SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports 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   ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is an accelerate filer (as defined in Rule 12b-2 of the Act) Yes  o    No  ý

 

As of June 28, 2002 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant was approximately $5,474,207 (based upon the last reported sales price of the Common Stock as reported by the Nasdaq National Market).

 

As of March 21, 2003, there were 25,030,689 shares of Common Stock and no shares of Preferred Stock of the Registrant outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:  See Page 2

 

Portions of the Registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

 

 

PART OF FORM 10-K		DOCUMENT
PART I		None
PART II		None
PART III
ITEM 10	Directors and Executive Officers	Company’s Proxy Statement
	of the Registrant	to be filed in connection with
		its Annual Meeting of
		Stockholders
ITEM 11	Executive Compensation	Company’s Proxy Statement
		to be filed in connection with
		its Annual Meeting of
		Stockholders
ITEM 12	Security Ownership of	Company’s Proxy Statement
	Certain Beneficial Owners	to be filed in connection with
	and Management and Related	its Annual Meeting of
	Stockholder Matters	Stockholders
ITEM 13	Certain Relationships and	Company’s Proxy Statement
	Related Transactions	to be filed in connection with
		its Annual Meeting of
		Stockholders
ITEM 14	Controls And Procedures	None
PART IV
ITEM 15	Exhibits, Financial Statement	Exhibits as specified in Item
	Schedules, and Reports on	15 of this Report
	Form 8-K
	Signatures
	Certifications

 

2

 

HYPERFEED TECHNOLOGIES, INC.

 

PART I

 

ITEM 1.  BUSINESS

 

COMPANY OVERVIEW

 

HyperFeed Technologies, Inc. (“HyperFeed” or the “Company”) offers its Managed Exchange Platform Services (“MEPS”) and derived data feed products to financial institutions, exchanges, value added distributors and trading professionals in a managed services model. Its proprietary technologies are designed specifically to support real-time market data, data management, data reporting, and value added services for use in delivering and receiving financial content with a competitive edge. The Company applies its advanced ticker plant technologies to the processing, distribution and access of financial market data. HyperFeed offers some of the fastest, most complete, flexible and reliable MEPS that can be used with industry-leading APIs, third-party applications or online desktop solutions.

 

GENERAL DEVELOPMENT OF BUSINESS

 

Background

HyperFeed was originally incorporated in Illinois on June 23, 1980 as On-Line Response, Inc. The Company changed its name to PCQuote, Inc. in 1983 and incorporated in Delaware on August 12, 1987. In an effort to focus on the Web site and consumer business, the Company incorporated a subsidiary, PCQuote.com, Inc. (“PCQuote”) in March 1999. In June 1999, the Company changed its name to HyperFeed Technologies, Inc.

 

From its inception over 20 years ago, HyperFeed’s core concentration has been and continues to be its development of ticker plant technologies to facilitate the trading of securities.

 

Current Market Conditions

For over 20 years, HyperFeed’s ticker plant technologies were proprietary and used behind-the-scenes to process its consolidated market data feed, HyperFeed® Market Data, for its customers. In response to market trends demanding direct exchange connectivity, the current model allows the same advanced and robust ticker plant technologies to be used by its customers in the MEPS model. This opens new markets for HyperFeed to serve exchanges and content providers as well as financial institutions and redistributors.

 

HyperFeed’s MEPS model evolved due to trends in the $6 billion (Risk Waters 2002) securities industry. Rampant data vendor consolidation, the proliferation of program trading, the advent of new exchange depth products, and the effect of current economic conditions are influencing financial institutions to take market data feeds directly from each exchange. These trends translate to bottom line issues of performance management and redundancy, bandwidth requirements and latency reduction.

 

A key market condition that spurred the shift toward direct exchange connections is the merger and acquisition (“M&A”) activity marking consolidated data vendors. Reuters acquired Bridge and Multex and, most recently, IDC acquired S&P Comstock. Financial institutions are now considering direct connectivity for primary and secondary data sources.

 

A second trend persuading financial institutions to “go-direct” is program trading. As more active and complex black box program trading proliferates, faster access to exchanges is necessary to maintain the competitive edge. Direct exchange access minimizes latency while providing the large volume of data required to support the trading applications.

 

NASDAQ’s SuperMontage, NYSE’s OpenBook, and the arrival of ECN’s to the trading community increased already high data volumes. These depth-of-book products magnify the number of updates requiring even higher amounts of bandwidth. High update rates also require more ticker plant processing power, which in turn can result in data processing latency. In efforts to ensure performance and reliability, financial institutions began to seriously investigate eliminating the consolidated data vendor and obtaining their market data directly from each exchange.

 

3

 

 

Current Market Opportunity

“Going-direct” is not a simple plug-and-play solution. Exchanges broadcast market data in different formats, and have very granular and detailed user reporting and permissioning requirements. End-users rely on complex algorithms and calculations to make split-second trading decisions. In addition, true latency reduction requires more than just a direct connection and a source server. Each exchange feed must be developed to and supported for systems and data management. These problems can be solved by utilizing HyperFeed’s MEPS, which have been continually developed for over 20 years and is now offered to HyperFeed’s customers. The MEPS allows users to pick and choose any configuration of a direct exchange feed with consolidated data in a managed services platform.

 

Capturing direct data feeds from many different exchanges requires financial institutions to write code and develop separate Front End Processors (“FEPs”) for each exchange. The FEPs must be able to process trade corrections, perform data integrity checks, and read complex symbology. Once the FEPs receive the data, it must be consolidated and normalized into a single format for output so it can be processed by applications or viewed on a desktop by an end-user. HyperFeed has FEPs that currently process all North American exchange data, in addition to a FEP for Telekurs that delivers international data. HyperFeed’s FEP toolkits have also been used by third parties to access international markets directly.

 

Each exchanges has specific detailed reporting and user-management requirements. A robust back-end database must be built for administration of this function. HyperFeed’s exchange-compliant Neosphere DB ™ is an extensible system built to manage HyperFeed’s administrative Vendor of Record functions and is now offered for use as part of the MEPS.

 

In addition, many traders rely on special ratios and calculations like Volume Weighted Average Price (“VWAP”), time/sales, best bid or money flow to make split second trading decisions. These are complex algorithms only handled by robust and flexible ticker plant technologies. They need to be calculated in real-time, simultaneously as the data is received or they have little value. HyperFeed’s ticker plant technologies have these calculations already built in and can offer this solution to financial institutions taking direct exchange feeds as a component of its MEPS.

 

HyperFeed’s consolidated data feed, HyperFeed® Market Data, is known in the industry for its speed and ability to deliver every trade. But it is the technology behind it – Zero Loss Compaction (“ZLC”) that powers this. HyperFeed’s ZLC technology, another component of its MEPS, can alleviate the latency problems and reduce the bandwidth costs financial institutions face with direct-to-exchange data feeds.

 

Large financial institutions often create proprietary calculations and data feeds that give them a competitive edge in trading and analysis. HyperFeed’s Software Development Kits (“SDKs”) allow companies to seamlessly integrate the proprietary information with the rest of the market data.

 

In addition, HyperFeed offers its services as a technical solution for consolidated data vendors and exchanges looking for efficient ways to deliver new products and services to their customers. These services can now be licensed from HyperFeed by the exchanges directly or by the feed vendors themselves. As more institutions opt for direct exchange feeds, HyperFeed has positioned itself to license its technology for market disintermediation and to capture market share with its MEPS offerings. MEPS is an enabling technology platform that delivers a suite of market data feeds and ticker plant technologies in a managed services model. HyperFeed delivers market data from every North American exchange, but more importantly, it licenses the complex ticker plant technologies that read, formulate and normalize the data, process great volumes of market data, make calculations needed for trading decisions, and manage relationships with exchanges and customers.

 

Customers

HyperFeed’s target customers fall into four categories: Exchanges, Financial Institutions, Content Providers, and Redistributors. HyperFeed’s MEPS allows for the aggregation and delivery of exchange based data and services via channel and alliance partners that utilize HyperFeed’s technology to enhance the direct delivery of data from exchanges to financial institutions.

 

4

 

PRODUCTS AND SERVICES

 

Managed Exchange Platform Services (MEPS)

All HyperFeed products are components of its MEPS, a complete turnkey solution for the normalization, data-basing, integration and transmission of high performance, real-time data sources from exchanges, content providers and proprietary in-house sources. It provides direct access to all North American exchanges and offers a complete set of data cleansing and management tools for remote or on-site use. It provides adaptors to a number of widely used middleware platforms and can be used collectively as a complete solution or individually to augment the functionality of other vendor system products.

•                  Front End Processors (FEP)

Different types of data received directly from multiple sources (exchanges, fundamental data providers, historical data providers and customers’ proprietary data) can be transformed into a normalized protocol that eliminates the need for a consolidated data vendor feed. HyperFeed’s FEPs also offer line arbitration, a service that selects the best feed from redundant sources.

•                  Value Added Services

HyperFeed’s Value Added Services include a Calculation Engine (VWAP, Time/Sales), Fundamental Data, Historical Data, Indices and News.

•                  Data Management

•                  Neosphere DB™

HyperFeed’s Neosphere DB is an exchange-compliant enterprise level user management system and complete back-office entitlement system. It expertly monitors and manages enterprise data set permissions and automatically records and accurately reports this information to the exchanges.

•                  Control Room

HyperFeed’s Control Room is a set of over 200 monitoring tools that manage and audit incoming lines and alert for problems. It allows viewing of incoming lines and indicates sequence number, baud rate, and sensitivity. It also has completely customizable alarms, task management capabilities, and remote accessibility.

•                  Technologies

•                  ZLC (Zero Loss Compaction)

HyperFeed’s proprietary technology provides up to a 10:1 ratio, allowing clients to receive complete data sets over less bandwidth.

•                  Tools and Adaptors

•                  SDKs (Software Development Kits)

HyperFeed’s SDKs allow customers to quickly and easily integrate all HyperFeed’s database content into their own financial applications without enduring long development cycles or incurring high development costs. Available development tools are: COM, JAVA, C/C++ (for UNIX/LINUX and Windows), Visual Basic and CGI.

•                  RMDS Adaptor (Reuters Market Data System)

RMDS Adaptor is an adaptor that allows financial institutions with the RMDS infrastructure to access, publish, manipulate and display HyperFeed Market Data.

•                  HyperFeed Box (“H!BOX”)

H!BOX is a delivery service platform that puts HyperFeed’s advanced ticker plant technology at the clients’ site, offering connectivity to a consolidated data feed through HyperServer, Telekurs, and/or any other data stream a customer desires to receive. Other key features and benefits include latency minimization, Data Maintenance Line (DML), data integrity maintenance, and scalability.

•                  HyperServer FEP

HyperServer 6.0 powers HyperFeed’s consolidated data feed, which consists of price and volume data on over 800,000 equity, option, commodity and OTC issues principally covering all North American exchanges, and delivers it directly to the customer in record time. In addition to quotes, it also supplies news, historical data, fundamental information, and data on fixed income securities.

•                  Telekurs FEP

Telekurs FEP is the first true joint product between HyperFeed and Telekurs USA that gives customers access to the contents of the Telekurs MDF (Market Data Feed). HyperFeed’s Telekurs FEP is available in native HyperFeed format and through HyperFeed’s ticker plant technologies.

 

5

 

PATENTS, TRADEMARKS AND LICENSES

 

Our proprietary software is protected from unauthorized use by the U.S. Copyright Act and trade secret laws and all distributed copies of the software and supporting materials bear a copyright notice. We also attempt to protect our rights in proprietary software by entering into license agreements with customers and suppliers and confidentiality and non-disclosure agreements with our employees and other third parties. We use security measures to restrict access to our services to only those with proper password identification. As an additional safeguard, we retain source code and provide only object code bearing a copyright notice to third party users of our proprietary software.

 

The following are trademarks we use in our business:

 

•                  HyperFeed® and the HyperFeed® logos are registered trademarks of HyperFeed Technologies, Inc.

 

•                  HyperServer™ is a trademark of HyperFeed Technologies, Inc.

 

•                  HyperFeed SmarTicker™ is a trademark of HyperFeed Technologies, Inc.

 

•                  Neosphere™ is a trademark of HyperFeed Technologies, Inc.

 

•                  Neosphere DB™ is a trademark of HyperFeed Technologies, Inc.

 

COMPETITION

 

The market for ticker plant technologies used to facilitate and manage the direct exchange feeds of financial institutions in a MEPS model is opportune and recently developed due to key previously identified trends in the financial services industry. Direct competitors on this front include small consulting shops that sell data feed servers and in-house development teams, but they only compete with HyperFeed on the first level of service involving FEPs. They do not offer Value Added Services like time/sales, money flow and bid/ask, Data Management Tools like Neosphere and Control Room, ZLC technologies or SDKs and Adaptors. HyperFeed’s service strategy is based on a one-to-many delivery model that may potentially increase a customer’s return on investment.

 

The market for the provision of a domestic consolidated data feed containing real-time streaming financial information such as equities, commodities, futures and options quotations, and news through services and software applications similar to those we provide includes a large amount of competitors and is subject to rapid change. The industry has also seen unprecedented M&A activity. We believe our primary competitors today include Reuters, the ILX unit of Thomson Corporation and the Comstock unit of Standard and Poor’s, which was recently acquired by IDC. Although our new strategy is to license our technology to these current competitors, they have significantly greater financial, technical and marketing resources and greater name recognition than we do to compete for the provision of market data.

 

SEASONALITY

 

We have not experienced any material seasonal fluctuations in our business. Barring any prolonged period of investor inactivity in trading securities, we do not believe that seasonality is material to our business activities.

 

RESEARCH AND DEVELOPMENT

 

Our research and development personnel expend their time and effort enhancing HyperFeed’s ticker plant technologies. This includes upgrades to HyperServer 6.0, developing new SDKs, and creating software that allows our technologies and data to be read by and integrated with our partners and third party products. Our investment in software development consists primarily of:

 

6

 

 

•                  Development of new FEPs for receipt of data from exchanges, consolidated sources, and news and fundamental data sources.

 

•                  Leveraging existing ticker plant technologies by packaging it into our new MEPS model for use at customer sites.

 

•                  Enhancing the efficiency of our compression technology and channels for the internal ticker plant which makes up part of a consolidated ticker plant.

 

During the fiscal years ended December 31, 2002, 2001 and 2000, we expensed $1,307,740, $1,120,124 and $1,794,228, respectively, for research and development.

 

ENVIRONMENT

 

Compliance with Federal, state and local provisions with respect to the environment has not had a material adverse effect on our capital expenditures, earnings, or competitive position.

 

EMPLOYEES

 

As of December 31, 2002, we employed 71 people and PCQuote employed 2 people, none of whom are represented by a collective bargaining unit. We believe we have a satisfactory relationship with our employees. From time to time, we use the services of outside consultants on an hourly basis.

 

GOVERNMENT CONTRACTS

 

We have no material contracts with the Government.

 

BACKLOGS

 

Due to the nature of our business, backlogs are not a typical occurrence in our industry.

 

MAJOR CUSTOMERS

 

Revenues from Charles Schwab & Co., Inc., our largest customer in 2002, represented approximately 16% of the Company’s consolidated revenues for that year. We did not have any customers that accounted for 10% or more of consolidated revenue in 2001. Revenues from AB Watley Group, Inc. (“AB Watley”), our largest customer in 2000, represented approximately 21% of the Company’s consolidated revenues for that year.

 

ITEM 2.  PROPERTIES

 

Our executive offices and primary data center are located in approximately 15,000 square feet of leased space on the 3rd floor of 300 South Wacker Drive, Chicago, Illinois. The lease for the premises expires on December 31, 2009. Lease payments are subject to escalating base rent as well as adjustment for changes in real estate taxes and other operating expenses. (See Note 7 of the Notes to Consolidated Financial Statements.)

 

We lease approximately 11,000 square feet of office space at two sites in Aurora, Illinois, through March 2005. The lease for 3,000 square feet of office space in New York City expires in July 2003. We also leased 9,000 square feet of office space on the 20^th floor of 300 South Wacker Drive, Chicago, Illinois through February 2003. (See Note 7 of the Notes to Consolidated Financial Statements.)

 

7

 

ITEM 3.  LEGAL PROCEEDINGS

 

On July 24, 2002, the Company filed an action against Quantitative Science Technologies, Inc. to recover payment under a Promissory Note of approximately $100,000, plus interest, costs and attorneys fees. Defendant filed an answer, affirmative defenses and counterclaim for declaratory judgment and breach of a separate License Agreement, requesting damages. The Company denies the allegations of the Defendant, believes the counterclaim is a device intended to avoid payment of amounts owed, and intends to move forward with its collection efforts.

 

On July 3, 2002, the Company filed a two-count action against PC Quote Canada asserting breach of Agency License Agreement, fraud and unjust enrichment and requesting damages, plus interest, costs and attorneys fees. Defendant filed an answer, affirmative defenses and counterclaim asserting that oral agreement modified the Agency License Agreement, requesting damages. Defendant filed a motion for preliminary injunction to enjoin HyperFeed from terminating services provided under the Agreement and, pending a complete, court-ordered audit of Defendant’s records, the Company has agreed not to terminate such services. Furthermore, the Company denies the allegations by the defendant, believes the counterclaim is a device intended to avoid payment of amounts owed, and intends to move forward with its collection efforts.

 

On October 1, 2001, the Company filed a collection action against AB Watley seeking damages. While the parties entered into a settlement agreement in which AB Watley agreed to pay the Company in three installments, Defendant failed to make the third installment payment on September 26, 2002. Accordingly, pursuant to the terms of the settlement agreement, a consent judgment was entered in the total amount of $180,503 on January 10, 2003. HyperFeed is taking steps necessary to enforce and collect on this judgment.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our common stock is traded on the Nasdaq National Market under the symbol “HYPR.”

 

The following tables show for 2002 and 2001 the high and low sales prices of our common stock for the periods indicated, as reported by the Nasdaq National Market.

 

2002 QUARTERLY INFORMATION		HIGH			LOW
First		$	0.890		$	0.470
Second		0.800			0.040
Third		0.660			0.254
Fourth		0.590			0.240

 

2001 QUARTERLY INFORMATION		HIGH			LOW
First		$	2.969		$	1.438
Second		3.220			1.438
Third		2.160			0.800
Fourth		1.050			0.540

 

As of February 28, 2003, we had 557 stockholders of record of our common stock.

 

8

 

DIVIDEND POLICY

 

We have not paid dividends on our common stock and do not currently plan to do so in the near future.

 

ITEM 6. SELECTED FINANCIAL DATA

 

		Years Ending December 31,
		2002			2001			2000			1999			1998
INCOME DATA:
Net revenue		$	19,825,071		$	33,345,717		$	46,446,887		$	33,128,059		$	23,045,533
Operating income (loss)		$	(4,426,336	)	$	(1,453,280	)	$	1,875,851		$	(9,352,153	)	$	(4,699,426	)
Income (loss) before minority interest and income taxes		$	(4,407,073	)	$	(1,417,765	)	$	1,756,116		$	(9,511,228