AMENDMENT NO. 5 TO FORM S-1
 

As filed with the Securities and Exchange Commission on August 5, 2004
Registration No. 333-112718


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 5

to
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


MarketAxess Holdings Inc.

(Exact name of registrant as specified in its charter)
         
Delaware   6211   52-2230784
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
classification code number)
  (I.R.S. employer
identification number)


140 Broadway, 42nd Floor

New York, NY 10005
Telephone: (212) 813-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)


Richard M. McVey

Chief Executive Officer
MarketAxess Holdings Inc.
140 Broadway, 42nd Floor
New York, NY 10005
(212) 813-6000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code of Agent for Service)


Copies to:

     
Adam J. Kansler, Esq.
Brian B. Margolis, Esq.
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
(212) 969-3000
  Luciana Fato, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
(212) 450-4000


         Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

         If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.    o


CALCULATION OF REGISTRATION FEE

                                 


Proposed Maximum Proposed Maximum
Amount to be Offering Price Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Registered (1) Per Share (2) Price (2) Registration Fee (3)

Common stock, par value $0.003 per share     10,350,000     $ 18.00     $ 186,300,000     $ 23,605  


(1)  Includes 1,350,000 shares which may be sold pursuant to the underwriters’ over-allotment option.
(2)  Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act.
(3)  $23,605 has previously been paid.


         The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




 

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

SUBJECT TO COMPLETION, DATED AUGUST 5, 2004

PROSPECTUS

9,000,000 Shares

(MARKET AXESS LOGO)             

Common Stock

        MarketAxess Holdings Inc. is offering 3,000,000 shares of its common stock and the selling stockholders identified in this prospectus are offering an additional 6,000,000 shares of common stock. MarketAxess will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

      Some of the selling stockholders are significant clients of MarketAxess. In addition, affiliates of each of the underwriters are selling stockholders in this offering. For additional information, see “Prospectus Summary — Potential Conflicts of Interest With the Underwriters,” “Prospectus Summary — Dependence on Our Broker-Dealer Clients Who Are Also Our Stockholders” and “Risk Factors — Risks Related to the Potential Conflicts of Interest With Our Broker-Dealer Clients Who Are Also Our Stockholders.”

      This is the initial public offering of our common stock. The estimated initial public offering price will be between $16.00 and $18.00 per share.

      Prior to this offering, there has been no public market for our common stock. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol “MKTX.”

       Investing in our common stock involves risks. See “Risk Factors” beginning on page 12 of this prospectus.

                                 
Underwriting Net Proceeds to
Discounts and Net Proceeds to Selling
Price to Public Commissions MarketAxess Stockholders




Per Share
  $       $       $       $    
Total
  $       $       $       $    

      Some of the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to an aggregate of 1,350,000 additional shares of our common stock to cover over-allotments, if any.

      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

      The underwriters expect to deliver the shares of our common stock to investors in New York, New York on                     , 2004.

Joint Book-Running Managers

Credit Suisse First Boston JPMorgan

Co-Managers

Banc of America Securities LLC
  Bear, Stearns & Co. Inc.
  UBS Investment Bank

Thomas Weisel Partners LLC

                    , 2004


 

[GRAPHICS TO FOLLOW BY AMENDMENT]

 


 

      No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.


TABLE OF CONTENTS

         
Prospectus Summary
    1  
Risk Factors
    12  
Special Note Regarding Forward-Looking Statements
    30  
Use of Proceeds
    31  
Dividend Policy
    31  
Capitalization
    32  
Dilution
    34  
Selected Consolidated Financial and Other Data
    37  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    39  
Business
    74  
Management
    94  
Certain Relationships and Related Party Transactions
    105  
Principal and Selling Stockholders
    115  
Description of Capital Stock
    123  
Shares Eligible for Future Sale
    128  
Material United States Federal Income Tax Considerations to Non-U.S. Holders
    130  
Underwriting
    132  
Legal Matters
    136  
Experts
    136  
Where You Can Find More Information
    136  
Index to Financial Statements
    F-1  


      Until                     , 2004 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


 

PROSPECTUS SUMMARY

      This summary highlights information contained elsewhere in this prospectus. While we have highlighted what we believe is the most important information about us and this offering in this summary, you should read the entire prospectus carefully, including the “Risk Factors” and “Special Note Regarding Forward-Looking Statements” sections and our consolidated financial statements and the notes to those financial statements before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our” and “MarketAxess” refer to the consolidated operations of MarketAxess Holdings Inc., and its primary operating subsidiaries, MarketAxess Corporation and MarketAxess Europe Limited.

Potential Conflicts of Interest With the Underwriters and Our Broker-Dealer Clients

      Some of the selling stockholders in this offering, including affiliates of certain of the underwriters of this offering, are significant clients of MarketAxess. In addition, affiliates of each of the underwriters are selling an aggregate of 3,739,768 shares of the 9,000,000 shares to be sold in this offering (assuming no exercise of the underwriters’ over-allotment option) or 4,672,871 shares of the 10,350,000 shares to be sold in this offering (assuming full exercise of the underwriters’ over-allotment option). For additional information, see “Prospectus Summary — Potential Conflicts of Interest With the Underwriters” and “Prospectus Summary — Dependence on Our Broker-Dealer Clients Who Are Also Our Stockholders.”

Our Business

      MarketAxess operates one of the leading platforms for the electronic trading of corporate bonds and certain other types of fixed-income securities. Through our platform, our more than 500 active institutional investor client firms can access the aggregate liquidity provided by our 19 broker-dealer clients. We also provide data and analytical tools that help our clients make trading decisions and we facilitate the trading process by electronically communicating order information between trading counterparties. Since our inception, the majority of our revenues has been generated from the trading of U.S. high-grade corporate bonds, although an increasing percentage of our revenues has recently been derived from the trading of European high-grade corporate bonds.

      Our multi-dealer trading platform allows our institutional investor clients to simultaneously request competing, executable bids or offers from our broker-dealer clients and execute trades with the broker-dealer of their choice from among those that choose to respond. We offer our broker-dealer clients a solution that enables them to efficiently reach our institutional investor clients for the distribution and trading of bonds. In addition to U.S. high-grade corporate bonds and European high-grade corporate bonds, we also offer our clients the ability to trade emerging markets bonds, which we define as sovereign and corporate bonds issued by entities domiciled in an emerging markets country, including both high-grade and non-investment grade debt although to date emerging markets bonds do not represent a significant component of our revenues. In addition, we recently announced a strategic alliance to provide our institutional investor clients with the ability to trade U.S. Treasury securities electronically through our broker-dealer clients in the inter-dealer market.

      We derive our revenues primarily from commissions paid by our broker-dealer clients for trades executed on our platform (which represented 92% of our revenues for the six months ended June 30, 2004) and, to a lesser extent, from information and user access fees charged to our clients (which represented 3% of our revenues for the six months ended June 30, 2004) and license fees for access to our trading platform charged to certain of our broker-dealer clients (which represented 3% of our revenues for the six months ended June 30, 2004).

      Traditionally, bond trading has been a manual process with product and price discovery conducted over the telephone between two or more parties. This traditional process, which is still how most corporate bonds are traded, has a number of shortcomings resulting primarily from the lack of a central trading facility for these securities, which creates difficulty matching buyers and sellers for particular issues. In recent years, an increasing number of corporate bond trading participants have utilized e-mail and other electronic means of communication (including proprietary single-dealer systems) for trading corporate bonds. While this has

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addressed some of the shortcomings associated with traditional corporate bond trading, we believe that the process is still hindered by limited liquidity, limited price transparency, significant transaction costs, compliance and regulatory challenges, and the difficulty of implementing numerous trades at one time.

      Through our electronic platform, our institutional investor clients can determine prices available for a security, a process called price discovery, as well as trade securities directly with our broker-dealer clients. The price discovery process includes the ability to view indicative prices from the broker-dealer clients’ inventory available on our platform, access to real-time pricing information and analytical tools (including spread-to-Treasury data, search capabilities and independent credit research) available on our Corporate BondTickerTM service and the ability to request executable bids and offers from up to 18 of our broker-dealer clients during the trade process. Our services relating to trade execution include single- and multiple-dealer inquiries; list trading, which is the ability to request bids and offers on multiple bonds at the same time; and swap trading, which is the ability to request an offer to purchase one bond and a bid to sell another bond, in a manner such that the two trades will be executed simultaneously, with payment based on the price differential of the bonds. Once a trade is completed on our platform, the broker-dealer client and institutional investor client may settle the trade with the assistance of our automated post-trade messaging, which facilitates the communication of trade acknowledgment and allocation information between our institutional investor and broker-dealer clients.

      We are not a party to the actual trades that occur on our platform and we do not at any time take title to the traded securities or the proceeds from the sale of such securities. Rather, we serve as an intermediary between broker-dealers and institutional investors, enabling them to meet, agree on a price, and then transact with each other.

      Our client base includes 19 of the leading broker-dealers in global fixed-income trading and more than 500 active institutional investor firms, including 80 of the top 100 global holders of U.S. corporate bonds, as measured by Thomson Financial. Our broker-dealer clients accounted for approximately 98% of the underwriting of newly-issued U.S. high-grade corporate bonds and approximately 59% of the underwriting of newly-issued European high-grade corporate bonds in 2003, and include 9 of the top 10 broker-dealers as ranked by 2003 new-issue underwriting volume of European high-grade corporate bonds. We believe these broker-dealers also represent the principal source of secondary market liquidity in such securities, as well as in sovereign and corporate bonds issued by entities domiciled in an emerging markets country. Secondary market liquidity refers to the ability of market participants to buy or sell a security quickly and in large volume subsequent to the original issuance of the security, without substantially affecting the price of the security. Our broker-dealer clients currently trade fixed-income securities by traditional means including telephone, e-mail and single-dealer proprietary trading systems in addition to our electronic trading platform and we expect them to continue to do so in the future. In fact, these traditional means of trading corporate bonds remain the manner in which the majority of corporate bonds are traded.

      Since the commercial launch of our electronic trading platform in January 2001, we have experienced significant growth in trading volume and strengthened our market position. Our annual trading volume has grown from $11.7 billion in 2001, to $48.4 billion in 2002 and $192.2 billion in 2003. For the year ended December 31, 2003, 73.0% of our trading volume was in U.S. high-grade corporate bonds, 16.5% of our trading volume was in European high-grade corporate bonds and 10.5% of our trading volume was in other bonds, most of which are sovereign and corporate bonds issued by entities domiciled in an emerging markets country. As a result of this growth in trading volume, our revenues have increased from $6.6 million in 2001, to $18.7 million in 2002 and $58.5 million in 2003, and our net income has increased from a loss of $62.7 million in 2001, to a loss of $32.6 million in 2002 and to income of $7.1 million in 2003.

Our Competitive Strengths

  •  Trading Volume. Our trading volume across all of our products was $192.2 billion in 2003 and $144.1 billion in the six months ended June 30, 2004. Our growing trading volume, particularly in U.S. high-grade corporate bonds and in European high-grade corporate bonds, combined with the participation on our platform of our broker-dealer and institutional investor clients, attracts client attention and order flow, thereby, we believe, further increasing the liquidity of the securities available on our

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  platform. As broker-dealers and institutional investors increase the proportion of their activity conducted on our platform and as new clients join the platform, we expect the liquidity of the securities available on our platform to continue to increase.
 
  •  Execution Benefits to Institutional Investor Clients. Our electronic trading platform enables institutional investors to simultaneously request competing bids or offers from our broker-dealer clients. We believe that this creates an environment that motivates our broker-dealer clients to provide competitive prices. We believe that we provide improved efficiency by reducing the time and labor required to conduct broad product and price discovery. Our electronic trading platform allows our institutional investor clients to find securities of the product types traded on our platform that match their specific risk and return objectives, and efficiently make changes in asset allocation.
 
  •  Execution Benefits to Broker-Dealer Clients. We enable our broker-dealer clients to broaden their distribution by participating in transactions to which they otherwise may not have had access, without adding additional sales professionals. As a result, we believe they can achieve enhanced bond inventory turnover, which may help them to limit their credit exposure.
 
  •  Improved Trading Accuracy, Efficiency and Compliance. By processing trades electronically, our platform provides an automated audit trail for each stage in the trading cycle, offering our clients a useful tool for their risk monitoring and compliance. We believe that the automated audit trail, together with the ability to request competing bids and offers from multiple broker-dealers, enhances fiduciaries’ ability to demonstrate best execution. In addition, we believe that the ability to automate transaction processing (commonly referred to as straight-through processing) improves accuracy and efficiency by reducing the number of times data need to be manually entered.
 
  •  Robust, Scalable Technology Platform. We have developed proprietary technology that is highly secure and fault-tolerant, and that provides adequate capacity for our current operations and substantial growth. Our highly scalable systems are designed to accommodate additional volume, products and clients with relatively little modification and low incremental costs.
 
  •  Proven Innovator with an Experienced Management Team. Since our inception, we have consistently been an innovator in the fixed-income securities markets, introducing new functionality to our platform to meet the needs of broker-dealers and institutional investors. Our management team is comprised of executives with an average of more than 20 years’ experience in the securities industry.

      Potentially offsetting these competitive strengths is the highly competitive nature of the electronic trading industry in which we operate. The four main areas of competition which we face are traditional bond trading conducted over the telephone, bond trading conducted between broker-dealers and institutional investors using e-mail, other electronic trading platforms, and market data and information vendors. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or have announced their intention to explore the development of electronic trading platforms that will compete with us.

Our Strategy

      Our objective is to provide the leading global electronic trading platform for fixed-income securities, connecting broker-dealers and institutional investors to enable them to communicate and trade more easily and efficiently. We believe that our strong competitive position, our large network of clients and our proven ability to introduce new products and services that anticipate and respond to client needs will enable us to achieve this goal. The key elements of our strategy include:

  •  enhance the liquidity of securities traded on our platform and broaden our client base in our existing markets;
 
  •  leverage our existing technology and client relationships to expand into new segments of the fixed-income securities market;
 
  •  continue to strengthen and expand our trade-related service offerings;

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  •  expand our data and information services offerings; and
 
  •  pursue strategic alliances and select acquisitions.

Potential Conflicts of Interest With the Underwriters

     Stock Ownership

      MarketAxess was formed in April 2000 by affiliates of Bear Stearns, Chase Manhattan Bank and J.P. Morgan. Since our formation, we have received substantially all of our equity financing from certain of our broker-dealer clients, including (either directly or through affiliates) Credit Suisse First Boston LLC and J.P. Morgan Securities Inc., the joint book-running managers of this offering. We also received equity investments from affiliates of Banc of America Securities LLC, Bear, Stearns & Co., Inc. and UBS Securities LLC, each of which is an underwriter of this offering. In addition, through our acquisition of Trading Edge, affiliates of Thomas Weisel Partners LLC, one of the underwriters of this offering, became stockholders of MarketAxess.

      Prior to this offering, assuming the conversion of our outstanding preferred stock into common stock and assuming the exercise in full of a warrant to purchase 5,000,002 shares of our common stock held by affiliates of six of our broker-dealer client stockholders (including affiliates of four of the underwriters), at an exercise price of $0.003 per share, the underwriters named in this prospectus owned, in the aggregate, directly or through affiliates, approximately 52.5% of our outstanding voting and non-voting common stock. Following this offering, those same broker-dealer clients will own, in the aggregate, directly or through affiliates, approximately 34.4% of our common stock (or approximately 31.3% of our common stock if the underwriters’ option to purchase additional shares is exercised in full). To the extent that some or all of these broker-dealer clients or their affiliates vote similarly, they are likely to be able to influence decisions requiring approval by our stockholders. See “Principal and Selling Stockholders.”

      Several of our broker-dealer clients who are not underwriters of this offering have also made equity investments in MarketAxess. Specifically, ABN Amro, BNP Paribas, Deutsche Bank and Lehman Brothers, or their affiliates, are our stockholders.

     Sale of Stock in the Offering by the Underwriters

      Each of the six firms that are underwriters of this offering, or their affiliates, will be selling stockholders in this offering. These institutions, the respective number of shares they will sell and the corresponding percentage of their total ownership interest these sales represent, are listed below:

                                                                 
Assuming no exercise of Assuming full exercise of
over-allotment option over-allotment option


Post-offering
Percentage Percentage ownership(3)
of their of their
Number of Aggregate pre-offering Number of Aggregate pre-offering Number
Name of Underwriter Shares Sold Proceeds(1) ownership(2) Shares Sold Proceeds(1) ownership(2) of Shares Percentage(4)









Credit Suisse First Boston
    768,117     $ 13,057,989       24.74%       984,902     $ 16,743,334       31.73%       2,119,581       8.28%  
JPMorgan
    1,392,155     $ 23,666,635       25.69%       1,785,063     $ 30,346,071       32.94%       3,634,225       9.99%  
Banc of America Securities
    492,223     $ 8,367,791       26.22%       627,325     $ 10,664,525       33.42%       1,249,639       4.97%  
Bear, Stearns & Co.
    667,214     $ 11,342,638       25.69%       855,522     $ 14,543,874       32.94%       1,741,763       6.91%  
UBS Securities
    166,667     $ 2,833,339       50.00%       166,667     $ 2,833,339       50.00%       166,667       0.68%  
Thomas Weisel Partners
    253,392     $ 4,307,664       46.52%       253,392     $ 4,307,664       46.52%       291,294       1.18%  
     
     
     
     
     
     
     
     
 
Total
    3,739,768     $ 63,576,056       26.95%       4,672,871     $ 79,438,807       33.68%       9,203,169       29.55%  


(1)  Assumes an initial public offering price of $17.00 per share before deducting estimated underwriting discounts and commissions.
(2)  Assumes the conversion of all shares of preferred stock and the exercise of all warrants into shares of common stock.
(3)  Assumes full exercise of the underwriters’ over-allotment option.
(4)  Reflects beneficial ownership percentages calculated in accordance with the rules of the Securities and Exchange Commission and gives effect to the limitations on acquiring shares of common stock upon the conversion of shares of non-voting common stock or exercise of warrants if the conversion or exercise would result in the stockholder beneficially owning more than 9.99% of our outstanding common stock. See “Principal and Selling Stockholders.”

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      Reduced involvement of these broker-dealer clients after this offering due to their loss of the right to designate a member of our board of directors, or the reduction in the level of their equity ownership due to their selling a significant portion of their shares of our common stock in this offering, may cause them to reduce or discontinue their use of our electronic trading platform and other services, which could negatively impact the use of our platform by our institutional investor clients and result in a reduction in our revenues and net income.

     Revenues

      We have historically earned a substantial portion of our commissions from the six clients (Banc of America, Bear Stearns, Credit Suisse First Boston, JPMorgan, Thomas Weisel Partners and UBS) that are (or whose affiliates are) underwriters of this offering. For the year ended December 31, 2001, $2.5 million or 58.1% of our commissions, for the year ended December 31, 2002, $8.2 million or 52.9% of our commissions, for the year ended December 31, 2003, $20.9 million or 39.7% of our commissions, and for the six months ended June 30, 2004, $11.8 million or 34.2% of our commissions, were generated by these six clients.

     Board of Directors

      We currently have eight board members, seven of whom are not our employees. Of those seven non-employee directors, two were designated by entities that are affiliates of the underwriters of this offering and stockholders of MarketAxess. Upon the closing of this offering, those entities will no longer have the contractual right to designate members of our board of directors. However, the two directors designated by entities that are affiliates of underwriters of this offering and stockholders of MarketAxess will remain on our board of directors at least until our next annual meeting of stockholders (currently expected to be in the second quarter of 2005) unless they resign or otherwise relinquish their board seat prior to that time.

     Other Businesses

      Affiliates of the underwriters of this offering currently trade fixed-income securities by means other than our electronic trading platform and we expect them to continue to do so in the future. Affiliates of the underwriters buy and sell fixed-income securities directly with their clients through traditional bond trading methods, including telephone conversations, e-mail messaging and other electronic means of communication, including proprietary single-dealer systems.

     Determination of Initial Public Offering Price

      Prior to this offering, there has been no public market for our common stock. We and the underwriters, including the “qualified independent underwriter,” will negotiate the initial public offering price. The factors that will be considered are set forth below:

  •  prevailing market conditions in the equity markets;
 
  •  an analysis of our historical revenues, earnings, cash flow, return on invested capital and operating margins, including an analysis of the trend of our revenues, earnings and cash flow, the volatility associated with those trends and the fact that we began operating profitably only within the past year;
 
  •  estimates of our revenues, earnings potential and prospects;
 
  •  an analysis of the stock prices of companies engaged in activities similar or related to ours in relation to their earnings, as well as recent movements and trends in the market prices of securities of these other companies, and other financial and operating information of these other companies;
 
  •  prevailing market conditions in the bond markets, particularly with respect to the overall trading volumes for U.S. and European high-grade corporate bonds;

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  •  investor demand for our common stock;
 
  •  the history of and prospects for electronic trading of corporate bonds;
 
  •  the competitive landscape in which we operate; and
 
  •  an assessment of our management and its ability to achieve its estimates for future revenues and earnings.

In addition, other factors of lesser significance will also be considered.

      Affiliates of certain of the underwriters own more than 10% of our preferred equity outstanding prior to the completion of this offering, and therefore we are conducting this offering in accordance with the applicable provisions of Rule 2720 of the National Association of Securities Dealers, Inc. Conduct Rules, which require that the initial public offering price of the shares of common stock offered hereby not be higher than that recommended by a “qualified independent underwriter” meeting certain standards. Thomas Weisel Partners LLC is acting as the qualified independent underwriter in pricing this offering. Entities affiliated with Thomas Weisel Partners LLC own an aggregate of 544,686 shares of our common stock immediately prior to the completion of this offering and are selling an aggregate of 253,392 shares of our common stock in this offering, or 46.5% of their shares. The National Association of Securities Dealers, Inc. has concurred with us that Thomas Weisel Partners LLC meets the requirements of a qualified independent underwriter in connection with this offering. See “Underwriting” for more information.

      Neither we, the selling stockholders nor the underwriters can assure investors that an active trading market will develop for our common stock, or that our common stock will trade in the public market at or above the initial public offering price. The estimated initial public offering price range set forth on the cover page of the preliminary prospectus is subject to change as a result of the factors described above and the initial public offering price may be above or below that range.

Determination of Historical Fair Market Value of Our Common Stock

      Options have been granted to employees, and shares have been allocated to certain of our broker-dealer clients who are also our stockholders under a warrant issued to those stockholders at the time they made an equity investment in us, in each case at fair market value. We determined the fair market value of these options and warrants using the Black-Scholes option-pricing model. To assist management in determining the fair market value of the shares issuable, a key input to the Black-Scholes model, independent valuations of our common stock were undertaken as of December 31, 2001, December 31, 2002, September 30, 2003 and December 31, 2003, which resulted in per share valuations of $2.70, $2.70, $7.92 and $13.95, respectively. Management concurred with and used the valuations provided by the independent valuation experts in all cases. As a result, management determined that the fair market value of the common stock was $2.70 per share between January 1, 2002 and September 30, 2003, $7.92 per share between October 1, 2003 and December 31, 2003, and $13.95 per share between January 1, 2004 and March 29, 2004.

      A number of factors were considered in the valuations, including our then-current financial condition, our future earnings capacity and cash flow generation, the market price of publicly-traded corporations in similar lines of business and the values of prior sales of our preferred stock. A number of significant factors contributed to the rapid increase in the value of our common stock during this time period. During the calendar year 2003, our total trading volume increased significantly. In addition, we added significant additional broker-dealer clients and additional institutional investor clients. Finally, the improvement in our financial performance from 2002 resulted in a shift in net income from a loss of $32.6 million in 2002 to income of $7.1 million in 2003.

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Dependence on Our Broker-Dealer Clients Who Are Also Our Stockholders

     Revenues

      We have historically earned most of our commissions and most of our revenues from the nine clients (ABN Amro, BNP Paribas, Banc of America, Bear Stearns, Credit Suisse First Boston, Deutsche Bank, JPMorgan, Lehman Brothers and UBS) that are (or whose affiliates are) our stockholders. Affiliates of most of our broker-dealer clients are also among our institutional investor clients. Information relating to the percentage of our commissions and the percentage of our revenues generated by these nine broker-dealer clients is provided in the chart below:

                                         
Six Months Ended
Year Ended December 31, June 30,


2001 2002 2003 2003 2004





(unaudited)
Percentage of commissions generated by broker-dealer client stockholders and their respective affiliates
    81.8%       79.0 %     62.5 %     66.2 %     57.7 %
Percentage of total revenues generated by broker-dealer client stockholders and their respective affiliates
    78.6%       66.4 %     57.0 %     58.4 %     54.0 %

      Our broker-dealer clients are not restricted from buying and selling fixed-income securities directly or through their own proprietary or third-party platforms. For more information, see “Risk Factors.”

     Board of Directors

      We currently have eight board members, seven of whom are not our employees. Of those seven non-employee directors, three were designated by entities that are broker-dealer clients and stockholders of MarketAxess. Upon the closing of this offering, those entities will no longer have the contractual right to designate members of our board of directors. However, the three directors designated by entities that are broker-dealer clients and stockholders of MarketAxess will remain on our board of directors at least until our next annual meeting of stockholders (currently expected to be in the second quarter of 2005) unless they resign or otherwise relinquish their board seat prior to that time.

     Other Businesses

      Our broker-dealer clients currently trade fixed-income securities by means other than our electronic trading platform and we expect them to continue to do so in the future. Our broker-dealer clients buy and sell fixed-income securities directly with their clients through traditional bond trading methods, including telephone conversations, e-mail messaging and other electronic means of communication, including proprietary single-dealer systems.

      We cannot be assured that such broker-dealers’ primary commitments will not be to one of our competitors. Other companies, including some in which certain of our broker-dealer clients have invested, have developed electronic trading platforms or have announced their intention to explore the development of electronic trading platforms that will compete with us. Furthermore, our broker-dealer clients have made, or may in the future make, investments in or enter into agreements with other businesses that directly or indirectly compete with us.

7


 

     Stock Ownership and Sale of Stock in the Offering by Our Broker-Dealer Clients

      Nine of our broker-dealer clients (ABN Amro, BNP Paribas, Banc of America, Bear Stearns, Credit Suisse First Boston, Deutsche Bank, JPMorgan, Lehman Brothers and UBS), or their affiliates, are stockholders of ours, and each of these stockholders other than ABN Amro will be a selling stockholder in this offering. Their aggregate share ownership, the number of shares they will sell and the corresponding percentage of their total ownership interest these sales represent, are listed below:

                                                             
Pre-offering ownership Assuming no exercise Assuming full exercise Post-offering
(in the aggregate) of over-allotment option of over-allotment option ownership(3)




Percentage of Percentage of
all shares all shares
Number of Percentage Number of being Number of being Number of Percentage
shares (1) shares sold sold(2) shares sold sold(2) shares (1)








  19,674,862       62.51%       5,093,531       84.89%       6,443,531       87.67%       13,231,331       42.83%  


(1)  Reflects the beneficial ownership percentage calculated in accordance with the rules of the Securities and Exchange Commission and gives effect to the limitations on acquiring shares of common stock upon the conversion of shares of non-voting common stock or exercise of warrants if the conversion or exercise would result in the stockholder beneficially owning more than 9.99% of our outstanding common stock. See “Principal and Selling Stockholders.”
(2)  Represents the percentage of all shares being sold by selling stockholders in the offering.
(3)  Assumes full exercise of the underwriters’ over-allotment option.

     Potential Conflicts of Interest

      For more information concerning the potential conflicts of interest that may arise as a result of the various roles (broker-dealer client, stockholder, underwriter and selling stockholder) played by certain of our broker-dealer clients, please see the section “Risk Factors — Risks Related to the Potential Conflicts of Interest With Our Broker-Dealer Clients Who Are Also Our Stockholders.”

Company Information

      Our business was incorporated in the State of Delaware on April 11, 2000. Our principal executive offices are located at 140 Broadway, 42nd Floor, New York, New York 10005. Our telephone number is (212) 813-6000. The address of our website is www.marketaxess.com. The information contained on our website does not constitute a part of this prospectus.

      We have obtained federal registration of the MarketAxess® name and logo, as well as for the marks Auto-Spotting®, BondLink® and Actives®. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.

8


 

The Offering

 
Common stock offered by MarketAxess 3,000,000 shares
 
Common stock offered by the selling stockholders 6,000,000 shares (7,350,000 shares if the underwriters’ over-allotment option is exercised in full)
 
Common stock to be outstanding after the offering 20,097,697 shares
 
Non-voting common stock to be outstanding after the offering 4,335,176 shares
 
Fully-diluted shares of common stock to be outstanding after the offering 34,408,552 (includes the common stock to be outstanding after the offering, the non-voting common stock to be outstanding after the offering, the 5,000,002 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $0.003 per share and the 4,975,677 shares of common stock issuable upon exercise of outstanding options with exercise prices ranging from $2.70 to $17.00 per share)
 
Proposed Nasdaq National Market symbol MKTX
 
Use of proceeds For general corporate purposes, including working capital and capital expenditures. In addition, we may use a portion of the net proceeds to expand our current business through strategic alliances and select acquisitions. See “Use of Proceeds.”


      Except as otherwise indicated, whenever we present the number of shares of our common stock outstanding, we have:

  •  based this information on the shares outstanding as of August 5, 2004, excluding:

  •  4,975,677 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $4.95 per share;
 
  •  5,000,002 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $0.003 per share;
 
  •  7,967 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $130.65 per share;
 
  •  608,782 shares of common stock available for issuance under our existing stock option plans; and
 
  •  an additional 2,400,000 shares of common stock reserved for issuance under the stock option plan adopted in connection with this offering;

  •  given effect to a one-for-three reverse stock split of our common stock to be effected prior to the completion of this offering;
 
  •  given effect to the conversion of our outstanding preferred stock into common stock and non-voting common stock at a ratio of 3.33 shares of common stock for each share of preferred stock upon completion of this offering; and
 
  •  assumed no exercise of the underwriters’ over-allotment option (which is being granted to the underwriters by certain of our selling stockholders and not by MarketAxess).

9


 

Summary Consolidated Financial and Other Data

     The following tables set forth, for the periods and at the dates indicated, our summary consolidated financial data. Historical results are not indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year. You should read this data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and the notes to those financial statements appearing elsewhere in this prospectus.

                                                       
April 11, 2000
(date of
inception) Six Months
through Year Ended December 31, Ended June 30,
December 31,

2000 2001 2002 2003 2003 2004






(in thousands, except share and per share data) (unaudited)
Statement of Operations Data:
                                               
 
Revenues
                                               
 
Commissions
                                               
   
U.S. high-grade
  $ 47     $ 3,392     $ 13,390     $ 40,310     $ 16,761     $ 22,916  
   
European high-grade
          47       975       7,126       2,474       8,143  
   
Other(1)
          833       1,190       5,364       2,165       3,482  
     
     
     
     
     
     
 
     
Total commissions
    47       4,273       15,555       52,800       21,400       34,541  
 
Information and user access fees
          13       287       1,144       391       1,021  
 
License fees
                924       4,145       2,516       1,148  
 
Interest income
                                    177       270  
 
Other(2)
    1,666       2,313       1,936       371             426  
     
     
     
     
     
     
 
     
Total revenues
    1,713       6,598       18,702       58,460       24,484       37,406  
     
     
     
     
     
     
 
Total expenses
    18,548       69,262       51,290       51,140       24,585       28,748  
     
     
     
     
     
     
 
Income (loss) before taxes
    (16,835 )     (62,663 )     (32,589 )     7,320       (101 )     8,658  
Provision (benefit) for income tax
                      190             (27,432 )
     
     
     
     
     
     
 
Net income (loss)
  $ (16,835 )   $ (62,663 )   $ (32,589 )   $ 7,131     $ (101 )   $ 36,090  
     
     
     
     
     
     
 
Net income (loss) per common share
                                               
 
Basic(3)
  $ (7.53 )   $ (23.29 )   $ (13.33 )   $ (1.31 )   $ (1.75 )   $ 9.22  
 
Diluted(3)
    N/A       N/A       N/A       N/A       N/A     $ 1.15  
Weighted average number of shares of common stock outstanding
                                               
 
Basic
    2,573,979       3,097,994       3,290,326       3,295,423       3,295,423       3,296,685  
 
Diluted
    N/A       N/A       N/A       N/A       N/A       31,344,342  
Pro forma net income per common share(4):
                                               
 
Basic
                          $ 0.24             $ 1.23  
 
Diluted
                          $ 0.21             $ 1.05  
Pro forma weighted average number of shares of common stock outstanding(4):
                                               
 
Basic
                            29,196,882               29,389,121  
 
Diluted
                            33,316,785               34,344,342  
                 
As of June 30, 2004

Pro Forma
Actual As Adjusted(5)


(in thousands)
(unaudited)
Balance Sheet Data:
               
 
Cash, cash equivalents and short-term investments
  $ 36,824     $ 84,254  
Working capital
    38,067       85,497  
Total assets
    91,842       135,822  
Total redeemable convertible preferred stock
    165,360        

10


 

                                                   
April 11, 2000
(date of
inception) Six Months
through Year Ended December 31, Ended June 30,
December 31,

2000 2001 2002 2003 2003 2004






(in billions)
Trading Volume Data:
                                               
U.S. high-grade
  $ 0.2     $ 10.0     $ 39.4     $ 140.3     $ 52.4     $ 89.2  
European high-grade
          0.2       4.2       31.8       10.5       41.2  
Other(1)
          1.5       4.8       20.1       8.0       13.7  
     
     
     
     
     
     
 
 
Total
  $ 0.2     $ 11.7     $ 48.4     $ 192.2     $ 70.9     $ 144.1  


(1)  Other commissions consists primarily of commissions from the trading of emerging markets and new issues bonds. Other trading volume refers to the volume of bonds traded of the aforementioned type.
 
(2)  Other revenues consist of interest income, insurance proceeds and other.
 
(3)  Includes the effect of dividends accrued on our redeemable convertible preferred stock. We are not including diluted net income (loss) per common share for periods in which we had a net loss, as the effect would have been anti-dilutive.
 
(4)  The pro forma basic net income per share amounts: add back the dividends on our redeemable convertible preferred stock of $11,454,621 and $5,696,014; include weighted-average common shares of 3,295,423 and 3,296,685; give effect to conversion of our redeemable convertible preferred stock into 18,122,661 and 18,122,661 shares of our common stock; give effect to the exercise of warrants on a weighted-average basis as converted to 4,778,800 and 4,969,775 shares of our common stock; and give effect to the sale of 3,000,000 shares of our common stock in this offering for the year ended December 31, 2003 and for the six months ended June 30, 2004, respectively.
 
     The pro forma diluted net income per share amounts: add back the dividends on our redeemable convertible preferred stock of $11,454,621 and $5,696,014; include the weighted-average common shares of 3,295,423 and 3,296,685; give effect to conversion of our convertible preferred stock into 18,122,661 and 18,122,661 shares of our common stock; give effect to the exercise of warrants on a weighted-average basis as converted to 4,778,800 and 4,969,775 shares of our common stock; give effect to the exercise of options outstanding totaling 4,119,903 and 4,955,221; and the sale of 3,000,000 shares of our common stock in this offering for the year ended December 31, 2003 and for the six months ended June 30, 2004, respectively.
 
(5)  The pro forma as adjusted balance sheet data give effect to the conversion of all outstanding shares of our convertible preferred stock into 14,415,628 shares of common stock and 4,335,176 shares of non-voting common stock upon the closing of this offering, as well as our receipt of the estimated net proceeds from the sale of 3,000,000 shares of our common stock in this offering, at an assumed initial public offering price of $17.00 per share, after deducting the estimated underwriting discounts and commissions and the estimated expenses of this offering.

11


 

RISK FACTORS

      You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to the Potential Conflicts of Interest With Our Broker-Dealer Clients

Who Are Also Our Stockholders
 
We are dependent on our broker-dealer clients, nine of which are also our stockholders, who are not restricted from buying and selling fixed-income securities directly or through their own proprietary or third-party platforms.

      We rely on our broker-dealer clients to provide product and liquidity on our electronic trading platform by posting bond prices on our platform for bonds in their inventory and responding to institutional investor client inquiries. Although each broker-dealer client is currently a party to an agreement with us, the obligations of each broker-dealer under these agreements are minimal. None of these agreements is exclusive and broker-dealers may terminate such agreements and/or enter into, and in some cases have entered into, similar agreements with our competitors. For example, some of our broker-dealer clients are also clients of TradeWeb, a multi-dealer to institutional investor trading platform that recently announced the launch of an online corporate bond trading platform.

      Our broker-dealer clients buy and sell fixed-income securities directly with their clients through traditional bond trading methods, including telephone conversations, e-mail messaging and other electronic methods of communication. Currently, the preponderance of trading of U.S. high-grade corporate bonds still occurs using traditional bond trading methods. Most of our broker-dealer and institutional investor clients are involved in other ventures, including other electronic trading platforms or other distribution channels, as trading participants and/or as equity holders, and such ventures or newly created ventures may compete with us and our electronic trading platform now and in the future.

      Consortia owned by some of our broker-dealer clients have developed electronic trading networks or have announced their intention to explore the development of electronic trading networks. These competing trading platforms may offer some features that we do not currently offer. Furthermore, our broker-dealer clients have made, and may in the future continue to make, investments in businesses that directly or indirectly compete with us, including, either individually or collectively, organizing or investing in a separate company similar to us for the purpose of competing with us or pursuing corporate opportunities that might be attractive to us. Accordingly, there can be no assurance that such broker-dealers’ primary commitments will not be to one of our competitors.

      Any reduction in the use of our electronic trading platform by our broker-dealer clients would reduce the number of different bond issues and the volume of trading in those bond issues on our platform which could, in turn, reduce the use of our platform by our institutional investor clients. The occurrence of any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

We derive a significant percentage of our total revenues, and an even greater percentage of our commissions, from broker-dealer clients who are also our stockholders.

      We have historically earned a substantial portion of our commissions from the nine broker-dealer clients that are our stockholders. For the year ended December 31, 2001, $3.5 million or 81.8% of our commissions, for the year ended December 31, 2002, $12.3 million or 79.0% of our commissions, for the year ended December 31, 2003, $33.0 million or 62.5% of our commissions, and for the six months ended June 30, 2004, $19.9 million or 57.7% of our commissions, were generated by these nine broker-dealer clients. Additionally, six of these nine broker-dealer clients — Banc of America Securities, Bear Stearns, Credit Suisse First Boston, Deutsche Bank, JPMorgan and Lehman Brothers — have had a right to appoint a member of our board of directors, which right will terminate upon the consummation of this offering. None of our broker-dealer clients is contractually or

12


 

otherwise obligated to continue to use our electronic trading platform. Reduced involvement of these broker-dealer clients after this offering due to their loss of a right to designate a member of our board of directors, or the reduction in the level of their equity ownership due to their selling a portion of their shares of our common stock in this offering, may cause them to reduce or discontinue their use of our electronic trading platform and other services, which could negatively impact the use of our platform by our institutional investor clients. The loss of, or a significant reduction of, participation on our platform by these broker-dealer clients may have a material adverse effect on our business, financial condition and results of operations.

Nine of our broker-dealer clients or their affiliates will beneficially own, in the aggregate, approximately   % of our outstanding voting common stock upon completion of this offering. These broker-dealer clients have strategic interests that differ from those of our other stockholders.

      Upon completion of this offering, nine of our broker-dealer clients or their affiliates will beneficially own, in the aggregate, approximately           % of our outstanding voting common stock (or approximately           % of our voting common stock if the underwriters’ option to purchase additional shares is exercised in full). These broker-dealer clients have strategic interests that are different than ours and those of our other stockholders. For example, in their capacity as broker-dealer clients, they would presumably favor lower commissions and/or commission caps. Furthermore, as stockholders in other consortia that have developed competitive electronic trading networks or have announced their intention to explore the development of competitive electronic trading networks, they may decide to direct some or all of their electronic trading business to one or more of our competitors. While these actions, if taken, would presumably reduce our revenues and our market capitalization, and, therefore, the value of their ownership position in us, there can be no assurance that they will not decide to take such actions for their own strategic reasons.

      We are not a party to any voting agreement with any of our stockholders, other than voting agreements that terminate upon the closing of this offering, and are not aware of any voting agreements among our broker-dealer clients; however, they may enter into a voting agreement in the future or otherwise vote in a similar manner. To the extent that some or all of these broker-dealer clients or their affiliates vote similarly, they may be able to influence decisions requiring approval by our stockholders. As a result, they or their affiliates may be able to:

  •  control the composition of our board of directors through their ability to nominate directors and vote their shares to elect them;
 
  •  control our management and policies; and
 
  •  determine the outcome of significant corporate transactions, including changes in control that may be beneficial to other stockholders.

      As a result of these factors, we may be less likely to pursue relationships with strategic partners who are not stockholders of ours, which could impede our ability to expand our business and strengthen our competitive position. Furthermore, these factors could also limit stockholder value by preventing a change in control or sale of MarketAxess.

Future sales of shares by our broker-dealer clients who are also our stockholders could cause the market price of our common stock to drop significantly.

      All of the shares of common stock and non-voting common stock owned by our broker-dealer clients are subject to a lock-up agreement with the underwriters of this offering, pursuant to which such shares may not be sold for a period of 180 days following the date of this prospectus, unless such restriction is waived by the underwriters. Subject to compliance with the federal securities laws, all of those shares will become available for resale in the public market after 180 days after the date of this prospectus subject only, in the case of “affiliates” of MarketAxess, to volume limitations on resale. For additional information, see “Shares Eligible for Future Sale.”

13


 

Risks Related to Our Business

We face substantial competition that could reduce our market share and harm our financial performance.

      The 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. We will continue to compete with bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically. In addition, our current and prospective competitors are numerous and include:

  •  other multi-dealer trading companies;
 
  •  market data and information vendors;
 
  •  securities and futures exchanges;
 
  •  inter-dealer brokerage firms;
 
  •  electronic communications networks;
 
  •  technology, software, information and media or other companies that have existing commercial relationships with broker-dealers or institutional investors; and
 
  •  other electronic marketplaces that are not currently in the securities business.

      Many of our current and potential competitors are more established and substantially larger than we are, and have substantially greater market presence, as well as greater financial, engineering, technical, marketing and other resources. These competitors may aggressively reduce their pricing to enter into market segments in which we have a leadership position today, potentially subsidizing any losses with profits from trading in other fixed-income or equity securities. In addition, many of our competitors offer a wider range of services, have broader name recognition and have larger customer bases than we do. Some of them may be able to respond more quickly to new or evolving opportunities, technologies and customer requirements than we can and may be able to undertake more extensive promotional activities.

      Any combination of our competitors may enter into joint ventures or consortia to provide services similar to those provided by us. Current and new competitors can launch new platforms at a relatively low cost. Others may acquire the capabilities necessary to compete with us through acquisitions. We expect that we will potentially compete with a variety of companies with respect to each product or service we offer. If we are not able to compete successfully in the future, our business, financial condition and results of operations would be adversely affected. For more information, see “Business — Competition.”

We have experienced losses and may incur losses in the future.

      Our losses were $16.8 million from the period of inception through December 31, 2000, $62.7 million for the year ended December 31, 2001 and $32.6 million for the year ended December 31, 2002. For the year ended December 31, 2003, we reported net income of $7.1 million and for the six months ended June 30, 2004, we reported net income of $36.1 million. We expect that our expenses will increase in the near term as we continue to expand our business and in order to meet the requirements related to being a public company. We cannot predict whether we will be able to sustain profitability and we may incur losses in future periods. If we are not able to sustain profitability, our stock price may decline.

Neither the sustainability of our current level of business nor our growth can be assured. Even if we do experience growth, we cannot assure you that we will grow profitably.

      The use of our electronic trading platform is relatively new. The success of our business strategy depends, in part, on our ability to maintain and expand the network of broker-dealer and institutional investor clients that use our electronic trading platform. Our business strategy also depends on increasing the use of our platform by these clients. Individuals at broker-dealers or institutional investors may have conflicting interests which may discourage their use of our platform.

14


 

      Our growth is also dependent on our ability to diversify our revenue base going forward. We currently derive a majority of our revenues from secondary trading in U.S. high-grade corporate bonds. Our trading volume for U.S. high-grade corporate bonds has remained relatively constant from the three months ended September 30, 2003 to the three months ended June 30, 2004 and our commissions from such trading have declined slightly during that period. Our long-term business strategy is dependent on expanding our service offerings and increasing our revenues from other fixed-income products and other sources. We cannot assure you that our efforts will be successful or result in increased revenues or continued profitability.

      Our plans to pursue other opportunities for revenue growth, which we describe in “Business — Our Strategy,” are at an early stage, and we cannot assure you that our plans will be successful or that we will actually proceed with them as described.

Because we have a limited operating history, it is difficult to evaluate our business and prospects.

      MarketAxess was formed in April 2000 and pilot trading on our electronic trading platform began in October 2000 with the commercial launch of the platform in January 2001. As a result, we have only a limited operating history from which you can evaluate our business and our prospects. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving industries, such as the electronic financial services industry. These risks and difficulties include, but are not limited to, our ability to:

  •  attract and retain broker-dealers and institutional investors on a cost-effective basis;
 
  •  expand and enhance reliable and cost-effective product and service offerings to our clients;
 
  •  respond effectively to competitive pressures;
 
  •  diversify our sources of revenues;
 
  •  maintain adequate control of our expenses;
 
  •  operate, support, expand and develop our operations, website, software, communications and other systems;
 
  •  manage growth in personnel and operations;
 
  •  increase awareness of our brand or market positioning;
 
  •  expand our sales and marketing programs; and
 
  •  respond to regulatory changes or demands.

      If we are unsuccessful in addressing these risks or in executing our business strategy, our business, financial condition and results of operations may suffer.

The cap we recently instituted on one of our pricing plans relating to commissions and fees paid by broker-dealers on our U.S. high-grade corporate bond trading platform could limit our revenues.

      For the year ended December 31, 2002, 71.6% of our revenues, for the year ended December 31, 2003, 69.0% of our revenues, and for the six months ended June 30, 2004, 61.3% of our revenues, came from the commissions paid directly by broker-dealer clients for secondary trading of U.S. high-grade corporate bonds on our electronic trading platform. We recently offered our broker-dealer clients the opportunity to switch to one of two new transaction fee plans for secondary U.S. high-grade corporate bond trading, each of which includes a fixed monthly fee component and a variable fee per trade component. For one of these new transaction fee plans, the aggregate amount of transaction fees payable by a broker-dealer client for U.S. high-grade corporate bond trading is capped on a monthly and an annual basis. Currently, two of our broker-dealer clients have selected the pricing plan that includes the fee cap, although 12 other broker-dealer clients will have an opportunity to switch to this pricing plan in September or October of 2004. While the fee cap is designed to encourage all of our broker-dealer clients to be more active on our electronic trading platform, the fee cap limits the maximum amount of commissions payable to us by our most active broker-dealer clients, which could limit our revenues and constrain our growth and profitability. For more information, see

15


 

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Revenues and Expenses — Revenues — Commissions.”

Decreases in trading volumes in the fixed-income markets generally or on our platform could harm our business and profitability.

      We may experience significant fluctuations in trading volume in the future. Declines in the overall volume of fixed-income securities trading and in market liquidity generally result in lower revenues from commissions for trades executed on our electronic trading platform and fees generated from related activities.

      Likewise, decreases in our share of the segments of fixed-income trading markets in which we operate, or shifts in trading volume to segments of clients which we have not penetrated, could result in lower trading volume on our platform and consequently lower commissions and other revenue. During periods of increased volatility in credit markets, the use of electronic trading platforms by market participants may decrease dramatically as institutional investors may seek to obtain additional information during the trade process through conversations with broker-dealers. In addition, during rapidly moving markets, broker-dealers may be less likely to post prices electronically.

      A decline in trading volumes on our platform for any reason may have a material adverse effect on our business, financial condition and results of operations because our commissions are largely variable but a significant portion of our costs is fixed.

 
If we experience significant fluctuations in our operating results or fail to meet revenues and earnings expectations, our stock price may fall rapidly and without advance notice.

      Due to our limited operating history, our evolving business model and the unpredictability of our industry, we may experience significant fluctuations in our operating results. We base our current and future expense levels and our investment plans on estimates of future revenues and future rate of growth. Our expenses and investments are, to a large extent, fixed and we expect that these expenses will increase in the future. We may not be able to adjust our spending quickly enough if our revenues fall short of our expectations.

      Our revenues and operating results may also fluctuate due to other factors, including:

  •  our ability to retain existing broker-dealer and institutional investor clients and attract new broker-dealers and institutional investor clients;
 
  •  our ability to drive an increase in use of our electronic trading platform by new and existing broker-dealer and institutional investor clients;
 
  •  changes in our pricing policies, including our recent introduction of fee arrangements with our broker-dealer clients relating to U.S. high-grade corporate bond trading that include a cap;
 
  •  the introduction of new features to our electronic trading platform;
 
  •  rate of expansion and effectiveness of our sales force;
 
  •  new product and service introductions by our competitors;
 
  •  fluctuations in overall market trading volume;
 
  •  technical difficulties or interruptions in our service;
 
  •  general economic conditions in our geographic markets;
 
  •  additional investment in our services or operations; and
 
  •  regulatory compliance costs.

      As a result, our operating results may fluctuate significantly on a quarterly basis, which could result in decreases in our stock price.

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We may not be able to introduce enhanced versions of our electronic trading platform, new services and/or service enhancements in a timely or acceptable manner, which could harm our competitive position.

      Our business environment is characterized by rapid technological change, changing and increasingly sophisticated client demands and evolving industry standards. Our future will depend on our ability to develop and introduce new features to, and new versions of, our electronic trading platform. The success of new features and versions depends on several factors, including the timely completion, introduction and market acceptance of the feature or version. In addition, the market for our electronic trading platform may be limited if prospective clients require customized features or functions that we are unable or unwilling to provide. If we are unable to anticipate and respond to the demand for new services, products and technologies and develop new features and enhanced versions of our electronic trading platform that achieve widespread levels of market acceptance on a timely and cost-effective basis, it could have a material adverse effect on our business, financial condition and results of operations.

As we enter new markets, we may not be able to successfully attract clients and adapt our technology and marketing strategy for use in those markets.

      Our strategy includes leveraging our electronic trading platform to enter new markets. We cannot assure you that we will be able to successfully adapt our proprietary software and technology for use in other markets. Even if we do adapt our software and technology, we cannot assure you that we will be able to attract clients and compete successfully in any such new markets. We cannot assure you that our marketing efforts or our pursuit of any of these opportunities will be successful. If these efforts are not successful, we may realize less than expected earnings, which in turn could result in a decrease in the market value of our common stock. Furthermore, these efforts may divert management attention or inefficiently utilize our resources.

Rapid technological changes may render our technology obsolete or decrease the attractiveness of our products and services to our broker-dealer and institutional investor clients.

      We must continue to enhance and improve our electronic trading platform. The electronic securities trading industry is characterized by increasingly complex systems and infrastructures and new business models. If new industry standards and practices emerge, our existing technology, systems and electronic trading platform may become obsolete or our existing business may be harmed. Our future success will depend on our ability to:

  •  enhance our existing products and services;
 
  •  develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our broker-dealer and institutional investor clients and prospective clients; and
 
  •  respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

      Developing our electronic trading platform and other technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our electronic trading platform, information databases and network infrastructure to broker-dealer or institutional investor client requirements or emerging industry standards. For example, our electronic trading platform functionality that allows searches and inquiries on bond pricing and availability is a critical part of our service, and it may become out-of-date or insufficient from our broker-dealer clients’ or institutional investor clients’ perspective and in relation to the inquiry functionality of our competitors’ systems. If we face material delays in introducing new services, products and enhancements, our broker-dealer and institutional investor clients may forego the use of our products and use those of our competitors.

      Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. We cannot assure you that we will be able to successfully implement new technologies or adapt our proprietary technology and transaction-processing systems to client requirements or emerging industry standards. We cannot assure you that we will be able to respond in a timely manner to changing market conditions or client requirements.

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We depend on third-party suppliers for key products and services.

      We rely on a number of third parties to supply elements of our trading, information and other systems, as well as computers and other equipment, and related support and maintenance. We cannot assure you that any of these providers will be able to continue to provide these services in an efficient, cost-effective manner, if at all, or that they will be able to adequately expand their services to meet our needs. If we are unable to make alternative arrangements for the supply of critical products or services in the event of a malfunction of a product or an interruption in or the cessation of service by an existing service provider, our business, financial condition and results of operations could be materially adversely affected.

      In particular, we depend on a third-party vendor for our reference database. Disruptions in the services provided by that third party to us, including as a result of their inability or unwillingness to continue to license us products that are critical to the success of our business, could have a material adverse effect on our business, financial condition and results of operations.

      We also rely, and expect in the future to continue to rely, on third parties for various computer and communications systems, such as telephone companies, online service providers, data processors, and software and hardware vendors. Other third parties provide, for instance, our data center, telecommunications access lines and significant computer systems and software licensing, support and maintenance services. Any interruption in these or other third-party services or a deterioration in their performance could impair the quality of our service. We cannot be certain of the financial viability of all of the third parties on which we rely.

      We license software from third parties, much of which is integral to our electronic trading platform and our business. We also hire contractors to assist in the development, quality assurance testing and maintenance of our electronic trading platform and other systems. Continued access to these licensors and contractors on favorable contract terms or access to alternative software and information technology contractors is important to our operations. Adverse changes in any of these relationships could have a material adverse effect on our business, financial condition and results of operations.

      We attempt to negotiate favorable pricing, service, confidentiality and intellectual property ownership or licensing and other terms in our contracts with our service providers. These contracts usually have multi-year terms. However, there is no guarantee that these contracts will not terminate and that we will be able to negotiate successor agreements or agreements with alternate service providers on competitive terms. Further, the existing agreements may bind us for a period of time to terms and technology that become obsolete as our industry and our competitors advance their own operations and contracts.

Our success depends on maintaining the integrity of our electronic trading platform, systems and infrastructure; our computer systems may suffer failures, capacity constraints and business interruptions that could increase our operating costs and cause us to lose clients.

      In order to be successful, we must provide reliable, real-time access to our electronic trading platform for our broker-dealer and institutional investor clients. If our electronic trading platform is hampered by slow delivery times, unreliable service or insufficient capacity, our broker-dealer and institutional investor clients may decide to stop using our platform, which would have a material adverse effect on our business, financial condition and results of operations.

      As our operations grow in both size and scope, we will need to improve and upgrade our electronic trading platform and infrastructure to accommodate potential increases in order message volume and trading volume, the trading practices of new and existing clients, regulatory changes and the development of new and enhanced trading platform features, functionalities and ancillary products and services. The expansion of our electronic trading platform and infrastructure has required, and will continue to require, substantial financial, operational and technical resources. These resources will typically need to be committed well in advance of any actual increase in trading volumes and order messages. We cannot assure you that our estimates of future trading volumes and order messages will be accurate or that our systems will always be able to accommodate actual trading volumes and order messages without failure or degradation of performance. Furthermore, we use new technologies to upgrade our established systems, and the development of these new technologies also entails technical, financial and business risks. We cannot assure you that we will successfully implement new technologies or adapt our existing electronic trading platform, technology and systems to the requirements of

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our broker-dealer and institutional investor clients or to emerging industry standards. The inability of our electronic trading platform to accommodate increasing trading volume and order messages would also constrain our ability to expand our business.

      We are in the process of transitioning from the current software on which our electronic trading platform is based to new internally-developed software. This change affects both our U.S. high-grade corporate bond platform and our European bond platform, which together accounted for over 80% of our aggregate revenues and almost 90% of our aggregate trading volume in 2003. We cannot assure you that there will not be delays in the implementation of our new software or that, when fully implemented, the new software will fully support the trading activity of our broker-dealer and institutional investor clients on our electronic trading platform. Any significant difficulties with the new software could have a negative impact on the market perception of our platform which, in turn, could have a material adverse effect on our trading volumes, business and results of operations.

      We cannot assure you that we will not experience systems failures. Our electronic trading platform, computer and communication systems and other operations are vulnerable to damage, interruption or failure as a result of, among other things:

  •  irregular or heavy use of our electronic trading platform during peak trading times or at times of unusual market volatility;
 
  •  power or telecommunications failures, hardware failures or software errors;
 
  •  human error;
 
  •  computer viruses, acts of vandalism or sabotage (and resulting potential lapses in security), both internal and external;
 
  •  natural disasters, fires, floods or other acts of God;
 
  •  acts of war or terrorism or other armed hostility; and
 
  •  loss of support services from third parties, including those to whom we outsource aspects of our computer infrastructure critical to our business.

      In the event that any of our systems, or those of our third-party providers, fail or operate slowly, it may cause any one or more of the following to occur:

  •  unanticipated disruptions in service to our clients;
 
  •  slower response times or delays in our clients’ trade execution;
 
  •  incomplete or inaccurate accounting, recording or processing of trades;
 
  •  financial losses and liabilities to clients;
 
  •  litigation or other claims against us, including formal complaints with industry regulatory organizations; and
 
  •  regulatory inquiries, proceedings or sanctions.

      Any system failure that causes an interruption in service or decreases the responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name and lead our broker-dealer and institutional investor clients to decrease or cease their use of our electronic trading platform.

      In these circumstances, our redundant systems or disaster recovery plans may not be adequate. Similarly, although many of our contracts with our service providers require them to have disaster recovery plans, we cannot be certain that these will be adequate or implemented properly. In addition, our business interruption insurance may not adequately compensate us for losses that may occur.

      We also cannot assure you that we have sufficient personnel to properly respond to system problems. We internally support and maintain many of our computer systems and networks, including those underlying our electronic trading platform. Our failure to monitor or maintain these systems and networks or, if necessary, to find a replacement for this technology in a timely and cost-effective manner would have a material adverse effect on our business, financial condition and results of operations.

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If our security measures are breached and unauthorized access is obtained to our electronic trading platform, broker-dealers and institutional investors may become hesitant to use, or reduce or stop their use of, our trading platform.

      Our electronic trading platform involves the storage and transmission of our clients’ proprietary information. The secure transmission of confidential information over public networks is a critical element of our operations. Security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to trading or other confidential information, our reputation could be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage computer systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual, threatened or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and could cause broker-dealers and clients to reduce or stop their use of our electronic trading platform. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient.

We may not be able to protect our intellectual property rights or technology effectively, which would allow competitors to duplicate or replicate our electronic trading platform. This could adversely affect our ability to compete.

      Intellectual property is critical to our success and ability to compete, and if we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology. We rely primarily on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements, third-party non-disclosure and other agreements and other contractual provisions and technical measures to protect our intellectual property rights. We attempt to negotiate beneficial intellectual property ownership provisions in our contracts and also require employees, consultants, advisors and collaborators to enter into confidentiality agreements in order to protect the confidentiality of our proprietary information. We have filed four patent applications covering aspects of our technology and/or business, but can make no assurances that any such patents will issue or, if issued, will protect our business and processes from competition. Additionally, laws and our actual contractual terms may not be sufficient to protect our technology from use or theft by third parties. For instance, a third party might reverse engineer or otherwise obtain and use our technology without our permission and without our knowledge, thereby infringing our rights and allowing competitors to duplicate or replicate our products. Furthermore, we cannot assure you that these protections will be adequate to prevent our competitors from independently developing technologies that are substantially equivalent or superior to our technology.

      We may have legal or contractual rights that we could assert against illegal use of our intellectual property rights, but lawsuits claiming infringement or misappropriation are complex and expensive, and the outcome would not be certain. In addition, the laws of some countries in which we now or in the future provide our services may not protect software and intellectual property rights to the same extent as the laws of the United States.

Defending against intellectual property infringement or other claims could be expensive and disruptive to our business. If we are found to infringe the proprietary rights of others, we could be required to redesign our products, pay royalties or enter into license agreements with third parties.

      In the technology industry, there is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As the number of participants in our market increases and the number of patents and other intellectual property registrations increase, the possibility of an intellectual property claim against us grows. Although we have never been the subject of a material intellectual property dispute, we cannot assure you that a third party will not assert in the future that our technology or the manner in which we operate our business violates its intellectual property rights. From time to time, in the ordinary course of our business, we may become subject to legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties may assert intellectual property claims against us, particularly as we expand the complexity and scope of our

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business, the number of electronic trading platforms increases and the functionality of these platforms further overlap. Any claims, whether with or without merit, could:

  •  be expensive and time consuming to defend;
 
  •  prevent us from operating our business, or portions of our business;
 
  •  cause us to cease developing, licensing or using all or any part of our electronic trading platform that incorporate the challenged intellectual property;
 
  •  require us to redesign our products or services, which may not be feasible;
 
  •  result in significant monetary liability;
 
  •  divert management’s attention and resources; and
 
  •  require us to pay royalties or enter into licensing agreements in order to obtain the right to use necessary technologies, which may not be possible on commercially reasonable terms.

      We cannot assure you that third parties will not assert infringement claims against us in the future with respect to our electronic trading platform or any of our other current or future products or services or that any such assertion will not require us to cease providing such services or products, try to redesign our products or services, enter into royalty arrangements, if available, or litigation that could be costly to us. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to enter into additional marketing and strategic alliances or if our current strategic alliances are not successful, we may not maintain the current level of trading or generate increased trading on our trading platform.

      We recently entered into a strategic alliance with BrokerTec USA, L.L.C. and BrokerTec Europe Ltd. pursuant to which our broker-dealer clients that are also participants in the BrokerTec electronic trading platform may access the BrokerTec platform for the purpose of executing orders to buy and sell United States Treasury securities at the request of our institutional investor clients. From time to time, we may enter into additional strategic alliances that will enable us to enter new markets, provide products or services that we do not currently offer or otherwise enhance the value of our platform to our clients.

      Entering into joint ventures and alliances entails risks, including:

  •  difficulties in developing and expanding the business of newly formed joint ventures;
 
  •  exercising influence over the activities of joint ventures in which we do not have a controlling interest; and
 
  •  potential conflicts with or among our joint venture or alliance partners.

      We cannot assure you that our strategic alliance with BrokerTec will be successful or that we will be able to enter into new strategic alliances on terms that are favorable to us, or at all. These arrangements may not generate the expected number of new clients or increased trading volume we are seeking. Unsuccessful joint ventures or alliances could have a material adverse effect on our business, financial condition and results of operations.

If we acquire or invest in other businesses, products or technologies, we may be unable to integrate them with our business, our financial performance may be impaired or we may not realize the anticipated financial and strategic goals for any such transactions.

      If appropriate opportunities present themselves, we may acquire or make investments in businesses, products or technologies that we believe are strategic. We may not be able to identify, negotiate or finance any future acquisition or investment successfully. Even if we do succeed in acquiring or investing in a business, product or technology, such acquisitions and investments involve a number of risks, including:

  •  we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that the economic conditions underlying our acquisition decision change;

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  •  we may have difficulty integrating the acquired technologies or products with our existing electronic trading platform, products and services;
 
  •  we may have difficulty integrating the operations and personnel of the acquired business, or retaining the key personnel of the acquired business;
 
  •  there may be client confusion if our services overlap with those of the acquired company;
 
  •  our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
 
  •  we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;
 
  •  an acquisition may result in litigation from terminated employees or third parties; and
 
  •  we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

      These factors could have a material adverse effect on our business, financial condition, results of operations and cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

      The consideration paid in connection with an investment or acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash, including proceeds of this offering, to consummate any acquisition. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs, such as of acquired in-process research and development costs, and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

 
We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.

      Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Richard M. McVey, our Chief Executive Officer and Chairman of our board of directors. The terms of Mr. McVey’s employment agreement with us do not require him to continue to work for us and allow him to terminate his employment at any time, subject to certain notice requirements and forfeiture of non-vested equity options. Any loss or interruption of Mr. McVey’s services or that of one or more of our other executive officers or key personnel could result in our inability to manage our operations effectively and/or pursue our business strategy.

 
Because competition for our employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our business.

      We strive to provide high-quality services that will allow us to establish and maintain long-term relationships with our broker-dealer and institutional investor clients. Our ability to provide these services and maintain these relationships, as well as our ability to execute our business plan generally, depends in large part upon our employees. We must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for engineers with extensive experience in designing and developing software and Internet-related services, qualified programmers, technicians and senior sales executives.

      The market for qualified personnel has grown more competitive in recent periods as electronic commerce has experienced growth. Domestic and international labor markets have tightened in concert with the continuing recovery in general economic conditions. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions,

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particularly in the Internet, high-technology and financial services industries, job candidates often consider the total compensation package offered, including the value of the stock options they are to receive in connection with their employment. Significant volatility in the price of our common stock after this offering may adversely affect our ability to attract or retain key employees. Furthermore, proposed changes to accounting principles generally accepted in the United States relating to the expensing of stock options may discourage us from granting the size or type of stock option awards that job candidates may require to join our company.

      We cannot assure you that we will be successful in our efforts to recruit and retain the required personnel. The failure to attract new personnel or to retain and motivate our current personnel may have a material adverse effect on our business, financial condition and results of operations.

 
Our business is subject to increasingly extensive government and other regulation and our relationships with our broker-dealer clients may subject us to increasing regulatory scrutiny.

      The financial industry is extensively regulated by many governmental agencies and self-regulatory organizations, including the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers, Inc. (NASD). As a matter of public policy, these regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the interests of investors in those markets. These regulatory bodies have broad powers to promulgate and interpret, investigate and sanction non-compliance with their laws, rules and regulations.

      Most aspects of our broker-dealer subsidiaries are highly regulated, including:

  •  the way we deal with our clients;
 
  •  our capital requirements;
 
  •  our financial and regulatory reporting practices;
 
  •  required record-keeping and record retention procedures;
 
  •  the licensing of our employees; and
 
  •  the conduct of our directors, officers, employees and affiliates.

      We cannot assure you that we and/or our directors, officers and employees will be able to fully comply with these laws, rules and regulations. If we fail to comply with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, suspensions of personnel or other sanctions, including revocation of our membership in the NASD and registration as a broker-dealer.

      Changes in laws or regulations or in governmental policies, including the rules relating to the maintenance of specific levels of net capital applicable to our broker-dealer subsidiaries, could have a material adverse effect on our business, financial condition and results of operations. 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 compliance costs or cause the development of affected markets to become impractical. In addition, as we expand our business into new markets, it is likely that we will be subject to additional laws, rules and regulations. We cannot predict the extent to which any future regulatory changes may adversely affect our business and operations.

      Our disclosed trading system has not been subjected to regulation as an alternative trading system under Regulation ATS. A determination by the Securities and Exchange Commission to treat our trading platform as an alternative trading system subject to Regulation ATS would subject us to additional reporting obligations and other limitations on the conduct of our business, many of which could be material.

      As an enterprise founded and historically controlled by broker-dealer competitors, we may be subject to ongoing regulatory scrutiny of our business to a degree that is not likely to be experienced by some of our competitors. In November 2000, we received a Civil Investigative Demand from the U.S. Department of Justice in connection with the Antitrust Division’s investigation of electronic bond and other consortia trading

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systems. After compliance with all information requests, we have received no further notice or inquiry from the U.S. Department of Justice. As the use of our electronic trading platform grows and represents a greater share of the trading volume of fixed-income securities, the risk that other regulatory investigations could commence in the future increases. Additionally, the involvement of individuals affiliated with certain of our broker-dealer clients on our board of directors and as stockholders may subject us to increased regulatory scrutiny of our business. At any time, the outcome of investigations and other regulatory scrutiny could lead to compulsory changes to our business model, conduct or practices, or our relationships with our broker-dealer clients, or additional governmental scrutiny or private lawsuits against us, any of which could materially harm our revenues, impair our ability to provide access to the broadest range of fixed-income securities and impact our ability to grow and compete effectively, particularly as we implement new initiatives designed to enhance our competitive position. The activities and consequences described above may result in significant distractions to our management and could have a material adverse effect on our business, financial condition and results of operations.
 
We expect to continue to expand our operations outside of the United States; however, we may face special economic and regulatory challenges that we may not be able to meet.

      We operate an electronic trading platform in Europe and we plan to further expand our operations throughout Europe and other regions. There are certain risks inherent in doing business in international markets, particularly in the securities trading industry, which is heavily regulated in many jurisdictions outside the United States. These risks include:

  •  less developed technological infrastructures and generally higher costs, which could result in lower client acceptance of our services or clients having difficulty accessing our trading platform;
 
  •  difficulty in obtaining the necessary regulatory approvals for planned expansion, if at all, and the possibility that any approvals that are obtained may impose restrictions on the operation of our business;
 
  •  the inability to manage and coordinate the various regulatory requirements of multiple jurisdictions that are constantly evolving and subject to unexpected change;
 
  •  difficulties in staffing and managing foreign operations;
 
  •  fluctuations in exchange rates;
 
  •  reduced or no protection for intellectual property rights;
 
  •  seasonal reductions in business activity; and
 
  •  potentially adverse tax consequences.

      Our inability to manage these risks effectively could adversely affect our business and limit our ability to expand our international operations, which could have a material adverse effect on our business, financial condition and results of operations.

 
We cannot predict our future capital needs or our ability to obtain additional financing if we need it.

      Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs primarily through equity financing from certain of our broker-dealer clients, our acquisition of Trading Edge, Inc. and, most recently, internally generated funds. Although we believe that our available cash resources, together with the proceeds of this offering, will be sufficient to meet our presently anticipated liquidity needs and capital expenditure requirements for at least the next 12 months, we may in the future need to raise additional funds to, among other things:

  •  support more rapid growth of our business;
 
  •  develop new or enhanced services and products;

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  •  respond to competitive pressures;
 
  •  acquire complementary companies or technologies;
 
  •  enter into strategic alliances;
 
  •  increase the regulatory net capital necessary to support our operations; or
 
  •  respond to unanticipated capital requirements.

      We may not be able to obtain additional financing, if needed, in amounts or on terms acceptable to us, if at all. Our existing investors, including our broker-dealer clients and their affiliates, have no obligation to make further investments in us, and we do not anticipate that they will do so. If sufficient funds are not available or are not available on terms acceptable to us, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. These limitations could have a material adverse effect on our business, financial condition and results of operations.

 
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

      As a public company, we will be subject to the reporting requirements of the Securities Exchange Act, the Sarbanes-Oxley Act of 2002 and Nasdaq rules promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our systems and resources. The Securities Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. 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 will be required. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

      These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors. Additionally, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Nasdaq rules also require that a majority of our board of directors and all of certain sub-committees of the board of directors consist of independent directors. We cannot assure you that we will be able to expand our board of directors to include a majority of independent directors in a timely fashion to comply with the requirements of these rules.

 
We are subject to the risks of litigation and securities laws liability.

      Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. Dissatisfied clients may make claims regarding quality of trade execution, improperly settled trades, mismanagement or even fraud against their service providers. We and our clients may become subject to these claims as the result of failures or malfunctions of our electronic trading platform and services provided by us. We could incur significant legal expenses defending claims, even those without merit. An adverse resolution of any lawsuits or claims against us could have a material adverse effect on our business, financial condition and results of operations.

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Risks Related to Our Industry

 
If the use of electronic trading platforms does not continue to increase, we will not be able to achieve our business objectives.

      The success of our business plan depends on our ability to create an electronic trading platform for a wide range of fixed-income products. Historically, fixed-income securities markets operated through telephone communications between institutional investors and broker-dealers. The utilization of our products and services depends on the acceptance, adoption and growth of electronic means of trading securities. We cannot assure you that the growth and acceptance of electronic means of trading securities will continue.

 
Weak economic conditions in the United States and in the other countries and geographic areas in which we offer our services may negatively impact our business.

      In recent years, the United States and other international markets in which we offer our services have experienced a significant economic downturn. In addition, the United States and other countries in which we offer our services have recently suffered acts of war or terrorism or other armed hostilities. These or similar acts have in the past increased or prolonged, and may in the future increase or prolong, negative economic conditions. An economic downturn may impact our ability to maintain profitability by negatively affecting demand for our services.

 
Economic, political and market factors beyond our control could reduce demand for our services and harm our business, and our profitability could suffer.

      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. These events could have a material adverse effect on our business, financial condition and results of operations. These factors include:

  •  economic and political conditions in the United States and elsewhere;
 
  •  adverse market conditions, including unforeseen market closures or other disruptions in trading;
 
  •  concerns over inflation and weakening consumer confidence levels;
 
  •  the availability of cash for investment by mutual funds and other wholesale and retail investors;
 
  •  the level and volatility of interest and foreign currency exchange rates; and
 
  •  legislative and regulatory changes.

      Any one or more of these factors may contribute to reduced activity and prices in the securities markets generally. Our revenues and profitability are likely to decline significantly during periods of stagnant economic conditions or low trading volume in the U.S. and global financial markets.

Risks Related to This Offering

 
There is no established trading market for our common stock, and the market price of our common stock may be highly volatile or may decline regardless of our operating performance. There can be no assurance that you will be able to sell your shares at or above the initial public offering price.

      There has not been a public market for our common stock prior to this offering. We cannot predict the extent to which a trading market will develop or how liquid that market might become. If you purchase shares of common stock in this offering, you will pay a price that was not established in the public trading markets. The initial public offering price will be determined by negotiations between the underwriters and us. You may not be able to resell your shares above the initial public offering price and may suffer a loss on your investment.

      In the past several years, technology stocks listed on the Nasdaq National Market have experienced unprecedented levels of high volatility and significant declines in values from their historic highs. The trading price of our common stock following this offering may fluctuate substantially. The price of our common stock

26


 

that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. The fluctuations could cause you to lose all or part of your investment in our shares of common stock. Factors that could cause fluctuation in the trading price of our common stock may include, but are not limited to:

  •  price and volume fluctuations in the overall stock market;
 
  •  significant volatility in the market price and trading volume of financial services companies generally or electronic trading companies in particular;
 
  •  actual or anticipated variations in our earnings or operating results;
 
  •  actual or anticipated changes in financial estimates by us or by any securities analysts who might cover our stock;
 
  •  securities analysts failing to publish research or reports about us or our business, or research downgrades of our common stock;
 
  •  market conditions or trends in our industry and the economy as a whole;
 
  •  announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
 
  •  announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
 
  •  capital commitments;
 
  •  additions or departures of key personnel; and
 
  •  sales of our common stock, including sales of large blocks of our common stock or sales by our directors and officers or our significant stockholders.

      In addition, if the market for technology stocks, financial services stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry or related industries even if these events do not directly affect us.

      In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.

The concentration of our capital stock ownership upon the completion of this offering may limit your ability to influence corporate matters.

      We anticipate that our executive officers, directors, current 5% or greater stockholders and affiliated entities will together beneficially own approximately           % of our voting common stock outstanding after this offering (  % if the underwriters’ over-allotment option is exercised in full). As a result, these stockholders, if acting together, will be able to control matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions such as mergers and acquisitions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

27


 

Future sales of shares by our existing stockholders could cause the market price of our common stock to drop significantly, regardless of our operating performance.

      After this offering, we will have outstanding 20,097,697 shares of common stock. Of these shares, the 9,000,000 shares sold in this offering and an additional 37,270 shares that are not subject to the restrictions described below will be freely tradeable except for any shares held by our “affiliates” as that term is used in Rule 144 of the Securities Act. The remaining 11,060,427 shares will become available for resale in the public market at various times in the future. This information is summarized in the chart below.

                 
Number of % of Total Shares
Shares Outstanding Date of Availability for Resale into the Public Market



   9,037,270       45 %   Immediately.
  11,060,427       55 %   180 days after the date of this prospectus due to agreements these stockholders have with the underwriters or with us. However, the underwriters can waive this restriction and allow these stockholders to sell their shares at any time without prior notice.

      In addition, as of August 5, 2004, 4,975,677 shares of our common stock are reserved for issuance pursuant to outstanding options, 5,007,969 shares of our common stock are reserved for issuance pursuant to outstanding warrants and 3,008,782 shares of our common stock are available for grant under our existing stock plans and under the stock plan to be adopted in connection with this offering. With respect to outstanding options, there are no restrictions on resale other than those imposed by lock-up agreements entered into with us and/or with the underwriters. Following the expiration or waiver of those lock-up agreements, all shares issuable upon the exercise of outstanding options will be freely tradeable, except for any shares held by our affiliates. With respect to outstanding warrants, there are no restrictions on resale other than (i) those imposed by lock-up agreements entered into with us and/or with the underwriters and (ii) the holding period imposed by Rule 144 if the warrant is exercised by the payment of cash. If, however, the warrant holder chooses to exercise its warrant pursuant to the cashless exercise feature contained in the warrant, the shares so issuable upon the exercise of outstanding warrants will be freely tradeable, except for any shares held by our affiliates.

      If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline. For additional information, see “Shares Eligible for Future Sale.”

You will incur immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering.

      Prior investors have paid substantially less per share than the price in this offering. The initial public offering price is substantially higher than the net tangible book value per share of the outstanding common stock immediately after this offering. Therefore, based on an assumed offering price of $17.00 per share, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $12.03 per share. If all outstanding options and warrants to purchase our common stock that are exercisable are exercised, you will suffer immediate and substantial dilution of approximately $13.23 per share. Any future equity issuances will result in even further dilution to holders of our common stock.

 
We will have broad discretion over the use of the proceeds to us from this offering, and we may not use these funds in a manner of which you would approve.

      We will have broad discretion to use the net proceeds to us from this offering, and you will be relying on the judgment of our management, subject to the approval of our board of directors in limited circumstances, regarding the application of these proceeds. Although we expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures, and for potential strategic alliances or select acquisitions, we have not allocated these net proceeds for specific purposes. Pending application of these uses, we intend to use the net proceeds to purchase short-term marketable securities.

28


 

Investors in this offering will need to rely on the judgment of our management with respect to the use of proceeds, with only limited information concerning management’s specific intentions. We cannot assure you that we will use these funds in a manner of which you would approve.
 
Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

      Delaware corporate law and our amended and restated certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

  •  authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt;
 
  •  provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
 
  •  establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

      In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. For more information, see “Description of Capital Stock — Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws.”

29


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this prospectus. You can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continues” or the negative of these terms or other similar expressions and comparable terminology. These expressions and terminology relate to, without limitation, statements about our market opportunities, our strategy, our competition, our projected revenues and expense levels and the adequacy of our available cash resources. This prospectus also contains forward-looking statements attributed to third parties relating to their estimates regarding our industry. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described above and elsewhere in this prospectus. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

30


 

USE OF PROCEEDS

      We estimate that we will receive net proceeds from the sale of the shares of our common stock in this offering of $44.0 million, assuming an initial public offering price of $17.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares being sold by the selling stockholders.

      We believe that the net proceeds from the issuance and sale of 3,000,000 shares in this offering, our available cash and anticipated future cash flow will provide us with adequate resources to fund currently anticipated liquidity needs and capital expenditure requirements for at least the next 12 months. Accordingly, we have determined not to issue additional shares to the underwriters pursuant to an over-allotment option. An over-allotment option is being provided by certain of the selling stockholders which, if exercised in full, would result in an additional $21.3 million in net proceeds to the selling stockholders, assuming an initial public offering price of $17.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the exercise by the underwriters, in whole or in part, of their over-allotment option.

      We presently intend to use a portion of the proceeds for general corporate purposes, including working capital and capital expenditures. We also believe opportunities may exist to expand our current business through strategic alliances and select acquisitions, and we may utilize a portion of the proceeds for such purposes, although we have no current agreements, commitments or discussions pending with respect to any material transactions of this type.

      Pending such uses, we intend to invest the net proceeds of this offering in short-term, marketable securities.

DIVIDEND POLICY

      We have not declared or paid any cash dividends on our capital stock since our inception. We intend to retain future earnings, if any, to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

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CAPITALIZATION

      The following table sets forth our cash, cash equivalents and short-term investments, and capitalization as of June 30, 2004:

  •  on an actual basis; and
 
  •  on a pro forma as adjusted basis to give effect to the conversion of all outstanding shares of our convertible preferred stock into 14,415,628 shares of common stock and 4,335,176 shares of non-voting common stock upon the closing of this offering, as well as our receipt of the estimated net proceeds from the sale by us in this offering of 3,000,000 shares of common stock at an assumed initial public offering price of $17.00 per share, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

      The number of shares of common stock outstanding excludes:

  •  5,019,180 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.02 per share;
 
  •  5,000,002 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $0.003 per share;
 
  •  7,967 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $130.65 per share;
 
  •  565,995 shares of common stock available for issuance under our existing stock option plans; and
 
  •  an additional 2,400,000 shares of common stock reserved for issuance under the stock option plan adopted in connection with this offering.

      This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes to those statements included elsewhere in this prospectus.

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As of June 30, 2004

Pro Forma
Actual as Adjusted


(in thousands)
(unaudited)
Cash, cash equivalents and short-term investments
  $ 36,824     $ 84,254  
     
     
 
Redeemable Convertible Preferred Stock:
               
 
Series A redeemable convertible preferred stock, $0.01 par value; actual — 1,822,785 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
  $ 24,000     $  
 
Series C redeemable convertible preferred stock, $0.01 par value; actual — 607,595 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    10,500        
 
Series D redeemable convertible preferred stock, $0.01 par value; actual — 200,000 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    5,000        
 
Series E redeemable convertible preferred stock, $0.01 par value; actual — 1,215,190 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    25,500        
 
Series F redeemable convertible preferred stock, $0.01 par value; actual — 1,126,219 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    45,049        
 
Series G redeemable convertible preferred stock, $0.01 par value; actual — 100,000 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    3,500        
 
Series H redeemable convertible preferred stock, $0.01 par value; actual — 65,000 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    2,925        
 
Series I redeemable convertible preferred stock, $0.01 par value; actual — 300,000 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    8,400        
 
Accrued dividends on redeemable convertible preferred stock
    40,486        
     
     
 
   
Total redeemable convertible preferred stock
    165,360        
Stockholders’ equity (deficit):
               
 
Series B convertible preferred stock, $0.01 par value; actual — 175,443 shares authorized, issued and outstanding; pro forma as adjusted — no shares authorized, issued or outstanding
    2        
 
Preferred Stock, $0.001 par value; actual — no shares authorized, issued or outstanding; pro forma as adjusted — 5,000,000 shares authorized and no shares issued or outstanding
           
 
Voting common stock, $0.003 par value; actual — 120,000,000 shares authorized and 2,546,333 shares issued and outstanding; pro forma as adjusted — 110,000,000 shares authorized and 20,097,697 shares issued and outstanding
    8       60  
 
Non-voting common stock, $0.003 par value; actual — 405,060 shares authorized and 135,020 shares issued and outstanding; pro forma as adjusted — 10,000,000 shares authorized and 4,335,176 shares issued and outstanding
          13  
 
Warrants; actual — 5,007,969 shares authorized, issued and outstanding; pro forma as adjusted — 5,007,969 shares authorized, issued and outstanding
    18,374       18,374  
 
Additional paid-in-capital
    4,310       213,586  
 
Unearned compensation
           
 
Receivable for common stock subscribed
    (1,042 )     (1,042 )
 
Accumulated deficit
    (109,352 )     (109,352 )
 
Accumulated other comprehensive income
    (102 )     (102 )
     
     
 
   
Total stockholders’ equity (deficit)
    (87,802 )     121,537  
     
     
 
   
Total capitalization
  $ 77,557     $ 121,537  
     
     
 

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DILUTION

      Dilution results from the addition to the number of shares outstanding through the issuance of additional shares or the conversion of convertible securities. This ultimately reduces the value of holdings of existing stockholders. If you invest in our common stock in this offering, your ownership interest in MarketAxess will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share after this offering. The minimum dollar amount of dilution per share assuming none of the options and warrants are exercised is $12.03. The maximum dollar amount of dilution per share assuming all currently outstanding options and warrants that are exercisable are exercised is $13.23. Our net tangible book deficit as of June 30, 2004 was approximately $(88.0) million or $(26.69) per share of common stock. Net tangible book deficit per share represents our tangible assets less total liabilities and redeemable convertible preferred stock, divided by the number of shares of common stock outstanding as of June 30, 2004.

Dilution Giving Effect to the Conversion of Redeemable Preferred Stock Only

      Our pro forma net tangible book value as of June 30, 2004 was $77.4 million or $3.61 per share of common stock. Pro forma net tangible book value gives effect to the conversion of all of our outstanding redeemable convertible preferred stock as of June 30, 2004 into 18,122,661 shares of common stock and non-voting common stock, which will become effective at the closing of this offering.

      After giving effect to the sale of 3,000,000 shares of common stock in this offering at an assumed initial public offering price of $17.00 per share, and after deducting underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of June 30, 2004 would have been approximately $121.3 million, or $4.97 per share. This represents an immediate increase in pro forma net tangible book value of $1.36 per share to existing stockholders and an immediate dilution in net tangible book value of $12.03 per share to new investors. The following table illustrates this calculation on a per share basis as of June 30, 2004:

                   
Assumed initial public offering price per share             $17.00  
  Net tangible book deficit per share as of June 30, 2004     $(26.69 )        
  Increase in net tangible book value per share attributable to the conversion of all outstanding redeemable convertible preferred stock as of June 30, 2004     30.31          
  Increase in pro forma net tangible book value per share attributable                
  to the sale of common stock to new investors in this offering     1.36          
     
         
Pro forma as adjusted net tangible book value per share after the offering
            4.97  
             
 
Dilution in net tangible book value per share to new investors             $12.03  
             
 

      The foregoing tables and calculations assume no exercise of any stock options or warrants outstanding as of June 30, 2004. Specifically, these tables and calculations exclude:

  •  5,019,180 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.02 per share;
 
  •  5,000,002 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $0.003 per share;
 
  •  7,967 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $130.65 per share;
 
  •  565,995 shares of common stock available for issuance under our existing stock option plans; and
 
  •  an additional 2,400,000 shares of common stock reserved for issuance under our stock option plan adopted in connection with this offering.

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Dilution Giving Effect to the Conversion of All Redeemable Preferred Stock and All Options and Warrants that are Exercisable

      Additionally, our pro forma net tangible book value as of June 30, 2004 after giving effect to the conversion of all our outstanding redeemable convertible preferred stock as of June 30, 2004 into 18,122,661 shares of common stock and non-voting common stock and the exercise of 5,007,969 warrants and 2,580,895 options that were exercisable as of June 30, 2004 was $84.9 million or $2.72 per share of common stock.

      After giving effect to the sale of the 3,000,000 shares of common stock we are offering at an assumed initial public offering price of $17.00 per share, and after deducting underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of June 30, 2004 would have been approximately $128.9 million, or $3.77 per share. This represents an immediate increase in pro forma net tangible book value of $1.05 per share to existing stockholders and an immediate dilution in net tangible book value of $13.23 per share to new investors. The following table illustrates this calculation on a per share basis as of June 30, 2004:

                   
Assumed initial public offering price per share             $17.00  
 
  Net tangible book deficit per share as of June 30, 2004     $(26.69 )        
 
  Increase in net tangible book value per share attributable to the conversion of all outstanding redeemable convertible preferred stock, and the exercise of all warrants and options as of June 30, 2004     29.41          
 
  Increase in pro forma net tangible book value per share attributable to the sale of common stock to new investors in this offering     1.05          
     
         
Pro forma as adjusted net tangible book value per share after the offering             3.77  
             
 
Dilution in net tangible book value per share to new investors             $13.23  
             
 

      The foregoing tables and calculations exclude:

  •  2,438,285 shares of common stock issuable upon exercise of outstanding options that are not yet vested;
 
  •  565,995 shares of common stock available for issuance under our existing stock option plans;
 
  •  an additional 2,400,000 shares of common stock reserved for issuance under our stock option plan adopted in connection with this offering; and
 
  •  500 shares of common stock issuable upon exercise of outstanding options granted after June 30, 2004.

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Total Consideration Paid or to be Paid and the Average Price Per Share Paid or to be Paid by Existing Holders and by New Investors

      The following table sets forth, on a pro forma basis as of June 30, 2004, after giving effect to the conversion of all outstanding shares of preferred stock into common stock and non-voting common stock upon the closing of this offering, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors who purchase shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses, assuming an initial public offering price of $17.00 per share:

                                           
Shares Purchased Total Consideration


Actual Price Paid
Number Percent Amount Percent Per Share





Existing stockholders
    21,432,156       70.4 %   $ 129,065,521       45.8 %     $0.003-$12.00  
New investors
    9,000,000       29.6       153,000,000       54.2       $17.00  
     
     
     
     
         
 
Total
    30,432,156       100.0 %   $ 282,065,521       100.0 %        
     
     
     
     
         

      The foregoing tables and calculations assume no exercise of any stock options or warrants outstanding as of June 30, 2004. Specifically, these tables and calculations exclude:

  •  5,019,180 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $5.02 per share;
 
  •  5,000,002 shares of common stock issuable upon exercise of an outstanding warrant at an exercise price of $0.003 per share;
 
  •  7,967 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $130.65 per share;
 
  •  565,995 shares of common stock available for issuance under our existing stock option plans; and
 
  •  an additional 2,400,000 shares of common stock reserved for issuance under our stock option plan adopted in connection with this offering.

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

      The selected statement of operations data for each of the years in the three-year period ended December 31, 2003 and the selected balance sheet data as of December 31, 2002 and 2003 have been derived from our audited financial statements included elsewhere in this prospectus. The selected statement of operations data for the period from April 11, 2000 (date of inception) through December 31, 2000, and the balance sheet data as of December 31, 2000 and 2001, have been derived from our audited financial statements not included in this prospectus. The selected statement of operations data for the six months ended June 30, 2003 and 2004, and the selected balance sheet data as of June 30, 2004 are derived from our unaudited financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the data. Historical results are not indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year. You should read these selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and the notes to those statements included in this prospectus.

                                                       
April 11, 2000
(date of
inception) Six Months Ended
through Year Ended December 31, June 30,
December 31,

2000 2001 2002 2003 2003 2004






(in thousands, except share and per share data) (unaudited)
Statement of Operations Data:
                                               
Revenues
                                               
 
Commissions
                                               
   
U.S. high-grade
  $ 47     $ 3,392     $ 13,390     $ 40,310     $ 16,761     $ 22,916  
   
European high-grade
          47       975       7,126       2,474       8,143  
   
Other(1)
          833       1,190       5,364       2,165       3,482  
     
     
     
     
     
     
 
     
Total commissions
    47       4,273       15,555       52,800       21,400       34,541  
 
Information and user access fees
          13       287       1,144       391       1,021  
 
License fees
                924       4,145       2,516       1,148  
 
Interest income
    1,666       2,132       742       371       177       270  
 
Other(2)
            181       1,193                   426  
     
     
     
     
     
     
 
     
Total revenues
    1,713       6,598       18,702       58,460       24,484       37,406  
     
     
     
     
     
     
 
Expenses
                                               
 
Employee compensation and benefits
    5,862       23,534       23,097       25,317       12,243       15,611  
 
Depreciation and amortization
    1,446       5,127       6,658       4,688       2,591       1,827  
 
Technology and communications
    2,304       5,240       3,943       4,755       2,303       3,139  
 
Professional and consulting fees
    5,005       12,903       4,699       4,180       2,282       1,736  
 
Warrant-related expense(3)
    15       5,874       6,330       4,024       1,592       2,131  
 
Marketing and advertising
    235       1,780       2,588       2,292       1,115       1,143  
 
Moneyline revenue share
          408       708       1,806       820       820  
 
Restructuring charges
          8,244       (674 )                  
 
General and administrative
    3,681       6,153       3,941       4,077       1,639       2,341  
     
     
     
     
     
     
 
     
Total expenses
    18,548       69,262       51,290       51,140       24,585       28,748  
     
     
     
     
     
     
 
Income (loss) before taxes
    (16,835 )     (62,663 )     (32,589 )     7,320       (101 )     8,658  
Provision (benefit) for income tax
                      190             (27,432 )
     
     
     
     
     
     
 
Net income (loss)
  $ (16,835 )   $ (62,663 )   $ (32,589 )   $ 7,131     $ (101 )   $ 36,090  
     
     
     
     
     
     
 
Net income (loss) per common share
                                               
   
Basic(4)
  $ (7.53 )   $ (23.29 )   $ (13.33 )   $ (1.31 )   $ (1.75 )   $ 9.22  
   
Diluted(4)
    N/A       N/A       N/A       N/A       N/A     $ 1.15  
Weighted average number of shares of common stock outstanding
                                               
   
Basic
    2,573,979       3,097,994       3,290,326       3,295,423       3,295,423       3,296,685  
   
Diluted
    N/A       N/A       N/A       N/A       N/A       31,344,342  
Pro forma net income per common share(5):
                                               
   
Basic
                          $ 0.24             $ 1.23  
   
Diluted
                          $ 0.21             $ 1.05  
Pro forma weighted average number of shares of common stock outstanding(5):
                                               
   
Basic
                            29,196,882               29,389,121  
   
Diluted
                            33,316,785               34,344,342  

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As of December 31, As of

June 30,
2000 2001 2002 2003 2004





(in thousands)
Balance Sheet Data:
                                       
 
Cash, cash equivalents and
short-term investments
  $ 49,927     $ 37,200     $ 23,806     $ 36,181     $ 36,824  
 
Working capital
    43,944       30,588       20,140       31,575       38,067  
 
Total assets
    55,532       56,042       39,437       57,183       91,842  
 
Total redeemable convertible preferred stock
    67,555       128,527       148,209       159,664       165,360  
                                                     
April 11, 2000
(date of
inception) Six Months
through Year Ended December 31, Ended June 30,
December 31,

2000 2001 2002 2003 2003 2004






(in billions)
Trading Volume Data:
                                               
 
U.S. high-grade
  $ 0.2     $ 10.0     $ 39.4     $ 140.3     $ 52.4     $ 89.2  
 
European high-grade
          0.2       4.2       31.8       10.5       41.2  
 
Other
          1.5       4.8       20.1       8.0       13.7  
     
     
     
     
     
     
 
   
Total
  $ 0.2     $ 11.7     $ 48.4     $ 192.2     $ 70.9     $ 144.1  


(1)  Other commissions consist primarily of commissions from the trading of emerging markets and new issues bonds. Other trading volume refers to the volume of bonds traded of the aforementioned type.
 
(2)  Other revenues consist of interest income, insurance proceeds and other.
 
(3)  Warrant-related expense is the expense associated with the allocation of shares of our common stock issuable pursuant to a warrant issued to six of our broker-dealer clients at the time they made an equity investment in us. The total number of shares underlying the warrant is 5,000,002. While the warrant is expensed each quarter at fair market value, this is a non-cash expense that fluctuates with the underlying price of our common stock. The final share allocations under the warrant program occurred on March 1, 2004. Accordingly, we will no longer record any expenses related to this warrant.
 
(4)  Includes the effect of dividends accrued on our redeemable convertible preferred stock.
 
(5)  The pro forma basic net income per share amounts: add back the dividends on our redeemable convertible preferred stock of $11,454,621 and $5,696,014; include weighted-average common shares of 3,295,423 and 3,296,685; give effect to conversion of our redeemable convertible preferred stock into 18,122,661 and 18,122,661 shares of our common stock; give effect to the exercise of warrants on a weighted-average basis as converted to 4,778,800 and 4,969,775 shares of our common stock; and give effect to the sale of 3,000,000 shares of our common stock in this offering for the year ended December 31, 2003 and for the six months ended June 30, 2004, respectively.
 
     The pro forma diluted net income per share amounts: add back the dividends on our redeemable convertible preferred stock of $11,454,621 and $5,696,014; include the weighted-average common shares of 3,295,423 and 3,296,685; give effect to conversion of our convertible preferred stock into 18,122,661 and 18,122,661 shares of our common stock; give effect to the exercise of warrants on a weighted-average basis as converted to 4,778,800 and 4,969,775 shares of our common stock; give effect to the exercise of options outstanding totaling 4,119,903 and 4,955,221; and give effect to the sale of 3,000,000 shares of our common stock in this offering for the year ended December 31, 2003 and for the six months ended June 30, 2004, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      You should read the following discussion and analysis of our financial condition and results of operations in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Executive Summary

      MarketAxess operates one of the leading platforms for the electronic trading of corporate bonds and certain other types of fixed-income securities. Through our platform, our more than 500 active institutional investor client firms can access the aggregate liquidity provided by our 19 broker-dealer clients. We also provide data and analytical tools that help our clients make trading decisions and we facilitate the trading process by electronically communicating order information between trading counterparties. Since our inception, the majority of our revenues has been generated from the trading of U.S. high-grade corporate bonds, although an increasing percentage of our revenues has recently been derived from the trading of European high-grade corporate bonds.

      Our multi-dealer trading platform allows our institutional investor clients to simultaneously request competing, executable bids or offers from our broker-dealer clients, and execute trades with the broker-dealer of their choice from among those that choose to respond. We offer our broker-dealer clients a solution that enables them to efficiently reach our institutional investor clients for the distribution and trading of bonds. In addition to U.S. high-grade corporate bonds and European high-grade corporate bonds, we also offer our clients the ability to trade emerging markets bonds, which we define as sovereign and corporate bonds issued by entities domiciled in an emerging markets country, including both high-grade and non-investment grade debt. In addition, we recently announced a strategic alliance to provide our institutional investor clients with the ability to trade U.S. Treasury securities electronically through our broker-dealer clients in the inter-dealer market.

      Our revenues consist of commissions from trades executed on our platform, information and user access fees, license fees and other income. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, warrant-related expense, marketing and advertising and other general and administrative expenses.

      Based on our limited operating history, we will encounter risks and difficulties frequently experienced by companies in rapidly evolving industries, such as the electronic financial services industry. These risks and difficulties include, but are not limited to, our ability to:

  •  attract and retain broker-dealer and institutional investor clients;
 
  •  deliver, expand and enhance reliable and cost-effective product and service offerings;
 
  •  respond effectively to competition;
 
  •  diversify our sources of revenues;
 
  •  maintain adequate control of our expenses; and
 
  •  attract and retain personnel.

      We operate in a highly competitive business environment. In particular, we compete with bond trading business conducted over the telephone between broker-dealers and their institutional investor clients. Institutional investors have historically purchased fixed-income securities by contacting bond sales professionals at one or more broker-dealers by telephone or e-mail and inquiring about the price and availability of individual bonds. This remains the manner in which the majority of fixed-income securities are traded. In addition, there are numerous other electronic trading platforms currently in existence. These include

39


 

TradeWeb, a multi-dealer to institutional investor trading platform, and Bloomberg, which provides electronic trading functionality.

      We believe that we compete favorably on the basis of several factors, including the liquidity provided on the platform, the magnitude and frequency of price improvement enabled by our platform, the quality and speed of execution, total transaction costs, technological capabilities including the ease of use of our trading platform and the range of our products and services. We also believe that we are well positioned to respond to future challenges due to the experience and continuity of our senior management team.

      We seek to grow and diversify our revenues by capitalizing on our status as the operator of a leading platform for the electronic trading of corporate bonds and certain other types of fixed-income securities. The key elements of our strategy are:

  •  to innovate and efficiently add new functionality and product offerings to the MarketAxess platform which we believe will help us 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;
 
  •  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. As an example, we recently entered into a strategic alliance with BrokerTec in order to provide our institutional investor clients with access to the inter-dealer market for U.S. Treasury securities through our broker-dealer clients.

      For the year ended December 31, 2003 and for the six months ended June 30, 2004, seven of our top ten customers by revenues were also our stockholders. The loss of one or more of these customers could have a material adverse effect on our business and results of operations. In addition, several of our stockholders intend to sell a portion of their ownership interest in us in this offering. It is possible that the level of business activity generated by these stockholders could decline following a reduction in their ownership interest in us in this offering.

Critical Factors Affecting Our Industry and Our Company

  Economic, Political and Market Factors

      The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in declining trading volume. These factors could have a material adverse effect on our business, financial condition and results of operations. These factors include:

  •  the current interest rate environment and investors’ forecasts of future interest rates;
 
  •  economic and political conditions in the United States, Europe and elsewhere;
 
  •  the availability of cash for investment by mutual funds and other institutional and retail investors;
 
  •  the volume of new fixed-income securities being brought to the market;
 
  •  investors’ assessment of the level of risk attributable to the issuers of corporate bonds;
 
  •  adverse market conditions, including unforeseen market closures or other disruptions in trading;

40


 

  •  concerns over inflation and weakening consumer confidence levels;
 
  •  the level and volatility of foreign currency exchange rates; and
 
  •  legislative and regulatory changes.

      Any one or more of these factors may contribute to reduced trading activity in the fixed-income securities markets generally. Our revenues and profitability are likely to decline during periods of stagnant economic conditions or low trading volume in the U.S. and global fixed-income securities markets.

  Certain Known Risks, Uncertainties, Challenges and Opportunities That May Affect Our Company

  Competition

      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. We will continue to compete with bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically. In addition, our current and prospective competitors are numerous and include:

  •  other multi-dealer trading companies;
 
  •  market data and information vendors;
 
  •  securities and futures exchanges;
 
  •  inter-dealer brokerage firms;
 
  •  electronic communications networks;
 
  •  technology, software, information and media or other companies that have existing commercial relationships with broker-dealers or institutional investors; and
 
  •  other electronic marketplaces that are not currently in the securities business.

      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 will compete with us.

      In general, we compete on the basis of a number of key factors, including:

  •  the liquidity provided on our platform;
 
  •  the magnitude and frequency of price improvement;
 
  •  the quality and speed of execution;
 
  •  total transaction costs;
 
  •  technology capabilities, including the ease of using our electronic trading platform; and
 
  •  the range of products and services offered.

      We believe we compete favorably with respect to these factors. Our trading volume and client acceptance have grown significantly over the past two years and 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.

      Many of our current and potential competitors are more established and substantially larger than we are, and have a substantially greater market presence, as well as greater financial, engineering, technical, marketing

41


 

and other resources. These competitors may aggressively reduce their pricing to enter into market segments in which we have a leadership position today, potentially subsidizing any losses with profits from trading in other securities, In addition, many of our competitors offer a wide range of services, have broader name recognition and have larger customer bases than we do. Some of them may be able to respond more quickly to new or evolving opportunities, technologies and customer requirements than we can and may be able to undertake more extensive promotional activities.

      Any combination of our competitors or our current broker-dealer clients may enter into joint ventures or consortia to provide services similar to those provided by us. Others may acquire the capabilities necessary to compete with us through acquisitions. Significant consolidation has occurred in our industry and these firms, as well as others that may undertake such consolidation in the future, are potential competitors of ours.

  Regulatory

      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.

      The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act, the Sarbanes-Oxley Act of 2002 and Nasdaq rules promulgated in response to the Sarbanes-Oxley Act. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue 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 will be required.

  Rapid Technological Changes

      We must continue to enhance and improve our electronic trading platform. The electronic securities trading industry is characterized by increasingly complex systems and infrastructures and new business models. If new industry standards and practices emerge, our existing technology, systems and electronic trading platform may become obsolete or our existing business may be harmed. Our future success will depend on our ability to:

  •  enhance our existing products and services;
 
  •  develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our broker-dealer and institutional investor clients and prospective clients; and
 
  •  respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

  Opportunities

      We believe that our business offers many opportunities for growth, including:

  •  enhancing the liquidity of securities traded on our platform and broadening our client base in our existing markets;
 
  •  leveraging our existing technology and client relationships to expand into new segments of the fixed-income securities markets;
 
  •  continuing to strengthen and expand our trade-related service offerings;
 
  •  expanding our data and information service offerings; and
 
  •  pursuing strategic alliances and select acquisitions.

      We continue to focus on these and other areas for both our short- and long-term direction.

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History

      MarketAxess was formed in April 2000, and pilot trading on our fully disclosed multi-dealer platform began in October 2000. We launched trading on our electronic platform in January 2001 with eight broker-dealer clients. Since that time, our broker-dealer clients have grown to include 19 of the leading securities firms. Our broker-dealer clients currently are: ABN Amro, Banc of America Securities, Banc One, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Société Générale, Spear Leeds & Kellogg, UBS and Wachovia. We have more than 500 active institutional investor clients in the U.S. and Europe. These include investment advisers, mutual funds, insurance companies, public and private pension funds, bank portfolios and hedge funds.

      In March 2001, we acquired Trading Edge, Inc. (Trading Edge), the operator of an anonymous trading platform for U.S. corporate bonds, convertible bonds, municipal bonds, and sovereign and corporate bonds issued by entities domiciled in emerging markets. In an anonymous platform, the identities of buyers and sellers of securities are not disclosed to each other. Rather, the broker-dealer stands between buyers and sellers, acting as riskless principal to both sides of each transaction. Two clearing brokers cleared all trades executed on the Trading Edge platform. The MarketAxess platform differs from the Trading Edge platform in that trading on the MarketAxess platform is conducted on a fully-disclosed basis, where buyers and sellers are aware of the other’s identity. Trades executed on the MarketAxess platform are settled directly between the buyer and the seller, with no credit risk exposure to MarketAxess.

      In May 2001, we decided to halt development efforts for the convertible bond trading platform, while continuing to operate that platform with its existing functionality. In October 2001, we decided to terminate the municipal bond trading platform. The decisions with respect to both the convertible bond and municipal bond trading platforms were not contemplated at the time of the Trading Edge acquisition and resulted from lower than anticipated trading volumes on these platforms. We currently maintain an anonymous trading platform for U.S. corporate bonds, convertible bonds, and sovereign and corporate bonds issued by entities domiciled in an emerging markets country, although it is dormant.

      In August 2001, one of our U.K. subsidiaries, MarketAxess Europe Limited (MarketAxess Europe), began operations with secondary trading in U.S. dollar-denominated and Euro-denominated corporate bonds.

      In February 2002, we reorganized into MarketAxess Holdings Inc., a holding company that operates primarily through two operating subsidiaries, MarketAxess Corporation and MarketAxess Europe. These subsidiaries are registered as broker-dealers with applicable market regulators in the U.S. and the U.K., respectively.

      We launched our information service, Corporate BondTickerTM, in July 2002. Corporate BondTicker combines National Association of Securities Dealers, Inc. (NASD) Trade Reporting and Compliance Engine (TRACE) data with MarketAxess data and analytical tools to provide trading professionals, research firms, rating and news agencies, and other market participants with a comprehensive set of corporate bond information.

      We have been funded by nine of our 19 broker-dealer clients through purchases of equity securities, primarily convertible preferred stock, for a total purchase price of $79.8 million. In addition, we acquired cash and investments at fair value totaling $36.4 million in connection with the acquisition of Trading Edge. As of June 30, 2004, we had cash, cash equivalents and short-term investments totaling $36.8 million. We have no outstanding debt.

Trends in Our Business

      The majority of our revenues (92.3% for the six months ended June 30, 2004) is derived from commissions for transactions in corporate bonds executed on our platform. These commissions are paid by our 19 broker-dealer clients, and are generally calculated as a percentage of notional dollar volume of bonds traded

43


 

on our platform and vary based on the type and the maturity of the bond traded. The standard fee schedule for U.S. high-grade corporate bonds was revised in August 2003, as more fully described below.

      Most transactions executed on our platform are originated by our active institutional investor clients, consisting of more than 500 institutions as of June 30, 2004. The volume of transactions executed across our platform is largely determined by the number of transaction inquiries originated by our institutional investor clients and the competitiveness of the prices they receive from our broker-dealer clients in response to these inquiries.

      The notional value of bonds traded over our platform has grown rapidly since the commercial launch of the platform in January 2001. The total notional value traded increased from $11.7 billion for the year ended December 31, 2001, to $48.4 billion for the year ended December 31, 2002, to $192.2 billion for the year ended December 31, 2003. The notional value traded increased from $70.9 billion for the six months ended June 30, 2003 to $144.1 billion for the six months ended June 30, 2004. This has resulted in revenues that have grown from $6.6 million for the year ended December 31, 2001, to $18.7 million for the year ended December 31, 2002, to $58.5 million for the year ended December 31, 2003. Revenues have increased from $24.5 million for the six months ended June 30, 2003 to $37.4 million for the six months ended June 30, 2004.

      Because a significant percentage of our revenues is tied directly to the volume of securities traded on our platform, it is likely that a general decline in trading volumes would reduce our revenues and have a significant negative impact on our future profitability.

  Five Key Variables Affecting Commissions

      We believe that there are five key variables that impact the notional value of bonds traded on our platform and the amount of commissions earned by us:

  •  the number of institutional investor clients that participate on the platform and their willingness to originate transactions through the platform;
 
  •  the number of broker-dealer clients on the platform and the competitiveness of prices 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.

      Growth in the notional value of trades executed over our platform has been driven by an increase in the base of institutional investor clients. Our active institutional investor client base has increased from 126 as of December 31, 2001 to 301 as of December 31, 2002 and 440 as of December 31, 2003. The number of active institutional investor clients increased from 389 as of June 30, 2003 to 502 as of June 30, 2004. However, as the number of institutional investor clients has increased, our volumes have been and will in the future be increasingly driven not only by new clients but also by existing clients executing a larger portion of their trading activity through our platform. We believe that our ability to continue to deliver enhanced functionality and to provide reliable, real-time access to our platform will be important factors in increasing usage of the platform by existing clients. Historical growth in the number of our institutional investor clients is not necessarily indicative of future growth, although with respect to the U.S. high-grade market, it is likely that the majority of our future growth will be derived from additional trading by existing institutional investor clients rather than from the addition of new institutional investor clients.

      Our broker-dealer client base has also increased from 11 as of December 31, 2001 to 13 as of December 31, 2002 and 18 as of December 31, 2003. The number of broker-dealer clients increased from 16 as of June 30, 2003 to 19 as of June 30, 2004. We believe that these broker-dealer clients represent the principal source of secondary market liquidity in U.S. high-grade corporate bonds, European high-grade corporate bonds, and sovereign and corporate bonds issued by entities domiciled in an emerging markets country. Historical growth in the number of our broker-dealer clients is not necessarily indicative of future

44


 

growth, although it is likely that the majority of our future growth will be derived from additional trading by existing broker-dealer clients rather than from the addition of new broker-dealer clients.

      We commenced commercial operations in January 2001 with the launch of our U.S. high-grade corporate bond platform. We expanded the markets we serve to sovereign and corporate bonds issued by entities domiciled in an emerging markets country in March 2001 and to European high-grade corporate bonds in September 2001. In the future, we expect to leverage our existing technology and client relationships to expand into new segments of the fixed income securities market.

      As the notional value of bonds traded over our platform has grown, we have also been more dependent on the overall level of activity in the markets in which we operate. We believe that trading activity in the markets in which we operate is growing and will continue to grow. For example, the average daily trading volume of U.S. corporate bonds grew from $18.9 billion for the year ended December 31, 2002 to $20.7 billion for the year ended December 31, 2003. However, we do expect that there will be fluctuations in trading volumes between quarters as a result of general economic conditions as well as factors specific to the fixed-income markets in which we operate. These quarterly fluctuations may create some variability in our revenues. The level of commissions we charge is also dependent on the fee plan selected by a particular broker-dealer.

      Our average commission on trades executed over our platform has declined from $365 per million for the year ended December 31, 2001 to $321 per million for the year ended December 31, 2002 and $275 per million for the year ended December 31, 2003. Average commissions were $302 per million for the six months ended June 30, 2003 and $240 per million for the six months ended June 30, 2004. These reductions are a result of increasing volumes in products with lower standard transaction fees and the addition of new transaction fee plans for U.S. high-grade corporate bonds in the third quarter of 2003. Under the fee plans currently in place for secondary U.S. high-grade corporate bond trading and European high-grade corporate bond trading, the average fees per million will decline as trading volumes increase. We also anticipate that some reduction in average fees per million for other products may occur in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.

     Other Revenue Trends

      In addition to the commissions discussed above, we have also earned revenue from certain fees paid by institutional investor and broker-dealer clients, income earned on investments and insurance recoveries. Revenues from these sources totalled $2.3 million for the year ended December 31, 2001, $3.1 million for the year ended December 31, 2002 and $5.7 million for the year ended December 31, 2003. Revenues from these sources decreased from $3.1 million for the six months ended June 30, 2003 to $2.9 million for the six months ended June 30, 2004. We anticipate that revenues other than commissions will grow as we expand our data and information services offerings.

     Expense Trends

      Growth in revenue and in the value of trades executed on our platform have been achieved without commensurate increases in expenses. Our total expenses were $69.3 million for the year ended December 31, 2001, $51.3 million for the year ended December 31, 2002 and $51.1 million for the year ended December 31, 2003. Our total expenses were $24.6 million for the six months ended June 30, 2003 and $28.7 million for the six months ended June 30, 2004. As a result, we had a net loss for the year ended December 31, 2001 of $62.7 million and a net loss of $32.6 million for the year ended December 31, 2002, and net income of $7.1 million for the year ended December 31, 2003. For the six months ended June 30, 2003, we had a net loss of $101,000 and for the six months ended June 30, 2004, we had net income of $36.1 million.

      In the normal course of business, we incur the following expenses:

  •  employee compensation and benefits expenses, which include salaries, incentive compensation and related employee benefits and taxes;

45


 

  •  depreciation and amortization expenses, which result primarily from the depreciation of the fixed assets we purchase, including computer software and hardware used in the development of our trading systems;
 
  •  technology and communications expenses, which consist primarily of costs for our network connections with our customers and our data centers, as well as connectivity to various other market centers;
 
  •  professional and consulting expenses, which consist primarily of legal and accounting expenses;
 
  •  marketing and advertising expenses, which consist primarily of media, print and other advertising expenses as well as customer marketing expenses; and
 
  •  general and administrative expenses, which include travel and entertainment expenses, rental and occupancy expenses, and other administrative expenses and general office costs.

      We anticipate some expense growth in the future, notably in employee compensation and benefits, professional and consulting fees and general and administrative expenses as we become a public company, but believe that operating leverage can be achieved by increasing volumes in existing products and adding new products without substantial additions to our infrastructure.

      As a public company, we will be subject to the requirements of the Sarbanes-Oxley Act of 2002, which will require us to incur significant expenditures in the near term to establish systems and hire and train personnel to comply with these requirements. In addition, as a public company, we may be required, pending the finalization of an exposure draft from the Financial Accounting Standards Board on accounting for stock compensation, to record compensation expense based on the fair value of options issued to employees. Currently, we are only required to record compensation expense to the extent that the fair value of our common stock exceeds the exercise price of the options.

Revenues and Expenses

 
Revenues

      We derive our revenues from commissions from trades executed on our platform, information and user access fees, license fees and other income. A table detailing the amount and percentage of revenue generated from each of these sources is provided below:

                                                                                   
Year Ended Six Months Ended
December 31, June 30,


2001 2002 2003 2003 2004





$ % $ % $ % $ % $ %










($ in thousands) (unaudited)
Total commissions
  $ 4,273       64.8 %   $ 15,555       83.2 %   $ 52,800       90.3 %   $ 21,400       87.4 %   $ 34,541       92.3 %
Information and
user access fees
    13       0.2 %     287       1.5 %     1,144       2.0 %     391       1.6 %     1,021       2.7 %
License fees
                924       4.9 %     4,145       7.1 %     2,516       10.3 %     1,148       3.1 %
Interest income
    2,132       32.3 %     742       4.0 %     371       0.6 %     177       0.7 %     270       0.7 %
Other income
    181       2.7 %     1,193       6.4 %           0.0 %           0.0 %     426       1.1 %
     
     
     
     
     
     
     
     
     
     
 
 
Total revenues
  $ 6,598       100.0 %   $ 18,702       100.0 %   $ 58,460       100.0 %   $ 24,484       100.0 %   $ 37,406       100.0 %

      We are dependent on our broker-dealer clients, nine of which are also our stockholders, who are not restricted from buying and selling fixed-income securities directly or through their own proprietary or third party platforms. Our broker-dealer clients buy and sell fixed-income securities directly with their clients through traditional bond trading methods. Any reduction in the use of our electronic trading platform by our broker-dealer clients would reduce the number of different bond issues and the volume of trading in those bond issues on our platform, which could, in turn, reduce the use of our platform by our institutional investor clients. The occurrence of any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

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      Commissions have increased as a percentage of revenues primarily due to increases in trading volume following additions to the number of our broker-dealer and institutional investor clients for each respective period. The rate of growth in commission income has been faster than the rate of growth in other sources of revenue.

      During 2003, the product mix of our revenues shifted. Specifically, commissions from European high-grade corporate bonds became a more significant percentage of our revenues. Revenues from European high-grade corporate bonds grew from $47,000 to $975,000 to $7.1 million for the years ended December 31, 2001, 2002 and 2003, respectively. This represents percentage increases of 1,975.4% and 630.8%, respectively, for the years ended December 31, 2002 and 2003. Revenue from European high-grade corporate bonds grew from $2.5 million for the six months ended June 30, 2003 to $8.1 million for the six months ended June 30, 2004, representing an increase of 224.0%.

      We intend to continue to diversify our revenue base. As we continue to expand our service offerings, we believe that there will be more opportunities for us to generate revenues from all of our trading and information services clients.

      The following table shows the extent to which the changes in revenue for the years ended December 31, 2002 and 2003 and the six months ended June 30, 2004 were attributable to increases in volumes, reductions in the average level of commissions charged, the introduction of our information services or other factors:

                           
Change from
Prior Year Change from

Prior Six
Months
Year Ended
December 31, Six Months

Ended
2002 2003 June 30, 2004



(in thousands)
(unaudited)
Volume increases
  $ 13,553     $ 46,215     $ 5,897  
Average fee reductions
    (2,270 )     (8,970 )     (2,759 )
Introduction of information services
          15       198  
Other
    820       2,499       92  
     
     
     
 
 
Total revenue increase
  $ 12,103     $ 39,759     $ 3,428  

      A table detailing the amount of revenues generated by each of our nine broker-dealer clients that are also stockholders (ABN Amro, Banc of America Securities, Bear Stearns, BNP Paribas, Credit Suisse First Boston, Deutsche Bank, JPMorgan, Lehman Brothers and UBS), and their respective affiliates, as well as the

47


 

corresponding percentage of total revenues, is provided below for the years ended December 31, 2001, 2002 and 2003 and for the six months ended June 30, 2003 and 2004:
                                           
Six Months Ended
Year Ended December 31, June 30,


2001 2002 2003 2003 2004





($ in thousands)
(unaudited)
Total revenues generated by broker-dealer client stockholders and their respective affiliates
                                       
 
Commissions
  $ 3,494     $ 12,291     $ 33,023     $ 14,177     $ 19,925  
 
Information and user access fees
                235       89       137  
 
Interest income
    1,695       118       68       32       121  
     
     
     
     
     
 
    $ 5,189     $ 12,409     $ 33,326     $ 14,298     $ 20,183  
     
     
     
     
     
 
Percentage of commissions generated by broker-dealer client stockholders and their respective affiliates
    81.8%       79.0 %     62.5 %     66.2 %     57.7 %
Percentage of total revenues generated by broker-dealer client stockholders and their respective affiliates
    78.6%       66.4 %     57.0 %     58.4 %     54.0 %

      We derive a significant percentage of our total revenues, and an even greater percentage of our commissions, from broker-dealer clients that are also our stockholders. Commissions from these nine broker-dealer stockholders have decreased as percentage of revenues primarily due to increased volume from existing broker-dealer clients that were not stockholders as well as the addition of new broker-dealer clients that were not stockholders. Reduced involvement of our broker-dealer clients who are also our stockholders after this offering due to their loss of the right to designate a member of our board of directors, or the reduction in the level of their equity ownership due to their selling a significant portion of their shares of our common stock in this offering, may cause them to reduce or discontinue their use of our electronic trading platform and other services, which could negatively impact the use of our platform by our institutional investor clients and result in a reduction in our revenues and net income.

      Our current fee plans may result in a reduction in average fees as trading volume increases. We may also introduce new plans that could result in lower fees, particularly where we believe that fee reductions will be offset by higher trading volumes. Historical trading volume and revenue are not necessarily indicative of future trading volume and revenue.

      Interest income has decreased over the respective periods since the amount of cash available for investment and the related interest rates have decreased. Other income has decreased over the respective periods, due to the non-recurring nature of the insurance proceeds received in 2002.

 
Commissions
                                                                                   
Year Ended December 31, Six Months Ended June 30,


2001 2002 2003 2003 2004





% of total % of total % of total % of total % of total
$ revenues $ revenues $ revenues $ revenues $ revenues










($ in thousands) (unaudited)
U.S. high-grade
  $ 3,392       51.4 %   $ 13,390       71.6 %   $ 40,310       69.0 %   $ 16,761       68.5 %   $ 22,916       61.3 %
European high-grade
    47       0.7 %     975       5.2 %     7,126       12.2 %     2,474       10.1 %     8,143       21.8 %
Other
    833       12.6 %     1,190       6.4 %     5,364       9.2 %     2,165       8.8 %     3,482       9.3 %
     
     
     
     
     
     
     
     
     
     
 
 
Total commissions
  $ 4,273       64.8 %   $ 15,555       83.2 %   $ 52,800       90.3 %   $ 21,400       87.4 %   $ 34,541       92.3 %
     
     
     
     
     
     
     
     
     
     
 

      Commissions are generated exclusively from our broker-dealer clients. Commissions are generally calculated as a percentage of notional dollar volume of bonds traded on our platform and vary based on the type and the maturity of the bond traded. The commission rates are generally set at levels that are based upon

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those charged by inter-dealer brokers in the respective markets. 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.

      In the past three years, we have experienced overall trading volume increases, while the overall average fee per million traded has decreased, as detailed in the table below:

                                           
Year ended December 31, Six months ended June 30


2001 2002 2003 2003 2004





Trading Volume Data (in billions)
                                       
 
U.S. high-grade
  $ 10.0     $ 39.4     $ 140.3     $ 52.4     $ 89.2  
 
European high-grade
    0.2       4.2       31.8       10.5       41.2  
 
Other
    1.5       4.8       20.1       8.0       13.7  
     
     
     
     
     
 
    $ 11.7     $ 48.4     $ 192.2     $ 70.9     $ 144.1  
     
     
     
     
     
 
Commissions (in thousands)
                                       
 
U.S. high-grade
  $ 3,392     $ 13,390     $ 40,310     $ 16,761     $ 22,916  
 
European high-grade
    47       975       7,126       2,474       8,143  
 
Other
    833       1,190       5,364       2,165       3,482  
     
     
     
     
     
 
    $ 4,273     $ 15,555     $ 52,800     $ 21,400     $ 34,541  
     
     
     
     
     
 
Average fee per million traded
                                       
 
U.S. high-grade
  $ 339.20     $ 339.85     $ 287.31     $ 319.94     $ 256.91  
 
European high-grade
    235.00       232.14       224.09       236.85       197.75  
 
Other
    555.33       247.92       266.87       268.99       253.93  
     
     
     
     
     
 
    $ 365.21     $ 321.38     $ 274.71     $ 301.91     $ 239.72  
     
     
     
     
     
 

          U.S. High-Grade Corporate Bonds

      Prior to August 2003, all of our broker-dealer clients operated under a standard transaction fee plan for the secondary trading of U.S. high-grade corporate bonds. Under the standard transaction fee plan, commissions are calculated as a percentage of notional dollar volume of bonds traded on our platform, vary based on the type and maturity of the bond, and are generally higher on bonds with longer maturities. Under this plan, there is no fixed monthly fee and no cap on the aggregate amount of commissions payable by a broker-dealer client. In August 2003, we offered our broker-dealer clients the opportunity to switch from the standard transaction fee plan to one of two new transaction fee plans for secondary U.S. high-grade corporate bond trading. These plans have a two-year term, which commenced on either August 1, 2003 or September 1, 2003. The plans differ in their fixed monthly fees, amount of variable fees per trade, and fee caps:

  •  Plan 1: Under this plan, the broker-dealer pays a fixed monthly fee for trading U.S. high-grade corporate bonds, which provides us with a recurring revenue stream. In exchange for paying the fixed monthly fee, the broker-dealer pays variable fees per trade that are lower than those in the standard transaction fee plan. There is no cap on the aggregate commissions payable by the broker-dealer client under this plan.
 
  •  Plan 2: Under this plan, the broker-dealer pays a fixed monthly fee for trading U.S. high-grade corporate bonds that is higher than that in Plan 1. In exchange for paying the higher fixed monthly fee, the broker-dealer pays variable fees per trade that are lower than those in Plan 1 and the standard transaction fee plan, and the aggregate commissions payable by the broker-dealer client are capped on a monthly and an annual basis.

      The new transaction fee plans were introduced during the third quarter of 2003 to provide incentives for dealers who transacted higher volumes through the platform while at the same time providing us with an element of fixed commission revenue over the two-year term of the new plans. We believed that these new

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plans would result in higher volume for our U.S. high-grade corporate bond platform. Commissions for our U.S. high-grade platform increased from $9.8 million for the three months ended June 30, 2003 to $12.2 million for the three months ended September 30, 2003. Commissions for our U.S. high-grade platform decreased to $11.4 million for the three months ended December 31, 2003, remained at $11.4 million for the three months ended March 31, 2004 and increased to $11.5 million for the three months ended June 30, 2004. Due primarily to the new transaction fee plans, average U.S. high-grade commissions declined from $320 per million traded in the three months ended June 30, 2003 to $278 per million traded in three months ended September 30, 2003 to $259 per million traded in the three months ended December 31, 2003 and to $254 per million traded in the three months ended March 31, 2004. Average U.S. high-grade commissions increased slightly to $257 per million traded in the three months ended June 30, 2004. These decreases in the average commission per million traded were more than offset by volume increases. U.S. high-grade corporate bond trading volume grew from $31.3 billion for the three months ended June 30, 2003 to $43.9 billion for the three months ended September 30, 2003. Our trading volume for U.S. high-grade corporate bonds has remained relatively constant since then, increasing to $44.0 billion for the three months ended December 31, 2003 and to $45.0 billion for the three months ended March 31, 2004, and decreasing to $44.2 billion for the three months ended June 30, 2004.

      Broker-dealer clients who selected either Plan 1 or Plan 2 for U.S. high-grade corporate bond trading have the opportunity to switch to the other transaction fee plan in the second year. Currently, thirteen broker-dealer clients are operating under Plan 1, two are operating under Plan 2 and three are operating under our standard transaction fee plan. Our one remaining broker-dealer client executes trades through our platform exclusively for European high-grade corporate bonds and is not therefore eligible to participate in our U.S. high-grade corporate bond transaction fee plan. Currently, six broker-dealer clients who are also our stockholders are operating under Plan 1, two broker-dealer clients who are also stockholders are operating under Plan 2 and one broker-dealer client who is also a stockholder is operating under the standard transaction fee plan. The fee caps were set to take effect at volume levels significantly above those being transacted at the time the new transaction fee plans were introduced but will limit revenue growth in the future for U.S. high-grade corporate bond trading from the broker-dealers that have selected these plans if the higher volume levels at which the fee cap is triggered are reached.

      The fee cap of Plan 2 sets an upper limit on the potential revenues for U.S. high-grade corporate bond trading from our broker-dealer clients that select that transaction fee plan. We believe that Plan 2 is well suited for our most active broker-dealer clients and it is designed to encourage more trading volume on our platform. For the three months ended December 31, 2003 and the six months ended June 30, 2004, had all broker-dealers been on the standard fee plan, our commission revenue would have been reduced by approximately $1.4 million and $2.9 million, respectively. Management believes, furthermore, that had the new fee plans not been in place, we would have seen lower transaction volumes in U.S. high-grade corporate bonds.

      As neither of the two broker-dealers operating under Plan 2 has yet reached the monthly cap, additional trading volume has resulted in incremental revenue for us. In future periods, if the caps are met, we may be limited in our ability to offset declines in the average commission by additional trading volume for U.S. high-grade corporate bonds. Due in part to the introduction of the fee cap of Plan 2, historical growth in trading volume and commission revenue is not necessarily indicative of future growth.

          European High-Grade Corporate Bonds

      On our European platform, each product traded carries a standard broker-dealer transaction fee based on a fee schedule tied to the type and the maturity of the bond traded. This fee schedule applies a tiered fee structure, which reduces the fees per trade upon the attainment of certain specified amounts of monthly commissions generated by a particular broker-dealer and does not carry a fixed monthly fee or fee cap.

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          Emerging Markets Bonds

      Broker-dealer clients pay a commission for transactions in sovereign and corporate bonds issued by entities domiciled in an emerging markets country based on the type and the amount of the security traded. Commissions for transactions in more active sectors of the emerging markets are generally lower.

          New Issues

      For newly-issued U.S. high-grade corporate bonds and for newly-issued sovereign and corporate bonds issued by entities domiciled in an emerging markets country, we enable U.S. institutional investors to submit indications of interest on our electronic trading platform directly to the underwriter syndicate desks of our broker-dealer clients. Broker-dealer clients pay a commission for new-issue transactions that is based on the allocation amount and a percentage of the new issue selling costs paid by the issuer to our broker-dealer client. The commission is generally lower on larger allocation amounts.

 
Information and User Access Fees
                                                                             
Year Ended December 31, Six Months Ended June 30,


2001 2002 2003 2003 2004





% of % of % of % of % of
total total total total total
$ revenues $ revenues $ revenues $ revenues $ revenues










($ in thousands) (unaudited)
Information services fees
  $—     0.0%     $ 15       0.0%     $ 826       1.5%     $ 209       0.9%     $ 815       2.1%  
User access fees
  13     0.2%       272       1.5%       318       0.5%       182       0.7%       206       0.6%  
   
   
     
     
     
     
     
     
     
     
 
    $13     0.2%     $ 287       1.5%     $ 1,144       2.0%     $ 391       1.6%     $ 1,021       2.7%  
   
   
     
     
     
     
     
     
     
     
 

      Information and user access fees consist of information services fees and monthly user fees.

      We charge information services fees for Corporate BondTicker to our broker-dealer clients, institutional investor clients and data only subscribers. The information services fee is a flat monthly fee, based on the level of service. We also generate information service 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 client’s users. To encourage institutional investor clients to execute trades on our U.S. high-grade corporate bond platform, we reduce these information and user access fees for such clients once minimum quarterly trading volumes are attained.

      Approximately 17.8% of our information and user access fees for the year ended December 31, 2003 came from our nine broker-dealer stockholders and their affiliates.

 
License Fees
                                                             
Year Ended December 31, Six Months Ended June 30,


2001 2002 2003 2003 2004





% of % of % of % of % of
total total total total total
$ revenues $ revenues $ revenues $ revenues $ revenues










($ in thousands) (unaudited)
License fees
  $—     0.0%     $924     4.9%     $4,145     7.1%     $2,516     10.3%     $1,148     3.1%  
   
   
   
   
   
   
   
   
   
   
 

      License fees consist of fees received from broker-dealer clients. In the agreements with our broker-dealer clients, we agree to provide access to our trading platform through a non-exclusive and non-transferable license. Broker-dealer clients, other than those that previously made equity investments in MarketAxess, pay an initial license fee, which is typically due and payable upon execution of the broker-dealer agreement. The initial license fee varies by agreement and at a minimum is intended to cover the initial set-up costs we incur to enable a broker-dealer to begin using our platform. The license fee is a one-time fee and is recognized in the

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first three months of the agreement in the estimated amount of the set-up costs that we incur and the remaining amount is amortized over the initial term of the agreement, which is generally three years. We anticipate that license fees will be a less material source of revenues for us on a going-forward basis.

      None of our license fees for the year ended December 31, 2003 came from our nine broker-dealer stockholders and their affiliates.

     Interest Income

                                                             
Year Ended December 31, Six Months Ended June 30,


2001 2002 2003 2003 2004





% of % of % of % of % of
total total total total total
$ revenues $ revenues $ revenues $ revenues $ revenues










($ in thousands) (unaudited)
Interest income
  $2,132     32.3%     $742     4.0%     $371     0.6%     $177     0.7%     $270     0.7%  
   
   
   
   
   
   
   
   
   
   
 

      Interest income consists of income earned on our investments. We generate interest income through the investment of our excess cash in U.S. Treasury obligations and money market instruments.

      Approximately 7.5% of our interest income for the year ended December 31, 2003 came from our nine broker-dealer stockholders and their affiliates.

     Other

                                                                                 
Year Ended December 31, Six Months Ended June 30,


2001 2002 2003 2003 2004





% of % of % of % of % of
total total total total total
$ revenues $ revenues $ revenues $ revenues $ revenues










($ in thousands) (unaudited)
Other revenues
  $ 181       2.7 %   $ 1,193       6.4 %   $       0.0 %   $       0.0 %   $ 426       1.1 %
     
     
     
     
     
     
     
     
     
     
 

      Other revenues consist of funds received as business interruption insurance settlements, which was a non-recurring item in relation to the effects of the September 11, 2001 terrorist acts, telecommunications line charges to broker-dealer clients and other miscellaneous revenues. We do not anticipate that other revenues will be a material source of revenue in future periods.

      None of our other revenues for the year ended December 31, 2003 came from our nine broker-dealer stockholders and their affiliates.

 
Expenses
 
Employee Compensation and Benefits

      Employee compensation and benefits is our most significant expense and includes employee salaries, bonuses, related employee benefits and payroll taxes. Salaries and benefits typically account for approximately 64% of our total employee compensation and benefits expense. Many employees receive bonuses based on our overall operating results as well as their individual performance. These bonuses vary from year to year and have a significant impact on our employee compensation and benefits expense. Increases in the number of our employees and cost increases affecting employee-provided benefit plans also drive changes in this expense.

 
Depreciation and Amortization

      Depreciation and amortization expense results from the depreciation of fixed assets, which consist of computer hardware, furniture and fixtures, and the amortization of software, capitalized software development costs and leasehold improvements. We depreciate our fixed assets and amortize our capitalized software development costs on a straight-line basis over a three-year period. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement and the remaining term of the lease. Our depreciation and amortization expense varies from year to year due to new asset purchases and assets that become fully depreciated during the year.

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Technology and Communications

      Technology and communications expense consists primarily of costs relating to the amortization of licenses for software used in our trading platform, maintenance on software and hardware, our internal network connections, data center hosting costs and data feeds provided by outside vendors or service providers. We amortize software licenses and maintenance agreements relating to hardware and software over the term of these agreements, which is generally one year. Maintenance agreements for our computer hardware are in place to ensure that we receive technical service from the vendor in the event of a malfunction. We enter into software maintenance agreements to ensure that we have access to the latest versions of the software we use. All of our broker-dealer clients have dedicated T-1 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. The number of users accessing our trading and information services products affects our technology and communications expense.

 
Professional and Consulting Fees

      Professional and consulting fees consist primarily of fees paid to consultants for services provided for the development and enhancement of our trading platform and information services products and, to a lesser extent, accounting and legal fees.

 
Warrant-Related Expense

      Warrant-related expense is the expense associated with the allocation of shares of our common stock issuable pursuant to a warrant issued to six of our broker-dealer clients at the time they made an equity investment in us. The warrant program was put in place in April 2000 and was designed to motivate broker-dealers to trade on our platform.

      The total number of shares underlying the warrant is 5,000,002. The warrant program has two distinct pieces, a U.S. portion and a European portion, under which the aggregate number of shares underlying the warrant to be allocated in each three-month period was fixed. Allocations under this program commenced on May 1, 2001 for the U.S. portion and June 1, 2002 for the European portion, and were based on each broker-dealer client’s respective commissions as a percentage of the total commissions paid to us from the six participating warrant holders, calculated on a quarterly basis.

      Shares allocated under the warrant program are expensed each quarter at fair market value in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation” (SFAS No. 123). We determine the fair market value of the shares issuable upon exercise of the warrant using the Black-Scholes option-pricing model. The final share allocations under the warrant program occurred on March 1, 2004. Accordingly, we will no longer record any expenses related to this warrant. Please refer to “Critical Accounting Estimates” for more information.

 
Marketing and Advertising

      Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions. Also included in this expense are travel and entertainment expenses incurred by our sales force to promote our trading platform and information services.

 
Moneyline Revenue Share

      Moneyline revenue share expense consists of expenses incurred pursuant to our agreement with Moneyline Telerate (Moneyline), an independent technology and data company, which assisted us in the development of our U.S. high-grade corporate bond and European trading platforms. Pursuant to the agreement, a revenue share is paid quarterly to Moneyline based on a percentage of revenues generated on our U.S. high-grade corporate bond and European trading platforms, after deduction of identified development costs. We have completed the transition to new internally-developed software for our U.S. high-grade corporate bond platform and are in the process of transitioning to new internally-developed software for our European bond platform. The transition is expected to occur during 2004, at which time the Moneyline revenue share expense will cease. In connection with that transition, we expect to write off outdated software in the amount of approximately $900,000 for the year ending December 31, 2004.

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Restructuring Charges

      Restructuring charges relate to losses incurred when our management formally committed to a restructuring plan designed to position us for improved profitability and growth, which included the realignment of certain products and other structural changes and to losses incurred when facilities were subleased.

      In May 2001, we decided to halt the development efforts for the convertible bond trading platform we acquired from Trading Edge, while continuing to operate that platform with its existing functionality. In October 2001, we decided to terminate the municipal bond trading platform. The decisions with respect to both the convertible bond and municipal bond trading platforms were not contemplated at the time of the Trading Edge acquisition in March 2001 and resulted from lower than anticipated trading volumes on these platforms. For the years ended December 31, 2000 and 2001, revenues related to convertible bond and municipal bond trading were $1.2 million and $486,000, respectively. We incurred one-time pre-tax restructuring charges of $3.1 million during the year ended December 31, 2001, which related to employee severance costs, write-off of software development costs and excess purchase price allocation and impairment costs.

      During the year ended December 31, 2001, we incurred a one-time pre-tax restructuring charge of $5.1 million related to facilities that were subleased, including a write-off of leasehold improvements and furniture and fixtures. This charge was unrelated to the write-off of the convertible bond and municipal bond trading platforms.

 
General and Administrative

      General and administrative expense consists primarily of occupancy and utilities, general travel and entertainment, staff training and various state franchise and U.K. value-added taxes.

 
Net Operating Loss Carryforwards

      We have net operating loss carryforwards as of June 30, 2004 of $106.3 million. Our U.S. net operating loss carryforwards as of June 30, 2004 totaling $92.0 million will begin to expire in 2018 and our U.K. net operating loss carryforwards totaling $14.2 million do not expire. In 2000 and in 2001, MarketAxess Holdings Inc. and MarketAxess Corporation respectively, had an ownership change within the meaning of Section 382 of the Internal Revenue Code. As a result of Section 382 and pertinent tax provisions, the utilization of $39.3 million of our net operating loss carryforwards existing at the date of the ownership change are subject to significant limitations. In addition, our net operating loss carryforwards may be subject to further annual limitations as a result of ownership changes upon the completion of this offering.

Critical Accounting Policies and Estimates

      This Management’s 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.

      On an ongoing basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are critical. That is, these accounting policies are most important to the portrayal of our financial condition and results of operations and they require management’s

54


 

most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
 
Allowance for Doubtful Accounts

      We charge certain of our institutional investor clients an information services fee and a monthly user access fee for the use of our trading platform. The user access fees charged to an institutional investor client are reduced or eliminated if the institutional investor client meets certain minimum quarterly trading volumes.

      We have established an allowance for doubtful accounts based upon the estimated collectibility of information and user access fees. Additions to the allowance are charged to bad debt expense, which is included in the general and administrative expense in our Statement of Operations.

 
Goodwill and Other Intangible Assets

      SFAS No. 142, “Goodwill and Other Intangible Assets,” addresses how goodwill and other intangible assets should be accounted for subsequent to an acquisition. Goodwill and intangible assets that have indefinite useful lives no longer will be amortized, but will be tested at least annually for impairment. Intangible assets with finite lives will continue to be amortized over their useful lives. We adopted SFAS No. 142 on January 1, 2002.

      In accordance with SFAS No. 142, we used a third party to test goodwill impairment resulting from the acquisition of Trading Edge for the years ended December 31, 2001 and December 31, 2002. We again used a third party to review potential goodwill impairment for the year ended December 31, 2003. After that review, we were advised that there was no goodwill impairment for the year ended December 31, 2003. As of June 30, 2004, the value of our acquired goodwill and other intangible assets was $202,000.

 
Revenue Recognition

      We recognize revenues relating to broker-dealer license fees in the first three months of the applicable agreement in the estimated amount of the setup costs incurred, and the remaining amount is amortized over the initial term of the agreement, which is generally three years.

      Where a dealer has selected Plan 2 of the new transaction fee plans for secondary U.S. high-grade corporate bond trading, the U.S. high-grade commissions that they pay are capped at $500,000 per month and $4.8 million per year. If the commissions paid by a dealer in any one quarter measured from the effective date of the agreement exceed $1.2 million, the excess commissions over $1.2 million are reserved and only recorded as revenue when the year-to-date commissions generated by the broker-dealer either reach the annual $4.8 million cap or fall below a year-to-date quarterly average of $1.2 million.

 
Stock-Based Employee Compensation

      During the years ended December 31, 2002 and 2003, and for the six months ended June 30, 2004, we have accounted for stock-based employee compensation plans in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS No. 123. In accordance with APB No. 25, compensation expense is not recognized for stock awards that have no intrinsic value on the date of grant. Unearned compensation is amortized and charged to income over the vesting schedule. Our employee option grants usually vest over a three-year period from the date of issuance.

      Had we adopted SFAS No. 148, “Accounting for Stock-Based Compensation Transactions and Disclosure,” to expense the fair value of an employee grant over the appropriate vesting period, we would have incurred stock-based employee compensation expense of $278,000 for the year ended December 31, 2002, $352,000 for the year ended December 31, 2003 and $511,000 for the six months ended June 30, 2004.

 
Warrant

      We allocated shares of common stock issuable upon exercise of a warrant to certain of our broker-dealer clients on a quarterly basis. Allocations under our warrant program were based on a percentage of the total quarterly commissions generated either on our U.S. or our European trading platform by broker-dealer clients eligible for the warrant pool.

55


 

      We account for this warrant in accordance with SFAS No. 123. Expense is recognized on the measurement date based on the fair market value of the shares of common stock underlying the warrant. Fair market value is determined using the Black-Scholes option-pricing model. This pricing model requires the following inputs: (1) our underlying stock price; (2) the historic volatility of the underlying stock; (3) the expiration date of the warrant; (4) the risk-free rate of return; and (5) dividend payments on our stock. The underlying stock price has been obtained using independent third-party valuations. For the stock volatility factor, we use a weighted average volatility over a one-year period for the Nasdaq 100 index. We determine the risk-free rate of return based on the interest rate of a U.S. government obligation with the same term to maturity as the exercise period of the warrant at the time of issuance. The expiration date of the warrant is November 30, 2008, and we have assumed no dividend payments on our common stock. The final share allocations under the warrant program occurred on March 1, 2004. Accordingly, we will no longer record any warrant-related expense.

  Income Taxes

      Income taxes are accounted for on the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes.” 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.

      A valuation allowance is recorded when it is more likely than not that some portion of the gross deferred tax assets will not be realized in future years. We have recorded a valuation allowance of $29.2 million against the deferred tax assets arising from net operating loss carryforwards and temporary differences relating to deductibility of certain expenses for book and tax purposes. Certain of our net operating loss carryforwards are subject to significant limitations and utilizations pursuant to the Internal Revenue Code. In addition, our net operating loss carryforwards may be subject to further annual limitations as a result of ownership changes upon the completion of this offering.

Key Performance Indicators

      The following tables provide the notional value of bonds traded on our platform for each of the periods presented:

                                                                                   
Three Months Ended

March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
2002 2002 2002 2002 2003 2003 2003 2003 2004 2004










(in billions, except number of trading days)
U.S. high-grade
  $ 7.1     $ 8.6     $ 9.6     $ 14.2     $ 21.0     $ 31.4     $ 43.9     $ 44.0     $ 45.0     $ 44.2  
European high-grade
    0.6       1.0       0.8       1.8       4.3       6.1       9.1       12.3       23.6       17.6  
Other
    0.7       0.9       1.5       1.7       3.6       4.5       5.3       6.8       6.4       7.4  
     
     
     
     
     
     
     
     
     
     
 
 
Total
  $ 8.3     $ 10.5     $ 11.9     $ 17.7     $ 28.9     $ 41.9     $ 58.2     $ 63.2     $ 75.0     $ 69.1  
Number of trading days
    61       63       64       62       61       63       64       63       62       62  
                                           
Six Months
Year Ended December 31, Ended June 30,


2001 2002 2003 2003 2004





(in billions, except number of trading days)
U.S. high-grade
  $ 10.0     $ 39.4     $ 140.3     $ 52.4     $ 89.2  
European high-grade
    0.2       4.2       31.8       10.5       41.2  
Other
    1.5       4.8       20.1       8.0       13.7  
     
     
     
     
     
 
 
Total
  $ 11.7     $ 48.4     $ 192.2     $ 70.9     $ 144.1  
 
Number of trading days
    250       250       251       124       124  

      For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at the exchange rates prevailing on the day the transactions were executed.

56


 

Results of Operations

      The following tables present our consolidated operating results expressed in U.S. dollars and as a percentage of total revenues for each of the periods presented:

                                               
Six Months
Year Ended December 31, Ended June 30,


2001 2002 2003 2003 2004





(in thousands)
(unaudited)
Revenues
                                       
 
Commissions
                                       
   
U.S. high-grade
  $ 3,392     $ 13,390     $ 40,310     $ 16,761     $ 22,916  
   
European high-grade
    47       975       7,126       2,474       8,143  
   
Other
    833       1,190       5,364       2,165       3,482  
     
     
     
     
     
 
     
Total commissions
    4,273       15,555       52,800       21,400       34,541  
 
Information and user access fees
    13       287       1,144       391       1,021  
 
License fees
          924       4,145       2,516       1,148  
 
Interest income
    2,132       742       371       177       270  
 
Other
    181       1,193                   426  
     
     
     
     
     
 
   
Total revenues
    6,598       18,702       58,460       24,484       37,406  
     
     
     
     
     
 
Expenses
                                       
 
Employee compensation and benefits
    23,534       23,097       25,317       12,243       15,611  
 
Depreciation and amortization
    5,127       6,658       4,688       2,591       1,827  
 
Technology and communications
    5,240       3,943       4,755       2,303       3,139  
 
Professional and consulting fees
    12,903       4,699       4,180       2,282       1,736  
 
Warrant-related expense(1)
    5,874       6,330       4,024       1,592       2,131  
 
Marketing and advertising
    1,780       2,588       2,292       1,115       1,143  
 
Moneyline revenue share
    408       708       1,806       820       820  
 
Restructuring charges
    8,244       (674 )                  
 
General and administrative
    6,153       3,941       4,077       1,639       2,341  
     
     
     
     
     
 
   
Total expenses
    69,262       51,290       51,140       24,585       28,748  
     
     
     
     
     
 
Income (loss) before taxes
    (62,663 )     (32,589 )     7,320       (101 )     8,658  
 
Provision (benefit) for income tax
                190             (27,432 )
     
     
     
     
     
 
Net income (loss)
  $ (62,663 )   $ (32,589 )   $ 7,131     $ (101 )   $ 36,090  
     
     
     
     
     
 


(1)  Warrant-related expense is the expense associated with the allocation of shares of our common stock issuable pursuant to a warrant issued to six of our broker-dealer clients at the time they made an equity investment in us. The total number of shares underlying the warrant is 5,000,002. While the warrant is expensed each quarter at fair market value, this is a non-cash expense that fluctuates with the underlying price of our common stock. The final share allocations under the warrant program occurred on March 1, 2004. Accordingly, we will no longer record any expenses related to this warrant.

57


 

                                               
Six Months
Year Ended December 31, Ended June 30,


2001 2002 2003 2003 2004





(unaudited)
Revenues
                                       
 
Commissions
                                       
   
U.S. high-grade
    51 %     72 %     69 %     68 %     61 %
   
European high-grade
    1       5       12       10       22  
   
Other
    13       6       9       9       9  
     
     
     
     
     
 
     
Total commissions
    65 %     83 %     90 %     87 %     92 %
 
Information and user access fees
    0       2       2       2       3  
 
License fees
    0       5       7       10       3  
 
Interest income
    32       4       1       1       1  
 
Other
    3       6       0       0       1  
     
     
     
     
     
 
     
Total revenues
    100 %     100 %     100 %     100 %     100 %
     
     
     
     
     
 
Expenses
                                       
 
Employee compensation and benefits
    357 %     124 %     43 %     50 %     42 %
 
Depreciation and amortization
    78       36       8       11       5  
 
Technology and communications
    79       21       8       9       8  
 
Professional and consulting fees
    196       25       7       9       5  
 
Warrant-related expense
    89       34       7       7       6  
 
Marketing and advertising
    27       14       4       5       3  
 
Moneyline revenue share
    6       4       3       3       2  
 
Restructuring charges
    125       (4 )     0       0       0  
 
General and administrative
    93       21       7       7       6  
     
     
     
     
     
 
     
Total expenses
    1,050 %     274 %     87 %     100 %     77 %
     
     
     
     
     
 
Income (loss) before taxes
    (950 )%     (174 )%     13 %     0 %     23 %
 
Provision (benefit) for income tax
    0       0       0       0       (73 )%
     
     
     
     
     
 
Net income (loss)
    (950 )%     (174 )%     12 %     0 %     96 %
     
     
     
     
     
 
 
Segment Results

      As an electronic, multi-dealer to client platform for trading fixed-income securities, our operations constitute a single business segment pursuant to SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Because of the highly integrated nature of the financial markets in which we compete and the integration of our worldwide business activities, we believe that results by geographic region, products or types of clients are not necessarily meaningful in understanding our business.

 
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
 
Overview

      For the six months ended June 30, 2004, net income increased by $36.2 million to $36.1 million compared to a net loss of $101,000 for the comparable period in 2003. Total revenues increased by $12.9 million or 52.8% to $37.4 million for the six months ended June 30, 2004 from $24.5 million for the six ended June 30, 2003. This increase in total revenues was primarily due to the growth in the total volume of bonds traded on our platform, which grew 103.2% to $144.1 billion for the six months ended June 30, 2004 from $70.9 billion for the comparable period in 2003 offset in part by an increasing portion of our total trading volume being generated from European high-grade corporate bonds, which carry a lower fee per million, as well as by the introduction of the new U.S. high-grade fee plans in the third quarter of 2003. Total expenses increased by $4.2 million or 16.9% to $28.7 million for the six months ended June 30, 2004 from $24.6 million for the comparable period in 2003. For the six months ended June 30, 2004, our total expenses increased primarily due to increases in employee compensation and benefits, technology and communications, warrant

58


 

related, and general and administrative expenses, offset by decreases in depreciation and amortization, and professional and consulting fees, in each case compared to the comparable period in 2003.
 
Revenues

      The revenues for the six months ended June 30, 2003 and 2004, and resulting dollar and percentage change, are as follows:

                                                       
Six Months Ended June 30,

2003 2004 2004 vs. 2003



($ in thousands)
(unaudited)
Revenues
                                               
 
Commissions
                                               
   
U.S. high-grade
  $ 16,761       68.5 %   $ 22,916       61.3 %   $ 6,155       36.7 %
   
European high-grade
    2,474       10.1       8,143       21.8       5,668       229.1  
   
Other
    2,165       8.8       3,482       9.3       1,317       60.8  
     
     
     
     
     
         
     
Total commissions
    21,400       87.4       34,541       92.3       13,141       61.4  
 
Information and user access fees
    391       1.6       1,021       2.7       630       161.3  
 
License fees
    2,516       10.3       1,148       3.1       (1,369 )     (54.4 )
 
Interest income
    177       0.7       270       0.7       93       52.7  
 
Other
          0.0       426       1.1       426        
     
     
     
     
     
         
     
Total revenues
  $ 24,484       100.0 %   $ 37,406       100.0 %   $ 12,922       52.8 %
     
     
     
     
     
         

      Commissions. Total commissions increased by $13.1 million or 61.4% to $34.5 million for the six months ended June 30, 2004 from $21.4 million for the comparable period in 2003. This increase was primarily due to increases in the amount of U.S. high-grade commissions and European high-grade commissions. U.S. high-grade commissions increased by $6.2 million or 36.7% to $22.9 million for the six months ended June 30, 2004 from $16.8 million for the comparable period in 2003. European high-grade commissions increased by $5.7 million or 229.1% to $8.1 million from $2.5 million for the comparable period in 2003. Other commissions increased by $1.3 million or 60.8% to $3.5 million from $2.2 million for the comparable period in 2003. These increases were primarily due to an increase in transaction volume from $70.9 billion for the six months ended June 30, 2003 to $144.1 billion for the six months ended June 30, 2004 generated by new and existing clients.

      Information and User Access Fees. Information and user access fees increased by $630,000 or 161.3% to $1.0 million for the six months ended June 30, 2004 from $391,000 for the comparable period in 2003. This increase was due to an increase in the number of subscribers to our Corporate BondTicker service.

      License Fees. License fees decreased by $1.4 million or 54.4% to $1.1 million for the six months ended June 30, 2004 from $2.5 million for the comparable period in 2003. This decrease was due to the addition of one new broker-dealer client in the six months ended June 30, 2004 compared to four new broker-dealer clients added in the comparable period in 2003.

      Interest Income. Interest income increased by $93,000 or 52.7% to $270,000 for the six months ended June 30, 2004 from $177,000 for the comparable period in 2003. This increase was due to higher cash, cash equivalents and short-term investment balances during the six months ended June 30, 2004 as compared to the comparable period in 2003.

      Other. Other revenues increased to $426,000 for the six months ended June 30, 2004 from $0 for the comparable period in 2003. This increase was primarily due to the effects of an accounting change in 2003, recognizing gross telecommunication line charges from broker-dealer clients. These line charges had been offset against the related technology and communications cost in prior periods.

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     Expenses

      The expenses for the six months ended June 30, 2003 and 2004, and resulting dollar and percentage change, are as follows:

                                                   
Six Months Ended June 30,

2003 2004 2004 vs. 2003



($ in thousands)
(unaudited)
Expenses
                                               
Employee compensation and benefits
  $ 12,243       50.0 %   $ 15,611       41.7 %   $ 3,368       27.5 %
Depreciation and amortization
    2,591       10.6       1,827       4.9       (764 )     (29.5 )
Technology and communications
    2,303       9.4       3,139       8.4       836       36.3  
Professional and consulting fees
    2,282       9.3       1,736       4.6       (546 )     (23.9 )
Warrant-related expense
    1,592       6.5       2,131       5.7       539       33.8  
Marketing and advertising
    1,115       4.6       1,143       3.1       28       2.5  
Moneyline revenue share
    820       3.3       820       2.2             0.0  
General and administrative
    1,639       6.7       2,341       6.3       702       42.8  
     
     
     
     
     
         
 
Total expenses
  $ 24,585       100.4 %   $ 28,748       76.9 %   $ 4,163       16.9 %
     
     
     
     
     
         

      Employee Compensation and Benefits. Employee compensation and benefits increased by $3.4 million or 27.5% to $15.6 million for the six months ended June 30, 2004 from $12.2 million for the comparable period in 2003. This increase was primarily due to the addition of new employees to support our growth and Moneyline consultant staff that became full-time employees. The total number of employees increased to 182 as of June 30, 2004 from 158 as of June 30, 2003. As a percentage of total revenues, employee compensation and benefits expense decreased to 41.7% for the six months ended June 30, 2004 from 50.0% for the comparable period in 2003. We expect this expense to continue to decline as a percentage of total revenues as we continue to grow our business.

      Depreciation and Amortization. Depreciation and amortization expense decreased by $764,000 or 29.5% to $1.8 million for the six months ended June 30, 2004 from $2.6 million for the comparable period in 2003. This decrease was primarily due to certain assets coming to the end of their depreciable lives. For the year ending December 31, 2004, it is anticipated that approximately $3.6 million in fixed assets relating to software development will become operational and will result in an approximate $100,000 per month increase in depreciation and amortization expense.

      Technology and Communications. Technology and communications expense increased by $836,000 or 36.3% to $3.1 million for the six months ended June 30, 2004 from $2.3 million for the comparable period in 2003. This increase was primarily due to the additional costs relating to licenses, maintenance, production data feeds and hosting, all associated with the growth in volume traded on our platform. As a percentage of total revenues, technology and communications expense decreased to 8.4% for the six months ended June 30, 2004 from 9.4% for the comparable period in 2003.

      Professional and Consulting Fees. Professional and consulting fees decreased by $546,000 or 23.9% to $1.7 million for the six months ended June 30, 2004 from $2.3 million for the comparable period in 2003. This decrease was primarily due to the fact that certain Moneyline consultant staff became full-time employees. As a percentage of total revenues, professional and consulting fees decreased to 4.6% for the six months ended June 30, 2004 from 9.3% for the comparable period in 2003.

      Warrant-Related Expense. Warrant-related expense increased by $539,000 or 33.8% to $2.1 million for the six months ended June 30, 2004 from $1.6 million for the comparable period in 2003. This increase was due to an increase in our common stock valuation to $13.95 per share for the six months ended June 30, 2004 from $2.70 for the comparable period in 2003.

      Marketing and Advertising. Marketing and advertising expense increased by $28,000 or 2.5% to $1.1 million for the six months ended June 30, 2004 from $1.1 million for the comparable period in 2003. This

60


 

increase was primarily due to expenses we incurred for print and other advertising used to promote our electronic trading platform.

      Moneyline Revenue Share. Moneyline revenue share expense remained at $820,000 for the six months ended June 30, 2004 and for the comparable period in 2003. The increased trading volume in U.S. high-grade corporate and European corporate bonds that is the basis for the revenue share calculation was offset by the changes in the U.S. high-grade corporate bond fee plan in the third quarter of 2003 and the migration away from the high-grade Moneyline platform to the new high-grade platform in May of 2004.

      General and Administrative. General and administrative expense increased by $702,000 or 42.8% to $2.3 million for the six months ended June 30, 2004 from $1.6 million for the comparable period in 2003. This increase was due to a number of factors, including increase in occupancy expenses, value-added tax (VAT) and franchise tax payments, partially offset by the reversal of $247,000 in a VAT tax reserve taken in 2003.

 
Provision for Income Tax

      For the six months ended June 30, 2004, we recorded an income tax benefit of $27.4 million. The benefit consists of $27.6 million of deferred taxes relating to the recognition of deferred tax assets, off set with a charge of $210,000 of alternative minimum taxes. We have recorded a valuation allowance of $29.2 million against the gross deferred tax assets of $56.8 million arising from net operating loss carryforwards and temporary differences relating to deductibility of certain expenses for book and tax purposes. This valuation allowance was deemed appropriate due to available evidence indicating that some of the deferred tax assets might not be realized in future years due to annual utilization restrictions. The net operating losses will be carried forward to future years.

      We cannot predict the timing of the reversal of the temporary differences. Therefore, the reversal of the temporary differences may result in charges to the provision for income taxes and may affect our future earnings.

 
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
 
Overview

      For the year ended December 31, 2003, net income increased by $39.7 million to $7.1 million from a net loss of $32.6 million for the year ended December 31, 2002. Total revenues increased by $39.8 million or 212.6% to $58.5 million for year ended December 31, 2003 from $18.7 million for the year ended December 31, 2002. This increase in total revenue was primarily due to the growth in the total volume of bonds traded on our platform, which grew 297.1% to $192.2 billion for the year ended December 31, 2003 from $48.4 billion for the year ended December 31, 2002. Total expenses decreased by $150,000 or 0.3% to $51.1 million for the year ended December 31, 2003 from $51.3 million for the year ended December 31, 2002. For the year ended December 31, 2003, our total expenses decreased due to lower warrant-related, depreciation and amortization, and marketing and advertising expenses offset by increases in employee compensation, technology and communications, and Moneyline revenue share expenses, in each case when compared to the year ended December 31, 2002.

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Revenues

      The revenues for the years ended December 31, 2002 and 2003, and resulting dollar and percentage change, are as follows:

                                                       
Year Ended December 31,

2002 2003


$ % of revenues $ % of revenues $ change % change






($ in thousands)
Revenues
                                               
 
Commissions
                                               
   
U.S. high-grade
  $ 13,390       71.6 %   $ 40,310       69.0 %   $ 26,920       201.1 %
   
European high-grade
    975       5.2 %     7,126       12.2 %     6,151       630.8 %
   
Other
    1,190       6.4 %     5,364       9.2 %     4,174       350.6 %
     
     
     
     
     
         
     
Total commissions
    15,555       83.2 %     52,800       90.3 %     37,245       239.4 %
Information and user access fees
    287       1.5 %     1,144       2.0 %     857       298.9 %
License fees
    924       4.9 %     4,145       7.1 %     3,221       348.8 %
Interest income
    742       4.0 %     371       0.6 %     (371 )     (50.0) %
Other
    1,193       6.4 %           0.0 %     (1,193 )     (100.0) %
     
     
     
     
     
         
   
Total revenues
  $ 18,702       100.0 %   $ 58,460       100.0 %   $ 39,759       212.6 %
     
     
     
     
     
     
 

      Commissions. Total commissions increased by $37.2 million or 239.4% to $52.8 million for the year ended December 31, 2003 from $15.6 million for the year ended December 31, 2002. This increase was primarily due to increases in the amount of U.S. high-grade commissions and European high-grade commissions. U.S. high-grade commissions increased by $26.9 million or 201.1% to $40.3 million for the year ended December 31, 2003 from $13.4 million for the year ended December 31, 2002. European high-grade commissions increased by $6.2 million or 630.8% to $7.1 million for the year ended December 31, 2003 from $975,000 for the year ended December 31, 2002. These increases were primarily due to an increase in transaction volume from $48.4 billion for the year ended December 31, 2002 to $192.2 billion for the year ended December 31, 2003 generated by new and existing clients.

      Information and User Access Fees. Information and user access fees increased by $857,000 or 298.9% to $1.1 million for the year ended December 31, 2003 from $287,000 for the year ended December 31, 2002. This increase was primarily due to $826,000 in information services fees received for the year ended December 31, 2003 following the launch of our Corporate BondTicker service in July 2002 for which we started charging in November 2002. We received $15,000 in information service fees during 2002.

      License Fees. License fees increased by $3.2 million or 348.8% to $4.1 million for the year ended December 31, 2003 from $924,000 for the year ended December 31, 2002. This increase was primarily due to the six new broker-dealer clients that joined the platform between October 1, 2002 and September 30, 2003.

      Interest Income. Interest income decreased by $371,000 or 50.0% to $371,000 for the year ended December 31, 2003 from $742,000 for the year ended December 31, 2002. This decrease was due to the lower interest rate environment in 2003.

      Other. Other income decreased to $0 for the year ended December 31, 2003 from $1.2 million for the comparable period in 2002. This decrease was due to the non-recurring insurance settlement of $1.2 million received in 2002.

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Expenses

      The expenses for the years ended December 31, 2002 and 2003, and resulting dollar and percentage change, are as follows:

                                                   
Year Ended December 31,

2002 2003


$ % of revenues $ % of revenues $ change % change






($ in thousands)
Employee compensation and benefits
  $ 23,097       123.5 %   $ 25,317       43.3 %   $ 2,220       9.6 %
Depreciation and amortization
    6,658       35.6 %     4,688       8.0 %     (1,970 )     (29.6) %
Technology and communications
    3,943       21.1 %     4,755       8.1 %     812       20.6 %
Professional and consulting fees
    4,699       25.1 %     4,180       7.2 %     (518 )     (11.0) %
Warrant-related expense
    6,330       33.8 %     4,024       6.9 %     (2,306 )     (36.4) %
Marketing and advertising
    2,588       13.8 %     2,292       3.9 %     (297 )     (11.5) %
Moneyline revenue share
    708       3.8 %     1,806       3.1 %     1,098       155.2 %
Restructuring charges
    (674 )     (3.6) %           0.0 %     674       (100.0) %
General and administrative
    3,941       21.1 %     4,077       7.0 %     136       3.5 %
     
     
     
     
     
         
 
Total expenses
  $ 51,290       274.3 %   $ 51,140       87.5 %   $ (150 )     (0.3) %
     
     
     
     
     
     
 

      Employee Compensation and Benefits. Employee compensation and benefits expense increased by $2.2 million or 9.6% to $25.3 million for the year ended December 31, 2003 from $23.1 million for the year ended December 31, 2002. This increase was primarily due to the addition of new employees to support our growth, Moneyline consultant staff that became full-time employees and an increase in performance-based bonuses. Total employees increased to 160 as of December 31, 2003, from 133 as of December 31, 2002. As a percentage of total revenues, employee compensation and benefits expense decreased to 43.3% for the year ended December 31, 2003 from 123.5% for the year ended December 31, 2002. We expect this expense to continue to decline as a percentage of total revenues as we continue to grow our business.

      Depreciation and Amortization. Depreciation and amortization expense decreased by $2.0 million or 29.6% to $4.7 million for the year ended December 31, 2003 from $6.7 million for the year ended December 31, 2002. This decrease was primarily due to the fact that $8.5 million of our fixed assets became fully depreciated during 2003. As a percentage of total revenues, depreciation and amortization expense decreased to 8.0% for the year ended December 31, 2003 from 35.6% for the year ended December 31, 2002.

      Technology and Communications. Technology and communications expense increased by $812,000 or 20.6% to $4.8 million for the year ended December 31, 2003 from $3.9 million for the year ended December 31, 2002. This increase was primarily due to the additional costs relating to licenses, maintenance, production data feeds and hosting, all associated with the growth in volume traded on our platform. As a percentage of total revenues, technology and communications expense decreased to 8.1% for the year ended December 31, 2003 from 21.1% for the year ended December 31, 2002.

      Professional and Consulting Fees. Professional and consulting fees decreased by $518,000 or 11.0% to $4.2 million for the year ended December 31, 2003 from $4.7 million for the year ended December 31, 2002. This decrease was primarily due to the fact that certain Moneyline consultant staff became full-time employees in May 2003. As a percentage of total revenues, professional and consulting fees decreased to 7.2% for the year ended December 31, 2003 from 25.1% for the year ended December 31, 2002.

      Warrant-Related Expense. Warrant-related expense decreased by $2.3 million or 36.4% to $4.0 million for year ended December 31, 2003 from $6.3 million for the year ended December 31, 2002. This decrease was primarily due to the U.S. portion of the warrant program becoming fully allocated on January 31, 2003 offset in part by increases in the value of the warrant. As a percentage of total revenues, warrant-related expense decreased to 6.9% for the year ended December 31, 2003 from 33.8% for the year ended December 31, 2002.

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      Marketing and Advertising. Marketing and advertising expense decreased by $297,000 or 11.5% to $2.3 million for the year ended December 31, 2003 from $2.6 million for the year ended December 31, 2002. This decrease was primarily due to reduced advertising in 2003. As a percentage of total revenues, marketing and advertising expense decreased to 3.9% for the year ended December 31, 2003 from 13.8% for the year ended December 31, 2002.

      Moneyline Revenue Share. Moneyline revenue share expense increased by $1.1 million or 155.2% to $1.8 million for the year ended December 31, 2003 from $708,000 for the year ended December 31, 2002. This increase was primarily due to our increased trading volume and the resultant increase in commissions. As a percentage of total revenues, Moneyline revenue share expense decreased to 3.1% for the year ended December 31, 2003 from 3.8% for the year ended December 31 2002.

      Restructuring Charges. For year ended December 31, 2002, a restructuring charge of $674,000 recorded in the year ended December 31, 2001 was determined not to be required and was reversed. There were no restructuring charges in 2003.

      General and Administrative. General and administrative expense increased by $136,000 or 3.5% to $4.1 million for the year ended December 31, 2003 from $3.9 million for year ended December 31, 2002. This increase was due primarily to a combination of increases in travel expense and miscellaneous expenses, offset by a $318,000 decrease in occupancy costs due to the sub leasing of unneeded facilities. As a percentage of total revenues, general and administrative expense decreased to 7.0% for the year ended December 31, 2003 from 21.1% for the year ended December 31, 2002.

 
Provision for Income Tax

      For the year ended December 31, 2003, income taxes were minimal due to the benefit of the net operating loss carryforward and the effective income tax rate for the year was 2.6%. No income tax provision was recorded for the year ended December 31, 2002 as a result of operating losses incurred during the year. We have recorded a valuation allowance against the gross deferred tax assets arising from net operating loss carryforwards. This valuation allowance was deemed appropriate due to available evidence indicating that some or all of the deferred tax assets might not be realized in future years due to annual utilization restrictions and the lack of a history of profitable operations. The net operating losses will be carried forward to future years.

 
      Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
 
Overview

      Our operations for the year ended December 31, 2002 resulted in a net loss of $32.6 million compared to a net loss of $62.7 million for the year ended December 31, 2001. This substantial reduction in our loss is attributable to a combination of increased revenue and reduced expenses. Total revenues increased by $12.1 million or 183.4% to $18.7 million for the year ended December 31, 2002 from $6.6 million for the year ended December 31, 2001. Our increased revenues were primarily due to increases in trading volume and the resultant increase in commissions. Total expenses decreased by $18.0 million or 25.9% to $51.3 million for the year ended December 31, 2002 from $69.3 million for the year ended December 31, 2001. Expenses decreased primarily because no restructuring costs were incurred and professional and consulting fees were reduced.

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Revenues

      The revenues for the years ended December 31, 2001 and 2002, and resulting dollar and percentage change, are as follows:

                                                       
Year Ended December 31,

2001 2002


$ % of revenues $ % of revenues $ change % change






($ in thousands)
 
Commissions
                                               
   
U.S. high-grade
  $ 3,392       51.4 %   $ 13,390       71.6 %   $ 9,998       294.7 %
   
European high-grade
    47       0.7 %     975       5.2 %     928       1,975.4 %
   
Other
    833       12.6 %     1,190       6.4 %     357       42.8 %
     
     
     
     
     
         
     
Total commissions
    4,273       64.8 %     15,555       83.2 %     11,283       264.1 %
Information and user access fees
    13       0.2 %     287       1.5 %     274       2,178.3 %
License fees
          0.0 %     924       4.9 %     924       N/A  
Interest income
    2,132       32.3 %     742       4.0 %     (1,390 )     (65.2) %
Other
    181       2.7 %     1,193       6.4 %     1,012       559.7 %
     
     
     
     
     
         
   
Total revenues
  $ 6,598       100.0 %   $ 18,702       100.0 %   $ 12,103       183.4 %
     
     
     
     
     
     
 

      Commissions. Total commissions increased by $11.3 million or 264.1% to $15.6 million for the year ended December 31, 2002 from $4.3 million for the year ended December 31, 2001, primarily as a result of increased trading volume from $11.7 billion for the year ended December 31, 2002 to $48.4 billion for the year ended December 31, 2003 of U.S. high-grade corporate bonds by our new and existing broker-dealer and institutional investor clients.

      Information and User Access Fees. Information and user access fees increased by $274,000 to $287,000 for the year ended December 31, 2002 from $13,000 for the year ended December 31, 2001. The increase was primarily due to recording a full year of user access fees, which increased by $270,000 for the year ended December 31, 2002.

      License Fees. License fees were $924,000 for the year ended December 31, 2002. We did not receive any license fees from our broker-dealer clients in the year ended December 31, 2001.

      Interest Income Interest income decreased by $1.4 million or 65.2% to $742,000 for the year ended December 31, 2002 from $2.1 million for the year ended December 31, 2001. This decrease was due to lower cash balances in 2002.

      Other. Other revenues increased by $1.0 million or 559.7% to $1.2 million for the year ended December 31, 2002 from $181,000 for the year ended December 31, 2001. We received insurance proceeds and World Trade Center recovery grants totaling $1.2 million, of which $526,000 relates to reimbursement of the additional costs incurred and $667,000 relates to loss of revenues. Such amount is included in our 2002 Statement of Operations in “Other revenues.”

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Expenses

      The expenses for the years ended December 31, 2001 and 2002, and resulting dollar and percentage change, are as follows:

                                                     
Year Ended December 31,

2001 2002


$ % of revenues $ % of revenues $ change % change






($ in thousands)
Expenses
                                               
 
Employee compensation
and benefits
  $ 23,534       356.7 %   $ 23,097       123.5 %   $ (436 )     (1.9) %
 
Depreciation and amortization
    5,127       77.7 %     6,658       35.6 %     1,531       29.9 %
 
Technology and communications
    5,240       79.4 %     3,943       21.1 %     (1,297 )     (24.7) %
 
Professional and consulting fees
    12,903       195.6 %     4,699       25.1 %     (8,205 )     (63.6) %
 
Warrant-related expense
    5,874       89.0 %     6,330       33.8 %     457       7.8 %
 
Marketing and advertising
    1,780       27.0 %     2,588       13.8 %     808       45.4 %
 
Moneyline revenue share
    408       6.2 %     708       3.8 %     300       73.5 %
 
Restructuring charges
    8,244       124.9 %     (674 )     (3.6 )%     (8,918 )     (108.2) %
 
General and administrative
    6,153       93.2 %     3,941       21.1 %     (2,212 )     (35.9) %
     
     
     
     
     
         
   
Total expenses
  $ 69,262       1,049.7 %   $ 51,290       274.3 %   $ (17,972 )     (25.9) %
     
     
     
     
     
     
 

      Employee Compensation and Benefits. Employee compensation and benefits expense decreased by $436,000 or 1.9% to $23.1 million for the year ended December 31, 2002 from $23.5 million for the year ended December 31, 2001. This decrease was primarily due to costs we incurred in 2001 associated with a staff reduction. These costs did not recur in 2002.

      Depreciation and Amortization. Depreciation and amortization expense increased by $1.5 million or 29.9% to $6.7 million for the year ended December 31, 2002 from $5.1 million for the year ended December 31, 2001. This increase was primarily due to increased costs of $1.4 million related to the development of our trading platform and the inclusion of a full year of depreciation for assets acquired in the Trading Edge acquisition in March 2001.

      Technology and Communications. Technology and communications expense decreased by $1.3 million or 24.7% to $3.9 million for the year ended December 31, 2002 from $5.2 million for the year ended December 31, 2001. This decrease was primarily due to cost savings we realized after closing Trading Edge data centers in 2001.

      Professional and Consulting Fees. Professional and consulting fees decreased by $8.2 million or 63.6% to $4.7 million for the year ended December 31, 2002 from $12.9 million for the year ended December 31, 2001. This decrease was primarily due to a $2.0 million reduction in investment banking fees, which were paid in 2001 for investment banking services in connection with the acquisition of Trading Edge, and these expenses did not recur in 2002. Additionally, we experienced a decrease in recruiting fees of $900,000, consulting fees of $3.3 million and legal fees of $1.2 million for the year ended December 31, 2002.

      Warrant-Related Expense. Warrant-related expense increased by $457,000 or 7.8% to $6.3 million for the year ended December 31, 2002 from $5.9 million for the year ended December 31, 2001. This increase was primarily due to the commencement of the European portion of the warrant program in March 2002.

      Marketing and Advertising. Marketing and advertising expense increased by $808,000 or 45.4% to $2.6 million for the year ended December 31, 2002 from $1.8 million for the year ended December 31, 2001. This increase was primarily due to expenses we incurred for print and other advertising used to promote our electronic trading platform.

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      Moneyline Revenue Share. Moneyline revenue share expense increased by $300,000 or 73.5% to $708,000 for the year ended December 31, 2002 from $408,000 for the year ended December 31, 2001. This increase resulted from the increase in the volume of trades and commissions in 2002.

      Restructuring Charges. For the year ended December 31, 2001, we incurred a restructuring charge of $8.2 million relating to losses incurred on facilities that were subleased, employee severance costs and the termination of municipal bond trading. In 2002, $674,000 of this restructuring charge was determined not to be required and was reversed.

      General and Administrative. General and administrative expense decreased by $2.2 million or 35.9% to $3.9 million for the year ended December 31, 2002 from $6.2 million for the year ended December 31, 2001. This decrease was due to a combination of factors, including reductions in 2002 in travel and rent expenses as well as the non-recurrence of a disaster recovery expense we incurred in 2001 following the September 11, 2001 terrorist acts and the resulting market disruption.

 
Provision for Income Tax

      No income tax provision was recorded for the respective years as a result of operating losses incurred during this period. We have recorded a valuation allowance against the gross deferred tax assets arising from net operating loss carryforwards. This valuation allowance was deemed appropriate due to available evidence indicating that some or all of the deferred tax assets might not be realized in future years due to annual utilization restrictions and the lack of a history of profitable operations. The net operating losses will be carried forward to future years.

 
      Quarterly Results of Operations

      Our quarterly results have varied significantly as a result of:

  •  changes in trading volume due to market conditions, due to a decrease in the number of trading days in certain quarters, and due to seasonality effects caused by slow-downs in trading activity during certain periods;
 
  •  non-recurring revenues relating to an insurance settlement and New York State disaster recovery grant relating to the September 11, 2001 terrorist acts and non-recurring expenses relating to the Trading Edge acquisition;
 
  •  increases in the number of broker-dealers and institutional investors using our trading platform as well as increased usage by existing clients; and
 
  •  expansion of the products we offer to our clients.

67


 

      The following table sets forth certain unaudited consolidated quarterly income statement data for the ten quarters ended June 30, 2004. In our opinion, this unaudited information has been prepared on a basis consistent with our annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the unaudited quarterly data. This information should be read in conjunction with our consolidated financial statements and related notes, included in this prospectus. The results of operations for any quarter are not necessarily indicative of results that we may achieve for any subsequent periods.

                                                                                       
Three Months Ended

March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
2002 2002 2002 2002 2003 2003 2003 2003 2004 2004










(unaudited)
(in thousands)
Revenues
                                                                               
 
Commissions
                                                                               
   
U.S. high-grade(1)
  $ 2,624     $ 2,986     $ 3,188     $ 4,592     $ 6,958     $ 9,803     $ 12,157     $ 11,392     $ 11,424     $ 11,492  
   
European high-grade(2)
    124       227       195       430       1,009       1,465       2,114       2,538       4,521       3,621  
   
Other(3)
    148       252       411       379       888       1,277       1,439       1,761       1,804       1,677  
     
     
     
     
     
     
     
     
     
     
 
     
Total commissions
    2,896       3,465       3,794       5,400       8,855       12,544       15,710       15,691       17,750       16,791  
 
Information and user access fees(4)
    53       52       89       92       122       268       391       362       489       532  
 
License fees
    42       42       774       66       1,679       838       533       1,095       582       566  
 
Interest income(5)
    225       184       204       130       86       91       90