-----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, MFHD9sXQGJyjAyUB2gjHMcAu+Xlb+FhRcqU2+3EXC3X9XZca90GV8qsPM5MKX4xj 25GthiOXuMJ1qrxeBcieJQ== 0001144204-07-044274.txt : 20070815 0001144204-07-044274.hdr.sgml : 20070815 20070815161709 ACCESSION NUMBER: 0001144204-07-044274 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070815 DATE AS OF CHANGE: 20070815 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21324 FILM NUMBER: 071059943 BUSINESS ADDRESS: STREET 1: 100 WALL STREET STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 BUSINESS PHONE: 212-809-3542 MAIL ADDRESS: STREET 1: 100 WALL STREET STREET 2: 26TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 FORMER COMPANY: FORMER CONFORMED NAME: TRINITECH SYSTEMS INC DATE OF NAME CHANGE: 19940404 FORMER COMPANY: FORMER CONFORMED NAME: TRANS AIRE ELECTRONICS INC DATE OF NAME CHANGE: 19910916 10-Q 1 v084345_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________________ to ___________________
 
Commission file number: 0-21324
 
 
NYFIX, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
06-1344888
(I.R.S. Employer
Identification Number)
   
100 Wall Street
New York, New York
(Address of principal executive offices)
 
10005
(Zip code)
 
(646) 525-3000
(Registrant’s telephone number, including area code) 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o  No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x

As of July 31, 2007, the registrant had 36,501,987 shares of common stock, $0.001 par value, outstanding.
 
 
NYFIX, INC.
 
INDEX
 
     
Page
PART I - FINANCIAL INFORMATION    
       
Item 1.
Unaudited Financial Statements
    
       
 
Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
  
3
       
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006
  
4
       
 
Condensed Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss for the three months ended March 31, 2007
  
5
       
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
  
6
       
 
Notes to Condensed Consolidated Financial Statements
  
7
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
21
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  
33
       
Item 4.
Controls and Procedures
  
33
       
PART II - OTHER INFORMATION    
       
Item 1.
Legal Proceedings
  
35
       
Item 1A.
Risk Factors
  
35
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  
35
       
Item 3.
Defaults Upon Senior Securities
  
36
       
Item 4.
Submission of Matters to a Vote of Security Holders
  
36
       
Item 5.
Other Information
  
36
       
Item 6.
Exhibits
  
37
       
 
Signatures
  
38
 
 
Page 2

Part I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements
 
NYFIX, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

   
March 31,
 
December 31,
 
 
  
2007
 
2006
  
   
(Unaudited)
 
(Audited)
  
Assets
          
Current assets:
          
Cash and cash equivalents
  
$
94,634
  
$
105,888
  
Accounts receivable, less allowances of $382 and $316, respectively
    
17,548
    
13,744
  
Clearing broker assets
    
431,320
    
422,880
  
Prepaid expenses and other current assets
    
5,349
    
4,435
  
Total current assets
    
548,851
    
546,947
  
Property and equipment, net of accumulated depreciation and amortization of $34,125 and $32,813, respectively
    
16,151
    
14,808
  
Product enhancement costs, net of accumulated amortization of $16,997 and $16,139, respectively
    
5,863
    
5,900
  
Goodwill
    
58,183
    
58,193
  
Acquired intangible assets, net of accumulated amortization of $11,038 and $10,472, respectively
    
1,402
    
1,966
  
Other assets, net
    
1,560
    
1,514
  
Total assets
  
$
632,010
  
$
629,328
  
               
Liabilities and Stockholders' Equity
              
Current liabilities:
              
Accounts payable and accrued expenses
  
$
27,264
  
$
25,133
  
Clearing broker liabilities
    
429,142
    
422,429
  
Current portion of capital lease obligations
    
1,173
    
1,223
  
Current portion of long-term debt
    
190
    
188
  
Current portion of other long-term liabilities
    
931
    
1,235
  
Deferred revenue
    
4,418
    
4,212
  
Total current liabilities
    
463,118
    
454,420
  
Long-term portion of capital lease obligations
    
260
    
461
  
Long-term debt
    
7,419
    
7,412
  
Other long-term liabilities
    
3,581
    
3,662
  
Total liabilities
    
474,378
    
465,955
  
Commitments and contingencies
              
Stockholders' equity:
              
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
              
Series A, none issued
    
-
    
-
  
Series B Voting Convertible, 1,500,000 shares issued and outstanding; liquidation preference of $76,319 at March 31, 2007
    
62,092
    
62,092
  
Series C Non-Voting Convertible, none issued
    
-
    
-
  
Common stock, $0.001 par value; 100,000,000 and 60,000,000 shares authorized; 36,882,486 and 36,654,986 shares issued, respectively
    
257,121
    
256,835
  
Accumulated deficit
    
(148,660
)
  
(139,309
)
Treasury stock, 933,780 and 1,133,778 shares, respectively, at cost
    
(12,901
)
  
(16,224
)
Accumulated other comprehensive loss
    
(20
)
  
(21
)
Total stockholders' equity
    
157,632
    
163,373
  
Total liabilities and stockholders' equity
  
$
632,010
  
$
629,328
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 3
 
NYFIX, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)

   
Three Months Ended
  
 
  
March 31,
  
 
  
2007
  
2006
  
           
Revenue:
          
Subscription and maintenance
  
$
17,274
  
$
15,647
  
Product sales and services
    
680
    
872
  
Transaction
    
9,776
    
7,203
  
Total revenue
    
27,730
    
23,722
  
               
Cost of revenue:
              
Subscription and maintenance
    
8,546
    
8,065
  
Product sales and services
    
387
    
497
  
Transaction
    
5,401
    
3,927
  
Total cost of revenue
    
14,334
    
12,489
  
               
Gross profit
    
13,396
    
11,233
  
               
Operating expense:
              
Selling, general and administrative
    
16,878
    
10,823
  
Restatement, SEC investigation and related expenses
    
3,593
    
4,054
  
Depreciation and amortization
    
282
    
369
  
               
Loss from operations
    
(7,357
)
  
(4,013
)
               
Interest expense
    
(136
)
  
(134
)
Investment income
    
1,227
    
132
  
Other expense, net
    
(15
)
  
-
  
Loss from continuing operations before income tax provision
    
(6,281
)
  
(4,015
)
Income tax provision
    
47
    
47
  
Loss from continuing operations
    
(6,328
)
  
(4,062
)
Loss from discontinued operations
    
-
    
(192
)
Net loss
    
(6,328
)
  
(4,254
)
Accumulated preferred dividends
    
(1,717
)
  
-
  
Loss applicable to common stockholders
  
$
(8,045
)
$
(4,254
)
               
Basic and diluted loss from continuing operations per common share (net of accumulated preferred dividends)
  
$
( 0.22
)
$
( 0.12
)
Basic and diluted loss from discontinued operations per common share
    
-
    
( 0.01
)
Basic and diluted loss per common share
  
$
( 0.22
)
$
( 0.13
)
               
Basic and diluted weighted average common shares outstanding
    
35,767
    
32,596
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 4
 
NYFIX, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Loss (Unaudited)
For the Three Months Ended March 31, 2007
(in thousands, except share amounts)

   
Series B Voting Convertible preferred stock issued
  
Preferred stock dividend
distributable
  
Common stock issued
  
Accumulated
deficit
  
Treasury
stock
  
Accumulated other comprehensive
loss
  
Total stockholders'
equity
  
   
Shares
  
Amount
    
Shares
  
Amount
          
Balance December 31, 2006
    
1,500,000
  
$
62,092
  
$
-
    
36,654,986
  
$
256,835
  
$
(139,309
)
$
(16,224
)
$
(21
)
$
163,373
  
Comprehensive loss:
                                                        
Net loss
    
-
    
-
    
-
    
-
    
-
    
(6,328
)
  
-
    
-
    
(6,328
)
Foreign currency translation adjustment
    
-
    
-
    
-
    
-
    
-
    
-
    
-
    
1
    
1
  
Total comprehensive loss
    
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
    
(6,327
)
Issuance of treasury stock for stock options exercised (225,000 shares issued; 73,171 shares surrendered)
    
-
    
-
    
-
    
-
    
-
    
(2,658
)
  
2,658
    
-
    
-
  
Issuance of treasury stock pursuant to employment agreement (48,169 shares)
    
-
    
-
    
-
    
-
    
-
    
(365
)
  
665
    
-
    
300
  
Declaration of preferred stock dividend
    
-
    
-
    
1,354
    
-
    
(1,354
)
  
-
    
-
    
-
    
-
  
Common shares issued in payment of preferred stock dividend
    
-
    
-
    
(1,354
)
  
227,500
    
1,354
    
-
    
-
    
-
    
-
  
Stock-based compensation expense
    
-
    
-
    
-
    
-
    
109
    
-
    
-
    
-
    
109
  
Modification of stock options
    
-
    
-
    
-
    
-
    
177
    
-
    
-
    
-
    
177
  
Balance March 31, 2007
    
1,500,000
  
$
62,092
  
$
-
    
36,882,486
  
$
257,121
  
$
(148,660
)
$
(12,901
)
$
(20
)
$
157,632
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 5
 
NYFIX, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
   
Three Months Ended
 
 
 
March 31,
 
 
 
2007
 
2006
  
Operating activities:
          
Net loss
  
$
(6,328
)
$
(4,254
)
Adjustments to reconcile net loss to net cash (used in) provided by continuing operating activities:
              
Loss from discontinued operations
    
-
    
192
  
Depreciation and amortization
    
2,756
    
2,944
  
Stock-based compensation expense
    
109
    
313
  
Amortization of debt discounts and premiums
    
10
    
5
  
Deferred income taxes
    
37
    
37
  
Changes in assets and liabilities:
              
Accounts receivable
    
(3,793
)
  
554
  
Prepaid expenses and other assets
    
(677
)
  
497
  
Clearing broker assets
    
(8,449
)
  
69,311
  
Deferred revenue
    
207
    
(407
)
Accounts payable, accrued expenses and other liabilities
    
1,971
    
3,148
  
Clearing broker liabilities
    
6,713
    
(70,659
)
Net cash (used in) provided by continuing operating activities
    
(7,444
)
  
1,681
  
Net cash provided by discontinued operating activities
    
-
    
197
  
Net cash (used in) provided by operating activities
    
(7,444
)
  
1,878
  
Investing activities:
              
Capital expenditures for property and equipment
    
(2,653
)
  
(957
)
Capitalization of product enhancement costs
    
(821
)
  
(755
)
Tax benefit attributable to goodwill
    
10
    
10
  
Net cash used in continuing investing activities
    
(3,464
)
  
(1,702
)
Net cash used in discontinued investing activities
    
-
    
(258
)
Net cash used in investing activities
    
(3,464
)
  
(1,960
)
Financing activities:
              
Principal payments under capital lease obligations
    
(251
)
  
(168
)
Other, net
    
(92
)
  
(20
)
Net cash used in continuing financing activities
    
(343
)
  
(188
)
Effect of exchange rate changes on cash
    
(3
)
  
26
  
Net decrease in cash and cash equivalents
    
(11,254
)
  
(244
)
Cash and cash equivalents, beginning of period
    
105,888
    
21,066
  
Cash and cash equivalents, end of period
    
94,634
    
20,822
  
Less cash and cash equivalents of discontinued operations, end of period
    
-
    
154
  
Cash and cash equivalents of continuing operations, end of period
  
$
94,634
  
$
20,668
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 6
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
1.
Summary of Significant Accounting Policies
 
Nature of Operations
 
NYFIX, Inc. (together with its consolidated subsidiaries, “NYFIX” or the “Company”) provides trading workstations, middle office trade automation technologies and trade messaging services to domestic and international market participants. In addition, NYFIX’s registered broker-dealer subsidiaries also provide automated trade execution services to institutional counterparties and operate a matched-book stock borrow/stock loan business.
 
The Company has its headquarters and principal office on Wall Street in New York City, and has other offices in London’s Financial District, Hong Kong, Boston, MA, Stamford, CT and San Francisco, CA. The Company operates redundant data centers in the northeastern United States as well as data center hubs in London and Amsterdam.
 
Basis of Presentation of Interim Financial Statements
 
The accompanying unaudited condensed consolidated financial statements were prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments (consisting of normal recurring accruals and adjustments necessary for adoption of new accounting standards) necessary to present fairly the results of the interim periods shown. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results for the interim periods are not necessarily indicative of results for the full year. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 10-K”).
 
The accompanying unaudited condensed consolidated financial statements include the accounts of NYFIX, Inc. and its majority-owned and wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Significant Accounting Policies
 
There have been no material changes in the Company’s significant accounting policies during 2007, as compared to what was previously disclosed in the 2006 10-K.
 
2.
Stock-Based Compensation
 
 The Company has stock option plans under which stock options have been granted to employees and non-employee members of the Board of Directors. These options are typically granted for a term not exceeding ten years and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. These options vest over periods specified at the time of grant, which generally range from less than one to five years.
 
The fair value of options is estimated using the Black-Scholes option-pricing model which considers, among other factors, the expected life of the award and the expected volatility of the Company’s stock price. Although the Black-Scholes model meets the requirements of Statement of Financial Accounting Standards (“SFAS”) 123 (revised 2004), Share-Based Payment and Staff Accounting Bulletin No. 107, Share-Based Payment, the fair values generated by the model may not be indicative of the actual fair values of the Company’s awards, as it does not consider other factors important to those stock-based compensation awards, such as continued employment, periodic vesting requirements, and limited transferability.
 
Page 7
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
Stock Option Plans
 
A summary of activity under stock option plans for three months ended March 31, 2007, follows:

           
  
 
Weighted
 
 
 
 
 
 
 
 
 
 Weighted
 
average
  
Aggregate
  
   
 
 
 
 
 average
 
remaining
 
intrinsic
 
 
 
 
 
 
 
 exercise
 
contractual
 
value
 
Options
 
Shares
 
 
 
 price
 
term (years)
 
(000's)
  
                        
Outstanding at beginning of the year
    
3,670,780
    
(1)
 
$
9.56
              
Exercised
    
(225,000
)
      
$
2.00
              
Cancelled
    
(577,884
)
      
$
9.16
              
Outstanding at end of the quarter
    
2,867,896
    
(2)
 
$
9.96
  
 4.8
  
$
2,882
  
                                 
Exercisable at end of the quarter
    
2,802,896
    
(2)
 
$
10.06
  
 4.7
  
$
2,842
  
(1) Includes 1,089,906 shares related to Pending Exercises not settled due to the Company not being current with its periodic reporting to the SEC. The weighted average exercise price for such shares approximates $3.95 per share.
             
(2) Includes 957,154 shares related to Pending Exercises not settled due to the Company not being current with its periodic reporting to the SEC. The weighted average exercise price for such shares approximates $4.85 per share.
 
Since the Company has not been current with its SEC reporting obligations, it generally did not issue shares to employees and directors in connection with the exercise of stock options since July 2005. In February 2006, the Compensation Committee of the Board of Directors approved a policy whereby the Company will honor awards to former employees who have validly notified the Company in writing of their intent to exercise. As a result, the Company modified vested in-the-money awards to terminating employees, prior to their termination of employment, extending the normal 90 day post-termination exercise period until such time as the Company expected to be current with its SEC reporting obligations and the underlying shares are once again covered by an effective registration statement.
 
The Company did not grant any awards during the three months ended March 31, 2007 and 2006.
 
Stock-based compensation expense during the three months ended March 31, 2007 and 2006 was approximately $0.1 million, and $0.4 million, respectively, which includes an aggregate of a nil amount and $0.1 million, respectively, of expense related to expired options to be cash settled and extending the normal 90 day post-termination exercise period.
 
3.
Loss Per Share
 
The Company’s basic loss per common share is determined by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share is determined by dividing the net loss applicable to common stockholders, adjusted for the effect of dilutive securities, by the weighted average number of common shares and dilutive potential common shares.
 
Page 8
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
The following table sets forth the computations of loss per common share and of the weighted average common shares outstanding:

   
Three Months Ended
 
 
 
March 31,
 
(in thousands, except per share amounts)
 
2007
 
2006
  
Loss from continuing operations
  
$
(6,328
)
$
(4,062
)
Less: Accumulated preferred dividends
    
(1,717
)
  
-
  
Loss from continuing operations applicable to common stockholders, basic and diluted
    
(8,045
)
  
(4,062
)
Loss from discontinued operations, basic and diluted
    
-
    
(192
)
Loss applicable to common stockholders, basic and diluted
  
$
(8,045
)
$
(4,254
)
               
Basic and diluted loss from continuing operations per common share
  
$
(0.22
)
$
(0.12
)
Basic and diluted loss from discontinued operations per common share
    
-
    
(0.01
)
Basic and diluted loss per common share
  
$
(0.22
)
$
(0.13
)
               
Weighted average common shares outstanding:
              
Basic and diluted shares
    
35,767
    
32,596
  
Antidilutive securities:
              
Stock options, treasury stock method (1)
    
439
    
768
  
Convertible note (1)
    
1,325
    
1,304
  
Convertible preferred stock (1)
    
15,000
    
-
  
(1) The impact of stock options, the convertible note and the convertible preferred stock on earnings per share is antidilutive in a period of loss.
 
4.
Other Balance Sheet Information
 
Accounts payable and accrued expenses consisted of the following at March 31, 2007 and December 31, 2006:

(in thousands)
  
March 31,
2007
 
December 31,
2006
  
Accounts payable
  
$
13,130
  
$
11,052
  
Compensation and related
    
5,502
    
6,276
  
Modification of stock-based awards
    
2,412
    
2,601
  
Sale of NYFIX Overseas working capital adjustment (Note 9)
    
1,318
    
1,318
  
Taxes, other than income and payroll taxes
    
962
    
834
  
Penalties on reporting delinquency (Note 11)
    
631
    
631
  
Other
    
3,309
    
2,421
  
Total accounts payable and accrued expenses
  
$
27,264
  
$
25,133
  
 
5.
Broker-Dealer Operations  
 
Clearing Broker Assets and Liabilities
 
Page 9
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
Clearing broker assets and liabilities consisted of the following at March 31, 2007 and December 31, 2006:

(in thousands)
  
March 31,
2007
  
December 31,
2006
  
Securities borrowed
  
$
427,018
  
$
421,435
  
Securities failed-to-deliver
    
1,825
    
-
  
Deposits with clearing firms
    
770
    
766
  
Receivables from clearing organizations
    
1,707
    
679
  
Total clearing broker assets
  
$
431,320
  
$
422,880
  
               
Securities loaned
  
$
427,370
  
$
422,414
  
Securities failed-to-receive
    
1,772
    
-
  
Payables to clearing organizations
    
-
    
15
  
Total clearing broker liabilities
  
$
429,142
  
$
422,429
  
 
Securities Lending
 
The Company receives collateral under securities borrowed transactions, which it is allowed by contract or custom to sell or repledge. As of March 31, 2007, securities borrowed with a fair value of $411.0 million were repledged for securities loaned. The gross amounts of interest earned on cash provided to counterparties as collateral for securities borrowed and interest incurred on cash received from counterparties as collateral for securities loaned and the resulting net amount included in transaction revenue for the three months ended March 31, 2007 and 2006, were as follows:

   
Three Months Ended
 
 
 
March 31,
 
(in thousands)
 
2007
 
2006
  
Interest earned
  
$
3,652
  
$
2,720
  
Interest incurred
    
(3,341
)
  
(2,351
)
Net
  
$
311
  
$
369
  
 
Regulatory Net Capital Requirements
 
U.S. registered broker-dealer subsidiaries - NYFIX Clearing Corporation (“NYFIX Clearing”), NYFIX Transaction Services, Inc. (“NYFIX Transaction”), and NYFIX Millennium, LLC (“NYFIX Millennium”) are subject to the SEC’s Uniform Net Capital Rule (15c3-1), which requires the maintenance of minimum regulatory net capital. NYFIX Clearing has elected to use the alternative method, as permitted by the rule, which requires the maintenance of minimum regulatory capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined. NYFIX Clearing’s membership in the Depository Trust & Clearing Corporation (the “DTCC”) requires it to maintain excess regulatory net capital of $10.0 million. NYFIX Transaction and NYFIX Millennium have elected to use the aggregate indebtedness standard, which requires that the ratio of aggregate indebtedness to regulatory net capital, both as defined, shall not exceed 15 to 1. The regulatory net capital ratios for NYFIX Transaction and NYFIX Millennium, at March 31, 2007, were 1.73 to 1 and 1.78 to 1, respectively.
 
Foreign registered subsidiaries - NYFIX International, Ltd. (“NYFIX International”) is an ISD Category B registered firm of the Financial Services Authority (“FSA”) in the U.K. NYFIX International is required to maintain financial resources generally equal to three months average expenditures, subject to a minimum of €125,000, plus a proportion of less liquid assets on hand.
 
Page 10
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
At March 31, 2007, the regulatory net capital/resources and excess amounts were as follows:
 
       
Excess
  
   
Regulatory
 
Regulatory
 
 
 
Net Capital
 
Net Capital
 
(in thousands)
 
/Resources
 
/Resources
  
NYFIX Clearing
  
$
25,399
  
$
25,149
  
NYFIX Transaction
    
580
    
514
  
NYFIX Millennium
    
1,845
    
1,626
  
     
27,824
    
27,289
  
               
NYFIX International
    
1,171
    
683
  
   
$
28,995
  
$
27,972
  
 
6.
Income Taxes
 
The income tax provision differs from the statutory U.S. federal income tax rate due primarily to a valuation allowance provided against net deferred tax assets. As described in the Company’s 2006 10-K, the Company maintains a valuation allowance in accordance with SFAS 109 on its net deferred tax assets. This allowance excludes the off-setting impact of the deferred tax liability for amortization of goodwill related to the acquisition of Renaissance Trading Technologies, LLC (“Renaissance”) due to the indefinite life of goodwill. Until the Company achieves and sustains an appropriate level of profitability, it plans to maintain a valuation allowance on its net deferred tax assets.
 
7.
Total Comprehensive Loss
 
The components of total comprehensive loss, net of tax, were as follows:

   
Three Months Ended
 
 
 
March 31,
 
(in thousands)
 
2007
 
2006
  
Net loss
  
$
(6,328
)
$
(4,254
)
Foreign currency translation adjustment
    
1
    
58
  
Total comprehensive loss
  
$
(6,327
)
$
(4,196
)
 
8.
Business Segment Information
 
In accordance with the requirements for interim period reporting under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), the Company is reporting the external, intersegment and net revenues and the operating income of its operating segments. As of March 31, 2007, the Company was organized into three operating divisions through which senior management evaluates the Company’s business. These divisions, as described in more detail below, are organized around the products and services provided to customers and represent the Company’s reportable segments under SFAS 131.
 
FIX Division. The FIX Division provides software and consultative services to enable global financial institutions to utilize the industry established Financial Information Exchange Protocol for messaging, monitoring and processing transaction information. The FIX Division also provides messaging channels for institutions who are members of its trading community for order routing and other value-added services.
 
Order Management Systems (“OMS”) Division. The OMS Division provides software applications for the management of New York Stock Exchange (“NYSE”) and Nasdaq listed trading activities. These products enable customers to take advantage of the broad range of products and services offered by other divisions.
 
Page 11
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
Transaction Services Division. The Transaction Services Division is comprised of the three U.S. registered broker-dealer subsidiaries, NYFIX Millennium, NYFIX Transaction and NYFIX Clearing together with the execution business of NYFIX International in the U.K. NYFIX Millennium, an alternative trading system (“ATS”) registered under SEC Regulation ATS, provides anonymous matching and routing of U.S. equity securities. NYFIX Transaction provides direct electronic market access and algorithmic trading products. NYFIX Millennium and NYFIX Transaction also resell certain products and services offered by the FIX Division and the OMS Division. NYFIX Clearing clears trades on behalf of NYFIX Millennium and NYFIX Transaction and operates a matched-book stock borrow/stock loan business.
 
The Company does not currently break out total assets by reportable segment as there is a high level of shared utilization between certain reportable segments.
 
The following table presents information by reportable segment for the three months ended March 31, 2007 and 2006: 

   
 
 
 
 
Transaction
 
Corporate
 
 
 
(in thousands)
 
FIX
Division
 
OMS
Division
 
Services
Division
 
& Other
(1)
 
Total
 
March 31, 2007
 
 
 
 
 
 
 
 
      
Revenue - external customers
  
$
13,309
  
$
3,407
  
$
11,014
    
-
  
$
27,730
  
                                 
Revenue (cost of revenues), net - intersegment
    
570
    
238
    
(808
)
  
-
    
-
  
Net revenue
    
13,879
    
3,645
    
10,206
    
-
    
27,730
  
Operating income (loss) (2)
    
1,563
    
(4,228
)
  
873
    
(5,565
)
  
(7,357
)
March 31, 2006
                                
Revenue - external customers
  
$
10,635
  
$
4,880
  
$
8,207
    
-
  
$
23,722
  
Revenue (cost of revenues), net - intersegment
    
617
    
297
    
(914
)
  
-
    
-
  
Net revenue
    
11,252
    
5,177
    
7,293
    
-
    
23,722
  
Operating income (loss) (2)
    
1,864
    
(1,944
)
  
294
    
(4,227
)
  
(4,013
)
(1) Corporate & Other includes restatement, SEC investigation and related expenses, certain transitional costs and other corporate items which are not allocated to reportable segments and certain shared costs which were previously allocated to disposed operations.
(2) Operating income (loss) by segment reflects a significant amount of costs which are allocated by headcount, usage and other methods, depending on the nature of the cost.
 
9.
Discontinued Operations
 
During the third quarter of 2006, the Company disposed of all of the issued and outstanding capital stock of NYFIX Overseas, a wholly-owned subsidiary which previously comprised the Company’s Order Book Management Systems (“OBMS”) Division to G.L. Trade S.A. (“GL”). Of the initial purchase price, $1.3 million was repaid to the buyer in April 2007 in settlement of a working capital adjustment. There is also an earn-out adjustment, under the terms of which the Company is eligible for additional earn-out payments based on future revenues of NYFIX Overseas through December 31, 2007. The maximum earn-out payment is $5.1 million, net of additional payments to the management team of NYFIX Overseas.
 
The Company has agreed to indemnify GL for certain claims made through December 31, 2007, as well as for losses arising out of or resulting from (1) any misrepresentation or breach of warranties; (2) any breach of a covenant or agreement made or to be performed by the Company under the Sale Agreement; (3) certain patent settlements; (4) the lack of recording stock-based compensation expense related to stock options granted to the employees of NYFIX Overseas by the Company; (5) specified taxes of NYFIX Overseas pre-closing that were not previously paid or adequately reserved for by NYFIX Overseas, and (6) any obligations relating to options to purchase shares of common stock of the Company held by employees of NYFIX Overseas.
 
For two years following the closing and subject to certain exceptions, the Company has agreed not to develop or market any product that is directly competitive with the OBMS product of NYFIX Overseas.
 
Page 12
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
The disposition of NYFIX Overseas constitutes a discontinued operation and accordingly all financial statements presented reflect amounts relative to NYFIX Overseas, except for previously allocated overhead charges, as a discontinued operation.
 
Revenue related to NYFIX Overseas included in the loss from discontinued operations was $1.7 million for the three months ended March 31, 2006.
 
10.
Commitments and Contingencies
 
Stock-based Compensation Related Matters
 
SEC Investigation
 
By letter dated October 28, 2004, the Division of Enforcement of the SEC informed the Company that it was conducting an informal investigation related to certain stock option grants. On February 25, 2005, the Company filed a current report on Form 8-K, which indicated that the Company believed that the matter was a formal inquiry. The Company is cooperating with the SEC with respect to this matter. The Company believes it is substantially complete with regard to producing all documents responsive to document requests and a subpoena. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including the Company’s former independent registered public accounting firm.
 
Grand Jury Subpoena
 
In May 2006, the Company received a grand jury subpoena from the U.S. Attorney for the Southern District of New York.  The subpoena sought documents relating to the Company’s granting of stock options.  With the agreement of the Assistant U.S. Attorney, the Company is responding to the subpoena by producing the documents it produces to the staff of the Division of Enforcement of the SEC. The U.S. Attorney has also conducted interviews with at least one current employee and two former employees (one of whom is a former officer) and with at least one employee of the Company’s former independent registered public accounting firm.
 
Shareholder Derivative Actions
 
On or about June 1, 2006, the Company was served as a nominal defendant with a complaint (the “Ritchie Complaint”) in a shareholder derivative action titled Ritchie v. Castillo, et al. in the Superior Court for the State of Connecticut.  The Ritchie Complaint also names the Company’s former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, the Company’s former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Ritchie Complaint asserts a claim for breach of fiduciary duty against all the individual defendants and a claim for unjust enrichment against four individual defendants based on claimed backdating of stock option grants to these individuals between 2000 and 2003.  On June 9, 2006, the Company was named as a nominal defendant in a shareholder derivative action titled McLaughlin v. Castillo, et al. in the same court and with the same substantive allegations as the Ritchie action. In September 2006, the Court consolidated the Ritchie and McLaughlin actions. In October 2006, plaintiffs filed a consolidated complaint (the “State Court Consolidated Complaint”). The State Court Consolidated Complaint contains nine counts (as opposed to the two counts previously alleged in each of two actions), including counts for an accounting of all stock options granted to the individual defendants, breach of fiduciary duty and unjust enrichment, insider trading, rescission and breach of contract. The State Court Consolidated Complaint adds seven additional defendants: three former directors (one of whom is deceased); two former Chief Financial Officers, the Company’s current General Counsel and former Secretary and the Company’s former Executive Vice President and President of NYFIX Millennium. The nine counts of the State Court Consolidated Complaint are based on claimed backdating of stock option grants to eleven individual defendants between 1997 and 2003.
 
Page 13
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
On August 30, 2006, the Company was served as a nominal defendant with a complaint (the “Cattelona Complaint”) in a shareholder derivative action titled Cattelona v. Hansen, et al., in the United States District Court for the District of Connecticut.   The Cattelona Complaint also names the Company’s former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, a former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Cattelona Complaint asserts counts against the individual defendants for violation of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and Section 14(a) of the Exchange Act and Section 20(a) of the Exchange Act, and for breach of fiduciary duty, gross mismanagement and corporate waste. In addition, the Cattelona Complaint asserts a count against four of the individual defendants for unjust enrichment based on claimed backdating of stock option grants to the latter individuals between 1999 and 2002. 
 
On or about September 7, 2006, a complaint (the “Brock Complaint”) was filed in a shareholder derivative action titled Brock v. Hansen, et al., in the United States District Court for the District of Connecticut. The Brock Complaint names the Company as a nominal defendant, as well as the Company’s former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, the Company’s former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Brock Complaint asserts a count for an accounting of all stock options granted to the individual defendants, and counts against all individual defendants for violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, and breach of contract. In addition, the Brock Complaint asserts counts against three individual defendants for rescission and for breach of contract for stock option grants made between 1997 and 2001.
 
On December 5, 2006, the U.S. District Court for the District of Connecticut consolidated the Brock and Cattelona actions. In December 2006, the plaintiffs filed a consolidated complaint (the “Federal Court Consolidated Complaint”). The Federal Court Consolidated Complaint contains twelve counts (as opposed to the eleven counts previously alleged in the Brock Complaint and the seven counts previously alleged in the Cattelona Complaint), including counts against all defendants for: violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; violations of Section 14(a) of the Exchange Act; for an accounting of all stock options granted to the individual defendants; breach of fiduciary duty and/or aiding and abetting; abuse of control; gross mismanagement; constructive fraud; corporate waste; and unjust enrichment. The Federal Court Consolidated Complaint also contains counts against six of the individual defendants for rescission and for breach of contract. The Federal Court Consolidated Complaint adds four additional defendants: two former directors, a former Chief Financial Officer and a former Executive Vice President of the Company and President of NYFIX Millennium. The twelve counts of the Federal Court Consolidated Complaint are based on claimed backdating of stock option grants to six individual defendants from 1997 to the filing of the Federal Court Consolidated Complaint. In June, 2007, plaintiffs filed a corrected amended consolidated complaint (the “Federal Court Amended Consolidated Complaint”). The Federal Court Amended Consolidated Complaint drops eight individual defendants (two current directors, two former directors, a former Chief Executive Officer and director, a former Chief Financial Officer, our former Chief Information Officer and a former Executive Vice President of the Company and President of NYFIX Millennium), two counts for rescission and breach of contract and the count for violation of Section 14(a) of the Exchange Act and adds a count under Section 20 of the Exchange Act. The ten counts of the Federal Court Amended Consolidated Complaint are based on claimed backdating of stock option grants and an allegedly false and misleading Form 10-K filed in June 2005.
 
Page 14
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
In addition, certain shareholders have made formal inquiries regarding alleged violations of Section 16(b) of the Exchange Act based on the same facts alleged in the Ritchie and McLaughlin suits, to which the Company has responded that in no case did it appear that options were exercised within six months or less from the date of grant and that each option would qualify as an exempt transaction under applicable rules.
 
Related Tax Matters
 
In 2006 and 2007, the Company has had communications with the United States Internal Revenue Service (“IRS”) and the United Kingdom HM Revenue & Customs (“Inland Revenue”) relating to historical stock option grants and exercises. These communications involve employment tax returns and the amounts of reported employee compensation and related payroll tax withholdings, as well as deductions on corporate income tax returns. The Company has received document requests from the IRS relating to stock option grants and exercises in connection with the IRS examination of the Company’s corporate tax returns for the years 2001 and 2004 and of the Company’s employment tax returns for the years 2003 through 2005, respectively. Subsequent to the sale of NYFIX Overseas in August 2006, GL forwarded correspondence from the Inland Revenue relating to NYFIX Overseas’ potential liability for payroll tax withholdings on prior option exercises by certain former employees.
 
The Company has determined that it has exposure as former management did not properly withhold employee income and related payroll taxes related to historical stock option activity. As a result, the Company has recorded a liability of $1.0 million related to tax withholdings not made on the exercises of stock options previously classified as Incentive Stock Options (“ISOs”), exposures related to Section 409A of the U.S. Internal Revenue Code (“Section 409A”), and similar exposures related to withholdings and payroll taxes which may be due in the U.K. related to stock option exercises under Pay As You Earn, or PAYE, and National Insurance Contribution provisions (due to the Company’s indemnity obligations to GL). In 2006, the Company remedied the 409A exposure with respect to certain current and former directors and executive officers by increasing exercise prices of affected grants. In August 2007, the Company remedied the 409A exposure with respect to most current rank and file employees by unilaterally increasing exercise prices of affected grants. The Company intends to pay these employees in January 2008 an aggregate cash bonus of $0.3 million to offset the impact of the increase in these exercise prices. To remedy the 409A exposure of former employees holding Pending Exercises (defined below) the Company intends to pay $0.1 million representing the former employees 20% additional tax under 409A, related interest and an income tax gross-up.
 
Based upon the current information available and the liabilities recognized, the Company believes the resolution of these tax matters will not have a material adverse effect on its consolidated financial condition or results of operations. However, the ongoing discussions with the taxing authorities could result in new information and higher than anticipated exposures. The Company is continuing to cooperate with the taxing authorities to resolve these matters.
 
Pending Exercises
 
Since the Company has not been current with its SEC reporting obligations, it generally did not issue shares to employees and directors in connection with the exercise of stock options since July 2005. In February 2006, the Compensation Committee of the Board of Directors approved a policy whereby the Company will honor awards to former employees who have validly notified the Company in writing of their intent to exercise.
 
The Company has cash exposure to these option holders equal to the difference between the fair market value of the Company’s common stock on the original exercise notification date and the fair market value of the Company’s common stock on the actual date of exercise if the price declines.
 
As of March 31, 2007, the Company had outstanding options covering 957,154 shares for which it had been notified of intents to exercise and which were not deemed probable of expiring before the Company could issue shares (“Pending Exercises”). Fair market values of the Company’s common stock on the dates of these notifications ranged from $2.90 to $7.35. The weighted average fair market value for such shares underlying options on the respective notification dates was $5.94. At March 31, 2007, the fair market value of the Company’s common stock was $6.10. The Company estimated that its potential cash exposure as of March 31, 2007, due to declines in its stock price after such notifications, was less than $0.1 million.
 
Page 15
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
During the second quarter of 2007, the Company was notified of additional intents to exercise. As of June 30, 2007, Pending Exercises totaled 1,030,150 shares. The range of fair market values for the Company’s common stock on the dates of the corresponding notifications through June 30, 2007 was from $2.90 to $7.47, with a weighted average fair market value for such shares underlying options on their notification dates of $5.97. The Company estimated that its potential cash exposure as of June 30, 2007, due to declines in its stock price after such notifications, was less than $0.1 million, based on the fair market value of $7.40 at June 30, 2007. This cash exposure could, however, significantly increase if the fair market value of the Company’s stock declines once option holders are able to exercise and sell the underlying shares. The Company intends to offer to settle Pending Exercises in cash in an amount equal to the difference between the closing price of its stock on the date of notification and the exercise price of such options. The Company estimates its maximum cash exposure for net settlements of this nature at approximately $1.8 million.
 
During the six months ended June 30, 2007, the Company paid $0.4 million to cash settle 114,250 options which had reached their 10-year contractual life and expired. At June 30, 2007, liabilities for modified awards to be cash settled, related to expired options covering 21,375 shares, aggregated $0.1 million. The Company has additional cash exposure if it cannot settle Pending Exercises with stock prior to their expiration going forward. 
 
Internal Accounting Review and Restatements
 
The Company performed an extensive internal review of its historical stock-based compensation awards as well as an overall accounting review. The consolidated financial statements for the years ended December 31, 2004 and 2003 were re-audited by a newly engaged independent registered public accounting firm. The internal review was overseen by the Audit Committee of the Board of Directors and a special Subcommittee of the Audit Committee formed in connection with a restructuring of the Board and of management that commenced in September 2005.
 
As a result of this internal review, in its 2005 10-K, the Company restated its consolidated financial statements for prior periods and related financial statement disclosures to reflect adjustments necessary, reducing its previously reported results by a net amount of $42.1 million (the “2005 Restatement”). The items adjusted consisted of stock-based compensation, acquisitions and investments, revenue recognition, income taxes and treasury stock. The findings of the Company’s internal review of historical stock-based compensation awards included (i) grants to officers and directors which were made outside the terms of the stock option plans then in effect; (ii) modifications of grants to Peter Hansen, the Company’s founder, former Chief Executive Officer and Chairman, where evidence could not be located to demonstrate that the modifications were authorized by the Board or Compensation Committee; (iii) retroactive reinstatement of the employment status of Richard Castillo, the Company’s former Chief Financial Officer and Secretary, after he had discontinued providing employee services and the continued vesting of his outstanding awards, (iv) subsequent changing of vesting terms with retroactive documentation as of an earlier date; (v) grant schedules to the minutes of Board or Compensation Committee meetings which included awards that were not initiated until after the dates of these meetings; (vi) grant schedules to the minutes of Board or Compensation Committee meetings which included awards which were modified after the dates of such meetings to increase the number of options granted or to decrease the exercise price, but which were included on such schedules as if they had been granted in modified form on the dates of the Board or Compensation Committee meetings; (vii) options and warrants exercised by officers and directors with non-recourse notes where evidence could not be located to demonstrate that the issuance of such notes was approved by the Board or Compensation Committee; and (viii) other circumstances indicating the issuance of in-the-money grants. The modifications to Mr. Hansen’s grants noted in (ii) above resulted in the recording of a $25.0 million charge in March 2000, based on the incremental intrinsic value on the date assumed to be the modification date.
 
Page 16
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
The restatement for stock-based compensation included in the Company’s 2005 10-K relied upon significant legal and other judgments. These judgments included determinations as to the validity of grants, measurement dates, and other matters, including reliance upon delegated authority with respect to awards issued directly by Mr. Hansen and not later ratified by the Board or Compensation Committee. Any and all of these determinations could be challenged. Additionally, new and possibly significant information may also be located which could lead to different determinations that may require different accounting treatment.
 
NYFIX Millennium SEC Inquiry
 
In connection with the restatement of the Company’s 1999 through 2002 consolidated financial statements relating to its accounting for the losses incurred by NYFIX Millennium filed in May 2004, the Division of Enforcement of the SEC informed the Company by letter dated July 14, 2004 that it was conducting an informal inquiry. On January 25, 2005, the Company filed a current report on Form 8-K, which indicated that the Company believed that the matter was a formal inquiry. The Company cooperated with the SEC, producing documents in response to document requests and subpoenas and making employees available for interviews and testimony. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including the Company’s former independent registered public accounting firm. In March 2006, the Company announced that the SEC Enforcement Staff had advised that it is recommending that the SEC close its inquiry into this matter without any action being taken against the Company or any individual. As a result of the Staff’s recommendation, which is subject to a formal approval process within the SEC, the Company has not been required to produce any more documents or provide additional witnesses for testimony in connection with this inquiry.
 
Other
 
During the normal course of business, the Company becomes involved in various other routine legal proceedings, including issues pertaining to patent infringement, customer disputes and employee matters. The Company does not believe that the outcome of these matters will have a material adverse effect on its financial condition.
 
During the three months ended March 31, 2007 and 2006, the Company incurred $3.6 million and $4.1 million, respectively, relating to the stock option investigation and subpoenas, a grand jury subpoena, related shareholder derivative litigation, related financial restatements and expenses to resolve related matters, together with an earlier SEC inquiry into former management’s accounting for NYFIX Millennium, related class action litigation and related financial restatement. These costs include outside counsels, contract attorneys and forensic accountants, other consultants and the cost of re-auditing previously issued financial statements following the resignation of the Company’s former independent registered public accounting firm. These costs do not include any portion of time that the Company’s employees have dedicated to these matters.  The Company will likely continue to incur material amounts of expense associated with these matters until they are resolved.
 
Other than the amounts described above for employee-related taxes for stock options and Pending Exercises, the Company, in accordance with SFAS No. 5, Accounting for Contingencies, has not recorded any liability with respect to these matters as it is currently unable to predict the outcomes and reasonably estimate the amounts of loss, if any. With respect to the SEC investigation of stock option grants, the grand jury subpoena, the State Court Consolidated Complaint, and the Federal Court Consolidated Complaint associated with such matters and other related matters, the Company could be subject to penalties, fines or regulatory sanctions or claims by current and former officers, directors or employees for indemnification of costs or losses they may incur and such amounts, individually or collectively, could have a material impact on the Company’s financial condition. In addition, other actions may be brought against the Company related to the matters described above. 
 
Page 17
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
11.
Stockholders’ Equity
 
Nasdaq Delisting Proceeding
 
As a result of the Company’s common stock being delisted, on November 1, 2005, from the Nasdaq National Market, the Company’s shares are currently traded in the Over-the-Counter (“OTC”) securities market with real-time quotes available on the Pink Sheets electronic quotation service using the symbol NYFX. Stockholders may find it more difficult to obtain accurate quotes and execute trades in the OTC market.
 
Preferred Stock
 
The Company is authorized to issue 5 million shares of preferred stock. The Company’s Board of Directors has designated 0.1 million shares as Series A Preferred Stock for issuance in connection with the Stockholders’ Rights Plan discussed below. In connection with the private placement of convertible preferred stock discussed below, 1.5 million shares were designated as Series B Voting Convertible Preferred Stock and 0.5 million as Series C Non-Voting Convertible Preferred Stock.
 
Stockholders’ Rights Plan
 
On September 1, 1997, the Board of Directors declared a dividend of a preference share purchase right (a “Right”) for each outstanding share of common stock of the Company held by stockholders of record on September 19, 1997 (the “Rights Agreement”). The number of outstanding Rights was adjusted for the two stock splits of 1.5 to 1.0 occurring in 1999 and 2000. Each share of common stock issued by the Company after such record date has the same Right attached thereto. Each Right entitles the registered holder to purchase from the Company, at any time after a stockholder acquires 20% or more of the Company's outstanding common stock, as set forth in the Rights Agreement, shares of the Company's Series A Preferred Stock (“Preference Stock”). The purchase price is $40 per one one-hundredth of a share of Preference Stock, subject to adjustment as set forth in the Rights Agreement.
 
Each share of Preference Stock will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of one hundred times the dividend declared per share of common stock. In the event of liquidation, the holders of the Preference Stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of one hundred times the payment made per share of common stock. Each share of Preference Stock will have one hundred votes, voting together with the shares of common stock. In the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each share of Preference Stock will be entitled to receive one hundred times the amount received per share of common stock.
 
Because of the nature of the Preference Stock’s dividend, liquidation and voting rights, the value of one one-hundredth interest in a share of Preference Stock purchasable upon exchange of each Right should approximate the value of one share of common stock.
 
On September 4, 2006, the Rights Agreement was amended to exclude the acquisition by Warburg Pincus Private Equity IX, L.P. (“Warburg Pincus”) of the 1.5 million shares of Series B Voting Convertible Preferred Stock issued on October 12, 2006 (see Private Placements) from triggering the exercise period for the Rights.
 
Page 18
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
Registration Rights Agreements and Reporting Requirements
 
In addition to its obligation to obtain registration of additional shares of its common stock under the terms of the $7.5 million convertible note, the Company is obligated to obtain registration of additional shares of its common stock under two separate registration rights agreements entered into coincidental to private placements of the Company’s equity securities and to become current in its reporting obligations under the Exchange Act as follows:
 
Private Placement of Common Stock
 
Pursuant to a registration rights agreement entered into in connection with the sale and issuance of 2,713,000 shares of its common stock in July 2006, the Company was obligated to use its best efforts to become current in its reporting obligations under the Exchange Act by September 30, 2006. The Company failed to become current in such obligations by December 31, 2006, which resulted in the Company incurring a liability to the Buyers in the form of liquidated damages in the amount of 5% of the aggregate purchase price. In the fourth quarter of 2006, the Company recorded a charge of $631,000 (which was paid in April 2007) as a result of not meeting these filing requirements. In addition, the Company is obligated to cause a registration statement covering these shares to become effective within 45 days (if the SEC elects not to review such registration statement) or 120 days (if the SEC elects to review the registration statement) following the date that the Company cures the delinquency in its periodic reporting obligations (such 45- or 120-day deadline, as applicable, the “Effectiveness Deadline”). Failure of the registration statement to become effective by the Effectiveness Deadline would result in a liability of the Company to the buyers for liquidated damages in the amount of 2% of the purchase price for each 30-day period after the Effectiveness Deadline during which the registration statement fails to become effective. The Company’s total liability for liquidated damages in connection with both such deadlines (including the 5% charge recorded in the fourth quarter of 2006) is capped at 13% of the aggregate purchase price of $12.6 million. The registration rights agreement also contains customary indemnity and contribution provisions in favor of the investors and the Company. The Company is responsible for paying the costs associated with the registration statement.
 
Private Placement of Series B Preferred Stock
 
Pursuant to a registration rights agreement entered into in connection with the sale and issuance of 1.5 million shares of its Series B Preferred Stock, the Company is obligated to use reasonable business efforts to become current with regard to its periodic reporting with the SEC under the Exchange Act and obtain authorization for its common stock to be relisted on a “Principal Market,” as defined in the registration rights agreement. Beginning on October 12, 2007, the first anniversary of the closing date, the buyer has the right to make a written request to the Company to register “Registrable Securities,” as defined in the registration rights agreement. “Registrable Securities” include shares of the Company’s common stock: that are issued upon conversion of the Series B Preferred Stock, issued as a dividend, and any other shares held or acquired by the buyer.
 
Common Stock and Treasury Stock
 
On February 27, 2007, the stockholders of the Company approved an amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 60,000,000 to 100,000,000 shares.
 
At December 31, 2006, the Company had outstanding 35,521,208 shares of common stock, with 1,133,778 held in treasury.
 
On January 25, 2007, the Board of Directors declared a dividend, payable that day, to holders of Series B Preferred Stock in payment of dividends accumulated through December 31, 2006; as a result, the Company issued 227,500 restricted shares of common stock, with a fair value of approximately $1,354,000 based on the market price of its common stock on that date. These accumulated dividends were reflected as a charge to loss applicable to common stockholders in calculating the basic and diluted loss per common share for the quarter and year ended December 31, 2006.
 
During the first quarter of 2007, certain stock options on the pending notification list aggregating 225,000 shares, held by an accredited investor (and former executive officer), were exercised at $2.00 per share. The $450,000 aggregate exercise price of such shares was paid for with the delivery of 73,171 shares of common stock previously held by the former executive officer for more than six months. The receipt of these shares is reflected in treasury stock. The Company then issued 225,000 restricted shares of common stock from treasury, on that same day, with a fair market value of $6.15 per share on the exercise date. The excess of the average cost of these treasury shares over the exercise proceeds received, of $2.7 million, was charged to retained earnings.
 
Page 19
 
Notes to Condensed Consolidated Financial Statements - continued (Unaudited)
 
Also during March 2007, the Company issued 48,169 restricted shares of common stock from treasury to an officer in satisfaction of his employment agreement requiring issuance of shares with a fair market value of $300,000. The fair value of such shares is being amortized pro rata over the requisite service period as defined in the employment agreement. The excess of the average cost of these treasury shares over the fair value of such shares on the reissuance date, of $365,000, was charged to retained earnings.
 
As a result of the foregoing activity, at March 31, 2007, the Company had outstanding 35,948,706 shares of common stock, with 933,780 held in treasury.
 
On June 19, 2007, the Board of Directors declared a dividend, payable July 2, 2007, to holders of Series B Preferred Stock in payment of dividends accumulated from January 1, 2007 through June 30, 2007; as a result, the Company issued 526,327 restricted shares of common stock, with a fair value of approximately $3,426,000 based on the market price of its common stock on the declaration date. A portion of these accumulated dividends was reflected as a charge to loss applicable to common stockholders in calculating the basic and diluted loss per common share for the three months ended March 31, 2007.
 
In July 2007, the Company issued 26,954 shares from treasury stock with an aggregate market price of $193,000 as final payment on the Renaissance acquisition related promissory notes. 
 
Page 20
 
Part I  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, which are intended to be covered by the safe harbors created thereby. Forward-looking statements are any statements other than statements of historical fact. In some cases, forward-looking statements are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” and similar expressions. This report on Form 10-Q may include forward-looking statements about future SEC filings, future restatements and related charges, future activities of new employees and the impact thereof on us. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include statements other than historical information or statements of current conditions and may relate to our future plans, operations and objectives and results, among other things, and may also include our belief regarding the effect of proposed transactions or various legal proceedings, as well as the impact of our ability to meet periodic filing deadlines, initiatives that may impact future business activities, and future disclosure practices. Actual future events, circumstances, performance and trends could materially differ from those set forth in these statements (including those discussed in Part II, Item 1A.Risk Factors) due to various factors, including but not limited to: general economic conditions; the impact of recording a sufficiently large impairment charge relating to our goodwill because we are not profitable; the effects of current, pending and future legislation; regulation and regulatory actions; our ability to achieve and maintain effective internal control over financial reporting in accordance with SEC rules promulgated under Section 404 of the Sarbanes-Oxley Act (“SOX 404”); the impact of accounting for stock-based compensation and ongoing regulatory investigations, including the possibility of new and significant information subsequently arising which could lead to different determinations and require different accounting treatment; actions and initiatives by both current and future competitors; the potential financial exposure related to cash settlements of certain stock option exercises and the possible sales of stock by employees exercising options; the risks related to our ability to market and develop our products and services; our success in obtaining, retaining and selling additional products and services to clients; the pricing of products and services; stock market activity; the ability of NYFIX Clearing to clear trades due to maximum limits imposed by the DTCC and the need for intra-day funding commitments from third parties; the ability of our Transaction Services Division to maintain third-party assistance to access exchanges and other important trading venues; our ability to comply with the SEC’s Uniform Net Capital Rule; the impact of our customers defaulting on their trading obligations; changes in technology; our ability to accommodate increased levels of trading activity and keep current with market data requirements; the availability of skilled technical associates; our ability to obtain necessary network equipment, technical support or other telecommunications services or being forced to pay higher prices for such equipment, support or services; and the impact of new acquisitions and divestitures; and other risks and uncertainties including those detailed in our SEC filings; as well as future decisions by us. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those referred to in Part II, Item 1A. Risk Factors. Our business may have changed since the date hereof, and we undertake no obligation to update these forward-looking statements.
 
When we use the terms “NYFIX”, the “Company”, “we”, “us” and “our”, we mean NYFIX, Inc. and its consolidated subsidiaries.
 
The following discussion should be read together with the accompanying Condensed Consolidated Financial Statements and notes thereto.
 
 Overview
 
We are a pioneer in electronic trading solutions and we continue to transform trading through innovation.  The NYFIX MarketplaceTM is a global community of trading counterparties utilizing innovative services that optimize the business of trading, including trading workstations, middle office trade automation technologies and trade messaging services.  NYFIX Millennium provides the NYFIX MarketplaceTM with enhanced methods of accessing liquidity.  We also provide value-added informational and analytic services and powerful tools for measuring execution quality.  As a trusted business partner and service provider to investment managers, mutual fund, pension fund and hedge fund managers (the “Buy-Side”) and brokerage firms and banks (the “Sell-Side”), NYFIX enables ultra-low touch, low impact market access and end-to-end transaction processing. We refer to ourselves as a “trusted business partner” because our clients depend on our products and services for mission-critical business functions, including order management, order routing and trade execution. And since we act only as agent for our clients and never engage in proprietary trading for the firm’s account, we are viewed as a neutral intermediary and impartial by Buy-Side and Sell-Side alike.
 
Page 21
 
We operate businesses that design, produce and sell technology based products and services to professional financial services organizations that are engaged in trading activities including traditional asset management (including the trading of those assets), proprietary trading, and/or the handling of client orders in the U.S. and international securities markets.
 
Many of our products and services utilize the FIX Protocol which is a messaging standard developed specifically for real-time electronic exchange of securities trading information.
 
We believe our innovative NYFIX products and services deliver value-added improvements in speed, quality of execution and cost efficiency by automating both the work flows at the user work station level and the interactive process of transmitting and executing orders between the Buy-Side institutional investors (e.g., hedge funds, investment advisers, mutual funds and pension funds) and the Sell-Side broker-dealers, and through exchanges (e.g., NYSE, American Stock Exchange (“AMEX”), the NASDAQ Stock Market (“Nasdaq”) and other exchanges), the OTC market, ATSs and electronic communication networks (“ECNs”).
 
Business Model
 
Our revenue is comprised of subscription and maintenance, product sales and services and transaction revenue, as follows:
 
Subscription and maintenance consists of contracts that provide for the use of our systems and our messaging channels, together with managed services, with a term of generally one to three years.  Additional services, provided under schedules, or addenda to the contracts, are either co-terminus with the original contract or have provisions similar to the original contract.  Under the terms of the subscription contracts and addenda, clients are typically invoiced a flat periodic charge after initial installation. Subscription and maintenance also includes maintenance contracts for software under separate, renewable maintenance contracts. Software related maintenance contracts are generally for a term of one year. Revenue related to these contracts and addenda is recognized over the term of the contract, addendum, or service period, on a straight-line basis.  We include within our subscription and maintenance revenue charges for connectivity to the NYFIX trading community. These include the various costs of connecting clients which include telecommunications, installation and maintenance of routers, network management software, and staff, and other costs related to the management of connectivity. The connectivity charges are recognized as the services are provided.  
 
Product sales and services are primarily comprised of FIX software licenses and professional services fees. This revenue is recognized when the software has been shipped and accepted by the client and when other contractual obligations, including installation, if applicable, have been satisfied and collection of the resulting receivable is reasonably assured.
 
Transaction revenue primarily consists of per-share commissions charged to clients who send and receive a match and execution in our NYFIX Millennium ATS and clients to whom we provide execution and smart order routing technology, gateways to access markets and algorithmic trading ability in: (i) their own name, (ii) a third party name, or (iii) our name. Revenue for these services is generally invoiced monthly in arrears or is obtained through the clearing process within three days of the trade date, and is recognized on a trade date basis, in the period in which it is earned. Transaction revenue also includes the net interest spread on our matched book of securities borrowed/loaned.
 
Cost of revenue includes the following:
 
 
·
Data center operating costs, including salaries, related to equipment, infrastructure and software supporting operations and the NYFIX MarketplaceTM;
 
 
·
Managed connectivity costs, including telecommunication and other costs incurred on behalf of clients, and costs to maintain the data centers, including depreciation and amortization of assets utilized by the data centers, which are recognized as either a cost of subscription and maintenance or cost of transaction revenue, as appropriate;
 
Page 22
 
 
·
Amortization expense of acquired intangible assets and capitalized product enhancement costs relating to the applicable revenue category;
 
 
·
Developer and quality assurance personnel labor for client and product support of software products;
 
 
·
The cost of leased subscription and service bureau equipment, which is depreciated over the estimated useful life of the equipment. When inventory is leased on a subscription basis, the cost of the inventory is relieved and transferred to property and equipment. The depreciation expense related to this equipment is included in cost of subscription and maintenance revenue; and
 
 
·
Execution and clearing costs to access various markets and exchanges and to process and settle transactions.
 
SEC Investigation and Related Contingencies
 
As described more fully in Note 10 to the Condensed Consolidated Financial Statements there is an ongoing SEC investigation of our historical stock option granting practices as well as a related grand jury subpoena and related shareholder derivative litigations and tax inquiries. In addition, in March 2007 we filed our 2005 10-K which included restatements of previously reported results related to stock-based compensation as well as acquisitions and investments, revenue recognition, income taxes and treasury stock. Our 2005 10-K includes detailed findings of the internal review of our historical stock-based awards.
 
We have determined that we have exposure as former management did not properly withhold employee income and related payroll taxes related to historical stock option activity. As a result, we have recorded a liability of $1.0 million related to tax withholdings not made on the exercises of stock options previously classified as Incentive Stock Options (“ISOs”), exposures related to Section 409A of the U.S. Internal Revenue Code (“Section 409A”), and similar exposures related to withholdings and payroll taxes which may be due in the U.K, related to stock option exercises under Pay As You Earn, or PAYE, and National Insurance Contribution provisions (due to our indemnity obligations to GL).
 
Due to the fact that we are not current with our SEC reporting obligations, we have generally not issued shares to employees and directors in connection with the exercise of stock options since July 2005. In February 2006, the Compensation Committee of the Board of Directors approved a policy whereby we will honor awards to former employees who have validly notified us in writing of their intent to exercise. These awards will be honored once the Company is current with its periodic SEC reporting requirements and can settle awards under its registration statements. Certain former employees have notified us in writing of their intent to exercise; however, we have not honored such exercises at this time. We have cash exposure if our stock price drops after employees have notified us in writing of their intent to exercise.
 
As of March 31, 2007, we had outstanding options covering 957,154 shares for which we had been notified of intents to exercise and which were not deemed probable of expiring before the Company could issue shares (“Pending Exercises”). The range of fair market values for our common stock on the dates of these notifications was from $2.90 to $7.35, with a weighted average fair market value for such shares on the notification dates of $5.94.
 
During the second quarter of 2007, we were notified of additional intents to exercise. As of June 30, 2007, Pending Exercises totaled 1,030,150 shares. The range of fair market values of our common stock on the dates of the corresponding notifications through June 30, 2007 was from $2.90 to $7.47, with a weighted average fair market value for such shares underlying options on their notification dates of $5.97. Our potential cash exposure as of June 30, 2007 for declines in our stock price after such notifications was estimated at less than $0.1 million, based on the fair market value of $7.40 at June 30, 2007. This cash exposure could, however, significantly increase if the fair market value of our stock declines once option holders are able to exercise and sell the underlying shares. We intend to offer to settle Pending Exercises in cash in an amount equal to the difference between the closing price of its stock on the date of notification and the exercise price of such options. We estimate our maximum cash exposure for net settlements of this nature at approximately $1.8 million.
 
Page 23
 
During the six months ended June 30, 2007, we paid $0.4 million to cash settle options which had reached their 10-year contractual life and expired. At June 30, 2007, liabilities for modified awards to be cash settled, related to options covering 21,375 shares, aggregated $0.1 million. We have additional cash exposure if we cannot settle Pending Exercises with stock prior to their expiration going forward.
 
During the three months ended March 31, 2007 and 2006, we incurred $3.6 million and $4.1 million, respectively, relating to the stock option investigation and subpoenas, a grand jury subpoena, related shareholder derivative litigation, related financial restatements and expenses to resolve related matters, together with an earlier SEC inquiry into former management’s accounting for NYFIX Millennium, related class action litigation and related financial restatement. These costs include outside counsels, contract attorneys and forensic accountants, other consultants and the cost of re-auditing previously issued financial statements following the resignation of our former independent registered public accounting firm. These costs do not include any portion of time that our employees have dedicated to these matters. We will likely continue to incur material amounts of expense associated with these matters until they are resolved.
 
As described more fully in Note 10 to the Condensed Consolidated Financial Statements, other than amounts for employee-related taxes for stock options and Pending Exercises, we, in accordance with SFAS No. 5, Accounting for Contingencies, have not recorded any liability with respect to these matters as we are currently unable to predict the outcomes and reasonably estimate the amounts of loss, if any. With respect to the SEC investigation of stock option grants, the grand jury subpoena, the State Court Consolidated Complaint, and the Federal Court Consolidated Complaint associated with such matters and other related matters, we could be subject to penalties, fines or regulatory sanctions or claims by current and former officers, directors or employees for indemnification of costs or losses they may incur and such amounts, individually or collectively, could have a material impact on the our financial condition. In addition, other actions may be brought against us related to the matters described above.
 
Results of Operations for the Three Month Periods Ended March 31, 2007 and 2006
 
The following table presents our consolidated results of operations for the periods indicated. These consolidated results of operations are not necessarily indicative of the consolidated results of operations that will be achieved in any future period.
 
Page 24
 
   
Three Months Ended March 31,
 
 
 
 
% of
 
 
 
% of
(in thousands, except percentages)
 
2007
 
revenue
 
2006
 
revenue
Revenue:
                
Subscription and maintenance
  
$
17,274
    
62%
 
$
15,647
    
66%
Product sales and services
    
680
    
2%
 
  
872
    
4%
Transaction
    
9,776
    
35%
 
  
7,203
    
30%
Total revenue
    
27,730
    
100%
 
  
23,722
    
100%
Cost of revenue:
          
 
          
 
Subscription and maintenance (1)
    
8,546
    
31%
 
  
8,065
    
34%
Product sales and services (1)
    
387
    
1%
 
  
497
    
2%
Transaction (1)
    
5,401
    
19%
 
  
3,927
    
17%
Total cost of revenue
    
14,334
    
52%
 
  
12,489
    
53%
Gross profit
    
13,396
    
48%
 
  
11,233
    
47%
Operating expense:
          
 
        
 
Selling, general and administrative (1)
    
16,878
    
61%
 
  
10,823
    
46%
Restatement, SEC investigation and related expenses (1)
    
3,593
    
13%
 
  
4,054
    
17%
Depreciation and amortization
    
282
    
1%
 
  
369
    
2%
Loss from operations
    
(7,357
)
  
-27%
 
  
(4,013
)
  
-17%
Interest expense
    
(136
)
  
0%
 
  
(134
)
  
-1%
Investment income
    
1,227
    
4%
 
  
132
    
1%
Other expense, net
    
(15
)
  
NM
  
-
    
-
Loss from continuing operations before income tax provision
    
(6,281
)
  
-23%
 
  
(4,015
)
  
-17%
Income tax provision
    
47
    
0%
 
  
47
    
0%
Loss from continuing operations
    
(6,328
)
  
-23%
 
  
(4,062
)
  
-17%
Loss from discontinued operations
    
-
    
 
    
(192
)
  
 
Net loss
    
(6,328
)
  
 
    
(4,254
)
  
 
Accumulated preferred dividends
    
(1,717
)
  
 
    
-
    
 
Loss applicable to common stockholders
  
$
(8,045
)
  
 
  
$
(4,254
)
  
 
NM - not meaningful
          
 
            
Percentage sub-totals may not add due to rounding
                        
(1) Stock-based compensation expense included
                        
in the respective line items above follows:
                        
Cost of revenue:
                        
Subscription and maintenance
  
$
10
        
$
43
      
Product sales and services
    
1
          
4
      
Transaction
    
-
          
3
      
Selling, general and administrative
    
98
          
263
      
Restatement, SEC investigation and related expenses
    
(11
)
        
105
      
   
$
98
        
$
418
      
 
Revenue
 
The following table presents the components of revenue for the periods indicated:
 
   
Three Months Ended
 
 
 
 
 
 
March 31,
 
Increase (Decrease)
(in thousands, except percentages)
 
2007
 
2006
 
 $
  
 %
Subscription and maintenance
  
$
17,274
  
$
15,647
  
$
1,627
    
10%
Product sales and services
    
680
    
872
    
(192
)
  
-22%
Transaction
    
9,776
    
7,203
    
2,573
    
36%
Total revenue
  
$
27,730
  
$
23,722
  
$
4,008
    
17%
 
Page 25
 
Subscription and Maintenance
 
The increase in subscription and maintenance revenue for the three months ended March 31, 2007 was primarily attributable to an increase in subscriptions (and related managed services) of messaging channels offered by our FIX Division. This growth was attributable to an increase in the number of Buy-Side to Sell-Side messaging channels, primarily for order routing, as we continued our efforts to increase the level of business with Buy-Side institutions. Subscriptions (and related managed services) of our OMS Division desktop and floor products decreased $1.5 million to $3.7 million for the three months ended March 31, 2007 compared to $5.2 million during the three months ended March 31, 2006, due primarily to the declining presence of floor traders using our products. Recurring maintenance on licensed software was comparable between the three months ended 2007 and 2006 at $1.0 and $1.1 million, respectively.
 
For the full year 2007, we expect our OMS Division revenues to decline by approximately 40% from 2006, due primarily to the discontinuation (during the second quarter) of certain floor application product offerings as well as cancellations by certain desktop clients.
 
Product Sales and Services
 
The decrease in product sales and services for the three months ended March 31, 2007 was primarily due to a decrease in sales of software licenses and related services by our FIX Division.
 
Transaction
 
The increase in transaction revenue for the three months ended March 31, 2007 was attributable to an increase in commissions on trade executions. Commissions increased $2.6 million to $9.4 million during the three months ended March 31, 2007 compared to $6.8 million during three months ended March 31, 2006 due primarily to a $3.8 million increase in commissions from Sell-Side clients offset by a $1.2 million decrease in commissions from Buy-Side clients. The increase from Sell-Side clients was due to increased matched volumes in NYFIX Millennium, increased use of the NYFIX NEXASTM algorithmic trading products and an increase in commissions for direct market access services, offset in part by a decline in billed specialist fees. The average daily matched volume in NYFIX Millennium during the three months ended March 31, 2007 was 41.3 million shares, a 120% increase over the average of 18.8 million shares during the three months ended March 31, 2006. This increase reflects increased popularity of dark pool matching venues for trading and algorithmic trading solutions sponsored by broker dealers. The increased popularity of these third-party algorithmic trading solutions with Buy-Side clients has had the effect of disintermediating our direct Buy-Side sales efforts, resulting in lower share volumes and commissions from these clients. Our securities lending business generated net interest spread on its matched book stock borrow/stock loan portfolio of $0.3 million during the three months ended March 31, 2007, compared to $0.4 million during the three months ended March 31, 2006.
 
Included in the NYFIX Millennium volume figures reported above are conditional orders executed against pass-through orders and other conditional orders, and third market trades crossed by clients and reported by NYFIX Millennium to Nasdaq.
 
Costs and Expenses
 
Cost of Revenue
 
The following table presents cost of revenue for the periods indicated:

   
Three Months Ended
 
 
 
 
 
March 31,
 
Increase (Decrease)
 
(in thousands, except percentages)
 
2007
 
2006
 
$
 
%
  
Subscription and maintenance
  
$
8,546
  
$
8,065
  
$
481
    
6%
 
Product sales and services
    
387
    
497
    
(110
)
  
-22%
 
Transaction
    
5,401
    
3,927
    
1,474
    
38%
 
Total cost of revenue
  
$
14,334
  
$
12,489
  
$
1,845
    
15%
 
Percent of total revenue
    
52%
 
  
53%
 
            
 
Page 26
 
Subscription and Maintenance
 
The increase in subscription and maintenance cost of revenue for the three months ended March 31, 2007 was primarily attributable to an increase in fees paid of $0.2 million to third-party order management system providers to establish messaging channels with their clients, investments in our subscription-based products, including higher personnel costs of $0.1 million and increased telecommunication costs of $0.1 million. These increases were offset in part by decreases in various other costs. As a percentage of related revenue, these costs decreased to 49% for the three months ended March 31, 2007 as compared to 52% for the three months ended March 31, 2006.
 
Product Sales and Services
 
The decrease in product sales and services cost of revenue for the three months ended March 31, 2007 was attributable to lower amortization of capitalized enhancement costs of $0.1 million. Recently, such costs have been primarily fixed versus variable in nature. As a percentage of related revenue these costs were comparable at 57% for the respective periods in 2007 and 2006.
 
Transaction
 
The increase in transaction cost of revenue for the three months ended March 31, 2007 primarily related to increased execution and clearing fees of $1.4 million, of which $1.1 million was associated with the growth in transaction volumes and $0.3 million related to outbound routed NYSE linkage fees. Upon the March 5, 2007 effective date of Regulation NMS for exchanges, we began to incur significant linkage fees from the NYSE to route orders to other market centers in order to access improved prices related to pending trades. As a percentage of related revenue, these costs were comparable at 55% for the three months ended March 31, 2007 and 2006. Due to significant delays and difficulties in capturing the trade-by-trade information for NYSE outbound routed orders and timely notifying our direct access clients of the respective linkage fee charges on a real time basis, we are still in the process of passing the linkage fee charges incurred from March 5, 2007 through May 31, 2007 to the respective clients as billed revenue. Due to this situation and related contingency, we will not record any offsetting linkage fee revenue for the period from March 5, 2007 to May 31, 2007 until trade-by-trade data is available and collectibility is reasonably assured.  In addition to the $0.3 million of linkage fee expense we recorded in March 2007, we recorded an additional $1.6 million of linkage fee expense during April 2007 and May 2007 which we are in the process of passing to customers.
 
Selling, General and Administrative Expenses (SG&A)
 
The following table presents components of our selling, general and administrative expense for the periods indicated:

   
Three Months Ended
  
 
 
  
March 31,
  
Increase (Decrease)
(in thousands, except percentages)
  
2007
  
2006
  
$
  
%
Compensation and related
  
$
7,838
  
$
6,157
  
$
1,681
    
27%
Occupancy and related
    
754
    
724
    
30
    
4%
Marketing, travel and entertainment
    
791
    
463
    
328
    
71%
Professional fees
    
2,921
    
1,604
    
1,317
    
82%
Stock-based compensation
    
98
    
263
    
(165
)
  
-63%
Transitional rebuilding and remediation
    
1,742
    
-
    
1,742
    
-
Transitional employment costs
    
1,036
    
181
    
855
    
472%
General and other
    
1,698
    
1,431
    
267
    
19%
Total SG&A
  
$
16,878
  
$
10,823
  
$
6,055
    
56%
Percent of total revenue
    
61%
 
  
46%
 
          
 
Page 27
 
 Compensation and Related
 
The increase in the portion of recurring compensation and related costs included in SG&A for the three months ended March 31, 2007 was primarily due to the impact of salary increases, growth in headcount as we continue to scale our organization for growth, increased incentive compensation associated with higher revenue levels and increased costs for employee benefits.
 
Occupancy and Related
 
Occupancy and related costs for the three months ended March 31, 2007 were comparable to the three months ended March 31, 2006 at $0.8 million and $0.7 million, respectively.
 
Marketing, Travel and Entertainment
 
The increase in marketing, travel and entertainment expenses for the three months ended March 31, 2007, primarily reflected our efforts to market our products including participation in industry trade shows and product promotion.
 
Professional Fees
 
The increase in professional fees incurred for the three months ended March 31, 2007, was primarily due to the use of consultants for organizational development, marketing, public relations and strategy, as well as increases in SOX 404 compliance and legal fees. Consultants and outside legal counsels were also engaged to supplement day-to-day management activities while the restatements and related legal issues were being addressed by management. These costs do not include the time spent by outside consultants and advisors on the restatements and related legal issues as such costs have been separately categorized below.
 
Stock-based Compensation
 
The decrease in stock-based compensation for the three months ended March 31, 2007 was primarily attributable to the fact that we have not issued any stock-based awards since the second quarter of 2005.
 
Transitional Rebuilding and Remediation Costs
 
Transitional rebuilding and remediation costs reflect a Company-wide, one-time effort, following the $75 million preferred stock investment by Warburg Pincus, to remediate deficiencies as well as improve critical operational systems and processes, including technology infrastructure and management information systems to improve scalability. As a result of this effort, we expect to have improvements in our lab environment, data replication and back-up, network monitoring, application security and more timely and detailed internal and external financial reporting. These efforts are also addressing certain historical administrative issues such as our corporate legal structure and our compensation programs. These costs primarily consist of fees paid to outside consultants. During the three months ended March 31, 2007, we incurred $1.7 million of such costs. We expect to incur approximately $6.0 million of these costs, mostly during the 2007 year, however, a portion of this work and related costs may carry forward into early 2008.
 
Page 28
 
Transitional Employment Costs
 
Transitional employment costs reflect the Company’s efforts to build critical teams, retain key employees, and improve various operational capabilities while remediating related skill gaps to improve scalability. These transitional costs primarily consist of sign-on bonuses and retention bonuses, severance and other termination benefits. During the three months ended March 31, 2007 and March 31, 2006, we incurred $1.0 million and $0.2 million of such costs, respectively. We expect to incur in excess of $3.0 million of such costs during the 2007 year and an additional $0.3 million during the first half of 2008.
 
General and Other
 
The increase in general and other expenses for the three months ended March 31, 2007 primarily reflects an increase in recruiting fees, various municipal taxes and higher software maintenance costs. These increases were offset in part by decreases in costs for temporary administrative help and various other general expenses.
 
Other Operating Expenses
 
Other operating expenses consist of the following for the periods indicated:
 
   
Three Months Ended
    
   
March 31,
  
Decrease
(in thousands, except percentages)
  
2007
  
2006
  
$
  
%
Restatement, SEC investigation and related expenses
  
$
3,593
  
$
4,054
  
$
(461
)
  
-11%
Depreciation and amortization
    
282
    
369
    
(87
)
  
-24%
 
Restatement, SEC Investigation and Related Expenses
 
During the three months ended March 31, 2007 and 2006, we incurred costs relating to the stock option investigation and subpoenas, a grand jury subpoena related to our stock option grants, related shareholder derivative litigation, related financial restatements and expenses to resolve related matters, together with the NYFIX Millennium SEC inquiry, related class action litigation and related financial restatement. These costs include outside counsels, contract attorneys and forensic accountants, other consultants and the cost of re-auditing previously issued financial statements following the resignation of our former independent registered public accounting firm. These costs do not include any portion of time that our employees have dedicated to these matters. We will continue to incur expenses associated with these matters until they are resolved. The amount of such expenses will likely vary and may be material.
 
These costs decreased $0.5 million to $3.6 million for the three months ended March 31, 2007, compared to $4.1 million for the three months ended March 31, 2006. With the completion of the 2005 Restatement in March 2007, we expect these costs to decline over the remainder of 2007 although we do expect to continue to incur costs related to the stock option investigation and litigations and other stock option related matters.
 
Depreciation and Amortization
 
The decline in the portion of depreciation and amortization not included in cost of revenue for the three months ended March 31, 2007 was due to an increase in the amount of general overhead assets that have become fully depreciated.
 
Non-Operating Income (Expense)
 
Non-operating income (expense) items are as follows for the periods indicated:

   
Three Months Ended
 
Increase
 
 
 
March 31,
 
(Decrease)
 
(in thousands)
 
2007
 
2006
 
$
  
Interest expense
  
$
(136
)
$
(134
)
$
2
  
Investment income
    
1,227
    
132
    
1,095
  
Other expense, net
    
(15
)
  
-
    
(15
)
 
Page 29
 
Interest Expense 
 
For the three months ended March 31, 2007 and 2006, interest expense was comparable at $0.1 million, reflecting the interest on capital lease obligations and the $7.5 million convertible note.
 
Investment Income
 
The increase in investment income for the three months ended March 31, 2007 reflected higher average cash balances invested during the period, primarily as a result of two private placements of equity securities during the last half of 2006.
 
Income Tax Provision
 
The income tax provisions for the three months ended March 31, 2007 and 2006 were solely attributable to the impact of deducting goodwill related to the Renaissance acquisition in our tax filings. All other tax effects during the three months ended March 31, 2007 and 2006 have been netted out in our deferred tax asset valuation reflecting our view that historical pre-tax book income and historical income for tax purposes are not sufficient to support a conclusion that the value of our net deferred tax assets are more likely than not to be realized. Until we achieve and sustain an appropriate level of profitability, we plan to maintain a valuation allowance on our net deferred tax assets.
 
Liquidity and Capital Resources
 
   
As of
  
   
March 31,
  
December 31,
  
(in thousands)
  
2007
  
2006
  
Cash and cash equivalents
  
$
94,634
  
$
105,888
  
 
   
Three Months Ended
 
(in thousands)
 
March 31, 2007
  
Net cash used in operating activities
  
$
(7,444
)
Net cash used in investing activities
    
(3,464
)
Net cash used in financing activities
    
(343
)
Effect of exchange rate changes on cash
    
(3
)
Net decrease in cash and cash equivalents
  
$
(11,254
)
 
Liquidity
 
We derive our liquidity and capital resources primarily from our cash flows from operations, from issuances of stock and from long-term borrowings. At March 31, 2007, we had cash and cash equivalents of $94.6 million. We believe resources available at March 31, 2007 will be sufficient to finance our current investing, transitional rebuilding, remediation and other costs, and operating needs as well as the net capital requirements of our broker-dealer subsidiaries. Due to operating losses and other uses during the three months ended June 30, 2007, our cash and cash equivalents on hand declined to $85.2 million at June 30, 2007. At March 31, 2007, $31.0 million of our total cash and cash equivalents were held in our broker-dealer subsidiaries to help meet their regulatory capital requirements.
 
Page 30
 
Operating Activities
 
The following table sets forth our net loss adjusted for non-cash items, such as depreciation, amortization, deferred taxes, provision for doubtful accounts and stock-based compensation; and the effect on cash generated by operating activities of changes in working capital and other operating accounts between periods.
 
   
Three Months Ended
 
(in thousands)
 
March 31, 2007
  
Net loss adjusted for non-cash items
  
$
(3,416
)
Effect of changes in working capital and other operating accounts
    
(4,028
)
Net cash used in operating activities
  
$
(7,444
)
 
Changes in working capital and other operating accounts affected cash flows during the three months ended March 31, 2007 primarily as a result of changes in the levels of accounts receivable, accounts payable and accrued expenses and net clearing broker assets between periods. These changes resulted primarily from increasing levels of sales and the timing of cash posted for securities lending positions, offset in part by increasing levels of expenditures, and from cash management efforts affecting the timing of payments.
 
Broker-Dealer Operations
 
Clearing broker assets reflect amounts on hand to support our ability to self-clear the transactions of NYFIX Millennium and NYFIX Transaction, such as receivables from clearing organizations and deposits with clearing firms, as well as balances to support our matched-book stock borrow/stock loan business. Our matched-book balances include offsetting stock borrowed and stock loaned and offsetting securities failed-to-deliver and securities failed-to-receive. At March 31, 2007, the net balance for clearing broker assets and clearing broker liabilities was a net receivable of $2.2 million.
 
Securities borrowed and securities loaned are recorded at the amount of cash collateral provided for securities borrowed transactions and received for securities loaned transactions, plus accrued interest. We monitor the market value of securities borrowed and loaned on a daily basis with additional collateral obtained or refunded as necessary. At March 31, 2007, clearing broker assets include stock borrows of $427.0 million and clearing broker liabilities include stock loans of $427.4 million. We anticipate that these balances will grow in 2007 as a result of the $12.5 million capital infusion into the business in December 2006.
 
NYFIX Millennium, NYFIX Transaction and NYFIX Clearing are U.S. registered broker-dealers required to maintain levels of regulatory net capital under Rule 15c3-1. NYFIX Clearing’s DTCC membership, used to self-clear securities transactions, requires the maintenance of $10 million in excess regulatory net capital. NYFIX International is a registered ISD Category B firm with the FSA, required to maintain financial resources generally equal to three months average expenditures, subject to a minimum of €125,000, plus a proportion of less liquid assets on hand. At March 31, 2007, the aggregate regulatory net capital/resources of our regulated subsidiaries in the U.S. and U.K. were $29.0 million, $18.0 million in excess of our aggregate requirement of $11.0 million (including the $10 million excess required by DTCC).
 
Investing Activities
 
Investments in current technology to maintain our infrastructure and to enhance our products remain an important requirement for our available cash resources.
 
Net cash used in investing activities for the three months ended March 31, 2007 was $3.5 million. This consisted of capital expenditures for property and equipment, principally for data center equipment and software, of $2.7 million and capitalized product enhancement costs of $0.8 million.
 
Financing Activities
 
Our financing activities primarily consist of long-term debt issued for acquisitions, capital lease obligations used for equipment purchases, long-term debt issued for working capital purposes, and issuance of capital stock for general corporate purposes and business development activities. At March 31, 2007, we had long-term debt and capital lease obligations outstanding aggregating $9.0 million (including current portions and the convertible note discussed below).
 
Page 31
 
At March 31, 2007, we had outstanding a $7.5 million convertible note with an interest rate of 5%, due in December 2009. At March 31, 2007, the price at which the lender could convert the convertible note into shares of our common stock was $5.66 per share. The conversion price may be reduced if we issue shares of common stock at a price below the conversion price in effect, excluding stock option exercises, the settlement of obligations outstanding as of the date of the convertible note and other transactions previously approved by our Board of Directors.
 
At the option of the lender, we may issue to the lender up to an additional $2.5 million note under terms substantially similar to those described above.
 
Net cash used in financing activities for the three months ended March 31, 2007 was $0.3 million, consisting primarily of principal payments under capital lease obligations.
 
Commitments and Contingencies
 
There are various lawsuits and claims pending against us as well as ongoing SEC and United States Attorney’s Office investigations into our accounting for stock option grants and an SEC investigation into our accounting for the losses incurred by NYFIX Millennium. We are currently unable to predict the outcomes and reasonably estimate the amounts of loss, if any, with respect to these matters. With respect to certain of these matters, we could be subject to penalties, fines or regulatory sanctions or claims by current and former officers, directors or employees for indemnification of costs or losses they may incur and such amounts, individually or collectively, could have a material impact on our financial condition. In addition, other actions may be brought against us related to these matters.
 
See Note 10 to the Condensed Consolidated Financial Statements for a description of our commitments and contingencies.
 
Seasonality and Inflation
 
We believe that our operations have not been significantly affected by seasonality or inflation.
 
Off-balance Sheet Arrangements
 
We have no material off-balance sheet arrangements other than those related to the contingent obligations under the $7.5 million convertible note as described above and under the terms of our Series B Preferred Stock as described in our 2006 10-K.
 
Critical Accounting Policies and Estimates 
 
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including our allowance for doubtful accounts, inventory valuation and obsolescence, long-lived tangible and intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In our 2006 10-K, we identified and disclosed critical accounting policies, which included revenue recognition, allowance for doubtful accounts, property and equipment, acquisitions and goodwill, product enhancement costs, long-lived assets, income taxes, contingencies and stock-based compensation. These critical accounting policies affect significant judgments and estimates used in the preparation of our financial statements. We reviewed our policies in conjunction with the preparation of this report and have determined that those critical policies remain and have not changed since December 31, 2006.
 
Page 32

Part I Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
There have been no material changes in our exposure to market risk during the three months ended March 31, 2007, from those described in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, included in our 2006 10-K.
 
Part I Item 4. Controls and Procedures
 
Disclosure Controls and Procedures
 
In connection with the preparation of this report on Form 10-Q, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2007. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures designed to provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
As disclosed in our 2006 10-K (filed in August 2007), management and our independent registered public accounting firm identified several material weaknesses regarding elements of our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Material weaknesses in internal controls may also constitute deficiencies in our disclosure controls and procedures. 
 
Based on an evaluation of the identified material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2007, we continued to have material weaknesses regarding elements of our internal control over financial reporting, and as a result, concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2007.
 
Interim Measures to Ensure the Accuracy of Financial Reporting
 
In response to the material weaknesses identified as a result of management’s assessment of internal control over financial reporting as disclosed in our 2005 and 2006 10-K’s, our management, with oversight from our Audit Committee, implemented measures to help ensure the accuracy of our financial reporting until such time as we are able to further improve our control environment and remedy our material weaknesses, including, among other things:
 
·  
expansion of our period-end closing procedures,
 
·  
enhanced monitoring and communications,
 
·  
additional analyses and cross team reviews,
 
·  
the dedication of significant internal resources,
 
·  
the engagement of external consultants, and
 
·  
additional top level management reviews of financial information and related disclosures.
 
As a result of these expanded and compensating procedures, we concluded that the consolidated financial statements included in this report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
 
Page 33
 
The certifications of our principal executive officer and principal financial officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures and our internal control over financial reporting, referred to in the certifications. Those certifications should be read in conjunction with this Item 4 for a complete understanding of the matters covered by the certifications.
 
Changes in Internal Control Over Financial Reporting
 
During 2006 and through the August 6, 2007 filing of our 2006 10-K (which included developments during the three months ended March 31, 2007), we initiated changes to address previously reported material weaknesses in internal control over financial reporting, as described therein, that have a material effect or are reasonably likely to have a material effect on our internal control over financial reporting. Our efforts, which spanned the January 1, 2006 through August 6, 2007 period and continued to the date of filing of this report as part of an ongoing process, have focused and continue to focus, on:
 
(i)
Expanding our organizational capabilities to improve our control environment;
 
(ii)
Implementing process changes to strengthen our internal control and monitoring activities; and
 
(iii)
Implementing adequate information technology general controls.
 
Ongoing Remediation of Material Weaknesses -
 
While we believe our ongoing efforts have improved our internal control over financial reporting, we have not completed the redesign and/or programming of all necessary procedures and controls nor our documentation and testing of the processes. Accordingly, we will continue to perform the interim measures described above and monitor the effectiveness of our internal control over financial reporting in the areas impacted by the material weaknesses discussed above.
 
We continue to have extensive work remaining and management has increased the resources dedicated to our remediation program following completion of our internal accounting review in February 2007, and the resultant restatement of our financial results for prior periods.
 
We believe that these remedial actions have improved and that further planned actions will continue to improve our internal control over financial reporting, as well as our disclosure controls and procedures. However, we do not believe that all of these material weaknesses, including certain of those involving our IT infrastructure and related controls, will be fully remediated by December 31, 2007. We expect that we will need a period of time over which to demonstrate that these controls are functioning appropriately to conclude that we have adequately remediated the weaknesses. Accordingly, we expect to report that our internal control over financial reporting and our disclosure controls and procedures remain ineffective as of December 31, 2007.
 
Certain of the planned remediation efforts will require significant ongoing effort and investment. Our management, with the oversight of our Audit Committee, will continue to identify and take steps to remedy known material weaknesses as expeditiously as possible and enhance the overall design and capability of our control environment. 

Page 34
 
PART II -- OTHER INFORMATION

Part II Item 1. Legal Proceedings
 
The information required by this Item with respect to legal proceedings set forth under “Commitments and Contingencies” in Note 10 to the Condensed Consolidated Financial Statements included in Part I, Item 1, Unaudited Financial Statements of this report on Form 10-Q is hereby incorporated by reference.
 
Part II Item 1A. Risk Factors
 
An investment in our securities involves a high degree of risk. The risks referred to in our 2006 10-K are not the only ones facing us. Additional risks not presently known to us, or that we currently deem immaterial, may also have a material adverse effect on us. If any of the risks referred to in our 2006 10-K actually occur our financial condition, results of operations, cash flows or business could be harmed. In that case, the market price of our securities could decline, and you could lose part or all of your investment.
 
We are not presently aware of new material risk factors in addition to those referred to in our 2006 10-K For more information regarding risk factors relating to us and our business, please refer to Item 1A, Risk Factors in our 2006 10-K.
 
Part II Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
Uses of Common Stock
 
Certain transactions involving our common stock occurring during the first quarter of 2007 and through the date of this report were as follows:
 
Three months ended March 31, 2007
 
·  
On January 25, 2007, the Board of Directors declared a dividend payable to holders of Series B Preferred Stock in payment of dividends accumulated through December 31, 2006. As a result, we issued 227,500 restricted shares of common stock, with a fair value of approximately $1,354,000 based on the market price of our common stock on the declaration date.  The issuance of the shares was effected in reliance on the exemption set forth in Section 4(2) of the Securities Act. 
 
·  
During the three months ended March 31, 2007, certain stock options on the pending notification list aggregating 225,000 shares were exercised by an affiliate at $2.00 per share. The $450,000 aggregate exercise price of such shares was paid for with 73,171 shares of then-outstanding common stock, which were returned to treasury. We then issued 225,000 restricted shares of common stock from treasury, on that same day, with a fair market value of $6.15 per share on the exercise date. The issuance of the shares was effected in reliance on the exemption set forth in Section 4(2) of the Securities Act.  
 
·  
Also during March 2007, we issued 48,169 restricted shares of common stock from treasury to an officer in satisfaction of his employment agreement requiring issuance of shares worth $300,000. The issuance of the shares to the officer was effected in reliance on the exemption set forth in Section 4(2) of the Securities Act.
 
Subsequent Stock Issuances
 
On June 19, 2007, the Board of Directors declared a dividend payable to holders of Series B Preferred Stock in payment of dividends accumulated from January 1, 2007 through June 30, 2007; as a result, we issued 526,327 restricted shares of common stock in July 2007, with a fair value of approximately $3,426,000 based on the market price of our common stock on the declaration date. The issuance of the shares was effected in reliance on the exemption set forth in Section 4(2) of the Securities Act. 
 
Page 35
 
Part II Item 3. Defaults Upon Senior Securities
 
There were no payment defaults on our outstanding indebtedness during the three months ended March 31, 2007; however, there have been defaults related to our other obligations to become current with our periodic SEC filings and to register certain securities. Please see Note 11 to the Condensed Consolidated Financial Statements included in this report for a more detailed description of these matters.
 
Part II Item 4. Submission of Matters to a Vote of Security Holders
 
A special meeting of stockholders was held on February 27, 2007, following a proxy filed with the SEC on January 31, 2007, to approve a proposal of the Board of Directors to amend the Restated Certificate of Incorporation of the Company to increase the number of authorized shares of the Company’s common stock from 60,000,000 to 100,000,000. A tabulation of the stockholder vote approving the proposal follows:
 
Vote of the Company’s Common Stock as a Class
  
For
    
29,372,641
  
Against
    
435,836
  
Abstain
    
41,425
  
Broker Non-votes
    
0
  
 
Vote of the Company’s Common Stock and the Series B Preferred Stock Combined as a Single Class
  
For
    
44,372,641
  
Against
    
435,836
  
Abstain
    
41,425
  
Broker Non-votes
    
0
  
 
Part II Item 5. Other Information
 
None.
 
Page 36
 
 
Exhibits
 
Exhibit No.
  
Description of Exhibit
     
*31.1
  
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
*31.2
  
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
*32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
*32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*
Filed herewith
 
Page 37

Signatures 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
   
NYFIX, INC.
 
 		  
 		  
 
August 15, 2007 
/s/ P. Howard Edelstein
 
P. Howard Edelstein
 
President and
Chief Executive Officer 
 
     
August 15, 2007 
/s/ Steven R. Vigliotti
 
Steven R. Vigliotti 
 
Chief Financial Officer 
 
Page 38
 
EXHIBIT INDEX

31.1
  
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
  
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Page 39
 EX-31.1 2 v084345_ex31-1.htm
EXHIBIT 31.1

Certification of Chief Executive Officer
pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, P. Howard Edelstein, Chief Executive Officer and President of NYFIX, Inc., certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of NYFIX, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated: August 15, 2007
     
 
/s/ P. Howard Edelstein
 
P. Howard Edelstein
 
President and Chief Executive Officer
 
 EX-31.2 3 v084345_ex31-2.htm
EXHIBIT 31.2

Certification of Chief Financial Officer
pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Steven R. Vigliotti, Chief Financial Officer of NYFIX, Inc., certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of NYFIX, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated: August 15, 2007
     
 
/s/ Steven R. Vigliotti
 
Steven R. Vigliotti
 
Chief Financial Officer
 
 EX-32.1 4 v084345_ex32-1.htm
EXHIBIT 32.1

Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 
 
In connection with the Quarterly Report on Form 10-Q of NYFIX, Inc. for the quarterly period ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), P. Howard Edelstein, as Chief Executive Officer of NYFIX, Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of NYFIX, Inc.
 
Dated: August 15, 2007
     
 
By:  /s/ P. Howard Edelstein
 
P. Howard Edelstein
 
President and Chief Executive Officer
 
 EX-32.2 5 v084345_ex32-2.htm
EXHIBIT 32.2

Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 
 
In connection with the Quarterly Report on Form 10-Q of NYFIX, Inc. for the quarterly period ended March 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Steven R. Vigliotti, as Chief Financial Officer of NYFIX, Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of NYFIX, Inc.
 
Dated: August 15, 2007
     
 
By:  /s/ Steven R. Vigliotti
 
Steven R. Vigliotti
 
Chief Financial Officer

-----END PRIVACY-ENHANCED MESSAGE-----