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 March 31, 2011
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 001-34091
MARKETAXESS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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52-2230784
(IRS Employer Identification No.) |
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299 Park Avenue, 10th Floor New York, New York
(Address of principal executive offices)
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10171
(Zip Code) |
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(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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of April 27, 2011, the number of shares of the Registrants voting common stock outstanding
was 35,323,105 and the number of shares of the Registrants non-voting common stock was 2,585,654.
MARKETAXESS HOLDINGS INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
TABLE OF CONTENTS
2
PART I Financial Information
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Item 1. |
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Financial Statements |
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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As of |
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March 31, |
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December 31, |
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2011 |
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2010 |
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(In thousands, except share |
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and per share amounts) |
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ASSETS |
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Cash and cash equivalents |
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$ |
116,567 |
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$ |
124,994 |
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Securities available-for-sale, at fair value |
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79,663 |
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72,552 |
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Accounts receivable, net of allowance of $312 and $427 as of March 31, 2011 and
December 31, 2010, respectively |
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30,064 |
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25,682 |
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Deferred tax assets, net |
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20,241 |
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19,813 |
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Goodwill and intangible assets, net of accumulated amortization |
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35,645 |
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36,012 |
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Furniture, equipment, leasehold improvements and capitalized software, net of accumulated
depreciation and amortization |
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12,701 |
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12,545 |
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Prepaid expenses and other assets |
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8,849 |
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7,923 |
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Total assets |
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$ |
303,730 |
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$ |
299,521 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities |
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Accrued employee compensation |
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$ |
5,972 |
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$ |
17,791 |
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Deferred revenue |
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4,679 |
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4,571 |
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Accounts payable, accrued expenses and other liabilities |
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11,695 |
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12,368 |
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Total liabilities |
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22,346 |
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34,730 |
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Commitments and Contingencies (Note 10) |
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Series B Preferred Stock, $0.001 par value, 35,000 shares authorized; zero and 35,000
issued
and outstanding as of March 31, 2011 and December 31, 2010, respectively |
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30,315 |
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Stockholders equity |
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Preferred stock, $0.001 par value, 4,855,000 shares authorized, no shares issued and
outstanding as of March 31, 2011 and December 31, 2010 |
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Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, no shares issued
and outstanding as of March 31, 2011 and December 31, 2010 |
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Common stock voting, $0.003 par value, 110,000,000 shares authorized, 36,585,440 shares
and
35,945,001 shares issued and 35,281,699 shares and 31,141,261 shares outstanding as of
March 31, 2011 and December 31, 2010, respectively |
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109 |
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108 |
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Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, 2,585,654 shares
issued and outstanding as of March 31, 2011 and December 31, 2010 |
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9 |
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9 |
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Additional paid-in capital |
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329,476 |
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340,615 |
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Treasury stock Common stock voting, at cost, 1,303,741 shares and 4,803,740 shares as of
March 31, 2011 and December 31, 2010, respectively |
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(18,998 |
) |
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(70,000 |
) |
Accumulated deficit |
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(27,213 |
) |
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(34,605 |
) |
Accumulated other comprehensive loss |
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(1,999 |
) |
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(1,651 |
) |
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Total stockholders equity |
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281,384 |
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234,476 |
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Total liabilities and stockholders equity |
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$ |
303,730 |
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$ |
299,521 |
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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 March 31, |
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2011 |
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2010 |
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(In thousands, except per share amounts) |
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Revenues |
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Commissions |
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U.S. high-grade |
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$ |
26,378 |
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$ |
19,776 |
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Eurobond |
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4,617 |
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5,492 |
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Other |
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6,790 |
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4,039 |
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Total commissions |
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37,785 |
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29,307 |
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Technology products and services |
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3,108 |
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3,164 |
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Information and user access fees |
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1,689 |
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1,634 |
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Investment income |
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299 |
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291 |
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Other |
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728 |
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488 |
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Total revenues |
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43,609 |
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34,884 |
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Expenses |
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Employee compensation and benefits |
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16,268 |
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13,933 |
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Depreciation and amortization |
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1,562 |
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1,616 |
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Technology and communications |
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2,500 |
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2,417 |
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Professional and consulting fees |
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2,872 |
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2,138 |
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Occupancy |
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766 |
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938 |
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Marketing and advertising |
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974 |
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628 |
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General and administrative |
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1,001 |
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2,129 |
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Total expenses |
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25,943 |
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23,799 |
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Income before income taxes |
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17,666 |
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11,085 |
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Provision for income taxes |
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6,886 |
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4,384 |
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Net income |
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$ |
10,780 |
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$ |
6,701 |
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Net income per common share |
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Basic |
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$ |
0.30 |
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$ |
0.18 |
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Diluted |
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$ |
0.27 |
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$ |
0.17 |
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Cash dividends declared per common
share |
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$ |
0.09 |
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$ |
0.07 |
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Weighted average common shares |
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Basic |
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36,507 |
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33,626 |
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Diluted |
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39,301 |
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39,306 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2011
(Unaudited)
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Treasury |
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Common |
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Stock - |
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Accumu- |
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Total |
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Common |
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Stock |
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Additional |
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Common |
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Accumu- |
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lated Other |
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Stock- |
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Stock |
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Non- |
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Paid-In |
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Stock |
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lated |
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Comprehen- |
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holders |
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Voting |
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Voting |
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Capital |
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Voting |
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Deficit |
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sive Loss |
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Equity |
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(In thousands) |
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Balance at December 31. 2010 |
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$ |
108 |
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$ |
9 |
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$ |
340,615 |
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$ |
(70,000 |
) |
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$ |
(34,605 |
) |
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$ |
(1,651 |
) |
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$ |
234,476 |
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Comprehensive income: |
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Net income |
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10,780 |
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10,780 |
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Cumulative translation adjustment
and foreign currency exchange
hedge, net of tax |
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(238 |
) |
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(238 |
) |
Unrealized net loss on securities
available-for-sale, net of tax |
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(110 |
) |
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(110 |
) |
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Total comprehensive income |
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10,432 |
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Stock-based compensation |
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2,290 |
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2,290 |
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Exercise of stock options and
grants of
restricted stock, net of
surrenders on
stock option exercises and
withholding
tax on stock vesting |
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1 |
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|
190 |
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|
191 |
|
Cash dividend on common stock |
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(3,388 |
) |
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(3,388 |
) |
Conversion of Series B Preferred
Stock
to common stock voting |
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(20,687 |
) |
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|
51,002 |
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30,315 |
|
Tax benefit from the exercise of
warrants in prior years |
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4,239 |
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4,239 |
|
Windfall tax benefits from
stock-based compensation |
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2,829 |
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2,829 |
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Balance at March 31, 2011 |
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$ |
109 |
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|
$ |
9 |
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$ |
329,476 |
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|
$ |
(18,998 |
) |
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$ |
(27,213 |
) |
|
$ |
(1,999 |
) |
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$ |
281,384 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, |
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2011 |
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2010 |
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(In thousands) |
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Cash flows from operating activities |
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Net income |
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$ |
10,780 |
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$ |
6,701 |
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Adjustments to reconcile net income to net cash provided by (used in) operating
activities: |
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Depreciation and amortization |
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1,562 |
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|
1,616 |
|
Stock-based compensation expense |
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|
2,290 |
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|
2,194 |
|
Deferred taxes |
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|
4,030 |
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|
3,377 |
|
Provision for bad debts |
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|
(64 |
) |
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|
242 |
|
Changes in operating assets and liabilities |
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(Increase) in accounts receivable |
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(4,318 |
) |
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|
(3,777 |
) |
(Increase) in prepaid expenses and other assets |
|
|
(898 |
) |
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|
(130 |
) |
(Decrease) in accrued employee compensation |
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(11,819 |
) |
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|
(10,820 |
) |
Increase in deferred revenue |
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|
108 |
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|
166 |
|
(Decrease) increase in accounts payable, accrued expenses and other liabilities |
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|
(605 |
) |
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|
350 |
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Net cash provided by (used in) operating activities |
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|
1,066 |
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|
(81 |
) |
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Cash flows from investing activities |
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Securities available-for-sale: |
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Proceeds from maturities |
|
|
4,331 |
|
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|
19,301 |
|
Purchases |
|
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(11,625 |
) |
|
|
(11,209 |
) |
Purchases of furniture, equipment and leasehold improvements |
|
|
(498 |
) |
|
|
(2,889 |
) |
Capitalization of software development costs |
|
|
(842 |
) |
|
|
(471 |
) |
Other |
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|
(28 |
) |
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|
57 |
|
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|
Net cash (used in) provided by investing activities |
|
|
(8,662 |
) |
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|
4,789 |
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|
Cash flows from financing activities |
|
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|
|
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|
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|
Cash dividend on common stock and Series B Preferred Stock |
|
|
(3,388 |
) |
|
|
(2,681 |
) |
Proceeds from exercise of stock options and grants of restricted stock,
net of surrenders on stock option exercises and withholding tax on stock vesting |
|
|
191 |
|
|
|
(830 |
) |
Windfall tax benefits from stock-based compensation |
|
|
2,829 |
|
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|
375 |
|
Other |
|
|
(68 |
) |
|
|
(62 |
) |
|
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|
|
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|
Net cash (used in) financing activities |
|
|
(436 |
) |
|
|
(3,198 |
) |
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|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(395 |
) |
|
|
(299 |
) |
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|
Cash and cash equivalents |
|
|
|
|
|
|
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|
Net (decrease) increase for the period |
|
|
(8,427 |
) |
|
|
1,211 |
|
Beginning of year |
|
|
124,994 |
|
|
|
103,341 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
116,567 |
|
|
$ |
104,552 |
|
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Supplemental cash flow information |
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Cash paid during the period: |
|
|
|
|
|
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|
|
Income taxes paid |
|
$ |
300 |
|
|
$ |
493 |
|
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|
|
|
|
Non-cash activity: |
|
|
|
|
|
|
|
|
Converion of Series B Preferred Stock to common stock |
|
$ |
30,315 |
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited
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 other types of fixed-income instruments 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 and asset-backed and preferred securities. The Company also
executes certain bond transactions between and among institutional investor and broker-dealer
clients on a riskless principal basis by serving as counterparty to both the buyer and the seller
in matching back-to-back trades, which then settle through a third-party clearing organization.
Through its Corporate BondTicker service, the Company provides fixed-income market data, analytics
and compliance tools that help its clients make trading decisions. In addition, the Company
provides FIX (Financial Information eXchange) message management tools, connectivity solutions and
ancillary technology services that facilitate the electronic communication of order information
between trading counterparties.
For
2011 and 2010, JPMorgan Chase & Co. was the Companys sole stockholder broker-dealer client (the
Stockholder Broker-Dealer Client). This broker-dealer client constituted a related party of the
Company. See Note 7, Related Party.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its
subsidiaries. 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, 2010. The consolidated financial information as of
December 31, 2010 has been derived from audited financial statements not included herein.
These unaudited consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and the rules and regulations of the
U.S. Securities and Exchange Commission (SEC) with respect to Form 10-Q and reflect all
adjustments that, in the opinion of management, are normal and recurring, and that 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash maintained at major 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. Given this concentration, the Company
is exposed to certain credit risk.
Securities Available-for-Sale
The Company classifies its marketable securities as available-for-sale securities. Unrealized
marketable securities gains and losses, net of taxes, are reflected as a net amount under the
caption of accumulated other comprehensive loss in the Consolidated Statements of Financial
Condition. Realized gains and losses are recorded in the Consolidated Statements of Operations in
other revenues. For the purpose of computing realized gains and losses, cost is determined on a
specific identification basis.
7
The Company assesses whether an other-than-temporary impairment loss on the investments has
occurred due to declines in fair value or other market conditions. The portion of an
other-than-temporary impairment related to credit loss is recorded as a charge in the Consolidated
Statements of Operations. The remainder is recognized in other comprehensive loss if the Company
does not intend to sell the security and it is more likely than not that the Company will not be
required to sell the security prior to recovery. No charges for other-than-temporary losses were
recorded during the three months ended March 31, 2011 and 2010.
Fair Value Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date. The standard also establishes a three-tiered fair value hierarchy that prioritizes inputs
to valuation techniques used in fair value calculations. The three levels of inputs are defined as
Level 1 (unadjusted quoted prices for identical assets or liabilities in active markets), Level 2
(inputs that are observable in the marketplace other than those inputs classified in Level 1) and
Level 3 (inputs that are unobservable in the marketplace). The Companys financial assets and
liabilities measured at fair value on a recurring basis consist of its securities
available-for-sale portfolio and one foreign currency forward contract.
Allowance for Doubtful Accounts
All accounts receivable have contractual maturities of less than one year and are derived from
trading-related fees and commissions and revenues from products and services. The Company
continually monitors collections and payments from its clients and maintains an allowance for
doubtful accounts. The allowance for doubtful accounts is based upon the historical collection
experience and specific collection issues that have been identified. Additions to the allowance for
doubtful accounts are charged to bad debt expense, which is included in general and administrative
expense in the Companys 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 to seven years, which is indicative of the
estimated useful life of the assets. 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
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 third party consulting costs 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.
Securities and Cash Provided as Collateral
Securities provided as collateral consist of U.S. government obligations and cash.
Collectively, these amounts are used as collateral for standby letters of credit, electronic bank
settlements, foreign currency forward contracts to hedge the Companys net investments in certain
foreign subsidiaries and broker dealer clearance accounts. Securities provided as collateral are
included in prepaid expenses and other assets in the Consolidated Statements of Financial
Condition.
Foreign Currency Translation and Forward Contracts
Assets and liabilities denominated in foreign currencies are translated using exchange rates
at the end of the period; revenues and expenses are translated at average monthly rates. Gains and
losses on foreign currency translation are a component of accumulated other comprehensive loss in
the Consolidated Statements of Financial Condition. Transaction gains and losses are recorded in
general and administrative expense in the Consolidated Statements of Operations.
The Company enters into foreign currency forward contracts to hedge its net investment in its
U.K. subsidiary. Gains and losses on these transactions are included in accumulated other
comprehensive loss on the Consolidated Statements of Financial Condition.
8
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 technology products and services, information and user access fees, investment income
and other income.
Commission revenue. Commissions are generally calculated as a percentage of the 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. Under certain fee
plans, broker-dealer clients pay monthly distribution fees. For trades that the Company executes
between and among institutional investor and broker-dealer clients on a riskless principal basis by
serving as counterparty to both the buyer and the seller, the Company earns the commission through
the difference in price between the two back-to-back trades.
Technology products and services. The Company generates revenues from technology software
licenses, maintenance and support services (referred to as post-contract technical support or
PCS) and professional consulting services. Revenue is generally recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and
collection is considered probable. The Company generally sells software licenses and PCS together
as part of multiple-element arrangements. The Company also enters into contracts for technology
integration consulting services unrelated to any software product.
For arrangements that include multiple elements, generally software licenses and PCS, we
allocate and defer revenue for the undelivered items based on vendor specific objective evidence
(VSOE) of the fair value of the undelivered elements and recognize the difference between the
total arrangement fee and the amount deferred for the undelivered items as license revenue. VSOE of
each element is based on historical evidence of stand-alone sales of these elements to third
parties or the stated renewal rate for the undelivered elements. When VSOE does not exist for
undelivered items, the entire arrangement fee is recognized ratably over the performance period.
For PCS the term is typically one year and revenue is recognized over the duration of the
arrangement on a straight-line basis.
Professional consulting services are generally separately priced and are typically not
essential to the functionality of the Companys software products. Revenues from these services
are recognized separately from the license fee. Generally, revenue from time-and-materials
consulting contracts is recognized as services are performed.
Revenues from contracts for technology integration consulting services are recognized on the
percentage-of-completion method. Percentage-of-completion accounting involves calculating the
percentage of services provided during the reporting period compared to the total estimated
services to be provided over the duration of the contract. If estimates indicate that a contract
loss will occur, a loss provision is recorded in the period in which the loss first becomes
probable and reasonably estimable. Contract losses are determined to be the amount by which the
estimated direct and indirect costs of the contract exceed the estimated total revenues that will
be generated by the contract. There were no contract loss provisions recorded as of March 31, 2011
and 2010. Revenues recognized in excess of billings are recorded as unbilled services within other
assets. Billings in excess of revenues recognized are recorded as deferred revenues until revenue
recognition criteria are met.
Initial set-up fees. The Company enters into agreements with its broker-dealer clients
pursuant to which the Company provides access to its platform through a non-exclusive and
non-transferable license. Broker-dealer clients may pay an initial set-up fee, which is typically
due and payable upon execution of the broker-dealer agreement. The initial set-up fee, if any,
varies by agreement. Revenue is recognized over the initial term of the agreement, which is
generally two years.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all share-based payment awards
based on their estimated fair values measured as of the grant date. These costs are recognized as
an expense in the Consolidated Statements of Operations over the requisite service period, which is
typically the vesting period, with an offsetting increase to additional paid-in capital.
Income Taxes
Income taxes are accounted for using the asset and liability method. 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. The Company recognizes interest and penalties related to
unrecognized tax benefits in general and administrative expenses in the Consolidated Statements of
Operations.
9
Business Combinations, Goodwill and Intangible Assets
Business acquisitions are accounted for under the purchase method of accounting. The total
cost of an acquisition is allocated to the underlying net assets based on their respective
estimated fair values. The excess of the purchase price over the estimated fair values of the net
assets acquired is recorded as goodwill. Determining the fair value of certain assets acquired and
liabilities assumed is judgmental in nature and often involves the use of significant estimates and
assumptions, including assumptions with respect to future cash flows, discount rates, growth rates
and asset lives.
Goodwill and other intangibles with indefinite lives are not amortized. An impairment review
of goodwill is performed on an annual basis and more frequently if circumstances change.
Intangible assets with definite lives, including purchased technologies, customer relationships and
other intangible assets, are amortized on a straight-line basis over their estimated useful lives,
ranging from five to ten years. The Company has no intangibles with indefinite lives. Intangible
assets are assessed for impairment when events or circumstances indicate the existence of a
possible impairment.
Earnings Per Share
For 2010, earnings per share (EPS) was calculated using the two-class method. 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, including consideration of the two-class method
to the extent that participating securities were outstanding during the period. Under the
two-class method, undistributed net income is allocated to common stock and participating
securities based on their respective right to share in dividends. The Series B Preferred Stock was
convertible into shares of common stock and also included a right whereby, upon the declaration or
payment of a dividend or distribution on the common stock, a dividend or distribution must also be
declared or paid on the Series B Preferred Stock based on the number of shares of common stock into
which such securities were convertible at the time. Due to these rights, the Series B Preferred
Stock was considered a participating security requiring the use of the two-class method for the
computation of basic EPS.
In January 2011, all of the shares of the Series B Preferred Stock were mandatorily and
automatically converted into shares of common stock. For 2011, basic EPS is computed by dividing
the net income attributable to common stock by the weighted-average number of shares of common
stock outstanding during the period.
Diluted EPS is computed using the more dilutive of the (a) if-converted method or (b)
two-class method. Since the Series B Preferred Stock participated equally with the common stock in
dividends and unallocated income, diluted EPS under the if-converted method was and is equivalent
to the two-class method. For both 2011 and 2010, the weighted-average shares outstanding of common
stock reflects the dilutive effect that could occur if convertible securities or other contracts to
issue common stock were converted into or exercised for common stock.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board issued authoritative
guidance on revenue recognition. The guidance required entities to allocate revenue in an
arrangement with multiple deliverables using estimated selling prices of the delivered goods and
services based on a selling price hierarchy. The guidance also removed tangible products from the
scope of software revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. The Company adopted the new revenue recognition guidance effective
January 1, 2011 and there was no material impact on the Companys Consolidated Financial
Statements.
10
3. Net Capital Requirements and Customer Protection Requirements
MarketAxess Corporation, a U.S. subsidiary, is a registered broker-dealer with the SEC and is
a member of the Financial Industry Regulatory Authority (FINRA). MarketAxess Corporation claims
exemption from SEC Rule 15c3-3, as it does not hold customer securities or funds on account, as
defined. 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 $100,000 or 6 2/3% of aggregate indebtedness. MarketAxess Europe Limited, a U.K.
subsidiary, is registered as a Multilateral Trading Facility with the Financial Services Authority
(FSA) in the U.K. MarketAxess Canada Limited, a Canadian subsidiary, is registered as an
Alternative Trading System dealer under the Securities Act of Ontario and is a member of the
Investment Industry Regulatory Organization of Canada. MarketAxess Europe Limited and MarketAxess
Canada Limited are subject to certain financial resource requirements of the FSA and the Ontario
Securities Commission, respectively. The following table sets forth the capital requirements, as
defined, that the Companys subsidiaries were required to maintain as of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MarketAxess |
|
|
MarketAxess |
|
|
MarketAxess |
|
|
|
Corporation |
|
|
Europe Limited |
|
|
Canada Limited |
|
|
|
(In thousands) |
|
Net capital |
|
$ |
58,992 |
|
|
$ |
25,068 |
|
|
$ |
436 |
|
Minimum net capital
required |
|
|
1,182 |
|
|
|
3,833 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
Excess net capital |
|
$ |
57,810 |
|
|
$ |
21,235 |
|
|
$ |
153 |
|
|
|
|
|
|
|
|
|
|
|
The Companys regulated subsidiaries are subject to U.S., U.K. and Canadian regulations
which 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, respectively, without prior
notification to or approval from such regulated entitys principal regulator.
4. Fair Value Measurements
The following table summarizes the valuation of the Companys assets measured at fair value as
categorized based on the hierarchy described in Note 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
As of March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
89,619 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
89,619 |
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations |
|
|
|
|
|
|
51,125 |
|
|
|
|
|
|
|
51,125 |
|
Municipal securities |
|
|
|
|
|
|
26,478 |
|
|
|
|
|
|
|
26,478 |
|
Corporate bonds |
|
|
|
|
|
|
2,060 |
|
|
|
|
|
|
|
2,060 |
|
Foreign currency forward
position |
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,619 |
|
|
$ |
79,903 |
|
|
$ |
|
|
|
$ |
169,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
96,661 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
96,661 |
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations |
|
|
|
|
|
|
41,351 |
|
|
|
|
|
|
|
41,351 |
|
Municipal securities |
|
|
|
|
|
|
29,145 |
|
|
|
|
|
|
|
29,145 |
|
Corporate bonds |
|
|
|
|
|
|
2,056 |
|
|
|
|
|
|
|
2,056 |
|
Foreign currency forward
position |
|
|
|
|
|
|
(337 |
) |
|
|
|
|
|
|
(337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
96,661 |
|
|
$ |
72,215 |
|
|
$ |
|
|
|
$ |
168,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities classified within Level 2 were valued using a market approach utilizing prices
and other relevant information generated by market transactions involving comparable assets. The
foreign currency forward contract is classified within Level 2 as the valuation inputs are based on
quoted market prices.
11
The Company enters into foreign currency forward contracts with a noncontrolling stockholder
broker-dealer client to hedge the exposure to variability in foreign currency cash flows resulting
from the net investment in the Companys U.K. subsidiary. The Company assesses each foreign
currency forward contract to ensure that it is highly effective at reducing the exposure being
hedged. The Company designates each foreign currency forward contract as a hedge, assesses the risk
management objective and strategy, including identification of the hedging instrument, the hedged
item and the risk exposure and how effectiveness is to be assessed prospectively and
retrospectively. These hedges are for a one-month period and are used to limit exposure to foreign
currency exchange rate fluctuations. The gross and net fair value asset of $0.2 million as of
March 31, 2011 is included in accounts receivable and the gross and net fair value liability of
$0.3 million as of December 31, 2010 is included in accounts payable, in the Consolidated
Statements of Financial Condition. Gains or losses on foreign currency forward contracts
designated as hedges are included in accumulated other comprehensive loss in the Consolidated
Statements of Financial Condition. A summary of the foreign currency forward contract is as
follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
(In thousands) |
|
Notional value |
|
$ |
26,225 |
|
|
$ |
29,117 |
|
Fair value of notional |
|
|
25,985 |
|
|
|
29,454 |
|
|
|
|
|
|
|
|
Gross and net fair value asset
(liability) |
|
$ |
240 |
|
|
$ |
(337 |
) |
|
|
|
|
|
|
|
The following is a summary of the Companys securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
fair |
|
|
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
|
(In thousands) |
|
As of March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations |
|
$ |
50,356 |
|
|
$ |
836 |
|
|
$ |
(67 |
) |
|
$ |
51,125 |
|
Municipal securities |
|
|
26,468 |
|
|
|
16 |
|
|
|
(6 |
) |
|
|
26,478 |
|
Corporate bonds |
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale |
|
$ |
78,884 |
|
|
$ |
852 |
|
|
$ |
(73 |
) |
|
$ |
79,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations |
|
$ |
40,383 |
|
|
$ |
968 |
|
|
$ |
|
|
|
$ |
41,351 |
|
Municipal securities |
|
|
29,150 |
|
|
|
14 |
|
|
|
(19 |
) |
|
|
29,145 |
|
Corporate bonds |
|
|
2,056 |
|
|
|
|
|
|
|
|
|
|
|
2,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale |
|
$ |
71,589 |
|
|
$ |
982 |
|
|
$ |
(19 |
) |
|
$ |
72,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the contractual maturities of securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
(In thousands) |
|
Less than one year |
|
$ |
24,354 |
|
|
$ |
23,593 |
|
Due in 1 - 5 years |
|
|
55,309 |
|
|
|
48,959 |
|
|
|
|
|
|
|
|
Total securities available-for-sale |
|
$ |
79,663 |
|
|
$ |
72,552 |
|
|
|
|
|
|
|
|
Proceeds from the maturities of securities available-for-sale during the three months
ended March 31, 2011 and 2010 were $4.3 million and $19.3 million, respectively.
12
The following table provides fair values and unrealized losses on securities
available-for-sale and by the aging of the securities continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than Twelve Months |
|
|
Twelve Months or More |
|
|
Total |
|
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
|
fair |
|
|
unrealized |
|
|
fair |
|
|
unrealized |
|
|
fair |
|
|
unrealized |
|
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
|
(In thousands) |
|
As of March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations |
|
$ |
15,434 |
|
|
$ |
(67 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
15,434 |
|
|
$ |
(67 |
) |
Municipal securities |
|
|
14,802 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
14,802 |
|
|
|
(6 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale |
|
$ |
30,236 |
|
|
$ |
(73 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
30,236 |
|
|
$ |
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Municipal securities |
|
|
18,218 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
18,218 |
|
|
|
(19 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale |
|
$ |
18,218 |
|
|
$ |
(19 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
18,218 |
|
|
$ |
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Goodwill and Intangible Assets
Goodwill and intangible assets principally relate to the acquisitions of Greenline Financial
Technologies, Inc. in 2008 and Trade West Systems, LLC in 2007. Goodwill was $31.8 million as of
both March 31, 2011 and December 31, 2010. Intangible assets that are subject to amortization,
including the related accumulated amortization, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
|
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
|
|
(In thousands) |
|
Technology |
|
$ |
4,010 |
|
|
$ |
(2,680 |
) |
|
$ |
1,330 |
|
|
$ |
4,010 |
|
|
$ |
(2,505 |
) |
|
$ |
1,505 |
|
Customer relationships |
|
|
3,530 |
|
|
|
(1,687 |
) |
|
|
1,843 |
|
|
|
3,530 |
|
|
|
(1,584 |
) |
|
|
1,946 |
|
Non-competition
agreements |
|
|
1,260 |
|
|
|
(773 |
) |
|
|
487 |
|
|
|
1,260 |
|
|
|
(710 |
) |
|
|
550 |
|
Tradenames |
|
|
590 |
|
|
|
(389 |
) |
|
|
201 |
|
|
|
590 |
|
|
|
(363 |
) |
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,390 |
|
|
$ |
(5,529 |
) |
|
$ |
3,861 |
|
|
$ |
9,390 |
|
|
$ |
(5,162 |
) |
|
$ |
4,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense associated with identifiable intangible assets was $0.4 million for both
the three months ended March 31, 2011 and 2010, respectively. Estimated total amortization expense
is $1.5 million for 2011, $1.4 million for 2012, $0.5 million for 2013, $0.3 million for 2014 and
$0.2 million for 2015.
13
6. Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
164 |
|
State and local |
|
|
246 |
|
|
|
(33 |
) |
Foreign |
|
|
(206 |
) |
|
|
522 |
|
|
|
|
|
|
|
|
Total current provision |
|
|
40 |
|
|
|
653 |
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
|
4,460 |
|
|
|
2,938 |
|
State and local |
|
|
1,784 |
|
|
|
721 |
|
Foreign |
|
|
602 |
|
|
|
72 |
|
|
|
|
|
|
|
|
Total deferred provision |
|
|
6,846 |
|
|
|
3,731 |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
6,886 |
|
|
$ |
4,384 |
|
|
|
|
|
|
|
|
The following is a summary of the Companys net deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
(In thousands) |
|
Deferred tax assets and liabilities |
|
$ |
20,504 |
|
|
$ |
20,062 |
|
Valuation allowance |
|
|
(263 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net |
|
$ |
20,241 |
|
|
$ |
19,813 |
|
|
|
|
|
|
|
|
In April 2000, the Board of Directors initiated a warrant program that commenced on
February 1, 2001. Under this program, the Company reserved for issuance 5,000,002 shares of common
stock. The warrants were issued to certain broker-dealer stockholders (the Warrant Holders). The
Warrant Holders were entitled to purchase shares of common stock from the Company at an exercise
price of $.003. The warrants were issued to the Warrant Holders at the time that they made an
equity investment in the Company. Allocations were based on each Warrant Holders respective
commissions as a percentage of the total commissions from the six participating Warrant Holders,
calculated on a quarterly basis. The final share allocations under the warrant program occurred on
March 1, 2004. Shares allocated under the warrant program were expensed on a quarterly basis at
fair market value. All of the warrants were exercised prior to 2008. Through December 31, 2009,
the tax benefit on a portion of the tax deduction generated on the exercise of the warrants had not
yet been recorded. During 2010, the Company recognized a portion of the tax benefits amounting to
$11.4 million as an increase to additional paid-in-capital due to the utilization of the related
tax loss carryforwards of $31.0 million. During the first quarter of 2011, the Company recognized
the remaining portion of the tax benefit, amounting to $4.2 million, as an increase to additional
paid-in-capital due to the expected utilization of the related tax loss carryforwards of $10.4
million.
The Company or one of its subsidiaries files U.S. federal, state and foreign income tax
returns. No income tax returns have been audited, with the exception of New York state (through
2006) and Connecticut state (through 2003) tax returns. An examination of the Companys New York
state franchise tax returns for 2007 through 2009 is currently underway. The Company cannot
estimate when the examination will conclude.
During the first quarter of 2011, the Company reached a settlement for a reimbursement claim
on previously paid sales tax amounting to approximately $0.7 million. This amount has been
reflected as a reduction of general and administrative expenses in the Consolidated Statements of
Operations.
14
7. Related Party
The Company generates commissions, technology products and services revenues, information and
user access fees, investment income and other income and related accounts receivable balances from
the Stockholder Broker-Dealer Client or its affiliates. In addition, the Stockholder Broker-Dealer
Client acts in an investment advisory, custodial and cash management capacity for the Company. The
Company incurs investment advisory and bank fees in connection with these arrangements. The
Company also maintained an account with and paid commissions to the Stockholder Broker-Dealer
Client in connection with a 2010 share repurchase program. As of the dates and for the periods
indicated below, the Company had the following balances and transactions with the Stockholder
Broker-Dealer Client or its affiliates:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
(In thousands) |
|
Cash and cash equivalents |
|
$ |
110,496 |
|
|
$ |
110,642 |
|
Securities and cash provided as
collateral |
|
|
4,066 |
|
|
|
4,049 |
|
Accounts receivable |
|
|
1,245 |
|
|
|
829 |
|
Accounts payable |
|
|
41 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Commissions |
|
$ |
1,719 |
|
|
$ |
1,357 |
|
Technology products and services |
|
|
|
|
|
|
5 |
|
Information and user access fees |
|
|
47 |
|
|
|
31 |
|
Investment income |
|
|
25 |
|
|
|
13 |
|
Other income |
|
|
17 |
|
|
|
16 |
|
General and administrative |
|
|
20 |
|
|
|
27 |
|
8. Stock-Based Compensation Plans
Stock-based compensation expense for the three months ended March 31, 2011 and 2010 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Employee: |
|
|
|
|
|
|
|
|
Stock options |
|
$ |
295 |
|
|
$ |
439 |
|
Restricted stock and performance shares |
|
|
1,822 |
|
|
|
1,601 |
|
|
|
|
|
|
|
|
|
|
|
2,117 |
|
|
|
2,040 |
|
|
|
|
|
|
|
|
Non-employee directors: |
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
54 |
|
Restricted stock |
|
|
173 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
173 |
|
|
|
154 |
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
2,290 |
|
|
$ |
2,194 |
|
|
|
|
|
|
|
|
The Company records stock-based compensation for employees in employee compensation and
benefits and for non-employee directors in general and administrative expenses in the Consolidated
Statements of Operations.
15
During the three months ended March 31, 2011, the Company granted to employees and
non-employee directors a total of 334,882 options to purchase shares of common stock, 409,718
shares of restricted stock or restricted stock units and performance-based shares with an expected
pay-out at target of 77,665 shares of common stock. Based on the Black-Scholes option pricing
model, the weighted-average fair value for each option granted was $11.20 per share. The fair
value of the restricted stock and performance-based share awards was based on a weighted-average
grant date fair value per share of $21.58 and $21.56, respectively. As of March 31, 2011, the
total unrecognized compensation costs related to non-vested awards was $21.5 million. That cost is
expected to be recognized over a weighted-average period of 2.1 years.
9. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common share.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands, except per share amounts) |
|
Basic EPS |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,780 |
|
|
$ |
6,701 |
|
Amount allocable to common shareholders |
|
|
100.0 |
% |
|
|
90.6 |
% |
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
10,780 |
|
|
$ |
6,069 |
|
|
|
|
|
|
|
|
|
|
Common stock voting |
|
|
33,921 |
|
|
|
31,040 |
|
Common stock non-voting |
|
|
2,586 |
|
|
|
2,586 |
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
36,507 |
|
|
|
33,626 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.30 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,780 |
|
|
$ |
6,701 |
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
36,507 |
|
|
|
33,626 |
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
Series B Preferred Stock |
|
|
|
|
|
|
3,500 |
|
Stock options, restricted stock and warrants |
|
|
2,794 |
|
|
|
2,180 |
|
|
|
|
|
|
|
|
Diluted weighted average shares
outstanding |
|
|
39,301 |
|
|
|
39,306 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.27 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
Stock options, restricted stock and warrants totaling 0.3 million shares and 0.7
million shares for the three months ended March 31, 2011 and 2010, respectively, were excluded from
the computation of diluted earnings per share because their effect would have been antidilutive.
The computation of diluted shares can vary among periods due, in part, to the change in the average
price of the Companys common stock.
16
10. Commitments and Contingencies
The Company leases office space and equipment under non-cancelable lease agreements expiring
at various dates through 2022. Office space leases are subject to escalation based on certain costs
incurred by the landlord. Minimum rental commitments as of March 31, 2011 under such operating and
capital leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Capital |
|
|
|
Leases |
|
|
Leases |
|
|
|
(In thousands) |
|
Remainder of 2011 |
|
$ |
1,344 |
|
|
$ |
252 |
|
2012 |
|
|
1,810 |
|
|
|
335 |
|
2013 |
|
|
1,794 |
|
|
|
322 |
|
2014 |
|
|
1,760 |
|
|
|
42 |
|
2015 |
|
|
2,022 |
|
|
|
|
|
2016 |
|
|
2,035 |
|
|
|
|
|
Thereafter |
|
|
10,191 |
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments |
|
|
20,956 |
|
|
|
951 |
|
Less amount representing interest |
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
$ |
20,956 |
|
|
$ |
857 |
|
|
|
|
|
|
|
|
Rental expense was $0.6 million and $0.8 million for the three months ended March 31,
2011 and 2010, respectively, and is included in occupancy expenses in the Consolidated Statements
of Operations. Rental expense has been recorded based on the total minimum lease payments after
giving effect to rent abatement and concessions, which are being amortized on a straight-line basis
over the life of the lease, and sublease income.
The Company entered into a sublease agreement on one of its leased properties through the
April 2011 lease termination date. In 2008, the Company assigned the lease agreement on another
leased property to a third party. The Company is contingently liable should the assignee default
on future lease obligations through the November 2015 lease termination date. The aggregate amount
of future lease obligations under these two arrangements was $1.7 million as of March 31, 2011.
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. This collateral is included with prepaid expenses and other assets in
the Consolidated Statements of Financial Condition and had a fair market value and amortized cost
of $3.5 million as of March 31, 2011 and December 31, 2010.
The Company, through two regulated subsidiaries, executes certain bond transactions between
and among institutional investor and broker-dealer clients on a riskless principal basis 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. The Company acts as intermediary on a
riskless principal basis in these bond transactions by serving as counterparty to the two clients
involved. 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. Under securities clearing agreements with the independent third party, the Company
maintains a collateral deposit with the clearing broker in the form of cash. As of March 31, 2011,
the collateral deposit included in prepaid expenses and other assets in the Consolidated Statements
of Financial Condition was $0.9 million. The Company is exposed to credit risk in the event a
counterparty does not fulfill its obligation to complete a transaction. Pursuant to the terms of
the securities clearing agreements between the Company and the independent clearing broker, the
clearing broker has the right to charge the Company 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 March 31, 2011, the Company had not
recorded any liabilities with regard to this right.
In the normal course of business, the Company enters into contracts that contain a variety of
representations, warranties and general indemnifications. The Companys maximum exposure under
these arrangements is unknown, as this would involve future
claims that may be made against the Company that have not yet occurred. However, based on
experience, the Company expects the risk of loss to be remote.
17
11. Comprehensive Income
Comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
10,780 |
|
|
$ |
6,701 |
|
Cumulative translation adjustment and foreign
currency exchange hedge, net of taxes |
|
|
(238 |
) |
|
|
(193 |
) |
Unrealized (loss) gain on securities available-for-sale, net of taxes |
|
|
(110 |
) |
|
|
145 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
10,432 |
|
|
$ |
6,653 |
|
|
|
|
|
|
|
|
12. Customer Concentration
During both the three months ended March 31, 2011 and 2010, no single client accounted for
more than 10% of total revenue. One client accounted for 15.7% and 16.3% of trading volumes during
the three months ended March 31, 2011 and 2010, respectively.
13. Series B Preferred Stock Conversion
During 2008, the Company entered into a Securities Purchase Agreement (the Purchase
Agreement) with two funds managed by Technology Crossover Ventures (the Purchasers), pursuant to
which the Company sold to the Purchasers (i) 35,000 shares of the Companys Series B Preferred
Stock, which shares were convertible into an aggregate of 3,500,000 shares of common stock, and
(ii) warrants (the Warrants and, together with the Series B Preferred Stock, the Securities) to
purchase an aggregate of 700,000 shares of common stock at an exercise price of $10.00 per share,
for an aggregate purchase price of $35.0 million. The net proceeds, after the placement agent fee
and legal fees, were $33.5 million. The Warrants may be exercised for cash or on a net exercise
basis. The Warrants expire on the tenth anniversary of the date they were first issued and are
subject to customary anti-dilution adjustments in the event of stock splits, reverse stock splits,
stock dividends and similar transactions.
The shares of Series B Preferred Stock were convertible at any time by the holders thereof at
a conversion price of $10.00 per share, subject to certain anti-dilution adjustments and also were
subject to automatic conversion into shares of common stock if the closing price of the common
stock was at least $17.50 on each trading day for a period of 65 consecutive trading days. On
January 24, 2011, all of the shares of the Series B Preferred Stock were mandatorily and
automatically converted into 3,499,999 shares of common stock. The Purchasers have the right to
nominate one director to the Board of Directors of the Company if they beneficially own at least
1,750,000 shares of common stock.
18
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Item 2. |
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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 a leading electronic trading platform that allows investment industry
professionals to efficiently trade corporate bonds and other types of fixed-income instruments. Our
over 800 active institutional investor clients (firms that executed at least one trade in U.S. or
European fixed-income securities through our electronic trading platform between April 2010 and
March 2011) include investment advisers, mutual funds, insurance companies, public and private
pension funds, bank portfolios, broker-dealers and hedge funds. Our 81 broker-dealer market-maker
clients provide liquidity on the platform and include most of the leading broker-dealers in global
fixed-income trading. The Company also executes certain bond transactions between and among
institutional investor and broker-dealer clients on a riskless principal basis by serving as
counterparty to both the buyer and the seller in matching back-to-back trades, which then settle
through a third-party clearing organization. Through our Corporate BondTicker service, we provide
fixed-income market data, analytics and compliance tools that help our clients make trading
decisions. In addition, we provide FIX (Financial Information eXchange) message management tools,
connectivity solutions and ancillary technology services that facilitate the electronic
communication of order information between trading counterparties. Our revenues are primarily
generated from the trading of U.S. 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, asset-backed and preferred securities and credit default swaps.
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
technology products and services, information and user access 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, occupancy, marketing and
advertising and other general and administrative expenses.
Our objective is to provide the leading global electronic trading platform for fixed-income
securities, connecting broker-dealers and institutional investors more easily and efficiently,
while offering a broad array of information, trading and technology services to market participants
across the trading cycle. The key elements of our strategy are:
|
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|
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
segments within the fixed-income securities markets, deliver fixed-income
securities-related technical services and products and deploy our electronic trading
platform into new client segments; |
19
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|
|
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 |
|
|
|
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, among others, credit market conditions, the current interest
rate environment, including the volatility of interest rates and investors forecasts of future
interest rates, economic and political conditions in the United States, Europe and elsewhere, and
consolidation or contraction of broker-dealers.
Competitive Landscape
The global fixed-income securities industry generally, and the electronic financial services
markets in which we engage in particular, are highly competitive, and we expect competition to
intensify in the future. Sources of competition for us will continue to include, among others, bond
trading conducted directly between broker-dealers and their institutional investor clients over the
telephone or electronically and other multi-dealer trading companies. Competitors, including
companies in which some of our broker-dealer clients have invested, have developed electronic
trading platforms or have announced their intention to explore the development of electronic
platforms that may compete with us.
In general, we compete on the basis of a number of key factors, including, among others, the
liquidity provided on our platform, the magnitude and frequency of price improvement enabled by our
platform and the quality and speed of execution. We believe that we compete favorably with respect
to these factors. We continue to proactively build technology solutions that serve the needs of the
credit markets.
Our competitive position is also enhanced by the familiarity and integration of our
broker-dealer and institutional investor clients with our electronic trading platform and other
systems. We have focused on the unique aspects of the credit markets we serve in the development of
our platform, working closely with our clients to provide a system that is suited to their needs.
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 require us to incur significant costs.
Our U.S. subsidiary, MarketAxess Corporation, is a registered broker-dealer with the SEC and
is a member of FINRA. Our U.K. subsidiary, MarketAxess Europe Limited, is registered as a
multilateral trading facility dealer with the FSA in the U.K. MarketAxess Canada Limited, a
Canadian subsidiary, is registered as an Alternative Trading System dealer under the Securities Act
of Ontario and is a member of the Investment Industry Regulatory Organization of Canada. Relevant
regulations prohibit repayment of borrowings from these subsidiaries or their affiliates, paying
cash dividends, making loans to us or our 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 regulated entitys principal regulator.
20
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act) was signed into law, marking the greatest change to financial supervision since
the 1930s. U.S. financial regulators are in the midst of an intense period of rulemaking to
implement the provisions of the Dodd-Frank Act, and market participants will need to make strategic
decisions in an
environment of regulatory uncertainty. Among the most significant aspects of the derivatives
section of the Dodd-Frank Act are mandatory clearing of certain derivatives transactions (swaps)
through regulated central clearing organizations and mandatory trading of those swaps through
either regulated exchanges or swap execution facilities, in each case, subject to certain key
exceptions. As with other parts of the Dodd-Frank Act, many of the details of the new regulatory
regime relating to swaps are left to the regulators to determine through rulemaking. Subject to
such rulemaking, we currently expect to establish and operate a swap execution facility and/or a
security-based swap execution facility.
As a public company listed on the NASDAQ Global Select Market, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and NASDAQ
rules. The requirements of these rules and regulations impose legal and financial compliance costs,
make some activities more difficult, time-consuming and/or costly and may also place a strain on
our systems and resources. In order to maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial reporting, significant resources and
management oversight are required.
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. 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. We received five patents in 2009 covering our most
significant trading protocols and other aspects of our trading system technology, we received two
additional patents in 2010 and other patents are pending.
Trends in Our Business
The majority of our revenues are derived from monthly distribution fees and 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 and distribution fees 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 frequency and
competitiveness of the price responses they provide to the institutional investor clients; |
|
|
|
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.
Commission Revenue
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 and transaction costs
through alternative channels including the telephone. 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.
21
U.S. High-Grade Corporate Bond Commissions. Our U.S. high-grade corporate bond fee plans for
fully electronic trades generally incorporate monthly distribution fees and variable transaction
fees billed to our broker-dealer clients on a monthly basis. Certain dealers participate in fee
programs which do not contain fixed monthly distribution fees and instead incorporate additional
per transaction execution fees and minimum monthly fee commitments. Under the fee plans, we
electronically add the transaction fee to the spread quoted by the broker-dealer client.
Eurobond Commissions. Similar to the U.S. high-grade plans, our European fee plan
incorporates monthly distribution fees as well as variable transaction fees. In June 2010, we
launched a click-to-trade protocol in the European market. Click-to-trade is offered alongside our
request-for-quote product and consists of streamed indicative pricing in credit and rates products.
Clients have the ability to request a trade at the displayed price with the indicated dealer. In
connection with the launch, the Eurobond fee plan was revised and a standard commission rate was
established across most types of bonds. Prior to this change, the variable transaction fee was
dependent on the type of bond traded and the maturity of the issue.
Other Commissions. Commissions for other bond, asset-backed and preferred securities and
credit default swap trades generally vary based on the type and the maturity of the instrument
traded. We generally operate using standard fee schedules that may include both transaction fees
and monthly distribution fees that are charged to the participating dealers.
For trades that we execute between and among institutional investor and broker-dealer clients
on a riskless principal basis by serving as counterparty to both the buyer and the seller, we earn
our commission through the difference in price between the two back-to-back trades.
We anticipate that average fees per million may change in the future. Consequently, past
trends in commissions are not necessarily indicative of future commissions.
Other Revenue
In addition to the commissions discussed above, we earn revenue from technology products and
services, information services fees paid by institutional investor and broker-dealer clients,
income on investments and other income.
Technology Products and Services. Technology products and services includes software
licenses, maintenance and support services and professional consulting services.
Information and User Access Fees. We charge information services fees for Corporate
BondTickerTM 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 platform, we reduce these information and
user access fees for such clients once minimum quarterly trading volumes are attained.
Investment Income. Investment income consists of income earned on our investments.
Other. Other revenues include fees from telecommunications line charges to broker-dealer
clients, initial set-up fees and other miscellaneous revenues.
Expenses
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,
employee benefits and payroll taxes.
Depreciation and Amortization. We depreciate our computer hardware and related software,
office hardware and furniture and fixtures and amortize our capitalized software development costs
on a straight-line basis over three to seven years. 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.
Intangible assets with definite lives, including purchased technologies, customer
relationships and other intangible assets, are amortized over their estimated useful lives, ranging
from five to ten years. Intangible assets are assessed for impairment when events or circumstances
indicate a possible impairment.
22
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.
Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and
commercial rent tax.
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, and 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 general
travel and entertainment, board of directors expenses, charitable contributions, provision for
doubtful accounts, and various state franchise and U.K. value-added taxes.
Expenses may grow 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. However, we believe that operating leverage can be achieved by increasing
volumes in existing products and adding new products without substantial additions to our
infrastructure.
Critical Accounting Estimates
This Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses our Consolidated Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States, also referred to as U.S. GAAP. The
preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported amounts of income and
expenses during the reporting periods. We base our estimates and judgments on historical experience
and on various other factors that we believe are reasonable under the circumstances. Actual results
may differ from these estimates under varying assumptions or conditions. Note 2 of the Notes to
our Consolidated Financial Statements includes a summary of the significant accounting policies and
methods used in the preparation of our Consolidated Financial Statements. Other than the adoption
of new authoritative guidance on revenue recognition for arrangements with multiple deliverables,
there were no significant changes to our critical accounting policies and estimates during the
three months ended March 31, 2011, 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, 2010. The adoption of the new revenue recognition guidance
effective January 1, 2011 did not have a material impact on the Companys Consolidated Financial
Statements.
Segment Results
As an electronic, multi-dealer platform for trading fixed-income securities, our operations
constitute a single business segment. 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.
23
Results of Operations
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Overview
Total revenues increased by $8.7 million or 25.0% to $43.6 million for the three months ended
March 31, 2011, from $34.9 million for the three months ended March 31, 2010. This increase in
total revenues was primarily due to an increase in commissions of $8.5 million.
Total expenses increased by $2.1 million or 9.0% to $25.9 million for the three months ended
March 31, 2011, from $23.8 million for the three months ended March 31, 2010. The increase was
primarily due to higher employee compensation and benefits of $2.3 million and professional and
consulting fees of $0.7 million, offset by a decline in general and administrative expenses of $1.1
million.
Income before taxes increased by $6.6 million or 59.4% to $17.7 million for the three months
ended March 31, 2011, from $11.1 million for the three months ended March 31, 2010. Net income
increased by $4.1 million or 60.9% to $10.8 million for the three months ended March 31, 2011, from
$6.7 million for three months ended March 31, 2010.
Revenues
Our revenues for the three months ended March 31, 2011 and 2010, and the resulting dollar and
percentage changes, were as follows:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
$ |
|
|
% |
|
|
|
$ |
|
|
Revenues |
|
|
$ |
|
|
Revenues |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Commissions |
|
$ |
37,785 |
|
|
|
86.6 |
% |
|
$ |
29,307 |
|
|
|
84.0 |
% |
|
$ |
8,478 |
|
|
|
28.9 |
% |
Technology products and services |
|
|
3,108 |
|
|
|
7.1 |
|
|
|
3,164 |
|
|
|
9.1 |
|
|
|
(56 |
) |
|
|
(1.8 |
) |
Information and user access fees |
|
|
1,689 |
|
|
|
3.9 |
|
|
|
1,634 |
|
|
|
4.7 |
|
|
|
55 |
|
|
|
3.4 |
|
Investment income |
|
|
299 |
|
|
|
0.7 |
|
|
|
291 |
|
|
|
0.8 |
|
|
|
8 |
|
|
|
2.7 |
|
Other |
|
|
728 |
|
|
|
1.7 |
|
|
|
488 |
|
|
|
1.4 |
|
|
|
240 |
|
|
|
49.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
43,609 |
|
|
|
100.0 |
% |
|
$ |
34,884 |
|
|
|
100.0 |
% |
|
$ |
8,725 |
|
|
|
25.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions. Our commission revenues for the three months ended March 31,
2011 and 2010, and the resulting dollar and percentage changes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Distribution fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade |
|
$ |
11,710 |
|
|
$ |
8,981 |
|
|
$ |
2,729 |
|
|
|
30.4 |
% |
Eurobond |
|
|
3,475 |
|
|
|
3,267 |
|
|
|
208 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distribution fees |
|
|
15,185 |
|
|
|
12,248 |
|
|
|
2,937 |
|
|
|
24.0 |
|
Variable transaction fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade |
|
|
14,668 |
|
|
|
10,795 |
|
|
|
3,873 |
|
|
|
35.9 |
|
Eurobond |
|
|
1,142 |
|
|
|
2,225 |
|
|
|
(1,083 |
) |
|
|
(48.7 |
) |
Other |
|
|
6,790 |
|
|
|
4,039 |
|
|
|
2,751 |
|
|
|
68.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable transaction fees |
|
|
22,600 |
|
|
|
17,059 |
|
|
|
5,541 |
|
|
|
32.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions |
|
$ |
37,785 |
|
|
$ |
29,307 |
|
|
$ |
8,478 |
|
|
|
28.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $2.9 million increase in distribution fees for the three months ended March 31, 2011
compared to the three months ended March 31, 2010 is due principally to the migration of several
U.S. broker-dealer market makers from an all-variable fee plan to a plan which incorporates a
combination of a monthly distribution fee and variable transaction fees.
24
The following table shows the extent to which the increase in commissions for the three months
ended March 31, 2011 was attributable to changes in transaction volumes, variable transaction fees
per million and monthly distribution fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from Three Months Ended March 31, 2010 |
|
|
|
U.S. |
|
|
|
|
|
|
|
|
|
|
|
|
High-Grade |
|
|
Eurobond |
|
|
Other |
|
|
Total |
|
|
|
(In thousands) |
|
Volume increase (decrease) |
|
$ |
4,158 |
|
|
$ |
(654 |
) |
|
$ |
3,166 |
|
|
$ |
6,670 |
|
Variable transaction fee per million (decrease) |
|
|
(285 |
) |
|
|
(429 |
) |
|
|
(415 |
) |
|
|
(1,129 |
) |
Monthly distribution fees increase |
|
|
2,729 |
|
|
|
208 |
|
|
|
|
|
|
|
2,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions increase (decrease) |
|
$ |
6,602 |
|
|
$ |
(875 |
) |
|
$ |
2,751 |
|
|
$ |
8,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our trading volumes for the three months ended March 31, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
Change |
|
Trading Volume Data (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade fixed rate |
|
$ |
82,267 |
|
|
$ |
58,666 |
|
|
$ |
23,601 |
|
|
|
40.2 |
% |
U.S. high-grade floating rate |
|
|
2,938 |
|
|
|
2,845 |
|
|
|
93 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. high-grade |
|
|
85,205 |
|
|
|
61,511 |
|
|
|
23,694 |
|
|
|
38.5 |
|
Eurobond |
|
|
11,313 |
|
|
|
16,019 |
|
|
|
(4,706 |
) |
|
|
(29.4 |
) |
Other |
|
|
38,661 |
|
|
|
21,672 |
|
|
|
16,989 |
|
|
|
78.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
135,179 |
|
|
$ |
99,202 |
|
|
$ |
35,977 |
|
|
|
36.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of U.S. Trading Days |
|
|
62 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
Number of U.K. Trading Days |
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
For volume reporting purposes, transactions in foreign currencies are converted to U.S.
dollars at average monthly rates. The 38.5% increase in U.S. high-grade volume was principally due
to an increase in the Companys estimated market share of total U.S. high-grade corporate bond
volume as reported by FINRA TRACE from 7.9% for the three months ended March 31, 2010 to 9.9% for
the three months ended March 31, 2011, coupled with an increase in overall market volume as
measured by FINRA TRACE. Estimated FINRA TRACE U.S. high-grade volume increased by 10.9% to $862.8
billion for the three months ended March 31, 2011 from $778.0 billion for the three months ended
March 31, 2010. Eurobond volumes decreased by 29.4% for the three months ended March 31, 2011
compared to the three months ended March 31, 2010. We believe that the decline in Eurobond volumes
was due, in part, to continuing sovereign debt concerns that negatively impacted market conditions.
Other volume increased by 78.4% for the three months ended March 31, 2011 compared to the three
months ended March 31, 2010, primarily due to higher agency, emerging markets and high-yield bond
volumes.
Our average variable transaction fee per million for the three months ended March 31, 2011 and
2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Average Variable Transaction Fee Per Million |
|
|
|
|
|
|
|
|
U.S. high-grade fixed rate |
|
$ |
178 |
|
|
$ |
183 |
|
U.S. high-grade floating rate |
|
|
17 |
|
|
|
27 |
|
Total U.S. high-grade |
|
|
172 |
|
|
|
175 |
|
Eurobond |
|
|
101 |
|
|
|
139 |
|
Other |
|
|
176 |
|
|
|
186 |
|
All Products |
|
|
167 |
|
|
|
172 |
|
25
The U.S. high-grade average variable transaction fee per million decreased slightly from
$175 for the three months ended March 31, 2010 to $172 for the three months ended March 31, 2011.
The Eurobond average variable transaction fee per million decreased from $139 for the three months
ended March 31, 2010 to $101 for the three months ended March 31, 2011. In June 2010, we launched
a click-to-trade protocol in the European market. In connection with the launch, the Eurobond fee
plan was generally revised downward. Other average variable transaction fee per million decreased
from $186 for the three months ended March 31, 2010 to $176 for the three months ended March 31,
2011, primarily due to a larger percentage of volume in products that carry lower fees per million,
principally agency bonds.
Technology Products and Services. Technology products and services revenues decreased by $0.1
million or 1.8% to $3.1 million for the three months ended March 31, 2011, from $3.2 million for
the three months ended March 31, 2010. The decrease was primarily a result of lower license
purchase fees.
Information and User Access Fees. Information and user access fees increased by $0.1 million
or 3.4% to $1.7 million for the three months ended March 31, 2011, from $1.6 million for the three
months ended March 31, 2010.
Investment Income. Investment income was $0.3 million for both the three months ended March
31, 2011 and 2010.
Other. Other revenues increased by $0.2 million or 49.2% to $0.7 million for the three months
ended March 31, 2011, from $0.5 million for the three months ended March 31, 2010. The increase
was primarily attributable to higher initial set-up fees from new broker-dealer clients.
Expenses
Our expenses for the three months ended March 31, 2011 and 2010, and the resulting dollar and
percentage changes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
$ |
|
|
% |
|
|
|
$ |
|
|
Revenues |
|
|
$ |
|
|
Revenues |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Employee compensation and benefits |
|
$ |
16,268 |
|
|
|
37.3 |
% |
|
$ |
13,933 |
|
|
|
39.9 |
% |
|
$ |
2,335 |
|
|
|
16.8 |
% |
Depreciation and amortization |
|
|
1,562 |
|
|
|
3.6 |
|
|
|
1,616 |
|
|
|
4.6 |
|
|
|
(54 |
) |
|
|
(3.3 |
) |
Technology and communications |
|
|
2,500 |
|
|
|
5.7 |
|
|
|
2,417 |
|
|
|
6.9 |
|
|
|
83 |
|
|
|
3.4 |
|
Professional and consulting fees |
|
|
2,872 |
|
|
|
6.6 |
|
|
|
2,138 |
|
|
|
6.1 |
|
|
|
734 |
|
|
|
34.3 |
|
Occupancy |
|
|
766 |
|
|
|
1.8 |
|
|
|
938 |
|
|
|
2.7 |
|
|
|
(172 |
) |
|
|
(18.3 |
) |
Marketing and advertising |
|
|
974 |
|
|
|
2.2 |
|
|
|
628 |
|
|
|
1.8 |
|
|
|
346 |
|
|
|
55.1 |
|
General and administrative |
|
|
1,001 |
|
|
|
2.3 |
|
|
|
2,129 |
|
|
|
6.1 |
|
|
|
(1,128 |
) |
|
|
(53.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
25,943 |
|
|
|
59.5 |
% |
|
$ |
23,799 |
|
|
|
68.2 |
% |
|
$ |
2,144 |
|
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits. Employee compensation and benefits
increased by $2.3 million or 16.8% to $16.3 million for the three months ended March 31, 2011, from
$13.9 million for the three months ended March 31, 2010. This increase was primarily attributable
to higher incentive compensation of $1.5 million due to improved operating performance and higher
employer taxes and benefits of $0.5 million.
Depreciation and Amortization. Depreciation and amortization was $1.6 million for both the
three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 and 2010, we
capitalized $0.5 million and $2.9 million, respectively, of leasehold improvements and equipment
purchases and $0.8 million and $0.5 million, respectively, of software development costs. The 2010
equipment and leasehold improvement expenditures included $2.4 million associated with the move of
our corporate offices to new premises in New York City in the first quarter of 2010.
26
Technology and Communications. Technology and communications expenses increased by $0.1
million or 3.4% to $2.5 million for the three months ended March 31, 2011 from $2.4 million for the
three months ended March 31, 2010. The increase was primarily attributable to higher expenses
associated with production data.
Professional and Consulting Fees. Professional and consulting fees increased by $0.7 million
or 34.3% to $2.9 million for the three months ended March 31, 2011, from $2.1 million for the three
months ended March 31, 2010. The increase was principally due to higher legal expense associated
with swap execution facility-related regulatory matters of $0.6 million and technology consulting
costs of $0.3 million.
Occupancy. Occupancy costs decreased by $0.2 million or 18.3% to $0.8 million for the three
months ended March 31, 2011, from $0.9 million for the three months ended March 31, 2010.
Occupancy costs in 2010 included a two-month overlap in rental costs for both our old and new
premises leased in New York City.
Marketing and Advertising. Marketing and advertising expenses increased by $0.3 million or
55.1% to $1.0 million for the three months ended March 31, 2011, from $0.6 million for the three
months ended March 31, 2010. The increase was principally due to higher advertising costs and
travel and entertainment expenses related to sales activities.
General and Administrative. General and administrative expenses decreased by $1.1 million or
53% to $1.0 million for the three months ended March 31, 2011, from $2.1 million for the three
months ended March 31, 2010. During the first quarter of 2011, we reached a settlement for a
reimbursement claim on previously paid sales tax amounting to approximately $0.7 million. The
decrease in general and administrative expenses was primarily attributable to the sales tax credit
coupled with a decline in the charge for doubtful accounts of $0.3 million.
Provision for Income Tax. For the three months ended March 31, 2011 and 2010, we recorded an
income tax provision of $6.9 million and $4.4 million, respectively. The increase in the tax
provision was primarily attributable to the $6.6 million increase in pre-tax income for the period.
With the exception of the payment of certain foreign and state and local taxes, the provision for
income taxes was a non-cash expense since we had available net operating loss carryforwards and tax
credits to offset the cash payment of taxes.
Our consolidated effective tax rate for the three months ended March 31, 2011 was 39.0%,
compared to 39.5% for the three months ended March 31, 2010. Our consolidated effective tax rate
can vary from period to period depending on, among other factors, the geographic and business mix
of our earnings and changes in tax legislation and tax rates. Due to our net deferred tax asset
balance, a decrease in tax rates results in a reduction in our deferred tax balance and an increase
in tax expense in the period in which the change occurs.
Liquidity and Capital Resources
During the past three years, we have met our cash needs through cash on hand, internally
generated funds and the issuance of Series B Preferred Stock. Cash and cash equivalents and
securities available-for-sale totaled $196.2 million at March 31, 2011. Other than
equipment-related capital lease obligations amounting to $0.9 million as of March 31, 2011, we have
no long-term or short-term debt and do not maintain bank lines of credit.
Our cash flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Net cash provided by (used in) operating activities |
|
$ |
1,066 |
|
|
$ |
(81 |
) |
Net cash (used in) provided by investing activities |
|
|
(8,662 |
) |
|
|
4,789 |
|
Net cash (used in) financing activities |
|
|
(436 |
) |
|
|
(3,198 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(395 |
) |
|
|
(299 |
) |
|
|
|
|
|
|
|
Net (decrease) increase for the period |
|
$ |
(8,427 |
) |
|
$ |
1,211 |
|
|
|
|
|
|
|
|
We define free cash flow as cash flow from operating activities less expenditures
for furniture, equipment and leasehold improvements and capitalized software development costs.
For the 12 months ended March 31, 2011 and 2010, free cash flow was $60.2 million and $36.3
million, respectively. Free cash flow is a non-GAAP financial measure. The Company believes that
this non-GAAP financial measure, when taken into consideration with the corresponding GAAP
financial measures, is important in gaining an understanding of the Companys financial strength
and cash flow generation.
27
Net cash provided by operating activities was $1.1 million for the three months ended March
31, 2011 compared to net cash used in operating activities of $0.1 million for the three months
ended March 31, 2010. The $1.1 million increase in net cash provided by operating activities was
primarily due to an increase in net income of $4.1 million and higher non-cash deferred income
taxes of $0.7 million, offset by an increase in cash used for working capital of $3.3 million.
During the three months ended March 31, 2011, annual bonus payments were $16.7 million compared to
$14.1 million for the three months ended March 31, 2010.
Net cash used in investing activities was $8.7 million for the three months ended March 31,
2011 compared to net cash provided by investing activities of $4.8 million for the three months
ended March 31, 2010. Net purchases of securities available-for-sale were $7.3 million for the
three months ended March 31, 2011 compared to net maturities of $8.1 million for the three months
ended March 31, 2010. Capital expenditures were $1.3 million and $3.4 million for the three months
ended March 31, 2011 and 2010, respectively. Leasehold improvements and equipment expenditures in
2010 included $2.4 million associated with the move of our corporate offices to new premises in New
York City in the first quarter of 2010.
Net cash used in financing activities was $0.4 million for the three months ended March 31,
2011 compared to $3.2 million for the three months ended March 31, 2010. The $2.8 million decrease
in net cash used in financing activities was principally due to an increase in windfall tax
benefits on stock-based compensation of $2.5 million and an increase in the proceeds from the
exercise of stock options and grants of restricted stock of $1.0 million, offset by an increase of
$0.7 million in cash dividends paid in 2011 on common stock.
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.
Other Factors Influencing Liquidity and Capital Resources
We are dependent on our broker-dealer clients, who are not restricted from buying and selling
fixed-income securities with institutional investors, either directly or through their own
proprietary or third-party platforms. 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 and new business opportunities that are intended to further diversify our
revenue stream. We may also acquire or invest in technologies, business ventures or products that
are complementary to our business. In addition, we expect to fully utilize the balance of our
unrestricted U.S. net operating loss carryforward during 2011, which would result in an increase in
cash paid for income taxes in 2011 and subsequent years. In the event we require any additional
financing, it will take the form of equity or debt financing. Any additional equity offerings may
result in dilution to our stockholders. Any debt financings, if available at all, may involve
restrictive covenants with respect to dividends, issuances of additional capital and other
financial and operational matters related to our business.
We have three regulated subsidiaries, MarketAxess Corporation, MarketAxess Europe Limited and
MarketAxess Canada Ltd. MarketAxess Corporation is a registered broker-dealer in the U.S.,
MarketAxess Europe Limited is a registered multilateral trading facility in the U.K. and
MarketAxess Canada Ltd. is a registered Alternative Trading System in the Province of Ontario. 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 relevant regulations prohibit a registrant 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 subsidiaries are designed to provide each with capital and
liquidity consistent with its business and regulatory requirements. Subject to rulemaking pursuant
to the Dodd-Frank Act, we currently expect to establish and operate a swap execution facility
and/or a security-based swap execution facility and we will be required to maintain an additional
amount of minimum net capital in connection with such facilities. The following table sets forth
the capital requirements, as defined, that the Companys subsidiaries were required to maintain as
of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MarketAxess |
|
|
MarketAxess |
|
|
MarketAxess |
|
|
|
Corporation |
|
|
Europe Limited |
|
|
Canada Limited |
|
|
|
(In thousands) |
|
Net capital |
|
$ |
58,992 |
|
|
$ |
25,068 |
|
|
$ |
436 |
|
Minimum net capital required |
|
|
1,182 |
|
|
|
3,833 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
Excess net capital |
|
$ |
57,810 |
|
|
$ |
21,235 |
|
|
$ |
153 |
|
|
|
|
|
|
|
|
|
|
|
28
We execute certain bond transactions between and among institutional investor and
broker-dealer clients on a riskless principal basis 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. We act as intermediary on a riskless principal basis in these bond
transactions by serving as counterparty to the two clients involved. 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. Under securities clearing
agreements with the independent third party, we maintain collateral deposits with the clearing
broker in the form of cash or U.S. government securities. As of March 31, 2011, the collateral
deposits included in prepaid expenses and other assets in the Consolidated Statements of Financial
Condition were $0.9 million. We are exposed to credit risk in the event a counterparty does not
fulfill its obligation to complete a transaction. Pursuant to the terms of the securities clearing
agreements between us and the independent clearing broker, the clearing broker has the right to
charge us 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 March 31, 2011, we have not recorded any liabilities with regard to this
right.
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.
In October 2009, our Board of Directors approved our first regular quarterly dividend of $0.07
per share. The quarterly cash dividend was increased to $0.09 per share in the first quarter of
2011. In April 2011, our Board of Directors approved a quarterly cash dividend of $0.09 per share,
which will be paid on May 25, 2011 to stockholders of record as of the close of business on May 11,
2011. We expect the total amount payable to be approximately $3.4 million. We expect to continue
paying regular cash dividends, although there is no assurance as to such dividends. Any future
declaration and payment of dividends will be at the sole discretion of our Board of Directors.
Effects of Inflation
Because the majority of our assets are short-term 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
condition and results of operations.
Contractual Obligations and Commitments
There was no significant change in our contractual obligations and commitments for the three
months ended March 31, 2011.
|
|
|
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.
Market Risk
The global financial services business is, by its nature, risky and volatile and is directly
affected by many national and international factors that are beyond our control. Any one of these
factors may cause a substantial decline in the U.S. and global financial services markets,
resulting in reduced trading volume and revenues. These events could have a material adverse effect
on our business, financial condition and results of operations.
29
As of March 31, 2011, we had a $79.7 million investment in securities available-for-sale.
Adverse movements, such as a 10% decrease in the value of these securities or a downturn or
disruption in the markets for these securities, could result in a substantial loss. In addition,
principal gains and losses resulting from these securities could on occasion have a
disproportionate effect, positive or negative, on our financial condition and results of
operations for any particular reporting period.
Interest Rate Risk
Interest rate risk represents our exposure to interest rate changes with respect to the money
market instruments, U.S. Treasury obligations and fixed-income securities in which we invest. As of
March 31, 2011, our cash and cash equivalents and securities available-for-sale amounted to $196.2
million and were primarily in money market instruments, U.S. government obligations and municipal
securities. We do not maintain an inventory of bonds that are traded on our platform.
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. subsidiary. As of March 31, 2011, the notional value of our foreign
currency forward contract was $26.2 million. We do not speculate in any derivative instruments.
Credit Risk
We act as a riskless principal through two of our regulated subsidiaries in certain
transactions that we execute between clients. We act as an intermediary in these transactions by
serving as counterparty to both the buyer and the seller in matching back-to-back bond 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 clients. 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 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 that term is defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 2011.
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 (as defined in Rule 13a-15(f) and Rule 15d-15(f) under
the Exchange Act) during the quarter ended March 31, 2011 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 materially affect, our internal
control over financial reporting.
30
PART II Other Information
|
|
|
Item 1. |
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Legal Proceedings |
None.
Risks that could have a negative impact on our business, results of operations and financial
condition include: 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; the rapidly
evolving nature of the electronic financial services industry; 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; our exposure to risk resulting from
non-performance by counterparties to transactions executed between our clients in which we act as
an intermediary in matching back-to-back trades; our dependence on our broker-dealer clients and
institutional investor clients; 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 for the year ended December 31, 2010. There have been no material changes to the
risk factors described in such Form 10-K.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During the quarter ended March 31, 2011, we repurchased the following shares of common stock:
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Total Number of |
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Dollar Value of |
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Shares Purchased |
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Shares That May |
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Total Number of |
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Average Price |
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as Part of Publicly |
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Yet Be Purchased |
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Period |
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Shares Purchased |
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Paid per Share |
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Announced Plans |
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Under the Plans |
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(In thousands) |
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January 1, 2011 January 31, 2011 |
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181,939 |
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$ |
19.54 |
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$ |
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February 1, 2011 February 28, 2011 |
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54,774 |
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13.60 |
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March 1, 2011 March 31, 2011 |
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4,507 |
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22.04 |
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241,220 |
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$ |
18.24 |
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During the three months ended March 31, 2011, a total of 205,448 shares were surrendered
by employees to us to satisfy the exercise price and employee withholding tax obligations upon the
vesting of restricted shares and exercise of stock options and 35,772 shares of unvested restricted
shares were repurchased upon the termination of employment or failure to meet performance
conditions.
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Item 3. |
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Defaults upon Senior Securities |
None.
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Item 4. |
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(Removed and Reserved) |
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Item 5. |
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Other Information |
None.
31
Exhibit Listing:
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Number |
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Description |
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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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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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32.1 |
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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 |
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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 |
32
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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MARKETAXESS HOLDINGS INC.
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Date: April 28, 2011 |
By: |
/s/ RICHARD M. MCVEY
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Richard M. McVey |
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Chief Executive Officer
(principal executive officer) |
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Date: April 28, 2011 |
By: |
/s/ ANTONIO L. DELISE
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Antonio L. DeLise |
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Chief Financial Officer
(principal financial and accounting officer) |
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33