Shares have been, and the Shares will be, when sold as contemplated by the Registration Statement, duly and validly issued, fully paid and non-assessable, subject to the provisions of Section 630 of the New York Business Corporation Law. In rendering our opinion with regards to the legality of the Over-Allotment Shares, we have relied without investigation on representations made by Trans-Aire Electronics, Inc. in the Exchange of Stock Agreement and Plan of Reorganization dated May 29, 1991, by and between Trans-Aire Electronics, Inc., a New York corporation, and Trinitech Business Systems, Inc., a New York corporation. We advise you that members of our firm own shares of Common Stock. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference made to our firm under the caption "Legal Matters" in the prospectus constituting part of the Registration Statement. Very truly yours, /s/ OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP EX-23.1 5 y49620a1ex23-1.txt CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Amendment No. 1 to Registration Statement No. 333-60314 of NYFIX, Inc. and subsidiary of our report dated March 2, 2001 (March 14, 2001 as to Note 18) included in the Annual Report on Form 10-K of NYFIX, Inc. for the year ended December 31, 2000 and the use of our report dated March 2, 2001 (March 14, 2001 as to Note 18) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the references to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Stamford, Connecticut May 31, 2001 EX-23.2 6 y49620a1ex23-2.txt CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated March 29, 2000 and to all references to our Firm included in or made a part of this registration statement. /s/ Arthur Andersen LLP Stamford, Connecticut May 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----