FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 |
For the quarterly period ended September 30, 2006
or
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o |
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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 0-50670
MARKETAXESS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State of incorporation)
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52-2230784
(IRS Employer Identification No.) |
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140 Broadway, 42nd Floor New York, New York
(Address of principal executive offices)
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10005
(Zip Code) |
(212) 813-6000
(Registrants 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 þ No o
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. (Check one):
Large accelerated filer o Accelerated Filer þ Non-accelerated filer o
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
At November 3, 2006, the number of shares of the Registrants voting common stock outstanding
was 29,164,483 and the number of shares of the Registrants
non-voting common shares was 3,125,379.
MARKETAXESS HOLDINGS INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
2
PART I Financial Information
Item 1. Financial Statements
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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As of |
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September 30, 2006 |
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December 31, 2005 |
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(In thousands, except share and per share amounts) |
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ASSETS |
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Cash and cash equivalents |
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$ |
65,293 |
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$ |
58,189 |
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Securities and cash provided as collateral |
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3,757 |
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3,799 |
|
Securities available-for-sale |
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58,208 |
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59,956 |
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Accounts receivable, net of allowance of $680 and $438 as of September 30,
2006 and December 31, 2005, including receivables from related parties of
$8,918 and $6,751, respectively |
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18,796 |
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14,796 |
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Furniture, equipment and leasehold improvements, net of accumulated
depreciation and amortization |
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4,635 |
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4,643 |
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Software development costs, net of amortization |
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6,315 |
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6,199 |
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Prepaid expenses |
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1,204 |
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2,871 |
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Deferred tax assets, net |
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39,042 |
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39,804 |
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Other assets |
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205 |
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205 |
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Total assets |
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$ |
197,455 |
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$ |
190,462 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities |
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Accrued employee compensation |
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$ |
8,751 |
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$ |
11,848 |
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Deferred license revenue |
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347 |
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926 |
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Accounts payable, accrued expenses, and other liabilities,
including
payables to a related party of $245 and $88 as of
September 30, 2006 and
December 31, 2005, respectively |
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7,401 |
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6,824 |
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Total liabilities |
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16,499 |
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19,598 |
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Commitments and Contingencies |
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Stockholders equity |
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Preferred stock, $0.001 par value, 5,000,000 shares
authorized as of
September 30, 2006 and December 31, 2005, 0 issued and
outstanding as of
September 30, 2006 and December 31, 2005 |
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Common stock voting, $0.003 par value, 110,000,000 shares
authorized as of
September 30, 2006 and December 31, 2005, 29,156,732
shares issued
and outstanding as of September 30, 2006 and 25,305,951
shares issued
and outstanding as of December 31, 2005 |
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86 |
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76 |
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Common stock non voting, $0.003 par value, 10,000,000
authorized as of
September 30, 2006 and December 31, 2005, 3,125,379 shares
issued
and outstanding as of September 30, 2006 and 4,401,330
issued and outstanding as of December 31, 2005 |
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11 |
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13 |
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Warrants, 2,379,199 authorized and outstanding as of
September 30, 2006
and 3,674,400 authorized and outstanding as of December
31, 2005 |
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11,658 |
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17,693 |
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Additional paid-in capital |
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260,261 |
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249,122 |
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Unearned compensation |
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(2,021 |
) |
Receivable for common stock subscribed |
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(1,042 |
) |
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(1,042 |
) |
Accumulated deficit |
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(89,312 |
) |
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(92,495 |
) |
Accumulated other comprehensive loss |
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(706 |
) |
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(482 |
) |
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Total stockholders equity |
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180,956 |
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170,864 |
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Total liabilities and stockholders equity |
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$ |
197,455 |
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$ |
190,462 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(In thousands, except share and per share amounts) |
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Revenues |
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Commissions |
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U.S. high-grade, including $6,064, $5,434, $17,034 and $19,073
from related
parties for the three and nine months ended September 30, 2006
and 2005,
respectively |
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$ |
12,250 |
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$ |
10,820 |
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$ |
34,254 |
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$ |
34,900 |
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European high-grade, including $1,401, $1,423, $5,095 and $5,586
from
related parties for the three and nine months ended September
30, 2006
and 2005, respectively |
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3,290 |
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3,132 |
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11,717 |
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10,869 |
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Other, including $1,285, $1,249, $4,120 and $3,757 from related
parties
for the three and nine months ended September 30, 2006 and
2005, respectively |
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2,057 |
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1,837 |
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6,371 |
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5,398 |
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Total commissions |
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17,597 |
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15,789 |
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52,342 |
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51,167 |
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Information and user access fees, including $290, $241, $898 and
$683 from related parties for the three and nine months ended
September 30, 2006 and 2005, respectively |
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1,426 |
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1,165 |
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4,108 |
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3,204 |
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License fees |
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247 |
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1,032 |
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742 |
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2,303 |
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Investment income, including $227, $167, $719 and $549 from related
parties for the three and nine months ended September 30, 2006
and 2005,
respectively |
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1,266 |
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828 |
|
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|
3,312 |
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2,205 |
|
Other, including $125, $156, $389 and $419 from related parties
for the three
and nine months ended September 30, 2006 and 2005, respectively |
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238 |
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274 |
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732 |
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|
799 |
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Total revenues |
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20,774 |
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19,088 |
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61,236 |
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59,678 |
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Expenses |
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Employee compensation and benefits |
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10,483 |
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9,030 |
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31,264 |
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26,947 |
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Depreciation and amortization |
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1,703 |
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|
1,525 |
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5,025 |
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|
4,175 |
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Technology and communications |
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1,956 |
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1,952 |
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5,799 |
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5,399 |
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Professional and consulting fees |
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1,883 |
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2,423 |
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6,922 |
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7,053 |
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Marketing and advertising |
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338 |
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503 |
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1,193 |
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1,784 |
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Moneyline revenue share to related party |
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(50 |
) |
General and administrative, including $16, $18, $47 and $39 to
related
parties for the three and nine months ended September 30, 2006
and 2005,
respectively |
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2,181 |
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1,914 |
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6,018 |
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|
4,441 |
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Total expenses |
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18,544 |
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17,347 |
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56,221 |
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49,749 |
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Income before income taxes |
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2,230 |
|
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1,741 |
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5,015 |
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9,929 |
|
Provision for income taxes |
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|
933 |
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570 |
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1,832 |
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3,877 |
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Net income |
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$ |
1,297 |
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$ |
1,171 |
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$ |
3,183 |
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$ |
6,052 |
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Net income per common share |
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Basic |
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$ |
0.04 |
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$ |
0.04 |
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$ |
0.11 |
|
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$ |
0.22 |
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Diluted |
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$ |
0.04 |
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$ |
0.03 |
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$ |
0.09 |
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$ |
0.17 |
|
Weighted average shares used to compute net income per common share |
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Basic |
|
|
31,319,771 |
|
|
|
28,316,845 |
|
|
|
30,274,448 |
|
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|
27,823,982 |
|
Diluted |
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|
34,792,783 |
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35,508,128 |
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35,028,296 |
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35,471,963 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
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Common |
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Receivable |
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Accumulated |
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Convertible |
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Common |
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Stock |
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Additional |
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for Common |
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Other |
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Total |
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Preferred |
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Stock |
|
Non |
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Paid-In |
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Unearned |
|
Stock |
|
Accumulated |
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Comprehensive |
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Stockholders |
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Stock |
|
Voting |
|
Voting |
|
Warrants |
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Capital |
|
Compensation |
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Subscribed |
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Deficit |
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(Loss) |
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Equity |
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(In thousands) |
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Balance at December 31, 2005 |
$ |
|
|
|
$ |
76 |
|
|
$ |
13 |
|
|
$ |
17,693 |
|
|
$ |
249,122 |
|
|
$ |
(2,021 |
) |
|
$ |
(1,042 |
) |
|
$ |
(92,495 |
) |
|
$ |
(482 |
) |
|
$ |
170,864 |
|
Issuance of voting common stock
related to stock option exercise |
|
|
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|
2 |
|
|
|
|
|
|
|
|
|
|
|
1,512 |
|
|
|
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|
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|
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|
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|
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|
|
|
|
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|
1,514 |
|
Conversion from Non-Voting
to Voting shares |
|
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|
2 |
|
|
|
(2 |
) |
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|
|
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|
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|
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Employee stock based
compensation |
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
4,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,148 |
|
Reclassification of Unearned
compensation related to
implementation of SFAS123R |
|
|
|
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|
|
|
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|
|
|
|
|
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|
(2,021 |
) |
|
|
2,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
(224 |
) |
|
|
(224 |
) |
Non-employee stock options
and restricted stock |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395 |
|
Excess tax benefit from share based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076 |
|
Exercise of warrants |
|
|
|
|
|
4 |
|
|
|
|
|
|
|
(6,035 |
) |
|
|
6,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,183 |
|
|
|
|
|
|
|
3,183 |
|
|
|
Balance at September 30, 2006 |
$ |
|
|
|
$ |
86 |
|
|
$ |
11 |
|
|
$ |
11,658 |
|
|
$ |
260,261 |
|
|
$ |
|
|
|
$ |
(1,042 |
) |
|
$ |
(89,312 |
) |
|
$ |
(706 |
) |
|
$ |
180,956 |
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,183 |
|
|
$ |
6,052 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,025 |
|
|
|
4,175 |
|
Amortization of unearned compensation |
|
|
|
|
|
|
459 |
|
Issuance of stock options and restricted stock
to non-employees |
|
|
395 |
|
|
|
200 |
|
Compensation expense related to stock options
and restricted stock |
|
|
4,146 |
|
|
|
1,129 |
|
Deferred taxes |
|
|
762 |
|
|
|
3,522 |
|
Provision for bad debts |
|
|
538 |
|
|
|
59 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) in accounts receivable,
including increases of $2,167 and
$1,315 from related parties for the
nine months ended
September 30, 2006 and 2005,
respectively |
|
|
(4,538 |
) |
|
|
(2,929 |
) |
(Increase) decrease in prepaid
expenses |
|
|
1,667 |
|
|
|
(1,375 |
) |
(Decrease) in accrued employee
compensation |
|
|
(3,097 |
) |
|
|
(2,910 |
) |
(Decrease) in deferred license revenue |
|
|
(579 |
) |
|
|
(1,465 |
) |
Increase in accounts payable, accrued
expenses and other liabilities,
including increases of $157
and $0 from related parties for the
nine months ended September 30, 2006
and 2005, respectively |
|
|
577 |
|
|
|
2,207 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
8,079 |
|
|
|
9,124 |
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
|
|
|
|
5,797 |
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
65,039 |
|
|
|
50,775 |
|
Purchases |
|
|
(63,213 |
) |
|
|
(106,298 |
) |
Securities held to maturity: |
|
|
|
|
|
|
|
|
Proceeds from maturities |
|
|
|
|
|
|
33,354 |
|
Purchases |
|
|
|
|
|
|
(35,352 |
) |
Securities and cash provided as collateral |
|
|
42 |
|
|
|
26 |
|
Purchase of furniture, equipment and leasehold improvements |
|
|
(2,309 |
) |
|
|
(513 |
) |
Capitalization of software development costs |
|
|
(2,824 |
) |
|
|
(2,514 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,265 |
) |
|
|
(54,725 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Excess tax benefits from share-based compensation |
|
|
1,076 |
|
|
|
|
|
Proceeds received from the exercise of stock options |
|
|
1,516 |
|
|
|
2,492 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,592 |
|
|
|
2,492 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(302 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Net increase (decrease) for the period |
|
|
7,104 |
|
|
|
(43,159 |
) |
Beginning of period |
|
|
58,189 |
|
|
|
97,652 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
65,293 |
|
|
$ |
54,493 |
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
203 |
|
|
$ |
23 |
|
Non-cash activity: |
|
|
|
|
|
|
|
|
Deferred taxes on disqualifying dispositions of incentive stock options |
|
$ |
|
|
|
$ |
2,020 |
|
Non-cash exercise of warrants and issuance of common stock |
|
$ |
6,035 |
|
|
$ |
2,005 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited
(in thousands, except share and per share amounts)
1. Organization and Principal Business Activity
MarketAxess Holdings Inc. (the Company) was incorporated in the State of Delaware on April
11, 2000. Through its subsidiaries, the Company operates an electronic trading platform for
corporate bonds and certain other types of fixed-income securities, through which the Companys institutional investor clients can access the liquidity
provided by its broker-dealer clients. The Companys multi-dealer trading platform allows its
institutional investor clients to simultaneously request competitive, executable bids or offers
from multiple broker-dealers, and to execute trades with the broker-dealer of their choice. The
Company offers its clients the ability to trade U.S. high-grade corporate bonds, European
high-grade corporate bonds, credit default swaps, agencies, high yield and emerging markets bonds.
The Company also provides data and analytical tools that help its clients make trading decisions,
and facilitates the trading process by electronically communicating order information between
trading counterparties. The Companys DealerAxessTM trading service allows dealers to
trade fixed-income securities with each other on its platform. The Companys current participating
dealers are: ABN AMRO, Banc of America Securities, Barclays PLC, Bear Stearns, BNP Paribas,
Citigroup Global Markets, Credit Suisse, Deutsche Bank Securities, Dresdner Bank, DZ Bank, FTN
Financial, Goldman Sachs, HSBC, ING Financial Markets, JP Morgan, Jefferies and Company, Lehman
Brothers, Merrill Lynch, Morgan Stanley, RBC Capital Markets, The Royal Bank of Scotland, Santander
Investment Securities, SG Corporate & Investment Banking, UBS and Wachovia Securities.
The Companys stockholder broker-dealer clients as of January 1, 2006 were ABN Amro, Banc of
America Securities, Bear Stearns, BNP Paribas, Credit Suisse, Deutsche Bank, JPMorgan, Lehman
Brothers and UBS. All of these broker-dealer clients constitute related parties of the Company
(together, the Stockholder Broker-Dealer Clients). Moneyline Telerate (Moneyline), which
provided certain software development services to the Company and had a revenue-sharing agreement
with the Company, is considered a related party for the fiscal year 2005. In February 2005, the
Company ceased using the technology platform that was covered under the Moneyline revenue-sharing
agreement.
The Companys U.S. subsidiary, MarketAxess Corporation, is a registered broker-dealer with the
U.S. Securities and Exchange Commission (SEC) and is a member of the National Association of
Securities Dealers, Inc. (NASD). The Company also has three international subsidiaries:
MarketAxess Europe Limited (MarketAxess Europe), which is registered as an Alternative Trading
System dealer with the Financial Services Authority (FSA) in the United Kingdom (U.K.);
MarketAxess Leasing Limited (collectively with MarketAxess Europe, the U.K. Subsidiaries); and
MarketAxess Canada Limited, a Canadian subsidiary that the Company incorporated in May 2003.
MarketAxess Canada Limited has applied for registration as an Alternative Trading System dealer
under the Securities Act of Ontario and is in the process of seeking approval for membership with
the Investment Dealers Association of Canada.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its
subsidiaries, MarketAxess Corporation, MarketAxess Europe, MarketAxess Leasing Limited and
MarketAxess Canada Limited. All intercompany transactions and balances have been eliminated.
These Consolidated Financial Statements are unaudited and should be read in conjunction with
the audited Consolidated Financial Statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2005. The consolidated financial information as of December 31,
2005 has been derived from audited financial statements not included herein.
These unaudited Consolidated Financial Statements are prepared in accordance with the rules
and regulations of the SEC with respect to Form 10-Q and reflect all adjustments that, in the
opinion of management, are normal and recurring, and which are necessary for a fair statement of
the results for the interim periods presented. In accordance with such rules and regulations,
certain disclosures that are normally included in annual financial statements have been omitted.
Interim period operating results may not be indicative of the operating results for a full year.
7
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
Cash and Cash Equivalents
Cash and cash equivalents include cash maintained at U.S. and U.K. banks and in money market
funds. The Company defines cash equivalents as short-term interest-bearing investments with
maturities at the time of purchase of three months or less.
Securities Available-for-Sale
The Company has classified certain of its marketable securities as available-for-sale
securities. Unrealized marketable securities gains and losses are reflected as a net amount in
Accumulated other comprehensive loss on the Consolidated Statements of Financial Condition.
Realized gains and losses are recorded on the Consolidated Statements of Operations in Other
revenues. For the purpose of computing realized gains and losses, cost is on a specific
identification basis.
The Company assesses whether an other-than-temporary impairment loss on securities has
occurred due to declines in fair value or other market conditions. Declines in fair value that are
considered other than temporary are recorded as charges in the Consolidated Statements of
Operations.
Depreciation and Amortization
Fixed assets are carried at cost less accumulated depreciation. The Company uses the
straight-line method of depreciation over three years.
Leasehold improvements are stated at cost and are amortized using the straight-line method
over the lesser of the life of the improvement or the remaining term of the lease.
Software Development Costs
In
accordance with Statement of Position No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, the Company capitalizes certain costs
associated with the development of internal use software at the point at which the conceptual
formulation, design and testing of possible software project alternatives have been completed. The
Company capitalizes employee compensation and related benefits and consulting fees incurred during
the preliminary software project stage. Once the product is ready for its intended use, such costs
are amortized on a straight-line basis over three years. The Company reviews the amounts
capitalized for impairment whenever events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable.
Stock-Based Compensation for Employees
Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), as permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). In accordance with APB 25, the Company
accounted for stock-based awards to employees and directors using the intrinsic value method.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123R), which is a revision of SFAS 123.
Effective January 1, 2006, the Company adopted SFAS 123R, which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees based on
estimated fair values. In accordance with SFAS 123R, non-employee members of the Board of Directors
are treated as employees. SFAS 123R supersedes the Companys previous accounting under APB 25 for
periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107
(SAB 107) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition method, which requires
the application of the accounting standard as of January 1, 2006. In accordance with the modified
prospective transition method, the Companys Consolidated Financial Statements for prior periods
have not been restated to reflect, and do not include, the impact of SFAS 123R.
SFAS 123R requires companies to estimate the fair value of share-based payment awards on the
date of grant using an option-
8
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
pricing model. Stock-based compensation expense recognized in the
Companys Consolidated Statements of Operations for the three
and nine months ended September 30, 2006 included compensation expense for share-based payment
awards granted prior to, but not yet vested, as of December 31, 2005 based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense
for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date
fair value estimated in accordance with the provisions of SFAS 123R. As stock-based compensation
expense recognized in the Consolidated Statements of Operations for the three and nine months ended
September 30, 2006 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In
the Companys pro forma information required under SFAS 123 for the periods prior to fiscal 2006,
the Company accounted for forfeitures as they occurred.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3, Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards. The alternative transition
method includes simplified methods to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the
tax effects of employee stock-based compensation awards that are outstanding upon the adoption of
SFAS 123R. The Company has used the long-method calculation, pursuant to SFAS 123R, to determine
its APIC pool as of December 31, 2005. As of September 30, 2006, the Company has calculated the
APIC pool to be $675.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from the
exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows.
SFAS 123R requires the cash flows resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as financing cash flows. The
excess tax benefit for the three and nine months ended September 30, 2006 of $510 and $1,076,
respectively, classified as a financing cash flow, would have been classified as an operating cash
flow if the Company had not adopted SFAS 123R.
Had compensation expense for the Companys plans been determined based on the fair value at
the grant dates for awards to employees under the plans, consistent with SFAS 123, the Companys
Net income and income per share for the three and nine months ended September 30, 2005 would have
been decreased to the pro forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income |
|
|
|
|
|
|
|
|
As reported |
|
$ |
1,171 |
|
|
$ |
6,052 |
|
Compensation expense, after related
tax effects |
|
|
(343 |
) |
|
|
(1,026 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
828 |
|
|
$ |
5,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share as reported |
|
$ |
0.04 |
|
|
$ |
0.22 |
|
Diluted net income per common share as
reported |
|
$ |
0.03 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
Basic net income per common share pro forma |
|
$ |
0.03 |
|
|
$ |
0.18 |
|
Diluted net income per common share pro forma |
|
$ |
0.02 |
|
|
$ |
0.14 |
|
In calculating the fair value of the options granted, the following assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, 2005 |
|
September 30, 2005 |
Weighted-Average Expected Life (years) |
|
|
3.00 |
|
|
|
3.00 |
|
Weighted-Average Risk-Free Interest Rate |
|
|
3.99 |
% |
|
|
3.79 |
% |
Weighted-Average Expected Volatility |
|
|
16.52 |
% |
|
|
18.82 |
% |
9
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
Revenue Recognition
The majority of the Companys revenues are derived from commissions for trades executed on its
platform that are billed to its broker-dealer clients on a monthly basis. The Company also derives
revenues from information and user access fees, license fees, investment income and other income.
Commissions are generally calculated as a percentage of notional dollar volume of bonds traded
on the platform and vary based on the type and maturity of the bond traded. Under the Companys
transaction fee plans, bonds that are more actively traded or that have shorter maturities are
generally charged lower commissions, while bonds that are less actively traded or that have longer
maturities generally command higher commissions.
Income Taxes
Income taxes are accounted for using the asset and liability method in accordance with SFAS
No. 109, Accounting for Income Taxes (SFAS 109). Deferred income taxes reflect the net tax
effects of temporary differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when such
differences are expected to reverse. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. A valuation
allowance is recognized against deferred tax assets if it is more likely than not that such assets
will not be realized in future years.
Earnings Per Share
SFAS No. 128, Earnings Per Share, requires the presentation of basic and diluted earnings
per share (EPS) in the Consolidated Statements of Operations. Basic EPS is computed by dividing
the net income attributable to common stock by the weighted-average number of shares of common
stock outstanding for the period. Diluted EPS is computed using the same method as basic EPS, but
in the denominator, shares of common stock outstanding reflect the potential dilution that could
occur if convertible securities or other contracts to issue common stock were converted into or
exercised for common stock.
Foreign Currency Translation
Assets and liabilities denominated in non-U.S. currencies are translated at month-end rates of
exchange on the date of the Consolidated Statements of Financial Condition, and revenues and
expenses are translated at the monthly average of the daily rates of exchange for the period.
Gains or losses on translation of the financial statements of a non-U.S. operation are included as
a component of Accumulated Other Comprehensive Loss in Stockholders Equity.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments (SFAS 155). SFAS 155 is an amendment of SFAS No. 133 and SFAS No. 140. SFAS 155
permits companies to elect, on a deal-by-deal basis, to apply a fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS 155 is effective for all financial instruments acquired or issued after the
beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does
not expect SFAS 155 to have a material impact on its Consolidated Financial Statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
(SFAS 156). SFAS 156 amends SFAS No. 140. SFAS 156 requires that all separately recognized
servicing assets and servicing liabilities be initially measured at fair value. For subsequent
measurements, SFAS 156 permits companies to choose between an amortization method or a fair value
measurement method for reporting purposes. SFAS 156 is effective as of the beginning of a companys
first fiscal year that begins after September 15, 2006. The Company does not expect SFAS 156 to
have a material impact on its Consolidated Financial Statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 applies to all tax
positions accounted for under SFAS 109. A tax position includes
10
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
current or future reductions in taxable income reported or expected to be reported on a tax
return. FIN 48 supplements SFAS 109 by defining the confidence level that a tax position must meet
in order to be recognized in the financial statements. The Interpretation requires that the tax
effects of a position be recognized only if it is more-likely-than-not (greater than 50%
likelihood) to be sustained based solely on its technical merits as of the reporting date. In
making this assessment, a company must assume that the taxing authorities will examine the
position. The Company currently uses a more stringent probable threshold for recognizing
uncertain tax positions. FIN 48 is effective as of the beginning of the first fiscal year beginning
after December 15, 2006. At adoption, companies must adjust their financial statements to reflect
only those tax positions that are more-likely-than-not to be sustained as of the adoption date. The
necessary adjustments, if any, should be recorded directly to the beginning balance of retained
earnings in the period of adoption and reported as a change in accounting principle. The Company is
currently evaluating the expected effect of the adoption of FIN 48 on its Consolidated Financial
Statements and is not yet in a position to determine such effect.
In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 requires that public companies utilize a dual-approach to
assessing the quantitative effects of financial misstatements. This dual approach includes both an
income statement focused assessment and a balance sheet focused assessment. The guidance in SAB
108 must be applied to annual financial statements for fiscal years ending after November 15, 2006.
The Company has not adopted SAB 108 and does not expect it to have a material impact on its
Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect SFAS 157 to have a material impact on its
Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)
(SFAS 158). SFAS 158 requires an entity to recognize in its statements of financial condition
the funded status of its defined benefit postretirement plans, measured as the difference between
the fair value of the plan assets and the benefit obligation. SFAS 158 also requires an entity to
recognize changes in the funded status of a defined benefit postretirement plan within Accumulated
Other Comprehensive Income, net of tax; to the extent such changes are not recognized in earnings
as components of periodic net benefit cost. SFAS 158 is effective for fiscal years ending after
December 15, 2006. The Company does not expect SFAS 158 to have a material impact on its
Consolidated Financial Statements.
Reclassifications
Certain reclassifications have been made to the prior periods financial statements in order
to conform to the current periods presentation. Such reclassifications had no effect on previously
reported Net income.
3. Change in Capitalization Policy
In January 2006, the Company changed its capitalization policy for furniture, equipment and
leasehold improvements, lowering the threshold for capitalizing such purchases from $10 to $2. The
change was made to ensure consistency between the financial accounting and tax treatment. For the
three and nine months ended September 30, 2006, the Company capitalized $46 and $204, respectively,
that would have been expensed under the old capitalization policy.
11
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
4. Net Capital Requirements and Customer Protection Requirements
The Companys U.S. subsidiary, MarketAxess Corporation, maintains a registration as a U.S.
securities broker-dealer. Pursuant to the Uniform Net Capital Rule under the Securities Exchange
Act of 1934, MarketAxess Corporation is required to maintain minimum net capital, as defined, equal
to the greater of $5 or 6 2/3% of aggregate indebtedness. A summary of MarketAxess Corporations
capital requirements is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Net capital |
|
$ |
9,923 |
|
|
$ |
14,820 |
|
Required net capital |
|
|
(863 |
) |
|
|
(1,105 |
) |
|
|
|
|
|
|
|
Excess amount over required net capital |
|
$ |
9,060 |
|
|
$ |
13,715 |
|
|
|
|
|
|
|
|
Ratio of aggregate indebtedness to net capital |
|
|
1.30 to 1 |
|
|
|
1.12 to 1 |
|
MarketAxess Corporation claims exemption from SEC Rule 15c3-3, as it does not hold customer
securities or funds on account, as defined.
MarketAxess Europe is subject to certain financial resource requirements of the FSA. A summary
of these financial resource requirements is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Financial resources |
|
$ |
14,167 |
|
|
$ |
10,907 |
|
Resource requirement |
|
|
(4,053 |
) |
|
|
(3,290 |
) |
|
|
|
|
|
|
|
Excess financial resources |
|
$ |
10,114 |
|
|
$ |
7,617 |
|
|
|
|
|
|
|
|
MarketAxess Corporation and MarketAxess Europe are subject to U.S. and U.K. regulations as
broker-dealers that prohibit repayment of borrowings from the Company or affiliates, paying cash
dividends, making loans to the Company or affiliates or otherwise entering into transactions that
result in a significant reduction in regulatory net capital or financial resources without prior
notification to or approval from such broker-dealers principal regulator.
5. Securities
In January 2005, the Company entered into investment advisory agreements with two of its
Stockholder Broker-Dealer Clients. See Related Parties in Footnote 9.
The following is a summary of the Companys Securities available-for-sale as of September 30,
2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
Fair |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Securities-available -for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency issues and municipal
securities |
|
$ |
56,405 |
|
|
$ |
|
|
|
$ |
(20 |
) |
|
$ |
56,385 |
|
Corporate Bonds |
|
|
1,831 |
|
|
|
|
|
|
|
(8 |
) |
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities-available -for-sale |
|
$ |
58,236 |
|
|
$ |
|
|
|
$ |
(28 |
) |
|
$ |
58,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
Fair |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Securities-available -for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agency issues and municipal securities |
|
$ |
50,122 |
|
|
$ |
|
|
|
$ |
(119 |
) |
|
$ |
50,003 |
|
Corporate Bonds |
|
|
10,000 |
|
|
|
|
|
|
|
(47 |
) |
|
|
9,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities-available-for-sale |
|
$ |
60,122 |
|
|
$ |
|
|
|
$ |
(166 |
) |
|
$ |
59,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
6. Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements, net, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Computer software and related equipment |
|
$ |
14,868 |
|
|
$ |
12,099 |
|
Office hardware |
|
|
3,119 |
|
|
|
2,990 |
|
Furniture and fixtures |
|
|
1,722 |
|
|
|
1,481 |
|
Accumulated depreciation |
|
|
(15,803 |
) |
|
|
(12,842 |
) |
|
|
|
|
|
|
|
Total furniture and equipment, net |
|
|
3,906 |
|
|
|
3,728 |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
2,204 |
|
|
|
2,207 |
|
Accumulated amortization |
|
|
(1,475 |
) |
|
|
(1,292 |
) |
|
|
|
|
|
|
|
Total leasehold improvements, net |
|
|
729 |
|
|
|
915 |
|
|
|
|
|
|
|
|
Total furniture, equipment and leasehold improvements, net |
|
$ |
4,635 |
|
|
$ |
4,643 |
|
|
|
|
|
|
|
|
7. Software Development Costs
Software development costs, net, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Software development costs |
|
$ |
12,672 |
|
|
$ |
9,848 |
|
Accumulated amortization |
|
|
(6,357 |
) |
|
|
(3,649 |
) |
|
|
|
|
|
|
|
Total software development costs, net |
|
$ |
6,315 |
|
|
$ |
6,199 |
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2006, software development costs totaling
$657 and $2,824, respectively, were capitalized. Non-capitalized software costs and routine
maintenance costs are expensed as incurred and are included in Employee compensation and benefits,
Technology and communications and Professional and consulting fees in the Consolidated Statements
of Operations.
8. Income Taxes
The Companys provision for income taxes, included in the Consolidated Statements of
Operations as determined in accordance with SFAS 109, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
187 |
|
|
$ |
|
|
|
$ |
421 |
|
|
$ |
|
|
State and local |
|
|
37 |
|
|
|
20 |
|
|
|
78 |
|
|
|
137 |
|
Foreign |
|
|
142 |
|
|
|
18 |
|
|
|
347 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
for
income
taxes |
|
|
366 |
|
|
|
38 |
|
|
|
846 |
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
310 |
|
|
|
311 |
|
|
|
436 |
|
|
|
2,233 |
|
State and local |
|
|
366 |
|
|
|
106 |
|
|
|
523 |
|
|
|
734 |
|
Foreign |
|
|
(109 |
) |
|
|
115 |
|
|
|
27 |
|
|
|
697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
provision
for
income
taxes |
|
|
567 |
|
|
|
532 |
|
|
|
986 |
|
|
|
3,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income
taxes |
|
$ |
933 |
|
|
$ |
570 |
|
|
$ |
1,832 |
|
|
$ |
3,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
The following is a summary of the Companys net deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Deferred tax assets |
|
$ |
57,026 |
|
|
$ |
57,949 |
|
Valuation allowance |
|
|
(15,218 |
) |
|
|
(15,218 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
41,808 |
|
|
|
42,731 |
|
Deferred tax liabilities |
|
|
(2,766 |
) |
|
|
(2,927 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net |
|
$ |
39,042 |
|
|
$ |
39,804 |
|
|
|
|
|
|
|
|
9. Related Parties
As of the dates and for the periods indicated below, the Company had the following balances
and transactions with the Stockholder Broker-Dealer Clients or their affiliates:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
September 30, 2006 |
|
December 31, 2005 |
Accounts receivable |
|
$ |
8,918 |
|
|
$ |
6,751 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
245 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Commissions |
|
$ |
8,750 |
|
|
$ |
8,106 |
|
|
$ |
26,249 |
|
|
$ |
28,416 |
|
Information and user access fees |
|
|
290 |
|
|
|
241 |
|
|
|
898 |
|
|
|
683 |
|
Investment income |
|
|
227 |
|
|
|
167 |
|
|
|
719 |
|
|
|
549 |
|
Other income |
|
|
125 |
|
|
|
156 |
|
|
|
389 |
|
|
|
419 |
|
For the three months ended September 30, 2006 and 2005, investment advisory fees and bank fees
paid to Stockholder Broker-Dealer Clients were $16 and $18, respectively, and for the nine months
ended September 30, 2006 and 2005 were $47 and $39, respectively, and are included in General and
administrative expenses in the Consolidated Statements of Operations.
During the three months ended September 30, 2006, two Stockholder Broker-Dealer Clients
converted 1,295,201 warrants into 1,294,849 shares of common stock through a non-cash exercise.
14
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
10. Stock-Based Compensation Plans
Stock compensation expense for the three and nine months ended September 30, 2006 and 2005 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Employee: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
677 |
|
|
$ |
369 |
|
|
$ |
2,529 |
|
|
$ |
1,129 |
|
Restricted stock |
|
|
484 |
|
|
|
153 |
|
|
|
1,617 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,161 |
|
|
|
522 |
|
|
|
4,146 |
|
|
|
1,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee
directors and
consultants: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
39 |
|
|
|
21 |
|
|
|
226 |
|
|
|
64 |
|
Restricted stock |
|
|
81 |
|
|
|
136 |
|
|
|
169 |
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
157 |
|
|
|
395 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock based
compensation |
|
$ |
1,281 |
|
|
$ |
679 |
|
|
$ |
4,541 |
|
|
$ |
1,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company records stock compensation for employees in Employee compensation and benefits and
for non-employee directors and consultants in General and administrative expenses in the
Consolidated Statements of Operations.
During the third quarter of 2006, the Company identified a difference in U.S. and U.K.
accounting treatment for taxes ultimately payable upon the exercise of stock options and vesting of
restricted stock for grants to U.K. employees. This difference in accounting was corrected through
a reversal of the reserve balance of $235 at September 30, 2006.
As a result of adopting SFAS 123R on January 1, 2006, the Companys Income before income taxes
for the three and nine months ended September 30, 2006 was $576 and $2,102 less, respectively, and
the Companys Net income for the three and nine months ended September 30, 2006 was $326 and $1,187
less, respectively, than if it had continued to account for stock-based compensation under APB 25.
Basic EPS for the three and nine months ended September 30, 2006 would have been $0.05 and $0.14,
respectively, if the Company had not adopted SFAS 123R, compared to reported basic EPS for these
periods of $0.04 and $0.11, respectively. Diluted EPS for the three and nine months ended September
30, 2006 would have been $0.05 and $0.12, respectively, if the Company had not adopted SFAS 123R,
compared to reported diluted EPS for the same periods of $0.04 and $0.09, respectively.
Stock Options
The Companys 2000 and 2001 Stock Incentive Plans (the 2000 and 2001 Plans) provide for the
grant of options or restricted stock as incentives and rewards to encourage employees, consultants
and non-employee directors to participate in the long-term success of the Company. The 2000 and
2001 Plans provide for the granting of up to 5,082,274 shares of the Companys common stock at fair
value or at a value other than fair value (determined by the Board of Directors or a committee
thereof) on the date the option is granted. Generally the options vest over a three-year period, at
a rate of one-third after one year from the grant date and with the remaining two-thirds vesting on
an equal monthly basis over the remaining two-year period. Options expire ten years from the date
of grant. The Company allocates shares for new stock option grants from the existing Plans.
In 2004, the Company adopted the 2004 Stock Incentive Plan (the 2004 Plan) to enable it to
offer equity-based awards in the Company to certain of the Companys key employees, consultants and
non-employee directors. The terms of the 2004 Plan are substantially the same as those of the 2000
and 2001 Plans, except as follows: the maximum aggregate number of shares available for grant is
different; the Compensation Committee of the Board of Directors (the Committee) has flexibility
to grant stock appreciation rights, performance shares, performance units or other stock-based
awards (in addition to stock options and restricted stock); and rights of first refusal and
repurchase rights do not apply to awards granted under the 2004 Plan. The Committee is appointed by
the Board of Directors, and consists of at least two non-employee directors and administers the
2004 Plan. With respect to the application of the 2004 Plan to non-employee directors,
15
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
the entire Board of Directors will act as a committee.
The 2004 Plan permits the Company to grant stock options (incentive stock options and non-qualified
stock options), stock appreciation rights, restricted stock, performance shares, performance units
and other stock-based awards (including, without limitation, restricted stock units) to certain key
employees, consultants and non-employee directors (to the extent permitted by law), as determined
by the Committee in its sole discretion. Through April 27, 2006, up to 2,400,000 shares of the
Companys common stock, plus 684,802 shares of common stock transferred to the 2004 Plan from the
2000 and 2001 Plans on November 2, 2004, could have been issued under the 2004 Plan (subject to
adjustment to reflect certain transactions and events specified in the 2004 Plan).
On June 7, 2006, stockholder approval was obtained for an amendment and restatement of the
2004 Plan to, among other things, increase the number of shares authorized for issuance under the
2004 Plan from 3,084,802 to 9,754,802 shares. The Board had previously approved the amended and
restated 2004 Plan effective April 28, 2006, subject to stockholder approval.
The 2004 Plan provides the Committee with authority and flexibility to determine the terms and
conditions of the awards at the time of grant. The 2004 Plan is intended to constitute a plan
described in Treasury Regulations Section 1.162-27(f)(1), pursuant to which the deduction limits
under Section 162(m) of the Internal Revenue Code do not apply during the applicable reliance
period.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton closed-form model (Black-Scholes) that uses the assumptions noted in the
following table. The Company believes that the use of the Black-Scholes model meets the fair value
measurement objectives of SFAS 123R and reflects all substantive characteristics of the instruments
being valued. The determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are not
limited to, the expected stock price volatility over the term of the awards and actual and
projected employee stock option exercise behavior. Expected volatilities are based on historical
volatility of the Companys stock and a peer group. The risk-free interest rate is based on U.S.
Treasury securities with a maturity value approximating the expected term of the option. The
expected term represents the period of time that options granted are expected to be outstanding and
was increased from four years to five years in May 2006.
The following table represents the assumptions used for the Black-Scholes option-pricing model
to determine the per share weighted- average fair value for options granted for the three and nine
months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2006 |
|
September 30, 2006 |
Weighted-Average Expected Life (years) |
|
|
5.00 |
|
|
|
4.58 |
|
Weighted-Average Risk-Free Interest Rate |
|
|
4.75 |
% |
|
|
4.69 |
% |
Weighted-Average Expected Volatility |
|
|
45.79 |
% |
|
|
41.25 |
% |
The following table reports stock option activity during the nine months ended September 30,
2006 and the intrinsic value as of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
Number of |
|
Weighted-Average |
|
Contractual |
|
|
|
|
Shares |
|
Exercise Price |
|
Term |
|
Intrinsic Value |
Outstanding at January 1, 2006 |
|
|
5,168,807 |
|
|
$ |
7.56 |
|
|
|
|
|
|
$ |
22,321 |
|
Granted |
|
|
2,087,900 |
|
|
$ |
10.83 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(660,388 |
) |
|
$ |
12.82 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(517,479 |
) |
|
$ |
2.95 |
|
|
|
|
|
|
$ |
4,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
6,078,840 |
|
|
$ |
8.51 |
|
|
|
7.32 |
|
|
$ |
18,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
3,754,654 |
|
|
$ |
6.71 |
|
|
|
6.03 |
|
|
$ |
18,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value is the amount by which the closing price of our common stock on September
30, 2006 of $10.47 exceeds the exercise price of the stock options.
16
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
The following table summarizes information regarding the stock options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006 |
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
Average |
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Contractual |
|
Exercise |
|
Number |
|
Exercise |
Range of Exercise Prices |
|
Outstanding |
|
Life |
|
Price |
|
Exercisable |
|
Price |
$2.10 $ 5.00 |
|
|
2,374,161 |
|
|
|
5.4976 |
|
|
$ |
2.79 |
|
|
|
2,374,161 |
|
|
$ |
2.79 |
|
$5.01 $10.00 |
|
|
223,585 |
|
|
|
8.8901 |
|
|
$ |
9.43 |
|
|
|
75,568 |
|
|
$ |
8.86 |
|
$10.01 $15.00 |
|
|
2,881,708 |
|
|
|
8.5794 |
|
|
$ |
11.61 |
|
|
|
936,173 |
|
|
$ |
12.84 |
|
$15.01 $19.60 |
|
|
599,386 |
|
|
|
7.8795 |
|
|
$ |
15.86 |
|
|
|
368,752 |
|
|
$ |
15.94 |
|
As of September 30, 2006, there was $8,610 of total unrecognized compensation cost related to
non-vested stock options granted under the 2000 and 2001 Plans and the 2004 Plan. That cost is
expected to be recognized over a weighted-average period of 2.2 years.
Restricted Stock
Restricted stock granted under the 2004 Plan generally vests over a period of three years.
Certain grants vest after five years, but contain provisions that allow for accelerated vesting
over a shorter term if defined performance criteria are met. Compensation expense is measured at
the grant date and recognized ratably over the vesting period. The Company considers the likelihood
of meeting the performance criteria in determining the amount to expense on a periodic basis.
The following table reports restricted stock activity during the nine months ended September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Number of |
|
Grant Date Fair |
|
|
Restricted Shares |
|
Value |
Outstanding at January 1, 2006 |
|
|
189,000 |
|
|
$ |
14.86 |
|
Granted |
|
|
869,000 |
|
|
$ |
11.78 |
|
Canceled |
|
|
(102,497 |
) |
|
$ |
12.38 |
|
Vested |
|
|
(57,409 |
) |
|
$ |
13.76 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
898,094 |
|
|
$ |
12.23 |
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $9,289 of total unrecognized compensation expense related
to non-vested restricted stock granted under the 2004 Plan. That cost is expected to be recognized
over a weighted-average period of 2.4 years.
17
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
11. Earnings Per Share
Basic and diluted EPS for the three and nine months ended September 30, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,297 |
|
|
$ |
1,171 |
|
|
$ |
3,183 |
|
|
$ |
6,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
31,319,771 |
|
|
|
28,316,845 |
|
|
|
30,274,448 |
|
|
|
27,823,982 |
|
Net income per common share |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.11 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,297 |
|
|
$ |
1,171 |
|
|
$ |
3,183 |
|
|
$ |
6,052 |
|
Weighted-average common shares
outstanding and common stock equivalents |
|
|
34,792,783 |
|
|
|
35,508,128 |
|
|
|
35,028,296 |
|
|
|
35,471,963 |
|
Net income per common share |
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.09 |
|
|
$ |
0.17 |
|
The following table summarizes the number of stock options and shares of restricted stock
excluded from the computation of diluted EPS because their effect would
be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Number of antidilutive stock options |
|
|
3,238,129 |
|
|
|
1,761,559 |
|
|
|
2,531,773 |
|
|
|
1,642,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of antidilutive shares of resticted stock |
|
|
812,871 |
|
|
|
|
|
|
|
270,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Commitments and Contingencies
The Company leases office space under non-cancelable lease agreements expiring at various
dates through 2011. These leases are subject to escalation based on certain costs incurred by the
landlord. Minimum rental commitments under such leases, net of sublease income at September 30,
2006, were as follows:
|
|
|
|
|
Year Ended December 31, |
|
Minimum Rentals |
Remaining 2006 |
|
$ |
600 |
|
2007 |
|
|
2,460 |
|
2008 |
|
|
2,468 |
|
2009 |
|
|
2,475 |
|
2010 |
|
|
1,334 |
|
Thereafter through 2015 |
|
|
4,364 |
|
Rental expense for the three and nine months ended September 30, 2006 was $718 and $2,065,
respectively, and for the three and nine months ended September 30, 2005 was $409 and $1,272,
respectively, which is included in General and administrative expenses in the Consolidated
Statements of Operations.
The Company has a sublease agreement for one of its properties. The following table summarizes
information regarding the sublease provisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublease Loss Accrual as of: |
|
|
Commencement |
|
Termination |
|
Sublease |
|
September 30, |
|
December 31, |
Location |
|
Date |
|
Date |
|
Rental |
|
2006 |
|
2005 |
|
New York, NY |
|
May 1, 2006 |
|
April 14, 2011 |
|
$ |
77 |
|
|
$ |
941 |
|
|
$ |
1,146 |
|
18
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited (Continued)
(in thousands, except share and per share amounts)
Between May 2002 and May 2005, the Company also had a sublease agreement for its London
property. The sublessee exercised its early termination option as provided in the agreement and
paid MarketAxess Europe an early termination fee of $225 in May 2005. MarketAxess Europe now
occupies the space.
The Company is contingently obligated for standby letters of credit that were issued to
landlords for office space. The Company uses a U.S. government obligation as collateral for these
standby letters of credit and for the Companys foreign currency forward contracts. This collateral
is included in Securities and cash provided as collateral on the Consolidated Statements of
Financial Condition and had a fair market value of $3,257 as of September 30, 2006 and $3,299 as of
December 31, 2005.
In June 2006, MarketAxess Corporation commenced operating an anonymous matching service for
its broker-dealer clients. MarketAxess Corporation executes trades on a riskless principal basis,
which are cleared and settled by an independent clearing broker. The securities clearing agreement
that MarketAxess Corporation maintains with the independent clearing broker commenced in December
2004. Under the securities clearing agreement, MarketAxess Corporation maintains a collateral
deposit with the clearing broker in the form of cash or U.S. government securities. As of September
30, 2006 and December 31, 2005, the collateral deposit included in Securities and cash provided as
collateral on the Consolidated Statements of Financial Condition was $500. MarketAxess Corporation
is exposed to credit risk in the event a contra-party does not fulfill its obligation to complete a
transaction. Pursuant to the terms of the securities clearing agreement between MarketAxess
Corporation and the independent clearing broker, the clearing broker has the right to charge
MarketAxess Corporation for losses resulting from a counterpartys failure to fulfill its
contractual obligations. The losses are not capped at a maximum amount and apply to all trades
executed through the clearing broker. At September 30, 2006, MarketAxess Corporation recorded no
contingent liabilities with regard to this right.
13. Comprehensive Income
Comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
1,297 |
|
|
$ |
1,171 |
|
|
$ |
3,183 |
|
|
$ |
6,052 |
|
Currency translation adjustments, net of taxes |
|
|
(152 |
) |
|
|
(12 |
) |
|
|
(302 |
) |
|
|
(50 |
) |
Unrealized gains (losses) on
Securities-available-for-sale, net of taxes
|
|
|
85 |
|
|
|
(54 |
) |
|
|
78 |
|
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income |
|
$ |
1,230 |
|
|
$ |
1,105 |
|
|
$ |
2,959 |
|
|
$ |
5,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Subsequent Event
On
October 26, 2006, the Board of Directors of the Company authorized a share repurchase
program for up to $40,000 of the Companys voting
Common stock. The Company intends to
repurchase the shares in the open market or privately negotiated transactions, at times and prices
considered appropriate by the Company. Shares
repurchased under the program will be held in treasury for future use.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words
such as expects, intends, anticipates, plans, believes, seeks, estimates, will, or
words of similar meaning and include, but are not limited to, statements regarding the outlook for
our future business and financial performance. Forward-looking statements are based on managements
current expectations and assumptions, which are subject to inherent uncertainties, risks and
changes in circumstances that are difficult to predict. It is routine for our internal projections
and expectations to change as the year or each quarter in the year progresses, and therefore it
should be clearly understood that the internal projections and beliefs upon which we base our
expectations may change prior to the end of each quarter or the year. Although these expectations
may change, we are under no obligation to revise or update any forward-looking statements contained
in this report. Our company policy is generally to provide our expectations only once per quarter,
and not to update that information until the next quarter. Actual future events or results may
differ materially from those contained in the projections or forward-looking statements. Factors
that could cause or contribute to such differences include those discussed below and elsewhere in
this report, particularly in the section captioned Part II, Item 1A, Risk Factors.
Executive Overview
MarketAxess operates one of the leading platforms for the electronic trading of corporate
bonds and certain other types of fixed-income securities. Through our platform, 683 active
institutional investor client firms (firms that executed at least one trade through our electronic
trading platform between October 2005 and September 2006) can access the aggregate liquidity
provided by the collective interest of our 25 broker-dealer clients in buying or selling bonds
through our platform. Our active institutional investor clients include investment advisers, mutual
funds, insurance companies, public and private pension funds, bank portfolios and hedge funds. We
also provide data and analytical tools that help our clients make trading decisions and we
facilitate the trading process by electronically communicating order information between trading
counterparties. Our revenues are primarily generated from the trading of U.S. and European
high-grade corporate bonds.
Our multi-dealer trading platform allows our institutional investor clients to simultaneously
request competing, executable bids or offers from our broker-dealer clients and execute trades with
the broker-dealer of their choice from among those that choose to respond. We offer our
broker-dealer clients a solution that enables them to efficiently reach our institutional investor
clients for the distribution and trading of bonds. In addition to U.S. high-grade corporate bonds,
European high-grade corporate bonds and emerging markets bonds, including both investment-grade and
non-investment grade debt, we also offer our clients the ability to trade crossover and high-yield
bonds, agency bonds, new issues and credit default swap indices. Our DealerAxessTM
trading service allows dealers to trade fixed-income securities
with each other on our platform.
The majority of our revenues are derived from commissions for trades executed on our platform
that are billed to our broker-dealer clients on a monthly basis. We also derive revenues from
information and user access fees, license fees, investment income and other income. Our expenses
consist of employee compensation and benefits, depreciation and amortization, technology and
communication expenses, professional and consulting fees, marketing and advertising and other
general and administrative expenses.
We seek to grow and diversify our revenues by capitalizing on our status as the operator of a
leading platform for the electronic trading of corporate bonds and certain other types of
fixed-income securities. The key elements of our strategy are:
|
|
|
to innovate and efficiently add new functionality and product offerings to the
MarketAxess platform that we believe will help to increase our market share with existing
clients, as well as expand our client base; |
|
|
|
|
to leverage our technology, as well as our strong broker-dealer and institutional
investor relationships, to deploy our electronic trading platform into additional product
and client segments within the fixed-income securities markets; |
|
|
|
|
to continue building our existing service offerings so that our electronic trading
platform is fully integrated into the workflow of our broker-dealer and institutional
investor clients and to continue to add functionality to allow our clients to achieve a
fully automated end-to-end straight-through processing solution (automation from trade
initiation to settlement); |
|
|
|
|
to add new content and analytical capabilities to Corporate BondTicker in order to
improve the value of the information
we provide to our clients; and |
20
|
|
|
to continue to supplement our internal growth by entering into strategic alliances, or
acquiring businesses or technologies that will enable us to enter new markets, provide new
products or services, or otherwise enhance the value of our platform to our clients. |
Critical Factors Affecting Our Industry and Our Company
Economic, Political and Market Factors
The global fixed-income securities industry is risky and volatile and is directly affected by
a number of economic, political and market factors that may result in declining trading volume.
These factors could have a material adverse effect on our business, financial condition and results
of operations. These factors include: the current interest rate environment, including the
volatility of interest rates and investors forecasts of future interest rates; the level of
corporate bond credit spreads and credit spread volatility; and adverse market conditions,
including unforeseen market closures or other disruptions in trading. Any one or more of these
factors may contribute to reduced trading activity in the fixed-income securities markets
generally. Our revenues and profitability are likely to decline during periods of stagnant economic
conditions or low trading volume in the U.S. and global fixed-income securities markets.
Competitive Landscape
The global fixed-income securities industry generally, and the electronic financial services
markets in which we operate in particular, are highly competitive, and we expect competition to
intensify in the future. We will continue to compete with bond trading conducted directly between
broker-dealers and their institutional investor clients over the telephone or electronically. In
addition, our current and prospective competitors are numerous and include: other multi-dealer
trading companies; market data and information vendors; securities and futures exchanges;
inter-dealer brokerage firms; and electronic communications networks not currently in the
securities business. We believe that we compete favorably with respect to: the liquidity provided
on our platform; the magnitude and frequency of price improvement enabled by our platform; the
quality and speed of execution; total transaction costs; technology capabilities, including the
ease of use of our trading platform; and the range of products and services.
Regulatory Environment
Our industry has been and is subject to continuous regulatory changes and may become subject
to new regulations or changes in the interpretation or enforcement of existing regulations, which
could have a material adverse effect on our business, financial condition and results of
operations.
Rapid Technological Changes
We must continue to enhance and improve our electronic trading platform. The electronic
financial services industry is characterized by increasingly complex systems and infrastructures
and new business models. If new industry standards and practices emerge, our existing technology,
systems and electronic trading platform may become obsolete or our existing business may be harmed.
Our future success will depend on our ability to: enhance our existing products and services;
develop and/or license new products and technologies that address the increasingly sophisticated
and varied needs of our broker-dealer and institutional investor clients and prospective clients;
and respond to technological advances and emerging industry standards and practices on a
cost-effective and timely basis.
Trends in Our Business
The majority of our revenues are derived from commissions for transactions executed on our
platform between our institutional investor and broker-dealer clients. We believe that there are
five key variables that impact the notional value of such transactions on our platform and the
amount of commissions earned by us:
|
|
|
the number of institutional investor clients that participate on the platform and their
willingness to originate transactions through the platform; |
|
|
|
|
the number of broker-dealer clients on the platform and the competitiveness of the prices
they provide to the institutional investor clients; |
21
|
|
|
the number of markets for which we make trading available to our clients; |
|
|
|
|
the overall level of activity in these markets; and |
|
|
|
|
the level of commissions that we collect for trades executed through the platform. |
We believe that overall corporate bond market trading volume is affected by various factors
including the absolute levels of interest rates, the direction of interest rate movements, the
level of new issues of corporate bonds and the volatility of corporate bond spreads versus U.S.
Treasury securities. Because a significant percentage of our revenue is tied directly to the volume
of securities traded on our platform, it is likely that a general decline in trading volumes,
regardless of the cause of such decline, would reduce our revenues and have a significant negative
impact on profitability.
We have historically earned a substantial portion of our commissions and overall revenues from
broker-dealer clients that are (or whose affiliates are) our stockholders. The percentage of our
revenues derived from our broker-dealer clients that are also our stockholders has been declining.
For the nine months ended September 30, 2006, the percentage decreased to 46.1% from 50.4% for the
nine months ended September 30, 2005. Affiliates of most of our broker-dealer clients are also
among our institutional investor clients. A table detailing the amount of revenues generated by the
nine broker-dealer clients that were also our stockholders as of January 1, 2006 (ABN Amro, Banc of
America Securities, Bear Stearns, BNP Paribas, Credit Suisse, Deutsche Bank, JPMorgan, Lehman
Brothers and UBS), and their respective affiliates, as well as the corresponding percentage of
total revenues, is provided below for the three and nine months ended September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
($ in thousands) |
|
Total revenues generated by Stockholder Broker-Dealer Clients
and their respective affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
8,750 |
|
|
$ |
8,106 |
|
|
$ |
26,249 |
|
|
$ |
28,416 |
|
Information and user access fees |
|
|
290 |
|
|
|
241 |
|
|
|
898 |
|
|
|
683 |
|
Investment income |
|
|
227 |
|
|
|
167 |
|
|
|
719 |
|
|
|
549 |
|
Other |
|
|
125 |
|
|
|
156 |
|
|
|
389 |
|
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues generated by Stockholder Broker-Dealer Clients
and their respective affiliates |
|
$ |
9,392 |
|
|
$ |
8,670 |
|
|
$ |
28,255 |
|
|
$ |
30,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues generated by Stockholder Broker-Dealer Clients
and their respective affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
49.7 |
% |
|
|
51.3 |
% |
|
|
50.2 |
% |
|
|
55.5 |
% |
Information and user access fees |
|
|
20.4 |
% |
|
|
20.7 |
% |
|
|
21.9 |
% |
|
|
21.3 |
% |
Investment income |
|
|
17.9 |
% |
|
|
17.9 |
% |
|
|
21.7 |
% |
|
|
22.3 |
% |
Other |
|
|
52.5 |
% |
|
|
56.9 |
% |
|
|
53.1 |
% |
|
|
52.4 |
% |
Percentage of total revenues generated by Stockholder
Broker-Dealer Clients
and their respective affiliates |
|
|
45.9 |
% |
|
|
45.4 |
% |
|
|
46.1 |
% |
|
|
50.4 |
% |
Commission Revenue Trends
Commissions are generally calculated as a percentage of the notional dollar volume of bonds
traded on our platform and vary based on the type, size, yield and maturity of the bond traded. The
commission rates are based on a number of factors, including fees charged by inter-dealer brokers
in the respective markets, average bid-offer spreads in the products we offer, transaction costs
through alternative channels including the telephone and the trading volume executed through our
platform by the broker-dealer completing the trade. Under our transaction fee plans, bonds that are
more actively traded or that have shorter maturities are generally charged lower commissions, while
bonds that are less actively traded or that have longer maturities generally command higher
commissions.
On June 1, 2005, we introduced a new fee plan primarily for secondary market transactions in
U.S. high-grade corporate bonds executed on our institutional client to multi-dealer electronic
trading platform. As of September 30, 2006, 18 of our U.S. high-grade broker-dealer clients have
signed new two-year agreements that supersede the fee arrangements that we entered into with many
of our broker-dealer clients during the third quarter of 2003. The new plan incorporates higher
fixed monthly fees and lower variable fees for our broker-dealer clients
22
than the previous U.S high-grade corporate transaction fee plans and
incorporates volume incentives to our broker-dealer clients that are designed to increase the
volume of transactions effected on our platform. Under the new fee plan, the Company electronically
adds the variable fee to the spread quoted by the broker-dealer client but does not charge for
inquiries that an institutional investor client sends to a single broker-dealer client. The
combination of higher fixed and lower variable fees in the new plan results in higher revenue to
the Company at lower volume levels but will limit revenue growth in the future for U.S high-grade
corporate bond trading as volume levels increase.
For European high-grade corporate bond trades, broker-dealer transaction fees vary based on
the type of bond traded. Different fee schedules apply to fixed rate and floating rate bonds.
Within the schedule for fixed rate bonds, the fee varies depending on whether the bond is a
corporate or a sovereign issue. For corporate bonds, the fee also varies depending on the maturity
of the issue. This fee schedule applies a tiered fee structure, which reduces the fee per trade
upon the attainment of certain specified amounts of monthly commissions generated by a particular
broker-dealer and does not carry a fixed monthly fee or fee cap.
In September 2005, we launched electronic credit default swap index trading on its platform
and charges commissions to both broker-dealer and institutional clients calculated as a percentage
of the notional volume of transactions traded. Broker-dealer clients are able to select between
standard fee schedules that contain monthly minimum commissions and, in some cases, monthly fee
caps.
In June 2006, we introduced functionality that allows broker-dealer clients to transact U.S.
corporate and emerging markets bond trades on our platform with other broker-dealer clients.
MarketAxess Corporation acts as intermediary in these transactions by serving as counterparty to
the two broker-dealer clients involved. We charge a fee to the broker-dealer clients involved in
the transaction that is based on the size of the transaction and the maturity of the bond traded.
Commissions for other products generally vary based on the type and the maturity of the bond
traded. Factors that we consider when setting commission rates include those charged by
inter-dealer brokers in the respective markets, average bid-offer spreads in the products we serve
and transaction costs through alternative channels including the telephone.
We anticipate that some reduction in average fees per million may occur in the future.
Consequently, past trends in commissions are not necessarily indicative of future commissions.
Other Revenue Trends
In addition to the commissions discussed above, we earn revenue from certain fees paid by
institutional investor and broker-dealer clients and from income on investments.
Information and User Access Fees We charge information services fees for Corporate BondTicker
to our broker-dealer clients, institutional investor clients and data-only subscribers. The
information services fee is a flat monthly fee, based on the level of service. We also generate
information services fees from the sale of bulk data to certain institutional investor clients and
data-only subscribers. Institutional investor clients trading U.S. high-grade corporate bonds are
charged a monthly user access fee for the use of our platform. The fee, billed quarterly, is
charged to the client based on the number of the clients users. To encourage institutional
investor clients to execute trades on our U.S. high-grade corporate bond platform, we reduce these
information and user access fees for such clients once minimum quarterly trading volumes are
attained.
License Fees License fees consist of fees received from broker-dealer clients for access to
our trading platform through a non-exclusive and non-transferable license. Broker-dealer clients,
other than those that made equity investments in the Company, typically pay an initial license fee,
which is due and payable upon execution of the broker-dealer agreement. The initial license fee
varies by agreement and at a minimum is generally intended to cover the initial set-up costs
incurred to enable a broker-dealer to begin using our electronic trading platform. The license fee
is recognized in the first three months of the agreement in the estimated amount of the set-up
costs that we incur and the remaining amount is amortized over the initial term of the agreement,
which is generally three years.
Investment Income Investment income consists of income earned on our investments.
Other Other revenues consist of telecommunications line charges to broker-dealer clients and
other miscellaneous revenues.
23
Expense Trends
In the normal course of business, we incur the following expenses:
Employee Compensation and Benefits Employee compensation and benefits is our most significant
expense and includes employee salaries, stock compensation costs, other incentive compensation,
related employee benefits and payroll taxes.
Depreciation and Amortization Depreciation and amortization expense results from the
depreciation of fixed assets, which consist of computer hardware, furniture and fixtures, and the
amortization of software, capitalized software development costs and leasehold improvements. We
depreciate our fixed assets and amortize our capitalized software development costs on a
straight-line basis over a three-year period. We amortize leasehold improvements on a
straight-line basis over the lesser of the life of the improvement or the remaining term of the
lease.
Technology and Communications Technology and communications expense consists primarily of costs
relating to maintenance on software and hardware, our internal network connections, data center
hosting costs and data feeds provided by outside vendors or service providers. The majority of
our broker-dealer clients have dedicated high-speed communication lines to our network in order
to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these
connections, which is recovered against the relevant expenses we incur.
Professional and Consulting Fees Professional and consulting fees consist primarily of
accounting fees, legal fees and fees paid to information technology and non-information
technology consultants for services provided for the maintenance of our trading platform and
information services products.
Marketing and Advertising Marketing and advertising expense consists primarily of print and
other advertising expenses we incur to promote our products and services. This expense also
includes costs associated with attending or exhibiting at industry-sponsored seminars,
conferences and conventions. Also included in this expense are travel and entertainment expenses
incurred by our sales force to promote our trading platform and information services.
General and Administrative General and administrative expense consists primarily of occupancy
and utilities, general travel and entertainment, board of directors expenses, charitable
contributions, provision for doubtful accounts, and various state franchise and U.K. value-added
taxes.
We anticipate expense growth in the future, primarily due to investment in new products,
notably in employee compensation and benefits, professional and consulting fees, and general and
administrative expense but we believe that operating leverage can be achieved by increasing volumes
in existing products and adding new products without substantial additions to our infrastructure.
Adoption of SFAS 123R
Effective January 1, 2006, we adopted SFAS 123R, which requires the measurement and
recognition of compensation expense for all stock-based payment awards made to employees and
directors, based on estimated fair values. SFAS 123R supersedes our previous accounting under APB
25 for periods beginning in fiscal 2006. In March 2005, the SEC issued SAB 107 relating to SFAS
123R. We have applied the provisions of SAB 107 in our adoption of SFAS 123R.
We adopted SFAS 123R using the modified prospective transition method, which requires the
application of the accounting standard as of January 1, 2006. In accordance with the modified
prospective transition method, the Companys Consolidated Financial Statements for prior periods
have not been restated to reflect, and do not include the impact of SFAS 123R. Stock-based
compensation expense recognized under SFAS 123R for the three and nine months ended September 30,
2006 was $0.6 million and $2.1 million, respectively, which consisted of stock-based compensation
expense related to employee stock options.
Stock-based compensation expense recognized in our Consolidated Statements of Operations for
the three and nine months ended September 30, 2006 included compensation expense for stock-based
payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant
date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation
expense for the stock-based payment awards granted subsequent to December 31, 2005 based on the
grant date fair value estimated in accordance with the provisions of SFAS 123R.
24
SFAS 123R requires companies to estimate the fair value of stock-based payment awards on the
date of grant using an option-pricing model. We believe that the use of the Black-Scholes model
meets the fair value measurement objectives of SFAS 123R and reflects all substantive
characteristics of the instruments being valued. The determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected by our stock price as
well as assumptions regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, the expected stock price volatility over the term of the awards
and actual and projected employee stock option exercise behavior. Expected volatilities are
currently based on historical volatility of our stock and a peer group. The risk-free interest rate
is based on U.S. Treasury securities with a maturity value approximating the expected term of the
option. The expected term represents the period of time that options granted are expected to be
outstanding and was increased from four years to five years in May 2006. The value of the portion
of the award that is ultimately expected to vest is recognized as expense in our Consolidated
Statements of Operations over the requisite service periods.
As stock-based compensation expense recognized in the Consolidated Statements of Operations
for the three and nine months ended September 30, 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In our pro forma information required under SFAS 123 for the periods prior to
fiscal 2006, the Company accounted for forfeitures as they occurred.
As of September 30, 2006, there was $8.6 million of total unrecognized compensation cost
related to non-vested stock options granted under our Stock Incentive Plans. That cost is expected
to be recognized over a weighted-average period of 2.2 years.
As of September 30, 2006, there was $9.3 million of total unrecognized compensation expense
related to non-vested restricted stock granted under the 2004 Plan. That cost is expected to be
recognized over a weighted-average period of 2.4 years.
If factors change and we employ different assumptions in the application of SFAS 123R in
future periods, the compensation expense we record under SFAS 123R may differ significantly from
that recorded in the current period.
Recent developments
On October 26, 2006, the Board of Directors of the Company authorized a share repurchase
program for up to $40 million of the Companys voting Common stock. The Company intends to
repurchase the shares in the open market or privately negotiated transactions, at times and prices
considered appropriate by the Company. Shares
repurchased under the program will be held in treasury for future use.
25
Statistical Information
Our trading volume and average fees per million traded for the three and nine months ended
September 30, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Trading Volume Data (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade multi dealer |
|
$ |
44.7 |
|
|
$ |
35.7 |
|
|
$ |
124.4 |
|
|
$ |
134.3 |
|
U.S. high-grade single dealer |
|
|
5.1 |
|
|
|
3.3 |
|
|
|
14.6 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. high-grade |
|
|
49.8 |
|
|
|
39.0 |
|
|
|
139.0 |
|
|
|
138.5 |
|
European high-grade |
|
|
18.7 |
|
|
|
16.3 |
|
|
|
65.5 |
|
|
|
56.1 |
|
Other |
|
|
15.3 |
|
|
|
13.3 |
|
|
|
43.3 |
|
|
|
35.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83.8 |
|
|
$ |
68.6 |
|
|
$ |
247.8 |
|
|
$ |
229.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Fee Per Million Traded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade |
|
$ |
246 |
|
|
$ |
277 |
|
|
$ |
246 |
|
|
$ |
252 |
|
European high-grade |
|
$ |
176 |
|
|
$ |
192 |
|
|
$ |
179 |
|
|
$ |
194 |
|
Other |
|
$ |
135 |
|
|
$ |
138 |
|
|
$ |
147 |
|
|
$ |
153 |
|
All Products |
|
$ |
210 |
|
|
$ |
230 |
|
|
$ |
211 |
|
|
$ |
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of U.S. Trading Days |
|
|
63 |
|
|
|
64 |
|
|
|
187 |
|
|
|
189 |
|
Number of U.K. Trading Days |
|
|
64 |
|
|
|
65 |
|
|
|
188 |
|
|
|
190 |
|
For volume reporting purposes, transactions in foreign currencies are converted to U.S.
dollars at the exchange rates prevailing on the day the transactions were executed.
Single-dealer inquiries represent U.S. high-grade trades on which no fees were charged in
accordance with the U.S. high-grade corporate bond fee plan that went into effect on June 1, 2005.
The U.S. high-grade average fee per million is calculated for each period presented using both the
variable transaction fees and the fixed monthly fees paid by our broker-dealer clients.
In September 2005, we launched electronic credit default swap index trading on its platform.
Trading volume data and commissions related to these transactions are included in Other.
In June 2006, we launched our DealerAxessTM product, which enables U.S. corporate
and emerging markets bond trading between broker-dealer clients. Trading volume data and
commissions related to these transactions are included in either U.S. high-grade or Other trading
volumes, as appropriate. We serve as a counterparty to both a buyer and a seller in matching these
back-to-back trades with its broker-dealer clients and, accordingly, includes both transactions in
its reported volume.
Our active institutional investor clients and broker-dealer clients as of September 30, 2006
and September 30, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
September 30, |
|
|
2006 |
|
2005 |
Institutional Investor Clients: |
|
|
|
|
|
|
|
|
U.S. |
|
|
452 |
|
|
|
413 |
|
Europe |
|
|
231 |
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
683 |
|
|
|
627 |
|
|
|
|
|
|
|
|
|
|
|
Broker-Dealer Clients |
|
|
25 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
26
Results of Operations
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
Overview
Total revenues increased by $1.7 million or 8.8% to $20.8 million for the three months ended
September 30, 2006 from $19.1 million for the three months ended September 30, 2005. This increase
in Total revenues was primarily due to increases in Commissions of $1.8 million, Investment income
of $0.4 million and Information and user access fees of $0.3 million, offset by a decrease in
License fees of $0.8 million.
Total expenses for the three months ended September 30, 2006 increased by $1.2 million or 6.9%
to $18.5 million for the three months ended September 30, 2006 from $17.3 million for the three
months ended September 30, 2005. Excluding the impact of $0.6 million in non-cash stock
compensation expense following the adoption of SFAS 123R in January 2006, Total expenses for the
three months ended September 30, 2006 increased by $0.6 million or 3.6% as compared to the three
months ended September 30, 2005. In addition to the SFAS 123R stock compensation expense, expense
increases were primarily due to additional increases in Employee compensation and benefits of $0.9
million, General and administrative expense of $0.3 million and Depreciation and amortization of
$0.2 million, offset by decreases in Professional and consulting fees of $0.5 million and Marketing
and advertising of $0.2 million.
For the three months ended September 30, 2006, Income before income taxes increased by $0.5
million or 28.1% to $2.2 million compared to Income before income taxes of $1.7 million for the
three months ended September 30, 2005. Net income increased by $0.1 million or 10.9% to $1.3
million compared to Net income of $1.2 million for the three months ended September 30, 2005.
Excluding the impact of stock compensation expense following the adoption of SFAS 123R, Net income
for the three months ended September 30, 2006 would have been $1.6 million. Net cash provided by
operating activities for the three months ended September 30, 2006 was $7.5 million compared to
$5.7 million for the three months ended September 30, 2005.
Revenues
Our revenues for the three months ended September 30, 2006 and September 30, 2005, and the
resulting dollar and percentage change, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
$ |
|
|
|
|
|
|
$ |
|
|
Revenues |
|
|
$ |
|
|
Revenues |
|
|
Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade |
|
$ |
12,250 |
|
|
|
59.0 |
% |
|
$ |
10,820 |
|
|
|
56.7 |
% |
|
$ |
1,430 |
|
|
|
13.2 |
% |
European high-grade |
|
|
3,290 |
|
|
|
15.8 |
|
|
|
3,132 |
|
|
|
16.4 |
|
|
|
158 |
|
|
|
5.0 |
|
Other |
|
|
2,057 |
|
|
|
9.9 |
|
|
|
1,837 |
|
|
|
9.6 |
|
|
|
220 |
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions |
|
|
17,597 |
|
|
|
84.7 |
|
|
|
15,789 |
|
|
|
82.7 |
|
|
|
1,808 |
|
|
|
11.5 |
|
Information and user access fees |
|
|
1,426 |
|
|
|
6.9 |
|
|
|
1,165 |
|
|
|
6.1 |
|
|
|
261 |
|
|
|
22.4 |
|
License fees |
|
|
247 |
|
|
|
1.2 |
|
|
|
1,032 |
|
|
|
5.4 |
|
|
|
(785 |
) |
|
|
(76.1 |
) |
Investment income |
|
|
1,266 |
|
|
|
6.1 |
|
|
|
828 |
|
|
|
4.3 |
|
|
|
438 |
|
|
|
52.9 |
|
Other |
|
|
238 |
|
|
|
1.1 |
|
|
|
274 |
|
|
|
1.5 |
|
|
|
(36 |
) |
|
|
(13.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
20,774 |
|
|
|
100.0 |
% |
|
$ |
19,088 |
|
|
|
100.0 |
% |
|
$ |
1,686 |
|
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The following table shows the extent to which the changes in revenue for the three months
ended September 30, 2006 as compared to the three months ended September 30, 2005 were attributable
to increases in volumes, reductions in the average level of commissions charged and other factors
not related to commission revenues:
|
|
|
|
|
|
|
(in thousands) |
|
Volume increases |
|
$ |
3,490 |
|
Average fee reductions |
|
|
(1,682 |
) |
Increase in Information and user access revenue |
|
|
261 |
|
Decrease in License fees |
|
|
(785 |
) |
Increase in Investment income |
|
|
438 |
|
Other |
|
|
(36 |
) |
|
|
|
|
Total revenue increase |
|
$ |
1,686 |
|
|
|
|
|
Commissions. Total commissions increased by $1.8 million or 11.5% to $17.6 million for the
three months ended September 30, 2006 from $15.8 million for the comparable period in 2005.
U.S. high-grade commissions increased by $1.4 million or 13.2% to $12.3 million for the three
months ended September 30, 2006 from $10.8 million for the comparable period in 2005. The higher
commissions were the result of DealerAxessTM revenues and increased U.S. high-grade
volume, offset by a decrease in the average fee per million. U.S. high-grade volume increased by
$10.8 billion or 27.4% from $39.0 billion for the three months ended September 30, 2005 to $49.8
billion for the three months ended September 30, 2006. The average U.S. high-grade fee declined
from $277 per million for the three months ended September 30, 2005 to $246 per million for the
three months ended September 30, 2006 as a result of a reduction in the average variable fee per
million due to the shorter maturity of trades executed on the platform as well as the introduction
in June 2005 of our new fee plan which has higher fixed monthly fees and results in lower average
fees per million at higher trading volumes. The fixed monthly U.S. high-grade fees increased to
$7.6 million for the three months ended September 30, 2006 from $7.1 million for the three months
ended September 30, 2005.
European high-grade commissions increased by $0.2 million or 5.0% for the three months ended
September 30, 2006 to $3.3 million from $3.1 million for the comparable period in 2005. The higher
commissions resulted from an increase in European high-grade volume of $2.5 billion or 15.3% from
$16.3 billion for the three months ended September 30, 2005 to $18.7 billion for the three months
ended September 30, 2006 that was partially offset by a decrease in the average European high-grade
fee from $192 per million for the three months ended September 30, 2005 to $176 per million for the
three months ended September 30, 2006. The decrease in the average European high-grade fee per
million resulted from a change in the mix of business.
Other commissions increased by $0.2 million or 11.9% for the three months ended September 30,
2006 to $2.1 million from $1.8 million for the comparable period in 2005. Other volumes which
includes, credit default swaps, agencies, high yield and emerging markets bonds, increased by $1.9
billion or 14.5% from $13.3 billion for the three months ended September 30, 2005 to $15.3 billion
for the three months ended September 30, 2006. Other fees per million decreased from $138 per
million for the three months ended September 30, 2005 to $135 per million for the three months
ended September 30, 2006, resulting from a change in the mix of business.
Information and User Access Fees. Information and user access fees increased by $0.3 million
or 22.4% to $1.4 million for the three months ended September 30, 2006 from $1.2 million for the
three months ended September 30, 2005. This increase was primarily due to increased sales of our
bulk data.
License Fees. License fees decreased by $0.8 million or 76.1% to $0.2 million for the three
months ended September 30, 2006 from $1.0 million for the three months ended September 30, 2005.
This decrease was attributable to a decline in the amortization of previously received license
fees.
Investment Income. Investment income increased by $0.4 million or 52.9% to $1.3 million for
the three months ended September 30, 2006 from $0.8 million for the comparable period in 2005. This
increase was due to higher Securities balances and a rise in interest rates during the three months
ended September 30, 2006 as compared to the three months ended September 30, 2005.
Other. Other revenues decreased by $0.1 million or 13.1% to $0.2 million for the three months
ended September 30, 2006 compared to $0.3 million for the three months ended September 30, 2005.
28
Expenses
Our expenses for the three months ended September 30, 2006 and September 30, 2005, and the
resulting dollar and percentage change, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
$ |
|
|
Revenues |
|
|
$ |
|
|
Revenues |
|
|
$ Change |
|
|
% Change |
|
|
|
($ in thousands) |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and
benefits |
|
$ |
10,483 |
|
|
|
50.5 |
% |
|
$ |
9,030 |
|
|
|
47.3 |
% |
|
$ |
1,453 |
|
|
|
16.1 |
% |
Depreciation and amortization |
|
|
1,703 |
|
|
|
8.2 |
|
|
|
1,525 |
|
|
|
8.0 |
|
|
|
178 |
|
|
|
11.7 |
|
Technology and communications |
|
|
1,956 |
|
|
|
9.4 |
|
|
|
1,952 |
|
|
|
10.2 |
|
|
|
4 |
|
|
|
0.2 |
|
Professional and consulting fees |
|
|
1,883 |
|
|
|
9.1 |
|
|
|
2,423 |
|
|
|
12.7 |
|
|
|
(540 |
) |
|
|
(22.3 |
) |
Marketing and advertising |
|
|
338 |
|
|
|
1.6 |
|
|
|
503 |
|
|
|
2.7 |
|
|
|
(165 |
) |
|
|
(32.8 |
) |
General and administrative |
|
|
2,181 |
|
|
|
10.5 |
|
|
|
1,914 |
|
|
|
10.0 |
|
|
|
267 |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
18,544 |
|
|
|
89.3 |
% |
|
$ |
17,347 |
|
|
|
90.9 |
% |
|
$ |
1,197 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits. Employee compensation and benefits increased by $1.5
million or 16.1% to $10.5 million for the three months ended September 30, 2006 from $9.0 million
for the three months ended September 30, 2005. This increase was primarily attributable to stock
option compensation costs of $0.6 million due to the adoption of SFAS 123R effective January 1,
2006, employee severance costs of $0.6 million, higher salary expense of $0.4 million and lower
capitalization of development wages of $0.3 million, offset by a reduction in employee benefits and
payroll taxes of $0.5 million. The reduction in employee benefits and payroll taxes was primarily
a result of the reversal of certain taxes accrued on stock options and restricted stock. During
the third quarter of 2006, the Company identified a difference in U.S. and U.K. accounting
treatment for taxes ultimately payable upon the exercise of stock options and vesting of restricted
stock for grants to U.K. employees. This difference in accounting was corrected through a reversal
of the reserve balance of $0.2 million at September 30, 2006. For the three months ended September
30, 2006, we capitalized $0.7 million of software development costs as compared to $1.2 million for
the three months ended September 30, 2005. The total number of employees increased to 185 as of
September 30, 2006 from 178 as of September 30, 2005. As a percentage of total revenues, Employee
compensation and benefits expense increased to 50.5% for the three months ended September 30, 2006
from 47.3% for the three months ended September 30, 2005.
Depreciation
and Amortization. Depreciation and amortization increased by $0.2 million or
11.7% to $1.7 million for the three months ended September 30, 2006 compared to $1.5 million for
the three months ended September 30, 2005. This increase was attributable to increased amortization
of capitalized software development costs for our credit default swap and
DealerAxessTM products.
Technology and Communications. Technology and communications expense was $2.0 million for both
of the three months ended September 30, 2006 and 2005.
Professional and Consulting Fees. Professional and consulting fees decreased by $0.5 million
or 22.3% to $1.9 million for the three months ended September 30, 2006 from $2.4 million for the
three months ended September 30, 2005. This decrease was primarily attributable to reduced
recruiting fees of $0.3 million as well as reduced professional services fees of $0.3 million.
Marketing and Advertising. Marketing and advertising expense decreased by $0.2 million or
32.8% to $0.3 million for the three months ended September 30, 2006 from $0.5 million for the three
months ended September 30, 2005. This decrease was primarily due to a reduction in advertising
expenditures of $0.2 million.
29
General and Administrative. General and administrative expense increased by $0.3 million or
13.9% to $2.2 million for the three months ended September 30, 2006 from $1.9 million for the three
months ended September 30, 2005. This increase was primarily due to an increase in the provision
for bad debts of $0.2 million as well as an increase in state and local franchise taxes of $0.1
million.
Provision for Income Tax
For the three months ended September 30, 2006, we recorded an income tax provision of $0.9
million. The provision consists principally of $0.5 million in federal taxes and $0.4 million in
state and local taxes.
For the three months ended September 30, 2005, we recorded an income tax provision of $0.6
million. The provision consisted primarily of $0.3 million in federal taxes, $0.1 million in state
and local taxes and $0.1 million in foreign taxes.
For the three months ended September 30, 2006 and 2005, with the exception of the payment of
certain state and local taxes, the provision for income taxes was a non-cash expense since the
Company had available net operating loss carryforwards and tax credits to offset the cash payment
of taxes.
Our consolidated effective tax rate can vary from period to period depending on, among other
factors, the geographic and business mix of our earnings.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Overview
Total revenues increased by $1.6 million or 2.6% to $61.2 million for the nine months ended
September 30, 2006 from $59.7 million for the nine months ended September 30, 2005. This increase
in Total revenues was primarily due to increases in Commissions of $1.2 million, Investment income
of $1.1 million and Information and user access fees of $0.9 million, offset by a decrease in
License fees of $1.6 million.
Total expenses for the nine months ended September 30, 2006 increased by $6.5 million or 13.0%
to $56.2 million from $49.7 million for the nine months ended September 30, 2005. Excluding the
impact of $2.1 million in non-cash stock compensation expense following the adoption of SFAS 123R
in January 2006, Total expenses for the nine months ended September 30, 2006 increased by $4.4
million or 8.8% as compared to the nine months ended September 30, 2005. In addition to the SFAS
123R stock compensation expense, expense increases were primarily due to additional increases in
Employee compensation and benefits of $2.2 million, General and administrative expenses of $1.6
million, Depreciation and amortization of $0.9 million, and Technology and communications of $0.4
million, offset by a decrease in Marketing and advertising of $0.6 million and in Professional and
consulting fees of $0.1 million.
For the nine months ended September 30, 2006, Income before income taxes decreased by $4.9
million or 49.5% to $5.0 million compared to Income before income taxes of $9.9 million for the
nine months ended September 30, 2005. Net income decreased by $2.9 million or 47.4% to $3.2 million
compared to Net income of $6.1 million for the nine months ended September 30, 2005. Excluding the
impact of stock compensation expense following the adoption of SFAS 123R, Net income for the nine
months ended September 30, 2006 would have been $4.4 million. Net cash provided by operating
activities for the nine months ended September 30, 2006 was $8.1 million compared to $9.1 million
for the nine months ended September 30, 2005.
30
Revenues
Our revenues for the nine months ended September 30, 2006 and September 30, 2005, and the
resulting dollar and percentage change, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
$ |
|
|
|
|
|
|
$ |
|
|
Revenues |
|
|
$ |
|
|
Revenues |
|
|
Change |
|
|
% Change |
|
|
|
($ in thousands) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade |
|
$ |
34,254 |
|
|
|
56.0 |
% |
|
$ |
34,900 |
|
|
|
58.5 |
% |
|
$ |
(646 |
) |
|
|
(1.8 |
)% |
European high-grade |
|
|
11,717 |
|
|
|
19.1 |
|
|
|
10,869 |
|
|
|
18.2 |
|
|
|
848 |
|
|
|
7.8 |
|
Other |
|
|
6,371 |
|
|
|
10.3 |
|
|
|
5,398 |
|
|
|
9.0 |
|
|
|
973 |
|
|
|
18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions |
|
|
52,342 |
|
|
|
85.4 |
|
|
|
51,167 |
|
|
|
85.7 |
|
|
|
1,175 |
|
|
|
2.3 |
|
Information and
user access fees |
|
|
4,108 |
|
|
|
6.8 |
|
|
|
3,204 |
|
|
|
5.4 |
|
|
|
904 |
|
|
|
28.2 |
|
License fees |
|
|
742 |
|
|
|
1.2 |
|
|
|
2,303 |
|
|
|
3.9 |
|
|
|
(1,561 |
) |
|
|
(67.8 |
) |
Investment income |
|
|
3,312 |
|
|
|
5.4 |
|
|
|
2,205 |
|
|
|
3.7 |
|
|
|
1,107 |
|
|
|
50.2 |
|
Other |
|
|
732 |
|
|
|
1.2 |
|
|
|
799 |
|
|
|
1.3 |
|
|
|
(67 |
) |
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
61,236 |
|
|
|
100.0 |
% |
|
$ |
59,678 |
|
|
|
100.0 |
% |
|
$ |
1,558 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the extent to which the changes in revenue for the nine months ended
September 30, 2006 as compared to the nine months ended September 30, 2005 were attributable to
increases in volumes, reductions in the average level of commissions charged and other factors not
related to commission revenues:
|
|
|
|
|
|
|
(in thousands) |
|
Volume increases |
|
$ |
4,215 |
|
Average fee reductions |
|
|
(3,041 |
) |
Increase in Information services and user access revenue |
|
|
904 |
|
Decrease in License Fees |
|
|
(1,561 |
) |
Increase in Investment income |
|
|
1,107 |
|
Other |
|
|
(66 |
) |
|
|
|
|
Total revenue increase |
|
$ |
1,558 |
|
|
|
|
|
Commissions. Total commissions increased by $1.2 million or 2.3% to $52.3 million for the nine
months ended September 30, 2006 from $51.2 million for the comparable period in 2005.
U.S. high-grade commissions decreased by $0.6 million or 1.9% to $34.3 million for the nine
months ended September 30, 2006 from $34.9 million for the comparable period in 2005. The lower
commissions primarily resulted from decreases in the average fee per million offset by revenue from
DealerAxessTM.
The average U.S. high-grade fee decreased by 2.4%, from $252 per million
for the nine months ended September 30, 2005 to $246 per million for the nine months ended
September 30, 2006. U.S. high-grade volume increased by 0.3%, from $138.5 billion for the nine
months ended September 30, 2005 to $139.0 billion for the nine months ended September 30, 2006.
The average variable fee per million was reduced due to the shorter maturity of trades executed on
the platform, partially offset by an increase in the fixed monthly U.S. high-grade fees to $22.2
million for the nine months ended September 30, 2006 from $17.6 million for the nine months ended
September 30, 2005.
European high-grade commissions increased by $0.9 million or 7.8% to $11.7 million for the
nine months ended September 30, 2006 from $10.9 million for the comparable period in 2005. The
higher commissions resulted from an increase in European high-grade volume of $9.4 billion or 16.7%
from $56.1 billion for the nine months ended September 30, 2005 to $65.5 billion for the nine
months ended September 30, 2006, partially offset by a decrease in the average European high-grade
fee from $194 per million for the nine months ended September 30, 2005 to $179 per million for the
nine months ended September 30, 2006. The decrease in the average European high-grade fee per
million resulted from a change in the mix of business.
Other commissions increased by $1.0 million or 18.0% to $6.4 million for the nine months ended
September 30, 2006 from $5.4 million for the comparable period in 2005. Other volumes which
includes, credit default swaps, agencies, high yield and emerging markets bonds, increased by $7.9
billion or 22.4% from $35.3 billion for the nine months ended September 30, 2005 to $43.3 billion
for the nine months ended September 30, 2006. Other fees per
million decreased from $153 per
million for the nine months ended September 30, 2005 to $147 per million for the nine months ended
September 30, 2006, as a result of a change in the mix of business.
31
Information and User Access Fees. Information and user access fees increased by $0.9 million
or 28.2% to $4.1 million for the nine months ended September 30, 2006 from $3.2 million for the
nine months ended September 30, 2005. This increase was primarily due to increased sales of bulk
data.
License Fees. License fees decreased by $1.6 million or 67.8% to $0.7 million for the nine
months ended September 30, 2006 from $2.3 million for the nine months ended September 30, 2005.
This decrease was attributable to a decline in the amortization of previously received license
fees.
Investment Income. Investment income increased by $1.1 million or 50.2% to $3.3 million for
the nine months ended September 30, 2006 from $2.2 million for the comparable period in 2005. This
increase was due to higher Securities balances and a rise in interest rates during the nine months
ended September 30, 2006 as compared to the nine months ended September 30, 2005.
Other. Other revenues decreased by $0.1 million or 8.4% to $0.7 million for the nine months
ended September 30, 2006 compared to $0.8 million for the nine months ended September 30, 2005.
Expenses
Our expenses for the nine months ended September 30, 2006 and September 30, 2005, and the
resulting dollar and percentage change, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
$ |
|
|
Revenues |
|
|
$ |
|
|
Revenues |
|
|
$ Change |
|
|
% Change |
|
|
|
($ in thousands) |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and
benefits |
|
$ |
31,264 |
|
|
|
51.1 |
% |
|
$ |
26,947 |
|
|
|
45.2 |
% |
|
$ |
4,317 |
|
|
|
16.0 |
% |
Depreciation and amortization |
|
|
5,025 |
|
|
|
8.2 |
|
|
|
4,175 |
|
|
|
7.0 |
|
|
|
850 |
|
|
|
20.4 |
|
Technology and communications |
|
|
5,799 |
|
|
|
9.5 |
|
|
|
5,399 |
|
|
|
9.1 |
|
|
|
400 |
|
|
|
7.4 |
|
Professional and consulting fees |
|
|
6,922 |
|
|
|
11.3 |
|
|
|
7,053 |
|
|
|
11.8 |
|
|
|
(131 |
) |
|
|
(1.9 |
) |
Marketing and advertising |
|
|
1,193 |
|
|
|
1.9 |
|
|
|
1,784 |
|
|
|
3.0 |
|
|
|
(591 |
) |
|
|
(33.1 |
) |
Moneyline revenue share |
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
(0.1 |
) |
|
|
50 |
|
|
|
|
|
General and administrative |
|
|
6,018 |
|
|
|
9.8 |
|
|
|
4,441 |
|
|
|
7.4 |
|
|
|
1,577 |
|
|
|
35.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
56,221 |
|
|
|
91.8 |
% |
|
$ |
49,749 |
|
|
|
83.4 |
% |
|
$ |
6,472 |
|
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits. Employee compensation and benefits increased by $4.3
million or 16.0% to $31.3 million for the nine months ended September 30, 2006 from $26.9 million
for the nine months ended September 30, 2005. This increase was primarily attributable to stock
option compensation costs of $2.1 million due to the adoption of SFAS 123R effective January 1,
2006, higher salary expense of $1.7 million, employee severance costs of $0.8 million and other
stock compensation costs of $0.5 million offset by a reduction in employee benefits and payroll
taxes of $0.4 million and lower bonus provision of $0.3 million. The reduction in employee
benefits and payroll taxes was primarily a result of the reversal of certain taxes accrued on stock
options and restricted stock. During the third quarter of 2006, the Company identified a
difference in U.S. and U.K. accounting treatment for taxes ultimately payable upon the exercise of
stock options and vesting of restricted stock for grants to U.K. employees. This difference in
accounting was corrected through a reversal of the reserve balance of $0.2 million at September 30,
2006. The total number of employees increased to 185 as of September 30, 2006 from 178 as of
September 30, 2005. As a percentage of total revenues, Employee compensation and benefits expense
increased to 51.1% for the nine months ended September 30, 2006 from 45.2% for the nine months
ended September 30, 2005.
32
Depreciation
and Amortization. Depreciation and amortization expense increased by $0.9 million
or 20.4% to $5.0 million for the nine months ended September 30, 2006 from $4.2 million for the
nine months ended September 30, 2005. This increase was attributable to increased amortization of
capitalized software development costs for our credit default swap and
DealerAxessTM products as well
as increased deprecation relating to computer hardware at our new disaster recovery site. For the
nine months ended September 30, 2006, we capitalized $2.8 million of software development costs as
compared to $2.5 million for the comparable period in 2005.
Technology and Communications. Technology and communications expense increased by $0.4 million
or 7.4% to $5.8 million for the nine months ended September 30, 2006 from $5.4 million for the nine
months ended September 30, 2005. This increase was attributable to increased costs for market data
of $0.4 million and for data center hosting of $0.1 million.
Professional and Consulting Fees. Professional and consulting fees decreased by $0.1 million
or 1.9% to $6.9 million for the nine months ended September 30, 2006 from $7.1 million for the nine
months ended September 30, 2005. This decrease was primarily due to $0.8 million in reduced
recruiting fees offset by an increase in information technology consulting costs of $0.7 million.
Marketing and Advertising. Marketing and advertising expense decreased by $0.6 million or
33.1% to $1.2 million for the nine months ended September 30, 2006 from $1.8 million for the nine
months ended September 30, 2005. This decrease was primarily due to a reduction in advertising
expenditures of $0.6 million.
General and Administrative. General and administrative expense increased by $1.6 million or
35.5% to $6.0 million for the nine months ended September 30, 2006 from $4.4 million for the
comparable period in 2005. This increase was primarily due to an increases in occupancy costs of
$0.5 million, provision for bad debts of $0.4 million, state and local franchise taxes of $0.3
million and board of directors costs of $0.2 million. These increases were offset by a decrease in
charitable contributions of $0.2 million.
Provision for Income Tax
For the nine months ended September 30, 2006, we recorded an income tax provision of $1.8
million. The provision consists principally of $0.9 million in federal taxes, $0.6 million in state
and local taxes and $0.3 million in foreign taxes.
For the nine months ended September 30, 2005, we recorded an income tax provision of $3.9
million. The provision consists principally of $2.2 million in federal taxes, $0.9 million in state
and local taxes and $0.7 million in foreign taxes.
For the nine months ended September 30, 2006 and 2005, with the exception of the payment of
certain state and local taxes, the provision for income taxes was a non-cash expense since the
Company had available net operating loss carryforwards and tax credits to offset the cash payment
of taxes.
Our consolidated effective tax rate can vary from period to period depending on, among other
factors, the geographic and business mix of our earnings.
Critical Accounting Policies and Estimates
On January 1, 2006, we adopted SFAS 123R, as disclosed in more detail in Expense Trends in
this Managements Discussion and Analysis of Financial Condition and Results of Operations.
In January 2006, the Company changed its capitalization policy for furniture, equipment and
leasehold improvements, lowering the threshold for capitalizing such purchases from $10,000 to
$2,000. The change was made to ensure consistency between the financial accounting and tax
treatment. For the three and nine months ended September 30, 2006, the Company capitalized $46,000
and $204,000, respectively, that would have been expensed under the old capitalization policy.
There were no other significant changes to our critical accounting policies and estimates
during the three and nine months ended September 30, 2006, as compared to those we disclosed in
Managements Discussion and Analysis of Financial Condition and Results of Operations included in
our Annual Report on Form 10-K for the year ended December 31, 2005.
33
Segment Results
As an electronic, multi-dealer to client platform for trading fixed-income securities, our
operations constitute a single business segment pursuant to SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. Because of the highly integrated nature of the
financial markets in which we compete and the integration of our worldwide business activities, we
believe that results by geographic region, products or types of clients are not necessarily
meaningful in understanding our business.
Liquidity and Capital Resources
Our cash flows for the periods presented below were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
8,079 |
|
|
$ |
9,124 |
|
Net cash used in investing activities |
|
|
(3,265 |
) |
|
|
(54,725 |
) |
Net cash provided by financing activities |
|
|
2,592 |
|
|
|
2,492 |
|
Effect of
exchange rate changes on cash |
|
|
(302 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
Net increase (decrease) for the period |
|
$ |
7,104 |
|
|
$ |
(43,159 |
) |
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities of $8.1 million for the nine months ended September
30, 2006 consisted of net income of $3.2 million, adjusted for non-cash charges, primarily
consisting of $4.5 million for compensation expense related to issuance of stock options and
restricted stock to employees, directors and consultants, $5.0 million for depreciation and
amortization and $0.8 million of deferred taxes. These non-cash charges were offset by an increase
of $6.0 million in cash used for working capital.
Net cash provided by operating activities of $9.1 million for the nine months ended September
30, 2005 consisted of net income of $6.1 million, adjusted for non-cash charges, primarily
consisting of $4.2 million for depreciation and amortization, $3.5 million of deferred taxes and
$1.3 million for compensation expense related to issuance of stock options and restricted stock to
employees, directors and consultants. These non-cash charges were offset by an increase in cash
used for working capital of $6.5 million.
Investing Activities
Net cash used in investing activities of $3.3 million for the nine months ended September 30,
2006 consisted of $63.2 million in purchases of Securities available-for-sale, purchases of
furniture, equipment and leasehold improvements of $2.3 million and capitalization of software
development costs of $2.8 million, offset by proceeds of $65.0 million from sales of Securities
available-for-sale.
Net cash used in investing activities of $54.7 million for the nine months ended September 30,
2005 consisted of $106.3 in purchases of Securities available-for-sale, $35.3 million of Securities
held-to-maturity, purchases of furniture, equipment and leasehold improvements of $0.5 million and
capitalization of software development costs of $2.5 million, offset by proceeds of $50.8 million
from sales of Securities available-for-sale and of $33.3 million from sales of Securities
held-to-maturity and proceeds from maturities of short-term investments of $5.8 million.
Financing Activities
Financing activities for the nine months ended September 30, 2006 consisted of proceeds from
the exercise of employee stock options of $1.5 million and $1.1 million from excess tax benefits
from share-based compensation.
Financing activities for the nine months ended September 30, 2005 consisted of proceeds from
the exercise of employee stock options of $2.5 million.
Past trends of cash flows are not necessarily indicative of future cash flow levels. A
decrease in cash flows may have a material adverse effect on our liquidity, business and financial
condition.
34
Other Factors Influencing Liquidity and Capital Resources
At September 30, 2006, we had Cash and cash equivalents and Securities available-for-sale of
$123.5 million, an increase of $5.4 million compared to $118.1 million at December 31, 2005. As of
September 30, 2006, Cash and cash equivalents and Securities available-for-sale represented 62.5%
of Total assets, compared to 62.0% of Total assets at December 31, 2005.
We are dependent on our broker-dealer clients, nine of which were also our stockholders as of
January 1, 2006, who are not restricted from buying and selling fixed-income securities, directly
or through their own proprietary or third-party platforms, with institutional investors. None of
our broker-dealer clients is contractually or otherwise obligated to continue to use our electronic
trading platform. The loss of, or a significant reduction in the use of our electronic platform by,
our broker-dealer clients could reduce our cash flows, affect our liquidity and have a material
adverse effect on our business, financial condition and results of operations.
We believe that our current resources are adequate to meet our liquidity needs and capital
expenditure requirements for at least the next 12 months. However, our future liquidity and capital
requirements will depend on a number of factors, including expenses associated with product
development and expansion, new business opportunities that are intended to further diversify our
revenue stream, or repurchases of the Companys stock. We may also acquire or invest in
technologies, business ventures or products that are complementary to our business. In the event we
require any additional financing, it will take the form of equity or debt financing. Any
additional equity may result in dilution to our stockholders. Any debt financings may involve
restrictive covenants with respect to dividends, issuances of additional capital and other
financial and operational matters related to our business.
Our two major operating subsidiaries are MarketAxess Corporation and MarketAxess Europe
Limited. MarketAxess Corporation is a registered broker-dealer in the U.S. and MarketAxess Europe
Limited is a registered alternative trading system in the U.K. As such, they are subject to minimum
regulatory capital requirements imposed by their respective market regulators that are intended to
ensure general financial soundness and liquidity based on certain minimum capital requirements. The
U.S. and the U.K. regulations prohibit a registered broker-dealer from repaying borrowings from its
parent or affiliates, paying cash dividends, making loans to its parent or affiliates or otherwise
entering into transactions that result in a significant reduction in its regulatory net capital
position without prior notification to or approval from its principal regulator. The capital
structures of our broker-dealer subsidiaries are designed to provide each with capital and
liquidity consistent with its business and regulatory requirements. As of September 30, 2006,
MarketAxess Corporation had net capital of $9.9 million, which was $9.1 million in excess of its
required minimum net capital of $0.9 million and MarketAxess Europe Limited had financial
resources, as defined by the FSA, of $14.2 million, which was $10.1 million in excess of its
required financial resources of $4.1 million.
In the ordinary course of business, we enter into contracts that contain a variety of
representations, warranties and general indemnifications. Our maximum exposure from any claims
under these arrangements is unknown, as this would involve claims that have not yet occurred.
However, based on past experience, we expect the risk of loss to be remote.
Contractual Obligations and Commitments
As
of September 30, 2006 we had the contractual obligations and
commitments detailed in the following table:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
Total |
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Less than 1 year |
|
1 - 3 years |
|
3 - 5 years |
|
More than 5 years |
|
|
|
|
|
(In thousands) |
|
|
|
Operating leases |
|
$ |
13,701 |
|
|
$ |
600 |
|
|
$ |
4,928 |
|
|
$ |
3,809 |
|
|
$ |
4,364 |
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|
|
|
In addition to the total contractual obligations and commitments in the table above, we have
contractual obligations to pay bonuses to certain of our executive officers, of $0.5 million over
the next two years.
35
Effects of Inflation
Because the majority of our assets are liquid in nature, they are not significantly affected
by inflation. However, the rate of inflation may affect our expenses, such as employee
compensation, office leasing costs and communications expenses, which may not be readily
recoverable in the prices of our services. To the extent inflation results in rising interest rates
and has other adverse effects on the securities markets, it may adversely affect our financial
position and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss resulting from adverse changes in market rates and prices,
such as interest rates and foreign currency exchange rates.
Interest Rate Risk
Interest rate risk represents our exposure to interest rate changes with respect to the money
market instruments and U.S. Treasury obligations in which we invest. We do not maintain an
inventory of bonds that are traded on our platform and, except as described below and certain other
limited exceptions, we do not act as principal to the bond transactions completed on our platform.
Our investment income from money market instruments, U.S. Treasury obligations and various
securities was $3.3 million for the nine months ended September 30, 2006. Fluctuations in
investment income are attributable to changes in our cash balances or holdings of U.S. Treasury
securities and fluctuations in interest rates received on those balances or securities.
Derivative Risk
Our limited derivative risk stems from our activities in the foreign currency forward contract
market. We use this market to mitigate our U.S. dollar versus Pound Sterling exposure that arises
from the activities of our U.K. subsidiaries. As of September 30, 2006, the notional value of our
foreign currency forward contracts was $16.6 million with an unrealized gain of $0.03 million. We
do not speculate in any derivative instruments.
Principal Transaction Risk
Through our subsidiary, MarketAxess Corporation, we began executing riskless principal
transactions between our broker-dealer clients in June 2006, in which we act as an intermediary by
serving as counterparty to both a buyer and a seller in matching back-to-back trades. These
transactions are then settled through a third-party clearing organization. Settlement typically
occurs within one to three trading days after the trade date. Cash settlement of the transaction
occurs upon receipt or delivery of the underlying instrument that was traded.
Riskless principal transactions expose us to risks. In executing riskless principal
transactions, we are exposed to the risk that one of the counterparties to a transaction may fail
to fulfill its obligations to settle a trade. Adverse movements in the prices of securities that
are the subject of these transactions can increase our risk.
Where the unmatched position or failure to deliver is prolonged, there may also be regulatory
capital charges required to be taken by us.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our management, including the Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of September 30, 2006. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective to ensure that information required to be
disclosed by MarketAxess in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and to ensure that information is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting. There were no changes in our
internal control over financial reporting
36
(as defined in Rules 13a-15(f) and Rule 15d-15(f) under
the Exchange Act) during the quarter ended September 30, 2006 identified in connection with the
evaluation thereof by our management, including the Chief Executive Officer and Chief Financial
Officer, that materially affected, or are reasonably likely to affect, our internal control over
financial reporting.
37
PART II Other Information
Item 1. Legal Proceedings
We are not currently a party to any material legal proceedings. We may be subject to various
claims and legal actions arising in the ordinary course of business.
Item 1A. Risk Factors
Risks that could have a negative impact on our business, results of operations and financial
condition include: our dependence on our broker-dealer clients, nine of which were also our
stockholders as of January 1, 2006; the level and intensity of competition in the fixed-income
electronic trading industry and the pricing pressures that may result; the variability of our
growth rate; our limited operating history; the level of trading volume transacted on the
MarketAxess platform; potential fluctuations in our operating results which may cause our stock
price to decline; the absolute level and direction of interest rates and the corresponding
volatility in the corporate fixed-income market; our ability to develop new products and offerings
and the markets acceptance of those products; technology failures, security breaches or rapid
technology changes that may harm our business; our ability to enter into strategic alliances and to
acquire other businesses and successfully integrate them with our business; extensive government
regulation; continuing international expansion that may present economic and regulatory challenges;
and our future capital needs and our ability to obtain capital when needed. This list is intended
to identify only certain of the principal factors that could have a material adverse impact on our
business, results of operations and financial condition. A more detailed description of each of
these and other important risk factors can be found under the caption Risk Factors in our most
recent Form 10-K, filed on March 14, 2006.
Except as noted below, there have been no material changes to the risk factors described in
the Form 10-K:
We are exposed to risks resulting from non-performance by counterparties to transactions executed
between our broker-dealer clients in which we act as an intermediary in matching back-to back
trades.
In June 2006, we began executing riskless principal transactions between our broker-dealer
clients through our subsidiary, MarketAxess Corporation. We act as an intermediary in these
transactions by serving as counterparty to both the buyer and the seller in matching back-to-back
trades, which are then settled through a third-party clearing organization. Settlement typically
occurs within one to three trading days after the trade date. Cash settlement of the transaction
occurs upon receipt or delivery of the underlying instrument that was traded.
We
are exposed to credit risk in our role as trading counterparty to our broker-dealer clients
executing trades on the
DealerAxessTM platform.
We are exposed to the risk that third parties that
owe us money, securities or other assets will not perform their obligations. These parties may
default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or
other reasons. Adverse movements in the prices of securities that are the subject of these
transactions can increase our risk. Where the unmatched position or failure to deliver is
prolonged, there may also be regulatory capital charges required to be taken by us. The policies
and procedures we use to manage this credit risk are new and untested. There can be no assurance
that these policies and procedures will effectively mitigate our exposure to credit risk.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
38
Item 5. Other Information
None
Item 6. Exhibits
Exhibit Listing
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Number |
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Description |
31.1
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Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 |
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|
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31.2
|
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Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002 |
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|
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32.1
|
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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32.2
|
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has
duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized.
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MARKETAXESS HOLDINGS INC.
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Date: November 3, 2006 |
By: |
/s/ RICHARD M. MCVEY
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Richard M. McVey |
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President and Chief Executive Officer
(principal executive officer) |
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Date: November 3, 2006 |
By: |
/s/ JAMES N.B. RUCKER
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James N. B. Rucker |
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Chief Financial Officer
(principal financial and accounting officer) |
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