As filed with the Securities and Exchange Commission on August 8, 2001
File No. 000-32651
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
To
Form 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
The Nasdaq Stock Market, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
Delaware 52-1165937
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Liberty Plaza 10006
New York, New York (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number,
including area code:
212-858-4750
Copies to:
Edward S. Knight, Esq. Matthew J. Mallow, Esq.
The Nasdaq Stock Market, Inc. Eric J. Friedman, Esq.
One Liberty Plaza Skadden, Arps, Slate, Meagher & Flom LLP
New York, New York 10006 Four Times Square
New York, New York 10036
Securities to be registered pursuant to Section 12(b) of the Act:
Not Applicable
Title of each class Name of each exchange on which
to be so registered each class to be registered
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
===============================================================================
EXPLANATORY NOTE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Form 10 became effective on June 29, 2001. However, material
amendments to the financial information contained herein may be forthcoming
due to ongoing discussions between The Nasdaq Stock Market, Inc. and members
of the staff of the Securities and Exchange Commission. Accordingly, the
financial information contained in this Form 10 should not be relied upon and
remains subject to further revision.
TABLE OF CONTENTS
Page
Item 1. Business.........................................................2
Item 2. Financial Information...........................................35
Item 3. Properties......................................................46
Item 4. Security Ownership of Certain Beneficial Owners
and Management..................................................46
Item 5. Directors and Executive Officers................................50
Item 6. Executive Compensation..........................................54
Item 7. Certain Relationships and Related Transactions..................57
Item 8. Legal Proceedings...............................................59
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters...................59
Item 10. Recent Sales of Unregistered Securities.........................59
Item 11. Description of Registrant's Securities to be Registered.........60
Item 12. Indemnification of Directors and Officers.......................64
Item 13. Financial Statements and Supplementary Data.....................64
Item 14. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure........................................65
Item 15. Financial Statements and Exhibits...............................65
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
This registration statement (the "Registration Statement")
contains "forward-looking" statements based on our current expectations,
assumptions, estimates and projections about The Nasdaq Stock Market, Inc.
("Nasdaq") and our industry. Actual results may differ materially from
those described in the forward-looking statements and will be affected by a
variety of risks and factors including, without limitation, the risks
described in "Item 1. Business-- Risk Factors" of this Registration
Statement. Readers should carefully review this Registration Statement in
its entirety, including, but not limited to, Nasdaq's financial statements
and the notes thereto. Nasdaq undertakes no obligation to publicly release
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof.
Item 1. Business.
Nasdaq Overview
The Nasdaq Stock Market is the world's largest electronic, screen-based
equity securities market and the largest equity securities market in the
world based on dollar volume. Through its deployment of advanced
technology, Nasdaq is positioning itself to become a truly global
securities market. Since its inception in 1971, Nasdaq has been a leader in
utilizing technology to enhance the securities markets. Nasdaq provides
products and services in the following three principal categories:
o Issuer services provide information services and products to
Nasdaq-listed companies and are responsible for obtaining new
listings on Nasdaq. In fiscal year 2000, listing fees
accounted for revenues of $184.6 million, which represented
approximately 21.3% of Nasdaq's total revenues.
o Transaction services include collecting, processing and
disseminating price quotes of Nasdaq-listed securities, the
routing and execution of buy and sell orders for
Nasdaq-listed securities and transaction reporting services
concerning certain qualified securities. Nasdaq's market
participants, who consist of market makers, electronic
communication networks ("ECNs") and order entry firms, each
of which is described below, are the users of Nasdaq's
transaction services. In fiscal year 2000, transaction
services accounted for revenues of $395.1 million, which
represented approximately 45.5% of Nasdaq's total revenues.
o Market information services provide varying levels of quote
and trade information to data vendors, who in turn sell it to
the public. In fiscal year 2000, market information services
accounted for revenues of $258.3 million, which represented
approximately 29.8% of Nasdaq's total revenues.
Nasdaq's growth and operating results are directly affected by the trading
volume of its listed securities and the number of companies listed on
Nasdaq. The following chart illustrates the significant business growth
Nasdaq has experienced over the past five years:
- ----------------------------------------------------------------------------------------------
For the 12 months ended For the 12 months ended For the six months
December 31, 1996 December 31, 2000 ended June 30, 2001
- ----------------------------------------------------------------------------------------------
Total share volume 138.1 billion 442.8 billion 255.6 billion
- ----------------------------------------------------------------------------------------------
Percentage of total shares 55.6% 61.6% 61.3%
traded in the primary
United States markets
- ----------------------------------------------------------------------------------------------
Dollar volume of equity $3.3 trillion $20.4 trillion $6.7 trillion
securities traded on Nasdaq
- ----------------------------------------------------------------------------------------------
Percentage of dollar volume 44.0% 62.8% 52.3%
of all equity securities
traded in the primary
United States markets
- ----------------------------------------------------------------------------------------------
Average Daily Share Volume 543.8 million 1.8 billion 2.0 billion
- ----------------------------------------------------------------------------------------------
Average Daily Dollar Volume $13 billion $81 billion $53 billion
- ----------------------------------------------------------------------------------------------
Market value of Nasdaq listed $1.5 trillion $3.6 trillion $3.2 trillion
companies (at period end)
- ----------------------------------------------------------------------------------------------
As a result of this business growth, Nasdaq's total revenues increased from
$332.2 million in 1996 to $868.0 million in 2000. During the same period,
Nasdaq's net income increased from $40.4 million in 1996 to $150.1 million
in 2000.
As of June 30, 2001 there were 4,378 companies listed on Nasdaq. As of June
30, 2001, Nasdaq was home to the highest percentage of publicly-traded
technology and service companies in the U.S., including 78% of computer
hardware and peripherals companies, 96% of computer networking companies, 85%
of computer software and data processing companies, 87% of semiconductor
companies, 71% of telecommunications and electronic companies, and 82% of
biotechnology and health care companies. In addition, as of June 30, 2001,
there were over 460 foreign companies listed on Nasdaq, more than on any other
U.S. equities market.
Nasdaq's top 100 U.S. and international non-financial listed stocks,
reflecting Nasdaq's largest growth companies across major industry groups,
comprise the Nasdaq-100 Index(R). As of June 30, 2001, the companies in the
Nasdaq-100 Index(R) had an average market capitalization of approximately
$18.7 billion and an average daily trading share volume of 11.4 million
shares. From June 30, 1991 to June 30, 2001, the Nasdaq-100 Index rose by
approximately 620%. The Nasdaq Composite Index(R) measures all domestic and
non-U.S. based common stocks listed on Nasdaq. This index is market-value
weighted so that each company's security affects the index in proportion to
its market value. The Nasdaq Composite Index rose by approximately 354%
from June 30, 1991 to June 30, 2001, compared with an approximate 230% gain
for the S&P 500 Index(R), an approximate 261% gain for the Dow Jones
Industrial Average, and an approximate 206% gain for the NYSE Composite
Index(R).
Nasdaq's Market Model
Nasdaq's market model is one of "open architecture." Participation in the
trading activities on Nasdaq is not limited to any fixed number of market
participants. This allows a large number of broker-dealers with widely
different business models and trading technologies to participate in the
Nasdaq network and compete with one another. The Nasdaq network, formally
called the "Enterprise Wide Network II", is a telecommunications network
that Nasdaq uses to deliver transaction and market information services to
its market participants. See "--The Nasdaq Network." Market participants
can access the network via Nasdaq Workstation II, Nasdaq's proprietary
operating system for the network, or through other customized operating
systems. See "--Products and Services-Transaction Services."
Market makers, also known as dealers, provide liquidity (which refers to the
ability of a stock to absorb a large amount of buying and selling without
substantial movement in price) by being willing to buy or sell securities at
all times at publicly-quoted prices for their own account and by maintaining
an inventory of securities for their customers. Market makers in a particular
stock are required at all times to post their bid and offer prices (i.e.,
price at which they will buy and sell) into the Nasdaq network where they can
be viewed and accessed by all market participants. Over 400 market makers
participate in Nasdaq. On average, stocks listed on Nasdaq have 14 market
makers. The minimum number of market makers for any Nasdaq-listed stock is two
and some stocks have over 80 market makers.
In addition to traditional market makers, the Nasdaq network also connects
to other brokerage firms operating as ECNs. ECNs provide electronic
facilities for investors to trade directly with each other without going
through a market maker. They operate simply as order-matching mechanisms
and do not maintain inventories of securities of their own. Nasdaq also
connects to other registered exchanges through SelectNet and the Nasdaq
InterMarket. The flexibility of the Nasdaq network means that innovators
with new trading technologies or strategies have an opportunity to
implement them quickly in the Nasdaq marketplace.
An order entry firm is a broker-dealer, but not a market maker or an ECN
for a particular security. An order entry firm can use Nasdaq services to
view price quotations and route customer orders for securities to a market
maker or ECN posting quotes in Nasdaq for that security so that such orders
can be executed.
Nasdaq's electronic systems centralize the price quotations from all market
participants in a given Nasdaq-listed stock so that they can compete and
others can choose with whom they are going to trade. Nasdaq also gathers
the trade and quote information from all of these market participants and
passes it on to data vendors who resell this information to the investment
community and the general public.
Nasdaq's History
Founded in 1971, Nasdaq is a subsidiary of the National Association of
Securities Dealers, Inc. (the "NASD"). The NASD, which operates subject to
the oversight of the U.S. Securities and Exchange Commission (the "SEC"),
is the largest self-regulatory organization ("SRO") in the United States
with a membership that includes virtually every broker-dealer that engages
in the securities business with the U.S. public. See "-- The NASD." In
2000, the NASD implemented a separation of Nasdaq from the NASD by
restructuring and broadening the ownership in Nasdaq (the "Restructuring").
The principal goals of the Restructuring, among others, were to (i) raise
proceeds to create a financially stronger Nasdaq better able to invest in
new technologies and address competitive challenges and global
opportunities, (ii) raise proceeds to support the operations of the NASD
which would remain the principal SRO responsible for the securities
markets, and (iii) realign strategically the ownership of Nasdaq by
enlisting a broad class of strategic investors interested in Nasdaq's
long-term success. As of June 30, 2001, the NASD beneficially owned
approximately 28% of Nasdaq on a fully diluted basis (approximately 70% on
a non-diluted basis). See "--The Restructuring."
In connection with the Restructuring, Nasdaq has applied with the SEC to
become registered as a national securities exchange ("Exchange Registration")
by filing an application for Exchange Registration with the SEC. In general,
Exchange Registration is a change in legal status for Nasdaq as opposed to a
change in the way Nasdaq operates. A decision on Exchange Registration is not
expected to occur until later this year or early next year and there is no
assurance that Nasdaq's application for Exchange Registration will be granted
or as to the timing of Exchange Registration. See"--Risk Factors--The SEC may
challenge or not approve Nasdaq's plan to become a national securities
exchange or it may require changes in the manner Nasdaq conducts its business
before granting its approval." Information relating to Nasdaq's application can
be found at the SEC's web site at http://www.sec.gov/rules/other/34-44396.htm.
The SEC has stated that its approval of Exchange Registration is linked to the
NASD's ability to provide an alternative facility to NASD members to trade
exchange listed securities. As a result, the SEC's present position appears to
be that the NASD must have an operating quotation and transaction reporting
facility for securities listed on Nasdaq, the New York Stock Exchange (the
"NYSE") and the American Stock Exchange LLC ("Amex") in place upon Exchange
Registration. Until such time as Nasdaq may obtain Exchange Registration,
Nasdaq's legal authority to operate as a stock market is delegated to it by
the NASD under a plan approved by the SEC (the "Delegation Plan"). Pursuant to
the Delegation Plan, the NASD must retain voting control over Nasdaq.
If Nasdaq obtains Exchange Registration it will receive its own SRO status,
separate from that of the NASD. Pursuant to the Exchange Act, SROs include
any recognized national securities exchange, registered securities
association (of which the NASD is currently the only one), or registered
clearing agency, or, for certain purposes, the Municipal Securities
Rulemaking Board. In general, a SRO is responsible for regulating its
members through the adoption and enforcement of rules and regulations
governing the business conduct of its members. As a SRO, Nasdaq will have
its own rules pertaining to its members and listed companies regarding
listing, membership and trading that are distinct and separate from those
rules applicable generally to broker-dealers as administered by the NASD.
Broker-dealers will be able to choose to become members of Nasdaq, in
addition to their other SRO memberships, including membership in the NASD.
In addition, Exchange Registration will enable the NASD to achieve its
stated intention to divest completely itself of an ownership interest in
Nasdaq. See "--Exchange Registration."
Whether or not Nasdaq is granted Exchange Registration, it is not expected
to have a material affect on Nasdaq's operating results in the short-term.
In the long-term, however, Exchange Registration is expected to improve the
competitive position of Nasdaq. Among other things, an independent Nasdaq
will have greater access to the capital markets in order to raise funds for
service enhancements and the flexibility to use its Common Stock in
connection with acquisitions or entering into strategic partnerships.
In April 2001, the Nasdaq Board approved in principle taking steps to
prepare for an initial public offering ("IPO") of its Common Stock.
Nasdaq's ability to consummate an IPO, and the timing of an IPO, will
depend on a variety of factors including recognition for Nasdaq by the SEC
that it meets the qualifications for Exchange Registration, the progress of
several important technology initiatives, and favorable market conditions.
Industry Overview
On traditional stock exchanges such as the NYSE, all trades in a single stock
take place in a single physical location on a trading floor. At that location,
a member of the exchange known as a designated dealer oversees the trading in
that stock. The designated dealer has an obligation to maintain a "fair and
orderly market" and acts as both a market maker and an auctioneer. Similar to
Nasdaq's market makers, the designated dealer is required to post bid and
offer price quotations at all times. When interest is shown in a displayed
order, the designated dealer solicits additional interest from brokers present
on the floor, or for his own account. The designated dealer oversees the
"order book" of orders that are routed to the floor of the NYSE. This order
book has traditionally been unavailable for the public to view. As a fully
computerized market, Nasdaq's quote montage is available to the public. As a
fully computerized market, Nasdaq itself does not have a central trading
floor.
In addition to the designated dealer, there are numerous floor brokers who
negotiate larger orders face-to-face for their customers. Typically, a
floor broker receives an order from a brokerage firm and then walks over to
the specialist post where the stock is traded. The floor broker then
negotiates with the designated dealer and any other floor brokers
interested in the same stock to try to fill the order. Smaller orders on a
traditional exchange may be electronically routed to the designated
dealer's order book.
Exchanges usually limit the number of their members. In order to become a
member, one has to purchase a membership, called a seat, from another
member who wants to sell.
Stock exchanges naturally sprang up in many cities to accommodate the needs
of local investors. Advances in communication reduced the need for so many
exchanges, and many of them merged with other stock exchanges. However, a
number of these so-called regional stock exchanges still survive. Although
some of these exchanges have a few exclusive "local" stocks, these
exchanges mostly compete in the business of trading the more active NYSE-
and Nasdaq-listed stocks. Although some of the regional exchanges still
have physical trading floors, for the most part their designated dealers
are acting as dealers filling electronically submitted orders from retail
firms. The regional exchanges include the Boston, Chicago, Cincinnati,
Pacific and Philadelphia exchanges.
The following table sets forth information comparing the primary U.S.
markets for 1996, 2000 and the six month period ending June 30, 2001:
- --------------------------------------------------------------------------------------------------------------------------
For the 12 months ended For the 12 months ended For the six months ended
December 31, 1996 December 31, 2000 June 30, 2001
- --------------------------------------------------------------------------------------------------------------------------
Nasdaq NYSE Amex Nasdaq NYSE Amex Nasdaq NYSE Amex
- --------------------------------------------------------------------------------------------------------------------------
Total share volume (billions) 138.1 104.6 5.6 442.8 262.5 13.3 255.6 152.2 9.1
- --------------------------------------------------------------------------------------------------------------------------
Total dollar volume $3.3 $4.1 $0.10 $20.4 $11.1 $1.0 $6.7 $5.6 $0.5
(trillions)
- --------------------------------------------------------------------------------------------------------------------------
Average daily share volume 543.8 411.9 22.6 1,757.0 1.041.6 52.9 2,045.1 1,217.7 72.5
(millions)
- --------------------------------------------------------------------------------------------------------------------------
Average daily dollar 13.0 16.0 0.4 80.9 43.9 3.8 53.4 45.0 3.8
volume
(trillions)
- --------------------------------------------------------------------------------------------------------------------------
Number of listed companies 5,556 2,907 751 4,734 2,862 765 4,378 2,814 704
(at period end)
- --------------------------------------------------------------------------------------------------------------------------
Regulatory and technological developments have led to gradual changes in
the industry and resulted in greater competition for trading of securities.
The emergence of alternative trading systems - a term that refers generally
to internal trading systems that are designed to match buyers and sellers
of securities on an agency basis and includes ECNs - has provided an
additional means for investors to transact certain trades. Nasdaq
encourages the use of internal or alternative systems to trade securities
and considers these systems an important component of the Nasdaq market in
that they report trades through Nasdaq and display their best bid and offer
on Nasdaq and transact on Nasdaq. ECNs let buyers and sellers match orders
directly and electronically through computer networks. For the first six
months of 2001, ECNs accounted for approximately 29.3% of the total Nasdaq
trade volume and approximately 34.9% of the total Nasdaq dollar volume.
National Market System
Until the 1970s, each exchange acted independently to disseminate its
market information on its own terms. Beginning in the 1970s, Congress
passed legislation and the SEC adopted rules to create a national market
system. As a result, participants in U.S. securities markets have access to
a consolidated stream of quotation and transaction information from the
exchanges and Nasdaq (acting under the Delegation Plan) for most equity
securities, which can be traded off the exchange or market that lists the
security. The exchanges and Nasdaq act jointly to collect and disseminate
this information under national market system plans approved by the SEC.
The price and transaction information collected under these national market
system plans is sold to data vendors, who in turn sell the information to
the public. After costs are deducted, the revenue generated by the sale of
the information to the data vendors is distributed among the participants
in each of the national market system plans based on their transaction
volume. The national market system plans include:
o The Nasdaq Unlisted Trading Privileges Plan ("UTP Plan"),
which collects and disseminates price and transaction
information for approximately 1,000 securities listed on The
Nasdaq National Market (sm). Members of the plan are the NASD
and certain regional exchanges that trade Nasdaq-listed
securities.
o The Consolidated Quotation Plan, which collects and
disseminates quotation information for securities listed on
the NYSE and Amex. All of the exchanges and the NASD are
members of this plan.
o The Consolidated Tape Association Plan, which collects and
disseminates transaction information for NYSE and Amex
securities. All of the exchanges and the NASD are members of
this plan.
o Nasdaq, acting under the Delegation Plan, participates in a
fourth national market system plan, the InterMarket Trading
System Plan. The InterMarket Trading System is a
communications system that allows orders to be sent to the
exchange or market quoting the best price. All of the
exchanges and the NASD are members of the InterMarket Trading
System Plan. The InterMarket Trading System Plan is described
in more detail in "--Nasdaq InterMarket."
Nasdaq, operating under the Delegation Plan, is a participant in each of
these plans and intends to become a member in its own right of each of
these plans when it becomes an exchange.
Products and Services
Nasdaq's products and services fall into three principal categories:
(1) issuer services;
(2) transaction services; and
(3) market information services.
Issuer Services. The Nasdaq Stock Market is the flagship market of Nasdaq
and has two tiers of listed companies: The Nasdaq National Market, which
included 3,567 companies at June 30, 2001, and The Nasdaq SmallCap Market,
with 811 smaller, emerging growth companies. At June 30, 2001, Nasdaq
listed 4,378 domestic and international companies, the largest number of
listings of any equity market in the world. As of June 30, 2001, Nasdaq had
the highest percentage of publicly traded technology and service companies
in the United States and had more than 460 foreign companies listed, more
than any other U.S. equities market.
From January 1, 1996 through June 30, 2001, 2,356 IPOs, approximately 84.2% of
all IPOs on primary U.S. markets during this period listed on Nasdaq. These
IPOs raised over $165 billion, approximately 44% of the total dollar value
raised in U.S. IPOs during this period. Of all U.S. IPOs during the year ended
December 31, 2000, 397 companies, approximately 88% of U.S. IPOs during this
period, listed on Nasdaq. These IPOs raised over $52.5 billion, approximately
47% of the total dollar value raised in U.S. IPOs during this period. Of all
the U.S. IPOs in the six months ended June 30, 2001, 28 companies,
approximately 55% of U.S. IPOs during this period, listed on Nasdaq. These
IPOs raised over $4.9 billion, approximately 17% of the total dollar value
raised in U.S. IPOs during this period. The reduction in Nasdaq's percentage
of U.S. IPOs during the first six months of 2001 reflects a decline in general
market and economic conditions which has impacted the ability of traditional
growth companies to access the public equity markets. In addition, during this
period there has been an increased number of IPOs of companies being spun-off
from already public parent companies that, in general, have not operated in
traditional growth industries. During the first six months of 2001, these
spin-offs accounted for 16% of all U.S. IPOs, approximately 58% of the total
dollar value raised in all U.S. IPOs during this period. Of the eight
spin-offs during this period, seven of the spin-offs were subsidiaries of
NYSE-listed companies, five of which also listed on the NYSE. In comparison,
during the first six months of 2000, the number of IPO spin-offs from public
companies accounted for only 6% of all U.S. IPOs, approximately 15% of the
total dollar value raised in U.S. IPOs during this period.
Over 85% of all the IPOs that have listed on Nasdaq from January 1, 1996
through June 30, 2001 have listed on The Nasdaq National Market and the
remaining companies have listed on The Nasdaq SmallCap Market.
Nasdaq's overall number of listings has declined from a high of 5,556 listings
as of December 31, 1996 to 4,378 listings as of June 30, 2001. Approximately
88% of the decline in Nasdaq listings over this period has occurred as a
result of failures to meet Nasdaq's listing standards, the imposition of more
rigorous listing standards in 1997 and consolidation of listings due to
increased merger and acquisition activity. The implementation of more rigorous
of listing standards included an increase in the minimum requirements for an
issuer's net tangible assets, market capitalization and net income, an
increase in the minimum bid price requirement, an increase in the number of
market makers required for an issuer's security and the imposition of more
stringent corporate governance standards. From January 1, 1996 through June
30, 2001, 1,970 issuers on Nasdaq have been delisted by Nasdaq for failure to
satisfy listing standards (primarily the failure to satisfy the minimum bid
requirement) and 1,608 issuers on Nasdaq have ceased being listed due to
mergers and consolidations.
A company must meet all of the requirements under at least one of three
listing standards below for initial listing on The Nasdaq National Market
and meet at least one continued listing standard below to maintain its
listing on The Nasdaq National Market:
- ----------------------------------------------------------------------------------------------------------------------
Initial Listing Continued Listing
- ----------------------------------------------------------------------------------------------------------------------
Requirements Standard 1 Standard 2 Standard 3 Standard 1 Standard 2
- ----------------------------------------------------------------------------------------------------------------------
Net Tangible Assets $6 million $18 million N/A $4 million N/A
- ----------------------------------------------------------------------------------------------------------------------
Market Capitalization N/A N/A $75 million N/A $50 million
or or
Total Assets
$75 million $50 million
or or
Total Revenue
$75 million $50 million
- ----------------------------------------------------------------------------------------------------------------------
Pretax Income $1 million N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Shares Outstanding 1.1 million 1.1 million 1.1 million .75 million 1.1 million
- ----------------------------------------------------------------------------------------------------------------------
Operating History N/A 2 years N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Market Value of Shares $8 million $18 million $20 million $5 million $15 million
Outstanding
- ----------------------------------------------------------------------------------------------------------------------
Minimum Bid Price $5 $5 $5 $1 $5
- ----------------------------------------------------------------------------------------------------------------------
Shareholders 400 400 400 400 400
- ----------------------------------------------------------------------------------------------------------------------
Market Makers 3 3 4 2 4
- ----------------------------------------------------------------------------------------------------------------------
For initial and continued listing on The Nasdaq SmallCap Market, a company
must meet the requirements listed below:
- --------------------------------------------------------------------------------------------------------------
Requirements Initial Listing Continued Listing
- --------------------------------------------------------------------------------------------------------------
Net Tangible Assets $4 million $2 million
or or
Market Capitalization $50 million $35 million
or or
Net Income (in last fiscal year or 2 of last 3 fiscal $.75 million $.5 million
years)
- --------------------------------------------------------------------------------------------------------------
Shares Outstanding 1 million .5 million
- --------------------------------------------------------------------------------------------------------------
Market Value of Shares Outstanding $5 million $1 million
- --------------------------------------------------------------------------------------------------------------
Minimum Bid Price $4 $1
- --------------------------------------------------------------------------------------------------------------
Shareholders 300 300
- --------------------------------------------------------------------------------------------------------------
Operating History 1 year N/A
or
Market Capitalization $50 million
- --------------------------------------------------------------------------------------------------------------
Market Makers 3 2
- --------------------------------------------------------------------------------------------------------------
As used in the charts above, "Shares Outstanding" refers to those shares
that are not directly or indirectly held by any officer or director of the
issuer or any beneficial owner of more than ten percent of the total number
of shares outstanding. "Shareholders" is defined as a holder of 100 shares
or more.
Nasdaq charges issuers an initial listing fee, a listing of additional
shares fee, and an annual fee. The initial listing fee for securities
listed on The Nasdaq National Market or The Nasdaq SmallCap Market includes
a one-time listing application fee of $5,000 and a total shares outstanding
fee. The total maximum fee for the initial listing application is $95,000
for The Nasdaq National Market and $10,000 for The Nasdaq SmallCap Market.
For the years ended December 31, 2000, 1999 and 1998, Nasdaq's revenues
from initial listing fees were $53.1 million, $54.9 million and $29.8
million, respectively. Nasdaq's initial listing fees accounted for
approximately 6.1% of Nasdaq's total revenues for the year ended December
31, 2000.
The fee for listing of additional shares is based on the total shares
outstanding, which Nasdaq reviews quarterly. The fee is $500 beginning
after the company has issued 49,999 additional shares per quarter, or $.01
per additional share, whichever is higher, up to a maximum of $22,500 per
quarter and an annual maximum of $45,000. For the years ended December 31,
2000, 1999 and 1998, Nasdaq's revenues from the listing of additional
shares were $49.6 million, $29.6 million and $28.2 million, respectively.
Nasdaq's additional share listing fees accounted for approximately 5.7% of
Nasdaq's total revenues for the year ended December 31, 2000.
Annual fees for securities listed on The Nasdaq National Market are based
on total shares outstanding and range from $10,710 to $50,000. The annual
fee for securities listed on The Nasdaq SmallCap Market is $4,000 for the
first issue and $1,000 for each additional issue. An "issue" refers to the
process (i.e., IPO or private placement) by which the securities of any
company are sold and distributed. For the years ended December 31, 2000,
1999 and 1998, Nasdaq's revenues from all annual listing fees were $81.1
million, $77.3 million and $77.6 million, respectively. Nasdaq's annual
listing fees accounted for approximately 9.3% of Nasdaq's total revenues for
the year ended December 31, 2000.
Following the initial listing, Nasdaq provides information services, products
and programs to Nasdaq-listed companies. Executives of Nasdaq-listed companies
are invited to participate in a variety of programs on a wide range of topics,
such as industry sector specific seminars and investor relation forums. These
executives also have access to Nasdaq Online(sm), a strategic planning tool
provided free of charge to Nasdaq-listed companies that was rated number one
in a recent survey of the top 10 favorite investor relations web sites by the
National Investor Relations Institute. Nasdaq Online presents market data on
all U.S. traded companies and real-time quotes for Nasdaq-listed stocks, as
well as information on institutional ownership, research coverage and
performance ratios. This combination of online real time data and analytical
information, along with a series of other seminars and programs, is designed
to help management of listed companies make better equity management
decisions. Each listed company is assigned a Nasdaq issuer service director
who oversees the listed company's relationship with Nasdaq.
Nasdaq's issuer services directors are continually engaged with each key
Nasdaq-listed company. A schedule of calls and visits along with contact
with various industry and market forums are used to enhance customer
satisfaction, keep companies informed of new developments at Nasdaq, and
discuss the benefits of a listing on Nasdaq. Nasdaq also has created a
program to educate investment bankers, capital market dealers,
institutional investors, and other constituencies that influence listing
decisions.
For the years ended December 31, 2000, 1999 and 1998 Nasdaq's total
revenues from issuer services were $184.6 million, $163.4 million and
$137.3 million, respectively. Issuer services accounted for approximately
21.3% of Nasdaq's total revenues for the year ended December 31, 2000. The
13.0% increase in issuer services revenue in 2000 from 1999 was primarily due
to a fee increase for the listing of additional shares. The 19.0% increase in
issuer services revenues in 1999 from 1998 was primarily due to the 58%
increase in new listings in 1999.
Transaction Services. Transaction services are the core set of products
designed to provide market participants with price discovery tools
supported by the Enterprise Wide Network II communications network and the
Nasdaq Workstation II. As part of its price discovery function, Nasdaq
provides collection, processing and dissemination of price quotations of
Nasdaq-listed securities to its market participants. Price quotations are
made up of two parts - the bid and the offer. The bid is the displayed price
at which the quoting market maker or ECN is prepared to buy the security
from any seller in the marketplace. The offer is the displayed price at
which the quoting market maker or ECN is prepared to sell the security to
any buyer in the marketplace. Since market makers and ECNs may wish to pay
differing amounts to buy or sell a particular security, Nasdaq looks at all
the price quotations of the market makers and ECNs in that security and
independently ranks the bids and offers so that one can easily determine
who is willing to sell the security for the lowest price and the one who is
willing to buy the security at the highest price. This combination of the
best bid and the best offer is the "inside market" or "inside quote."
Included in the price quotations collected by Nasdaq are the quotes of the
exchanges that trade Nasdaq-listed securities under the UTP Plan.
Currently, only the Chicago Stock Exchange and the Cincinnati Stock
Exchange display quotes on Nasdaq pursuant to the UTP Plan.
Once price quotations have been entered into the Nasdaq system, Nasdaq
processes the price quotations by updating the posted price and size (i.e.,
number of shares the posting party will buy or sell at that price) in
response to messages received from the party posting the price quotation.
Only registered market makers, ECNs and UTP Plan exchanges have the ability
to adjust their price and size quotations in the Nasdaq system.
In addition to quotations in Nasdaq-listed securities, Nasdaq also collects
and disseminates quotations in securities authorized for trading on the OTC
Bulletin Board Service(R) ("OTC Bulletin Board") as well as exchange listed
securities that are traded in the over-the-counter market by NASD members.
See "--Other Markets--Nasdaq InterMarket."
Nasdaq's primary transaction services include (i) Order Routing and
Execution, (ii) Trade Reporting and Comparison and (iii) Access Services.
o Order Routing and Execution. Historically, orders for
Nasdaq-listed stocks were communicated via the telephone.
However, advances in technology made routing of orders with
electronic systems prevalent. Since the late 1980s, Nasdaq
has provided electronic routing of buy and sell orders for
Nasdaq-listed stocks to a market maker or ECN and the
execution of those orders through the use of automated
systems. Order routing and execution are the terms generally
used to describe how orders to buy and sell securities are
directed to market participants as well as how these orders
are handled once they reach their destination. Order routing
refers to the act of transmitting orders to another market
participant for action. Order execution is a legally binding
step in which orders are executed, or responded to, once
received by a market participant. During the last few years
Nasdaq has experienced increased usage of its electronic
order routing and execution systems. Approximately 27.0% of
Nasdaq's share volume (based on the aggregate number of
shares traded) comes from orders routed and executed using a
Nasdaq system. The remaining 73.0% comes from internal or
alternative trading systems. Nasdaq has the following four
systems that provide for order routing and/or execution:
o The Nasdaq National Market Execution System (also known as
"SuperSoes(sm)") is an improved system for the execution of
buy and sell orders designed to provide automatic execution
capability for market makers, ECNs and all their
institutional and retail customers, and streamline Nasdaq's
transaction systems. The SuperSoes system is only available
for securities listed on The Nasdaq National Market. Securities
listed on The Nasdaq SmallCap Market will continue to be traded
through the Small Order Execution System ("SOES(sm)")(as
described below) and SelectNet (as described below). SuperSoes
was fully implemented on July 30, 2001. SuperSoes combines
features of the existing SelectNet and SOES. Like SOES,
SuperSoes permits the automatic execution of trades against the
best price quotations of other market participants in The Nasdaq
National Market without the need for an agreement to trade from
the party providing the price quotation. SuperSoes also relaxes
the usage restrictions of SOES, including the share size
restriction. This system allows the entry of single orders of up
to 999,999 shares as opposed to the SOES limit of 1,000 shares.
In addition, the time delay between executions of trades with
the same market maker at the same price for a single security is
eliminated.
SuperSoes is designed to encourage market participants to
make more shares available for trading. Using the system's
reserve size feature, market makers can enter both a
displayed share amount and an un-displayed "reserve" size
number of shares at the same price. Other market participants
see only the displayed number of shares. However, if an order
is routed through the system of a size that would execute
more than all of the displayed quantity of shares, the system
will also automatically execute the remainder against the
hidden reserve shares. This capability is important to market
makers as many are reluctant to post a price quotation for a
large number of shares. Such a quotation can cause other
traders to quickly adjust their price quotations knowing that
the market maker, or the market maker's customer, has a large
amount of shares to buy or sell. The reserve size feature
allows market makers to limit the price impact of displaying
a large amount of shares while still making these shares
available for trading in the market.
SuperSoes' restrictions on the use of SelectNet are designed
to prevent the situation which occurred in the previous
Nasdaq market in which a market maker's price quotation could
be accessed by both SOES and SelectNet at the same time,
resulting in the automatic execution of the trade on SOES and
the receipt of a SelectNet message obligating the market
maker to trade such shares. The result of this process is
that the market maker becomes obligated to trade a number of
shares greater than the number for which it had made a price
quotation. To remedy this problem of the market maker's
liability to two trading systems, the rules of SuperSoes are
designed to ensure that all market participants are obligated
to trade only in response to orders received from one system.
Nasdaq believes that by eliminating the potential for
unintended trade obligations, it will encourage market makers
to commit more shares to the market. The fees for SuperSoes,
to be paid by the originating party, are as follows:
o For trades of less than 2,000 shares: $0.50
o per trade for the first 150,000 trades in a
month
o $0.30 per trade for all additional trades
o For trades of greater than or equal to 2,000 shares:
o $0.90 per trade
o Cancellations
o $0.25 per cancellation
o SelectNet is an automated Nasdaq market service that
facilitates order execution by linking all market
participants that trade Nasdaq-listed stocks. Prior to the
implementation of SuperSoes, SelectNet was the primary system
that market makers used to trade with one another. It is also
the Nasdaq system used to access ECN price quotations and
through which ECNs receive the price quotations of other
market makers. SelectNet operates as a messaging system,
allowing market participants to direct an order message to a
particular counter-party or to broadcast such order to all
market participants offering to buy or sell a security at a
particular or market price. If the order routed via SelectNet
and the posted price quotation to which the order is directed
are of a price and size such that a trade should take place,
SEC and NASD rules generally require the party making the
price quotation to respond through SelectNet agreeing to the
trade. Once the poster of the price quotation sends its
agreement to the trade back to the party directing the order,
the trade is executed and both parties receive a confirmation
of the transaction. SelectNet is available for use by all
market participants and also provides the capability for
users to independently negotiate the terms of trades.
With the implementation of SuperSoes, SelectNet becomes
primarily a tool to be used by market makers to negotiate
trades. Market makers will be prohibited from sending each other
SelectNet messages that would obligate the receiving party to a
trade. However, market makers that wish to trade with ECNs will
still have the ability to send SelectNet order messages that
would require an agreement to trade from the ECN using SelectNet
prior to execution of the trade. ECNs will also have the option
to use SuperSoes to elect to receive automatic executions
against their price quotations, unlike market makers who are
mandated to provide automatic executions against their price
quotation. If ECNs so elect, they are protected from receiving
SelectNet order messages priced and sized in a manner that would
obligate the ECN to a trade in response to the SelectNet order
message. The current fees for SelectNet are (i) a $0.90 activity
fee for the originating party (i.e., the sender) for directed
orders executed by market makers, (ii) for orders sent to ECNs
and ATSs the activity fees for the originating party are as
follows: $0.70 per trade for the first 25,000 executions in a
month, $0.50 per trade for the next 25,000 trades, and $0.10 per
trade for additional trades, (iii) for broadcast orders, $2.50
per side of an executed order, and (iv) a $0.25 fee for
cancelled orders. For the years ended December 31, 2000, 1999
and 1998 Nasdaq's total revenues from SelectNet were $113.5
million, $83.1 million and $42.4 million, respectively.
SelectNet accounted for approximately 13.1% of Nasdaq's total
revenues for the year ended December 31, 2000.
o SOES routes small orders of public customers to market makers
and, based on their quotes, immediately executes trades
without a formal response from the market maker. The SOES
system is restricted to orders of no greater than 1,000
shares and cannot be used by market makers for their own
trading activity. As of August 1, 2001, SOES is only
available to trade securities listed on The Nasdaq SmallCap
Market. It is also not available to access ECN price
quotations or for ECNs to receive the price quotations of
other market participants. Unlike SelectNet, a trade on SOES
is executed without the requirement for the party providing
the price quotation to respond with an agreement to trade.
After execution, the party providing the price quotation is
informed by SOES that a trade has been executed and sent to
settlement. Under current NASD rules, all market makers that
provide price quotations for a security listed on The Nasdaq
National Market must participate in SOES and consent to its
automatic executions. If a market maker has posted the best
price quotation to buy or sell a security and has posted a
share size amount that would satisfy multiple SOES orders,
the system automatically delays 17 seconds between the
delivery of each SOES execution to give the market maker an
opportunity to adjust its price quotation to a new level. The
current fees for SOES, to be paid by the originating party,
are as follows:
o For trades of less than 2,000 shares: $0.50
o per trade for the first 150,000 trades in a month
o $0.30 per trade for all additional trades
o For trades of greater than or equal to 2,000 shares:
o $0.90 per trade
o Cancellations
o $0.25 per cancellation
SOES accounted for approximately 3.7% of Nasdaq's total
revenues for the year ended December 31, 2000.
o Advanced Computerized Execution System ("ACES"), is an order
routing service that is used by market makers to execute
order flow from order entry firms. Order entry firms
generally route buy and sell orders to the best price quotes
displayed in the market or enter into agreements with a
particular market maker where the market maker agrees to fill
the order entry firm's orders at the best price displayed in
the market. Order entry firms can route buy and sell orders
directly to specified market makers through Nasdaq
Workstation II or their own proprietary systems. These orders
are executed within the market makers' internal trading
systems and execution reports are routed back to the order
entry firms. ACES is often used by market makers to connect
with firms whose order volume is too low to justify the fixed
costs of establishing a proprietary network linkage. The
current fee for ACES, charged to the market maker only, is a
$1.00 activity fee per execution for the first 50,000
executions in a month, $0.70 per execution for the next
50,000 executions and $0.20 per execution for all additional
executions. ACES accounted for approximately 2.0% of Nasdaq's
total revenues for the year ended December 31, 2000.
o Computer Assisted Execution System(sm) ("CAES(sm)") is the
transaction service system for Nasdaq InterMarket, which is
an electronic marketplace where NASD members can trade
securities listed on the NYSE or Amex. CAES is linked to the
InterMarket Trading System. CAES allows users to direct
orders in exchange-listed securities to other Nasdaq
InterMarket market makers for automated response and
execution, and also provides access to the InterMarket
Trading System. The InterMarket Trading System is a
communications system that allows exchange-designated
dealers, exchange floor brokers and NASD members to send
orders for execution to the market quoting the best price.
Access to both systems (CAES/InterMarket Trading System)
costs Nasdaq InterMarket participants $100 per month, per
terminal. The current fee for CAES orders is $0.50 for the
originating party (i.e., the sender). CAES and InterMarket
Trading System fees accounted for less than 1% of Nasdaq's
total revenues for the year ended December 31, 2000.
o Trade Reporting and Comparison--Automated Confirmation Transaction
Service(sm) ("ACT(sm)"). U.S. securities laws require that all
registered stock exchanges and securities associations establish a
transaction reporting plan by which information (specifically price and
volume) concerning trades executed in qualified securities in those
markets is centrally collected. Transactions in Nasdaq-listed
securities, exchange listed securities traded over-the-counter, and
other equity securities traded over-the-counter are reported to ACT. A
protocol establishes which of the two parties to the trade are assigned
reporting responsibility. During market open hours, members are to
report trades within 90 seconds. Alternative procedures are in place
for reporting trades executed after hours. ACT has a schedule of fees
that reflect the services it provides. Trade reports are assessed a
nominal fee, while trades that require comparison matching generally
are assessed a higher fee depending upon the size of the trade. The
function that ACT performs depends on the information provided to ACT
by the parties to the trade. ACT risk management fees are $17.25 per
month plus $0.035 for each correspondent per transaction. A cap on ACT
risk management fees was implemented in April 2000, limiting the
monthly payment by clearing firm by correspondent to $10,000. This led
to over a $1 million decrease in ACT risk management revenue from
fiscal year 1999 to fiscal year 2000 despite the significantly higher
trading volumes in the year 2000. Further changes to the pricing
structure currently under consideration might have additional downward
effect on ACT revenues. In a current filing with the SEC, Nasdaq
proposes an interpretation of which firms classify as effectively
"self-clearing" with respect to affiliated correspondents, and relieves
them of the obligation of paying ACT risk management fees. Nasdaq is
contemplating a further clarification to this rule, which would require
SEC approval and which specifies that clearing firms will only be
charged ACT risk management fees for those correspondents they choose
to monitor through ACT risk management. This means that firms will
selectively have the ability to discontinue the use of this service for
certain correspondents and not pay ACT risk management fees, thus
reducing Nasdaq's revenue. For the years ended December 31, 2000, 1999
and 1998 Nasdaq's total revenues from ACT were $100.0 million, $68.1
million and $38.2 million, respectively. ACT fees accounted for
approximately 11.5% of Nasdaq's total revenues for the year ended
December 31, 2000.
o Access Services. The vast majority of Nasdaq's trading information and
trading services are delivered via the Enterprise Wide Network II
telecommunications network, which was jointly designed by Nasdaq and
WorldCom Inc. In November 1997, Nasdaq committed to a six-year, $600
million dollar contract for WorldCom Inc. to build and maintain the
Enterprise Wide Network II, a custom Extranet to expand Nasdaq's daily
trading capacity to four billion shares a day, with the capability of
scaling up to eight billion shares a day. The Enterprise Wide Network
II is one of the world's largest and most sophisticated information
systems, delivering time-sensitive information from Nasdaq's Trumbull,
Connecticut technology center to traders nationwide and giving Nasdaq
sophisticated routing and information collection capabilities. WorldCom
charges Nasdaq monthly for use of the network. The contract with
Worldcom will automatically renew for successive renewal periods
without the prior termination by a party. In the event of termination,
the contract provides that the services will continue for a sufficient
time to allow for a smooth transition. The technology and services
provided by WorldCom would be available to Nasdaq through a variety of
alternative sources. Pursuant to the contract, WorldCom is not
prevented from providing the same network services it provides to
Nasdaq to third parties.
The Enterprise Wide Network II employs technology that is designed to
ensure delivery of information to market participants without delay.
This technology provides market participants with simultaneity; that
is, absolutely equal access to the information they need to make
trading decisions. Thus, response times and the ability to enter
quotes, make trades, and see changes in the market is identical for all
market participants. With simultaneity, Nasdaq is able to provide the
same high level of service to investors and traders across a wide
geographic range, which includes the continental United States, and
parts of Canada.
Users connect to the Enterprise Wide Network II through a Nasdaq
Workstation II or a Nasdaq Workstation II modified with the use of an
application program interface. Connections to the Enterprise Wide
Network II use two separate communications lines, so that if there is a
failure on one line, messages are routed through the backup line. The
Enterprise Wide Network II data center is located in Trumbull,
Connecticut, with a backup facility in Rockville, Maryland.
The Enterprise Wide Network II is presently capable of handling a four
billion share-trading day. The architecture of the network is designed
so that resources can be added to the infrastructure to allow for
higher levels of traffic as Nasdaq continues to grow. Since the
introduction of the Enterprise Wide Network II in August 1999, the
capacity of the network has been doubled to meet growing market demand.
Trade reporting, SOES trades and the distribution of market data to
vendors is accomplished through separate networks, which are now being
integrated with the Enterprise Wide Network II.
Introduced in 1995, Nasdaq Workstation II is a proprietary operating
system for the Enterprise Wide Network II. This operating system gives
securities traders access to a centralized processing complex, which
provides quotation service, automated trade executions, real-time
reporting, trade negotiations, and clearing. Nasdaq's trading terminals
are now on the desks of approximately 9,000 users. With Nasdaq
Workstation II, traders are immediately connected to the Enterprise
Wide Network II. Nasdaq Workstation II employs advanced Windows
technology to create a fast, flexible, and convenient trading
environment running on a variety of platforms that can be integrated
with most in-house systems. An application programming interface allows
approximately 2,400 users currently to customize Nasdaq Workstation II
to meet their own presentation needs. A member firm can use their own
computer to perform these functions. Customers include market makers,
order entry firms, ECN's and UTP Plan exchanges. Services are
distributed through sophisticated computers and high-speed
telecommunications networks. Customers are invoiced for the Enterprise
Wide Network II connection and their respective logins. For the years
ended December 31, 2000, 1999 and 1998, Nasdaq's total revenues from
Nasdaq Workstation II were $121.5 million, $87.6 million and $49.3
million, respectively. Nasdaq Workstation II fees accounted for
approximately 14.0% of Nasdaq's total revenues for the year ended
December 31, 2000.
In December 1999, Nasdaq signed a letter of intent with Primex Trading
N.A., LLC to provide investors and market makers with a new electronic
trading platform. The new system will allow users to seek price
improvement opportunities for their customers' orders by electronically
exposing them to market participants who compete for the orders based
on price within the context of the best quotes publicly displayed. The
technology will be offered exclusively to Nasdaq and is scheduled to
launch in September 2001.
For the years ended December 31, 2000, 1999 and 1998 Nasdaq's total
revenues from transaction services were $395.1 million, $283.7 million and
$160.5 million, respectively. Transaction services accounted for
approximately 45.5% of Nasdaq's total revenues for the year ended December
31, 2000.
Market Information Services. As a market operator, Nasdaq collects and
disseminates price quotations and information regarding price and volume of
executed trades. Nasdaq's market participants have real-time access to
quote and trade data. Interested parties that are not direct market
participants in Nasdaq also can receive real-time information through a
number of market information services products.
Nasdaq has two primary market information services products designed to
provide the varying levels of detail desired by different broker-dealers
and their customers. The first product is called Level 1. This product
provides subscribers with the current inside quote and most recent price at
which the last sale or purchase was transacted for a specific security.
Professional subscribers, e.g., broker-dealers and other employees of
broker-dealers, to this product currently pay $20 per terminal per month
for the service, which is typically delivered to the subscriber through a
third-party data vendor. A vendor or a broker-dealer can provide
non-professional customers, i.e., individual investors, with Level 1
information at a reduced fee calculated on a per query basis of $.005 with
a cap of $1 per month per user. The growth in online investing has
increased the usage of these fee structures by online brokerage firms and
other Internet services. For the years ended December 31, 2000, 1999 and
1998, Nasdaq's revenues from Level 1 fees were $159.6 million, $135.0
million and $107.3 million, respectively. Nasdaq's Level 1 fees accounted
for approximately 18.4% of Nasdaq's total revenues for the year ended
December 31, 2000.
The second data product, the Nasdaq Quotation Dissemination Service,
provides subscribers with the quotes of each individual market maker and
ECN, in addition to the inside quotes and last transaction price. This
service is currently priced at $50 per terminal per month for professional
subscribers and $10 per terminal per month for non-professional customers.
This service is not priced on a per query basis. Professional subscribers
can also access historical data via a subscription to Nasdaq Trader, a
non-UTP Plan product. For the years ended December 31, 2000, 1999 and 1998,
Nasdaq's revenue from Nasdaq Quotation Dissemination Service fees were
$74.8 million, $32.5 million and $21.2 million, respectively. Nasdaq's
Quotation Dissemination Service fees accounted for approximately 8.6% of
Nasdaq's total revenue for the year ended December 31, 2000.
In addition, Nasdaq serves as a securities information processor ("SIP")
for purposes of collecting and disseminating quotation and last sale
information for all transactions effected on The Nasdaq Stock Market. In
creating the national market system, Congress intended for participants in
U.S. securities markets to have access to a consolidated stream of
quotation and transaction information for the exchanges and Nasdaq. To
accomplish this objective, SIPs consolidate information with respect to
quotations and transactions to increase information availability and create
the opportunity for a more efficient and effective market. Nasdaq is the
exclusive SIP pursuant to the UTP Plan. Under the UTP Plan, each
participant can choose up to 1,000 securities from among The Nasdaq
National Market securities from which to quote and trade, and Nasdaq
collects quotation and last sale information from competing exchanges
(currently the Chicago Stock Exchange and the Cincinnati Stock Exchange)
and consolidates such information with the information for all the
securities listed on The Nasdaq Stock Market. Nasdaq sells this information
to vendors for a fee ("Tape Fees"), and the data vendors in turn sell the
last sale and quotation data publicly. Under the revenue sharing provision
of the UTP Plan, Nasdaq is permitted to deduct certain costs associated
with acting as an exclusive SIP from the total amount of Tape Fees
collected. After these costs are deducted from the Tape Fees, Nasdaq
distributes to the respective UTP Plan participants their share of Tape
Fees based on a combination of trade volume and share volume.
While Nasdaq is currently the exclusive SIP for the UTP Plan, it is working
with the other UTP Plan participants to enter into a Request-for-Proposal
process to select a new processor. This process is the result of the SEC's
conditions for extending the UTP Plan beyond its March 2001 termination
date. The SEC has required that there be good faith negotiations among the
UTP Plan participants on a revised UTP Plan that provides for either (i) a
fully viable alternative exclusive SIP for all The Nasdaq National Market
securities, or (ii) a fully viable alternative non-exclusive SIP. To avoid
conflicts of interest, the SEC cautioned that, in the event the revised UTP
Plan provides for an exclusive SIP, a UTP Plan participant--particularly
Nasdaq--should not operate as the exclusive SIP unless (i) the SIP is
chosen on the basis of bona fide competitive bidding and the participant
submits the successful bid, and (ii) any decision to award a contract to a
UTP Plan participant, and any ensuing renewal of such contract, is made
without that UTP Plan participant's direct or indirect voting
participation. The UTP Plan participants are currently in the beginning
stages of creating the Request-for-Proposal, and it will likely take months
to solicit competing bids and come to a joint decision on a new SIP.
The SEC explored the issues relating to the regulation of market
information fees and revenues in its 1999 concept release (no. 34-42208). A
number of developments in the securities industry led the SEC to initiate
its review of the arrangements currently in place for disseminating market
information. Each of these developments is attributable, in large part, to
improved technology for communicating and organizing information,
including:
o the increased demand of retail investors for high-quality
information; and
o the changing structure of the securities industry,
particularly the growth of alternative trading systems that
compete with markets operated by SROs and the creation of
investor owned SROs and markets (such as Nasdaq).
Because the value of a market's information is dependent on the quality of
the market's operation and regulation, the SEC is concerned that the
current arrangements for setting fees and distributing revenues may need to
be revised in light of the changes in the industry.
In July 2000, the SEC established an Advisory Committee on Market
Information to assist it in evaluating issues relating to the public
availability of market information. The issues being addressed by the
committee include (i) alternative models for disseminating and
consolidating information from multiple markets, (ii) how market
information fees should be determined, including the role of public
disclosure of market information costs, fees, revenues and how the fairness
and reasonableness of fees should be evaluated, and (iii) appropriate
governance structures for joint market information plans and their
administration. The committee is expected to present its recommendations to
the SEC by September 2001.
Nasdaq has been participating in the meetings of the Advisory Committee.
The Advisory Committee's discussions have touched on potentially
fundamental changes to SEC rules and policies that govern SIPs and national
market system plans. Nasdaq's written positions on these issues present two
alternative approaches that ensure the continuation of broad dissemination
of consolidated national best-bid-and-offer and consolidated last sale
information and that focus on the ability for exchanges to compete in an
open environment. The first alternative is to eliminate mandatory
participation in the national market system plans, including the UTP Plan,
and allow exchanges to choose among several competing SIPs to distribute
their data. The second alternative, as an interim approach, is to maintain
a single national market system plan with a single exclusive SIP, but one
that is more limited in scope and function.
Nasdaq does not expect its revenues to be affected if it loses its status
as an exclusive SIP and no longer serves as a SIP; however, if this were to
happen, Nasdaq would lose certain control over the costs deducted from the
Tape Fees also. See "-Risk Factors- Nasdaq's costs may increase if it loses
its status as an exclusive SIP."
For the years ended December 31, 2000, 1999 and 1998 Nasdaq's total
revenues from market information services were $258.3 million, $186.5
million and $152.7 million, respectively. Market information services
accounted for approximately 30.1% of Nasdaq's total revenues for the year
ended December 31, 2000.
Other Markets
Nasdaq operates the Nasdaq InterMarket as well as the OTC Bulletin Board.
Nasdaq InterMarket. Nasdaq InterMarket is an electronic marketplace where NASD
members can trade securities listed on the NYSE and Amex. Users can trade on
Nasdaq InterMarket among themselves using Nasdaq's CAES order delivery system,
or with another participating stock exchange through the InterMarket Trading
System. CAES allows users to direct orders in exchange-listed securities to
other NASD members for automatic response and automatic execution, and also
provides access to the InterMarket Trading System. Nasdaq InterMarket revenues
accounted for approximately 2.7% of Nasdaq's total revenues for the year ended
December 31, 2000. Approximately 90% of the revenues generated from the Nasdaq
InterMarket are derived from the sale of data, and the remaining amount
derived from transaction service fees.
For the six months ended June 30, 2001, Nasdaq InterMarket accounted for
approximately 6.21% of trades in stocks listed on the NYSE and
approximately 31.84% of trades in stocks listed on Amex. All Nasdaq
InterMarket trades are reported and disseminated in real-time to the
Consolidated Tape Association ("CTA"), which is the operating authority for
exchange listed securities information, and as such, Nasdaq shares in the
revenues generated by the CTA. Two NASD members that are major wholesale
market makers and one ECN report most trades. Other ECNs report trades
through Nasdaq systems to the CTA and some are planning to begin quoting in
Nasdaq InterMarket. NASD members who trade exchange-listed stocks away from
the exchanges account for a significant amount of Nasdaq InterMarket
trading activity.
OTC Bulletin Board. The OTC Bulletin Board is an electronic screen-based
market for domestic equity securities that, among other things, are not
listed on The Nasdaq Stock Market or any primary national securities
exchange in the United States. At present, the OTC Bulletin Board is a
quotation service, as companies do not list on the OTC Bulletin Board. NASD
members may post quotes only for companies that file periodic reports with
the SEC and/or with a banking or insurance regulatory authority. In
addition, such companies are required to be current with their periodic
filings. Market makers are billed based on their average number of
positions during a month. A position is defined as any price quotation or
indication of interest entered by a market maker in an security listed on
the OTC Bulletin Board. The average number of positions is determined by
the sum of the total number of quotations for each day in the month divided
by the number of trading days in such month. The monthly fee for
participation is $6.00 per position. There are no fees charged to companies
whose securities are listed on the OTC Bulletin Board. The OTC
Bulletin Board revenues accounted for less than one percent of Nasdaq's
total revenues for the year ended December 31, 2000.
Last year, in conjunction with Exchange Registration, the Nasdaq Board of
Directors (the "Nasdaq Board") and the NASD Board of Governors (the "NASD
Board" and, together with the Nasdaq Board, the "Boards"), approved several
rule changes that are designed to enhance the OTC Bulletin Board and permit
Nasdaq to continue to operate it after Exchange Registration. First, the
Boards approved a program for Nasdaq to enter into a listing agreement with
each OTC Bulletin Board issuer and impose new listing standards to ensure
the quality of these issuers. Second, both Boards approved the creation of
an automated order delivery system for the OTC Bulletin Board that would
allow orders to be delivered and executed via Nasdaq Workstation II.
Finally, to accompany the new listing standards and order delivery system,
the Boards approved enhanced market rules that provide for limit order
protection, short interest reporting, and intraday trading halt authority.
Nasdaq plans to submit to the SEC the appropriate proposed rules and
exemption requests that would allow Nasdaq to continue to operate the OTC
Bulletin Board after Exchange Registration. The SEC has not yet approved
the rules or the exemption request. Therefore, it is not certain whether
Nasdaq will continue to operate the OTC Bulletin Board following Exchange
Registration. If the SEC does not approve the exemption request, these
securities could continue to trade over-the-counter through a non-Nasdaq
facility.
Nasdaq's Strategic Initiatives
Nasdaq's strategic initiatives include enhancing its products and services,
pursuing global market expansion through the creation of Nasdaq Japan, Inc.
("Nasdaq Japan") and Nasdaq Europe S.A./N.V. and exploring alliances with
foreign exchanges and creating a market for listing and trading single
stock futures.
Enhancing Products and Services.
Nasdaq Order Display Facility. On January 10, 2001, the SEC approved a rule
proposal to establish the Nasdaq Order Display Facility
("SuperMontage(sm)"). SuperMontage is an improved user interface on the
Nasdaq Workstation II designed to refine how market participants can
access, process, display, and integrate orders and quotes in Nasdaq.
SuperMontage has several strategic implications. First, it is intended to
attract more orders to the Nasdaq market by providing a comprehensive
display of the interest at or near the inside market. Second, SuperMontage
is intended to increase competition and market transparency. Third,
SuperMontage will provide pre-trade anonymity to market participants using
a Nasdaq system. As such, prior to execution, no one will know the identity
of the firm displaying the order unless such firm reveals its identity.
Anonymous trading can contribute to improved pricing for securities by
reducing the potential market impact of large transactions and transactions
by certain investors whose trading activity, if known, may be more likely
to influence other market activity.
By allowing (but not requiring) market participants to give the Nasdaq
system multiple orders at a single as well as at multiple price levels,
SuperMontage will assist market participants with the management of their
back book, i.e., orders that are not at the best price in the market
maker's book/system. This functionality will also assist market
participants with compliance with the SEC's order handling rules, which
among other things, require the display of customer limit orders priced
better than a Nasdaq market maker's or a designated dealer's quote or that
are for a larger number of shares at the same price. Other system
enhancements will make it easier for ECNs to participate in automatic
execution.
In the January 10 approval order, the SEC imposed certain conditions on
both Nasdaq and the NASD that must be met prior to the implementation of
SuperMontage. These conditions addressed the SEC's concern that
participation in the SuperMontage system would be viewed as involuntary due
to Nasdaq's role as the exclusive SIP. See "-Market Information Services"
for a description of Nasdaq's role as an exclusive SIP. The conditions
imposed by the SEC include that:
o the NASD will offer a quote and trade reporting alternative
that satisfies the SEC's rules;
o NASD quotes disseminated through the exclusive SIP will
identify the alternative trading system or market maker
source of the quote; and
o participation in SuperMontage will be entirely voluntary.
Assuming these conditions can be met and Nasdaq can successfully implement
SuperMontage, Nasdaq will add SuperMontage to the Nasdaq Workstation II,
which will show the top three price levels: the best bid and offer in
Nasdaq, and the two next best bids and offers. In each case, this display
will be accompanied by the aggregate order size at each price level. Nasdaq
market makers and ECNs will be able to display their orders anonymously at
these price levels in SuperMontage, thus encouraging display of greater
trading interest. As currently envisioned, SuperMontage displays the
aggregate trading interest in a security at the top of the screen by
aggregating trading interest of identified market participants and any
anonymous interest that exists in such security, which is entered into the
Nasdaq system. Market participants will be able to access the best prices
in SuperMontage electronically using enhanced versions of Nasdaq's
SuperSoes and SelectNet services. Thus, Nasdaq will provide order delivery
and automatic execution against the prices displayed in SuperMontage.
Nasdaq will continue to offer the ability for market participants to
negotiate transactions with specific market makers and ECNs electronically
at sizes above the quote size in Nasdaq. Nasdaq currently contemplates that
it will begin user testing of SuperMontage in the second quarter of 2002.
Creating a Single Stock Futures Market. On June 1, 2001, Nasdaq and the
London International Financial Futures and Options Exchange ("LIFFE")
formed Nasdaq LIFFE, LLC, a new U.S. joint venture company to list and
trade single stock futures. Established in 1982, LIFFE is an electronic
exchange which enables its users to manage their risk to foreign exchange
rates and interest rates through the offering of markets for a range of
financial and non-financial derivative instruments These instruments
include futures and options products on short-term interest rates,
government bonds, equities (including equities in the U.S., the U.K. and
continental Europe), indices and commodity products. In 1998, LIFFE
transformed its market from a floor-based trading system to a screen-based
electronic system through the implementation of its LIFFE CONNECT(TM)
electronic system. The products of the new joint venture are expected to be
traded through a modified version of the LIFFE CONNECT electronic system.
Nasdaq LIFFE, LLC is currently in the process of registering with the Commodity
Futures Trading Commission as a contract market.
Pursuing Global Market Expansion. The forces of technology and deregulation
are accelerating the pace of globalization in the trading and processing of
securities. Nasdaq believes that the foundation to create a global exchange
should be built on a strong regional presence in the dominant capital
centers of the world. At this time, those centers are the United States,
Europe, and parts of Asia, particularly Japan. Establishing centers for
price discovery and trading in these key regions will develop the
foundation for electronically linking these markets to establish a global
platform. Senior officers of Nasdaq have conducted exploratory discussions
with a number of major U.S. and foreign securities exchanges, regarding
cooperation, joint ventures, marketing affiliations, combinations, or other
collaborative activities. Nasdaq anticipates that such discussions will
continue but cannot predict the results of any such discussions.
Nasdaq Japan. In June 1999, a joint venture agreement to capitalize a new
company, Nasdaq Japan Planning Company, Inc. (subsequently renamed Nasdaq
Japan, Inc.) was entered into by the NASD and SOFTBANK Corp. of Japan
("SOFTBANK"), a provider of information, distribution and infrastructure
services in the digital information industry. The NASD's investment was
subsequently transferred to Nasdaq Global Holdings ("Nasdaq Global"), which is
a wholly-owned subsidiary of Nasdaq. Under this joint venture agreement,
Nasdaq and SOFTBANK agreed to jointly operate and provide management support
and technology and services to Nasdaq Japan in its development and
implementation of a new electronic stock market in Japan as a section of the
Osaka Securities Exchange (the "OSE"). The OSE is one of Japan's oldest
securities exchanges, with over 1,200 listed companies, and is Japan's largest
derivatives market. Nasdaq also provides Nasdaq Japan with licenses to its
technology and trademarks. On April 19, 2000, Nasdaq Japan signed a Business
Collaboration Agreement with the OSE to establish Nasdaq Japan Market as a new
market section of the OSE. The Nasdaq Japan Market began operations on June
19, 2000. In its first phase of operations, prior to its deployment of
Nasdaq/Indigo Markets technology, Nasdaq Japan will recruit IPOs of companies
for listing and will trade these securities on the existing OSE system. As of
May 1, 2001, 52 companies are trading on the interim trading platform with an
average monthly share volume of 5,281,728 shares. The Nasdaq Japan Market
operates under the umbrella of the OSE, which provides regulatory and listing
review as well as clearance and settlement services. In addition, Nasdaq
Japan, subject to regulatory approvals, intends to be competitive in the
trading of U.S. listed securities and exchange-traded funds in Japan, with the
trading of the Nasdaq-100 QQQ exchange-traded fund planned to begin in 2001.
Through the second quarter of 2001, each of Nasdaq and SOFTBANK has made
capital contributions of approximately $2.6 million to Nasdaq Japan. In July
2001, the Nasdaq Board approved an additional $8 million capital contribution
to Nasdaq Japan.
In October, 2000, Nasdaq Japan's owners approved a private placement
transaction in which Nasdaq Japan sold an approximately 15 percent stake for
approximately $48 million to a group of 13 major Japanese, U.S. and European
brokerages, thereby reducing the ownership interest of Nasdaq Global in Nasdaq
Japan to approximately 39.2%. Ten of the new investors sit on an advisory
council that recently elected one director to represent them on Nasdaq Japan's
seven-member board. The proceeds of this private placement will be used
primarily for working capital and the development of a more sophisticated and
efficient share-trading platform.
Nasdaq Europe S.A./N.V. In March, 2001, Nasdaq invested $12.5
million to acquire an initial 68% stake in EASDAQ S.A./N.V. ("EASDAQ"),
with an immediate aim to dilute its interest through the introduction of
other strategic partners as shareholders. EASDAQ is a pan-European stock
market for emerging growth companies and is headquartered in Brussels.
Pursuant to the investment agreement with EASDAQ, Nasdaq obtained the right
to appoint a majority of EASDAQ's board of directors, entered into
trademark licensing and consulting agreements with EASDAQ and received from
EASDAQ repayment of a loan made by Nasdaq in the amount of approximately
$2.6 million. In connection with this investment Nasdaq also restructured
EASDAQ into Nasdaq Europe S.A./N.V. with the goal to make Nasdaq Europe a
globally linked pan-European market.
A variety of firms, representing a cross-section of U.S. and foreign-based
investment banking, financial services and securities firms, have joined
Nasdaq as investors in Nasdaq Europe. Among these firms is Knight Trading
Group, which holds an approximately 8.8% ownership stake in Nasdaq Europe
through its earlier investment in EASDAQ prior to its restructuring into
Nasdaq Europe. As of June 30, 2001, Nasdaq's ownership stake in Nasdaq
Europe was 52.8%. Nasdaq expects further key investors to invest in Nasdaq
Europe.
Nasdaq Europe S.A./N.V. has also launched the newly developed European
Trading System. The European Trading System offers functions similar to The
Nasdaq Stock Market while being adaptable to the needs and requirements of
the European market. In addition, Nasdaq Europe S.A./N.V. intends to
introduce a system later this year that will integrate certain functions of
the SuperMontage system customized to European best practices. This market
model will integrate market maker quotes into an anonymous, voluntary limit
order book and provide expanded negotiation facilities and trade reporting.
As of June 30, 2001, there were 280 companies traded on Nasdaq Europe, 57
of which are listed on Nasdaq Europe and 223 are admitted for trading, and
69 different member firms. For the six months ended June 30, 2001, Nasdaq
Europe's average monthly trading volume averaged 9,972 shares.
Canadian Alliance. In April 2000, Nasdaq entered into a cooperative
agreement with the Provincial Government of Quebec for the development of a
new securities market within Canada called Nasdaq Canada. To facilitate
this development, the Provincial Government of Quebec has agreed to
undertake the necessary legislative and/or regulatory initiatives to
promote the assimilation of Nasdaq Canada into Quebec, including the
recognition of Nasdaq as a securities exchange within Quebec and the
recognition of Nasdaq-listed securities for trading through Nasdaq Canada
without further regulatory action. Nasdaq Canada will be developed in
stages, and may culminate in the creation of an autonomous pan-Canadian
market. The first stage commenced on November 21, 2000 with the
installation of Nasdaq terminals in 10 Canadian securities firms in
Montreal, Canada and the establishment of the Nasdaq Canada Index which
tracks the market performance of Canadian-listed Nasdaq stocks. These
terminals allow these firms to trade Nasdaq- listed securities directly
through their local broker, including the over 40 Canadian firms previously
listed solely on Nasdaq in the United States. The second stage is scheduled
to commence following the implementation of SuperMontage and is expected to
involve participation by new broker-dealer participants in Canada, trading
in both U.S. and Canadian dollars and the opportunity to list Canadian
companies exclusively on Nasdaq Canada. The planned third stage will result
in the linking of Nasdaq Canada with Nasdaq, Nasdaq Europe and Nasdaq
Japan. The timing of the second and third stages will be dependent on the
success of the alliance's first stage.
Technology
Nasdaq was the world's first electronic screen-based stock market and its
use of new computer networking, telecommunications, and information
technologies distinguishes it from other U.S. securities markets. Nasdaq
embraces automation through the effective use of technology as the key to
the future of financial markets. Using technology, Nasdaq eliminates the
need for a physical trading floor and enables securities firms across the
country to compete freely with one another in a screen-based environment.
Nasdaq also employs technology to maximize its ability to communicate with
investors, issuers, traders, the media, and others. In addition to the
Enterprise Wide Network II and the Nasdaq Workstation II, Nasdaq
technologies include:
The Processing Complex. Nasdaq's quote, trade execution, and trade
reporting systems are based on mainframe technology and are located in a
processing complex in Trumbull, Connecticut. The systems routinely handle
trade volume of over two billion shares daily and over 4,000 transactions
per second. In addition, these systems have substantial reserve capacity to
handle far greater levels of activity. An alternate processing complex
located in Rockville, Maryland backs up the Trumbull technology center.
Data Repository. Market data from Nasdaq's quote and trade execution
systems are transferred via high-speed communications links to a market
data repository in Rockville, Maryland. At this facility, eight terabytes
of online data are available for real-time analysis, historical analysis,
market surveillance and regulation, and data mining. The information is
provided to applications and users through relational database and
higher-level access facilities. The data is also available for delivery to
Internet applications.
Nasdaq Tools. On March 7, 2000, Nasdaq purchased Financial Systemware,
Inc., a manufacturer of software products. Financial Systemware became a
wholly-owned subsidiary of Nasdaq that has been named Nasdaq Tools, Inc.
Nasdaq Tools has an order routing and quote management product that allows
for, among other things, automatic execution of a liability order,
automatic updating of a security's market, and the ability to decline
subsequent orders at the same price. Nasdaq Tools is in the process of
introducing a new service bureau product. "Tools Plus" is a position
management system with real-time valuation, including profit and loss
calculations, automatic execution and display of orders, risk management
features, direct ECN access (for SEC Ordering Handling Rule compliance),
and storage of information in a database and/or report format. It also
provides an Order Audit Trail System compliance feature that handles
transaction reporting via e-mail to regulatory agencies.
Strategic Technology Alliances. Historically, Nasdaq has demonstrated an
ability to adapt current technology to provide an efficient, robust, and
fault tolerant price discovery network. To continue its successful
evolution, Nasdaq has formed partnerships and alliances with innovative
technology leaders, including the following:
Microsoft. Nasdaq uses Microsoft technology to drive Nasdaq.com and other
Web sites. In addition, Microsoft products are in broad use throughout
Nasdaq, including Microsoft Exchange for e-mail and sharing information; NT
and Windows 2000 servers for application, file, and print support; and
Windows workstations for applications and professional productivity. Future
potential technology alliances with Microsoft include site and information
linkages between Nasdaq.com and Microsoft's MoneyCentral Web site. The
alliance may sponsor industry standard solutions for Internet-based
financial information exchange and management.
TIBCO. Nasdaq has formed an alliance with TIBCO Software Inc. ("TIBCO") to
develop a series of innovative applications utilizing TIBCO information bus
technology, which simplifies and manages communications between diverse
systems and platforms. These applications include the real-time
dissemination of market data, population of data on the Nasdaq.com Web
site, and planned use of the technology in next-generation workstation
products. Future uses of TIBCO technology may include the development and
deployment of next-generation market systems, and extension of
publish-and-subscribe technology to additional data distribution channels
inside and outside Nasdaq.
IndigoMarkets. IndigoMarkets(sm) Ltd., a joint venture company with SSI
Ltd. of India, was established in May 2000. Nasdaq Global currently has a
55% interest in the venture. The company will create market systems for
Nasdaq global markets, including Nasdaq Japan. IndigoMarkets is also
expected to license its products to other customers worldwide. In October
2000, Indigo Markets created a wholly-owned Indian subsidiary, Indigo
Markets India Private Ltd. The purpose of the new subsidiary is to license
products to Indian customers as well as to provide ongoing maintenance and
consulting services.
BIOS Group. On June 25, 1999, Nasdaq and the BIOS Group, a research and
development organization based in Santa Fe, New Mexico, formed the
Nasdaq/BIOS R&D Joint Venture, LLC (the "Nasdaq BIOS JV"). This joint
venture is owned 50% by Nasdaq and 50% by the BIOS Group. The purpose of
the joint venture is to spawn inventions and applied research to advance
the business objectives of Nasdaq. Nasdaq will retain a right of first
refusal on any intellectual property generated as a result of the joint
venture. Nasdaq has the exclusive right to any technologies related to its
business objectives.
Competition
The securities markets, and the businesses in which Nasdaq engages, are
intensely competitive and they are expected to remain so. Nasdaq competes
with some of its competitors globally and with others on a product and
geographical basis. Nasdaq competes based on a number of factors, including
the quality of its technological and regulatory infrastructure, total
transaction costs, the depth and breadth of its markets, the quality of its
value-added customer services (e.g., market forums and educational
programs), international capabilities, reputation and price. In the U.S.,
Nasdaq is one of the leaders in each of its principal businesses. Some of
Nasdaq's most significant challenges and opportunities will arise outside
the United States as globalization is likely to result in a need for a
worldwide network for linking securities markets offering investors maximum
access to invest in companies anywhere at anytime. In order to take
advantage of these opportunities, Nasdaq has formed alliances in key
financial centers around the world in order to build on its successes in
the United States and its strong worldwide brand identity. Nevertheless,
most of Nasdaq's competitors overseas are currently larger and have a
longer operating history in these markets.
In light of recent technological and regulatory changes, Nasdaq expects to
compete with a number of different entities varying in size, business
objectives and strategy.
Issuer Services. Nasdaq's strategies for maintaining its current listings
in both The Nasdaq National Market and The Nasdaq Small Cap Market and
gaining new listings include marketing and building brand identity,
contacting key decision makers, and providing value-added issuer services.
Nasdaq's marketing efforts have centered on creating a valuable brand - an
important factor in attracting and retaining large world-class growth
companies. New and existing companies value being listed on a market that
has strong brand and name recognition around the world.
In terms of obtaining new listings, Nasdaq continues to focus its efforts
primarily on traditional growth companies. Over the last 12 -14 months,
general market and economic conditions have made it difficult for these
companies to access the public equity markets. Nevertheless, Nasdaq believes
that its market model, strong global brand awareness and value-added services
will enable it to compete successfully for listings. Nasdaq employs a variety
of initiatives and tools in its marketing efforts, including media
advertising, Internet publishing (Nasdaq.com), and international road shows.
Historically, Nasdaq's communication has focused on potential issuers and the
general investing community. Going forward, Nasdaq will seek to broaden its
marketing efforts to incorporate all those interacting with its business.
Nasdaq competes primarily with the NYSE for listings on The Nasdaq National
Market. As of June 30, 2001, there were 3,567 companies listed on The
Nasdaq National Market with an aggregate domestic market capitalization of
$3.14 trillion compared to 2,814 companies listed on the NYSE with an
aggregate domestic market capitalization of $12.34 trillion. Historically,
Rule 500 of the NYSE, which required supermajority stockholder approval
before a listed company could delist from the NYSE, made it extremely
difficult for issuers on the NYSE to leave voluntarily. On July 21, 1999
the SEC approved an amendment to Rule 500 to allow a company to delist from
the NYSE if it obtains the approval of its board of directors and its audit
committee, publishes a press release announcing its proposed delisting and
sends a written notice to its largest 35 stockholders of record (U.S.
stockholders of record if a non-U.S. issuer) alerting them to the proposed
delisting. Because of these affirmative steps imposed on an issuer's board
of directors, in particular the notice requirements, Nasdaq believes that
Rule 500 in its modified form continues to constitute an impediment to
Nasdaq's ability to compete for NYSE listings. Since Rule 500 was adopted,
only one company has transferred from the NYSE to Nasdaq. From January 1,
1996 to June 30, 2001, 336 companies have switched to the NYSE from Nasdaq.
The number of such transfers has declined significantly; however, from a
high of 96 in 1996 to 25 in 2000 and 16 for the first six months of 2001.
Nasdaq competes primarily with the Amex for listings on The Nasdaq SmallCap
Market. The companies that list on the SmallCap Market have the option of not
trading on the OTC Bulletin Board, through the Pink Sheets or listing on any
market. Securities firms who voluntarily post quotes or indications of
interest make markets for the securities of companies that are not listed on a
market.
The two leading services for the posting of quotes for these type of
companies are the OTC Bulletin Board, currently owned and operated by
Nasdaq, and the Pink Sheets owned by Pink Sheets LLC, a privately owned
company. In the fall of 1999, Pink Sheets LLC began operating an electronic
version of the Pink Sheets, allowing for the more frequent updating of
quotes and information about over-the-counter securities. Many
broker/dealers have adopted the electronic version thereby facilitating the
centralization of quotations and adding to the transparency of quotes for
over-the-counter securities. This enhancement to the Pink Sheets may lead
some companies to reconsider the value and associated costs of a Nasdaq
listing and increase the level of listing competition Nasdaq faces at the
small-company end of the spectrum.
Transaction Services. Nasdaq's core trading service is the provision of
the Nasdaq network that provides for the entry and real-time broadcast of
quotes to market makers and ECNs. Nasdaq expects to face competition from a
number of different sources in providing these services, including from:
o Competing stock exchanges or network providers that develop
ways to effectively replicate Nasdaq's network and offer
services at a lower cost and/or a greater speed and to
persuade a critical mass of market participants to switch to
the new network/market;
o Competing stock exchanges that are able to find ways to
effectively link into Nasdaq's network while avoiding the
subscription fees paid by member firms. The SEC could require
Nasdaq to distribute the quotations of independent exchanges
or the NASD through the Nasdaq network without permitting
Nasdaq to charge the same quotation fees that Nasdaq may
assess on Nasdaq quote providers. If this were to occur,
Nasdaq would, in effect, incur added costs potentially
without an opportunity to recover such costs from its full
user base;
o ECNs and third-party service bureaus that may join together
to form one dominant service provider, and thereby
diminishing Nasdaq's competitive position; and
o Companies that could provide trading services for products
and services, including software companies, information and
media companies and other companies that are not currently in
the securities business.
The net effect of these additional competitors, along with continuing
advances in technology and regulatory changes may put downward pressure on
the prices Nasdaq may charge for its transaction services.
To address this competition, Nasdaq has looked to enhance its technology
and the services it provides to its market participants and refine its
pricing approach by reviewing each component of its transaction services,
including access services, execution services and post-trade services. For
each component, Nasdaq has attempted to make pricing more attractive in
order to retain usage of its services. In addition, Nasdaq has looked to
increase member awareness of Nasdaq's role as a provider of liquidity in
the United States and internationally. For example, Nasdaq has enhanced its
order routing and execution services through the implementation of
SuperSoes, the addition of Primex, a new price improvement system, and the
introduction of its new price quotation and trading platform, SuperMontage.
Nasdaq has also commenced operations in Europe and Japan to extend the
benefits and lower costs of Nasdaq internationally.
Market Information Services. Nasdaq's market information services revenue
is under competitive threat from other stock exchanges that trade Nasdaq
stocks, including the established regional exchanges. Current SEC
regulations permit these regional exchanges to trade certain securities
that are not listed on a national securities exchange, including securities
listed on The Nasdaq National Market, pursuant to Nasdaq's UTP Plan.
Nasdaq's UTP Plan entitles these exchanges to a share of Nasdaq's data
revenue, roughly proportional to such exchange's share of trading as
measured by share volume and number of trades. Currently, only the Chicago
Stock Exchange and the Cincinnati Stock Exchange trade Nasdaq securities
pursuant to the UTP Plan. For the years 1998, 1999 and 2000, the Chicago
Stock Exchange's share of trading was 0.15%, 1.11% and 2.50%, respectively.
The Cincinnati Stock Exchange did not commence trading under the UTP Plan
until 2001. For the six-month period ended June 30, 2001, the Chicago Stock
Exchange's share of trading was 3.23% and the Cincinnati Stock Exchange's
share of trading was less than 0.01%. The Boston Stock Exchange, Amex and
the Philadelphia Stock Exchange have indicated their intent to commence
trading in Nasdaq securities pursuant to the UTP Plan. In addition, at
least two ECNs have applied for exchange registration and expressed
interest in becoming UTP Plan participants. Current active participants in
the UTP Plan have established payment for order flow arrangements with
their members and customers through sharing tape revenues.
During the last few years, there has been an increase in the number of
ECNs. In general, ECNs subscribe to the network service, report trades to
ACT, and use Nasdaq's order routing systems. On one level, an ECN performs
the same function as a market maker bringing buyers and sellers together.
However, ECNs pose a potential threat to Nasdaq's market information
services business because, under the new SEC guidelines, they may register
as securities exchanges. In this case, they would be eligible for a share
of the UTP Plan revenue generated by the sale of Nasdaq's market
information products, and their use of Nasdaq's systems could diminish. As
of June 30, 2001, there were no ECNs registered as securities exchanges;
however, Pacific/Archipelago and Island ECNs have submitted exchange
registration applications to the SEC.
Despite the potential threat, Nasdaq's market share of trade and share
volume under the UTP Plan remains at 97.5% at present. In addition, the SEC
has not yet approved the exchange registration filings for
Pacific/Archipelago and Island and Amex have not yet formalized their
intention to trade Nasdaq securities through a filing with the SEC.
Overall, there is a potential for a significant erosion in Nasdaq's market
share of trading activity, and thus market information services revenue;
however, there are substantial steps that must first be taken in order for
present and future alternative exchanges to compete with Nasdaq in a
meaningful way. These alternative exchanges must first register and be
approved as a national securities exchange with the SEC, which can be a
lengthy process. In connection with becoming an exchange, these competitors
would have to establish a regulatory structure to ensure the quality of
data and support its responsibility of being an SRO. In addition, a
competitor would need a technological infrastructure in place to ensure the
integrity and reliable transmission of data to the SIP.
Nasdaq competes for trading volume in NYSE and Amex exchange-listed
securities by offering customers quality trade executions at a reasonable
price and derives revenues from the sale of data. A significant amount of
investor self-directed, on line trading activity in listed securities is
today executed on Nasdaq InterMarket. These orders forgo the exposure of
the auction trading systems of the exchanges in favor of the execution
services provided by Nasdaq InterMarket participants.
Nasdaq is engaged in a vigorous effort to increase market share in the
Nasdaq InterMarket by encouraging additional market makers and ECNs to
participate through Nasdaq InterMarket. Nasdaq InterMarket has implemented
a program designed to lower costs for Nasdaq InterMarket participants
executing trades through Nasdaq facilities. The program allows Nasdaq
InterMarket participants to share in the tape revenue Nasdaq receives as
the participant in the CTA Plan. In addition, in May 2000, Nasdaq
redesigned certain systems to improve Nasdaq InterMarket trading
environment.
Employees
As of December 31, 2000, Nasdaq had approximately 1,200 employees. In
connection with efforts to maximize revenues, reduce costs and improve
organizational efficiency, Nasdaq implemented a 10 percent reduction in
workforce on June 27, 2001. None of its employees is subject to collective
bargaining agreements or is represented by a union. Nasdaq considers its
relations with its employees to be good.
The Restructuring
The NASD founded Nasdaq in 1971. Beginning in 1996, the NASD began an
internal reorganization, a major feature of which was to separate the
regulation of the broker-dealer professionals and surveillance of Nasdaq
from Nasdaq, which included establishing NASD Regulation, Inc. ("NASDR") as
a separate, independent wholly-owned subsidiary of the NASD. NASDR was
created to regulate securities markets for the benefit and protection of
the investor. In carrying out this mission, NASDR has assumed a substantial
portion of the NASD's responsibilities of being the securities industry's
largest self-regulator. In 2000, the NASD formed a new wholly-owned
subsidiary called NASD Dispute Resolution Inc. ("NASD Dispute Resolution"),
formerly known as the NASD Regulation Office of Dispute Resolution. NASD
Dispute Resolution administers the NASD's arbitration, mediation and other
alternative dispute-resolution services.
At a special meeting of NASD members held on April 14, 2000, more than a
majority of NASD members approved the Restructuring through a two-phase
private placement of securities. In the first phase of the Restructuring
("Phase I"), on June 28, 2000, Nasdaq sold an aggregate of 23,663,746
shares of Common Stock at $11 per share for an aggregate consideration of
$260,301,206. The NASD sold an aggregate of 6,415,049 warrants to purchase
an aggregate amount of 25,660,196 shares of Common Stock at $11 per warrant
and an aggregate of 323,196 shares of Common Stock owned by the NASD at $11
per share for an aggregate consideration of $74,120,695.
In the second phase of the Restructuring ("Phase II"), on January 18, 2001,
Nasdaq sold an aggregate of 5,028,797 shares of Common Stock at $13 per
share for an aggregate consideration of $65,374,361. The NASD sold an
aggregate of 4,392,345 warrants to purchase an aggregate amount of
17,569,380 shares of Common Stock at $14 per warrant and an aggregate of
4,222,295 shares of Common Stock owned by the NASD at $13 per share for an
aggregate consideration of $116,382,665.
Securities in the private placement were offered to (i) all NASD members in
good standing as of a record date established for each offering, (ii)
approximately 750 of the leading issuers whose stock was listed on Nasdaq
based on historic trading activity and market capitalization, and (iii)
leading institutional investment companies based on their holdings of all
Nasdaq-listed securities. All the securities sold in the private placement
are subject to restrictions on transfer until June 2002, and subject to
certain additional restrictions in the event of an IPO of the Common Stock.
The Restructuring benefits Nasdaq, its employees and investors and the
investing public because it:
o realigned strategically the ownership of Nasdaq with a broad
class of strategic investors interested in Nasdaq's long-term
success;
o will facilitate the streamlining of Nasdaq's corporate
governance and, once Nasdaq is reconstituted as an SRO,
Nasdaq will not need the NASD's consent (other than as a
stockholder) to take corporate actions;
o fosters the separation of Nasdaq from the NASD and NASDR in
an attempt to minimize potential conflicts of interest;
o generated over $325 million in gross proceeds for Nasdaq and
it created a financially stronger Nasdaq better able to
address competitive challenges and invest in new
technologies. This will assist Nasdaq in the implementation
of its strategic initiatives including (i) deploying new
technology like SuperMontage, (ii) forming global alliances
and (iii) implementing competitive pricing of its services;
o provides Nasdaq with greater access to the public capital
markets to fund future capital needs;
o provides Nasdaq with the flexibility to use its Common Stock
as acquisition currency, making it easier to make
acquisitions or enter into strategic partnerships; and
o provides Nasdaq with the ability to incentivize employees by
allowing them to become part owners of Nasdaq through its
equity plans.
The Restructuring benefits the NASD because it:
o permits the NASD to focus more on its original mission of
being solely a membership-focused organization; and
o generated gross proceeds of over $190 million, with the
potential to raise another approximately $625 million if all
the warrants sold are fully exercised. These proceeds will
help support the operations of the NASD, which will continue
to own NASDR, and will remain the principal SRO responsible
for the securities markets. These proceeds will allow the
NASDR to better utilize technological advances to more
effectively and efficiently regulate the markets.
The Nasdaq Board recognized that by virtue of the broadening of Nasdaq's
ownership and the corresponding applicability of the reporting requirements
under Sections 13, 14 and 16 of the Exchange Act, Nasdaq will have to
devote management time and expense to satisfy the increased disclosure
obligations, including information about its operations which would not
otherwise be required to be publicly disclosed, and it will become subject
to heightened scrutiny of the investing community. The Nasdaq Board also
recognized that although the separation of Nasdaq from the NASD is intended
to minimize potential conflicts of interests, conflicts may arise between
the NASD and Nasdaq relating to their continuing contractual relationships
and, until Exchange Registration, the NASD will retain voting control over
Nasdaq and, accordingly, will continue to exert influence over Nasdaq's
management and affairs.
In furtherance of the goals of the Restructuring, the NASD indicated its
intention to sell by June 30, 2002 those shares of Common Stock that it
owns (other than shares underlying outstanding warrants), subject to market
conditions and the NASD's ability to obtain a fair price. As of June 30,
2001, the NASD owned approximately 28% of Nasdaq on a fully-diluted basis
(approximately 70% on a non-diluted basis). Although it is contemplated
that the NASD will eventually divest completely its ownership interest in
Nasdaq, there may still exist certain contractual relationships between the
parties once this happens. For example, prior to the Restructuring, Nasdaq
had access to many support functions of the NASD, including cash management
and other financial services, real estate, legal, surveillance and other
regulatory services, information services and corporate and administrative
services. On June 28, 2000, the NASD and Nasdaq entered into a Separation
and Common Services Agreement pursuant to which the NASD continues to
provide these services to Nasdaq. Under this contract, Nasdaq pays to the
NASD the costs of the services provided, including any incidental expenses
associated with such services. Nasdaq has contracted with the NASD to
provide such services because of the NASD's expertise and experience in
providing such services to Nasdaq, resulting in cost savings and greater
efficiency for Nasdaq. Nasdaq expects the cost of the services provided by
the NASD to be approximately $9 million per year under this agreement.
Nasdaq expects to review in the future the provision of these services to
determine whether it will be more efficient to internalize these services
or to seek alternative third party providers. See "--Risk Factors--Nasdaq
faces potential conflicts of interest with related parties," "--Risk
Factors--The intercompany agreements may not be effected on terms as
favorable to Nasdaq as could have been obtained from unaffiliated third
parties" and "Item 7. Certain Relationships and Related Transactions."
Market Oversight
Virtually all facets of the operation of The Nasdaq Stock Market are
subject to the SEC's oversight, as prescribed by the Exchange Act.
SROs in the securities industry are an essential component of the
regulatory scheme of the Exchange Act for providing fair and orderly
markets and protecting investors. The Exchange Act and the rules thereunder
impose on the SROs many regulatory and operational responsibilities,
including the day-to-day responsibilities for market and broker-dealer
oversight. In general, a SRO is responsible for regulating its members
through the adoption and enforcement of rules and regulations governing the
business-conduct of its members. The NASD is the largest SRO in the United
States, with a membership that includes virtually every U.S. broker-dealer.
The NASD's status as a national securities association registered pursuant
to the terms of Section 15A of the Exchange Act establishes it as a SRO, on
par with registered exchanges (such as the NYSE and Amex), which are also
SROs. To date, the NASD is the only registered securities association,
though there is nothing in the Exchange Act precluding the formation of
other similar associations. The NASD was organized to standardize the
securities industry's principles and practices, to promote high standards
of commercial honor, to advance just and equitable principles of trade for
investor protection, to adopt and enforce rules of fair practice and to
foster member observance of federal and state securities laws. In keeping
with its regulatory obligations, the NASD is also currently responsible for
the regulation of the activity on Nasdaq as well as the over-the-counter
market.
Section 19 of the Exchange Act lays out the SEC's authority with respect to
SROs. In brief, SROs must submit proposed changes of their rules to the
SEC. The SEC will typically publish the proposal for public comment,
following which the SEC may approve, abrogate or amend the proposal, as it
deems appropriate. The SEC's action is designed to ensure that SRO rules
and procedures are consistent with the aims of the Exchange Act. In 1996,
investigations by the SEC and the U.S. Department of Justice found
deficiencies in the NASD's oversight of the Nasdaq market and the NASD's
enforcement of broker-dealer compliance with the NASD rules and the
requirements of the federal securities laws. As a consequence, the NASD
made certain undertakings as part of an order issued by the SEC, including
assuring that adequate resources are available to monitor the systems for
compliance, providing greater independence to the regulatory staff,
ensuring greater non-industry participation in deliberations relating to
regulatory and policy making and providing the NASDR with the day-to-day
responsibility for regulation, surveillance, examination and disciplining of
members. To the extent that Nasdaq is delegated areas of responsibility
covered by the order, it may be subject to requirements of the order.
Under the Delegation Plan, the NASD has delegated responsibility for
market-operation functions to Nasdaq. Although Nasdaq exercises primary
responsibility for market-related functions, including market-related
rulemaking, all actions taken by Nasdaq pursuant to its delegated authority
are subject to review, ratification or rejection by the NASD. As long as
the Delegation Plan remains in effect, the NASD will continue to have
authority over Nasdaq in this respect. The current structure will continue
until Nasdaq is reconstituted as an SRO, which will become effective upon
Exchange Registration. As a SRO, like other registered exchanges, Nasdaq
will have its own rules regarding listing, membership, trading and
regulation that are distinct and separate from those administered by the
NASD. Broker-dealers will be able to choose to become members of Nasdaq, in
addition to their other SRO memberships (including the NASD). As a SRO,
Nasdaq will regulate only those who elect to become members of Nasdaq while
the NASD will still be responsible for regulating all its members. At the
time Nasdaq becomes an SRO, the NASD will no longer be responsible for
Nasdaq meeting its SRO obligations.
Pursuant to a long-term contract, NASDR currently performs substantially
the same type and scope of regulatory functions as those NASDR performed
for Nasdaq prior to the Restructuring. See Item 7. "Certain Relationships
and Related Transactions" and "Risk Factors-Nasdaq faces potential
conflicts of interest with related parties" and "-The intercompany
agreements may not be effected on terms as favorable to Nasdaq as could
have been obtained from unaffiliated third parties." In general, under this
contract NASDR performs automated surveillance of trading on the markets
operated by Nasdaq and reviews member firm compliance with the rules and
regulations applicable to trading and market-making functions.
Exchange Registration
Nasdaq has initiated the process with the SEC for Exchange Registration by
filing an application with the SEC. If Nasdaq obtains Exchange Registration
it will receive its own SRO status separate from that of the NASD. Exchange
Registration is primarily a change in legal status for Nasdaq as opposed to
a change in the manner that Nasdaq operates. Exchange Registration is not
expected to have a material effect on Nasdaq's operating results in the
short term.
Nasdaq is seeking Exchange Registration for a number of reasons. Exchange
Registration will allow Nasdaq to separate fully from the NASD, further
minimizing of potential conflicts between Nasdaq and the NASDR and thereby
furthering certain of the principal goals of the Restructuring. In
addition, separation from the NASD will allow Nasdaq to more easily raise
capital for technology and for operational improvements. Exchange
Registration will also eliminate the disparity of treatment under certain
state laws between securities that are "listed on an exchange" and those
that are not. Nasdaq's domestic and global profile will be enhanced as
Nasdaq will become known as a securities exchange on the same terms as
other U.S. registered-exchange markets allowing Nasdaq to better respond to
the competition it faces. In addition, Exchange Registration will allow
Nasdaq to better compete with European exchanges which have, or plan to,
become publicly-traded companies by enhancing its ability to raise capital
and respond quickly to changes in the industry.
Nasdaq's application for Exchange Registration was published by the SEC for
public comment on June 13, 2001. The comment period has been extended to
August 29, 2001. Information relating to Nasdaq's application can be found
at the SEC's web site at http://www.sec.gov/rules/other/34-44396.htm. In
connection with Exchange Registration, the SEC is conducting a review of
Nasdaq's current rules and operations. The SEC also has requested certain
changes be made to the national market system plans and is reviewing issues
relating to the future control and operation of the OTC Bulletin Board. In
addition, the SEC has also stated that its approval of Exchange
Registration is linked to the NASD's obligation to provide an alternative
facility to NASD members to trade exchange listed securities. As a result,
the NASD must have an operating quotation and transaction reporting
facility for Nasdaq, NYSE and Amex listed securities in place upon Exchange
Registration. Upon the conclusion of the comment period, the SEC will
review any comment letters received and then issue an order granting
Exchange Registration or begin proceedings to disapprove the application.
The SEC may also extend the comment period or request that Nasdaq extend
their time for review of Nasdaq's application. A decision on Exchange
Registration is not expected to occur until later this year or early next
year and there is no assurance that Exchange Registration will be granted
or as to the timing of Exchange Registration. See"--Risk Factors--The SEC
may challenge or not approve Nasdaq's plan to become a national securities
exchange or it may require changes in the manner Nasdaq conducts its
business before granting its approval."
Exchange Registration will provide investors in Nasdaq with greater
governance rights, as the NASD will no longer be required to retain voting
control over Nasdaq. Until Nasdaq becomes an exchange, the shares
underlying unexercised and unexpired warrants as well as shares of Common
Stock purchased through the valid exercise of warrants, will be voted by a
trustee at the direction of the NASD, assuring that the NASD will retain
voting control over Nasdaq. Upon Exchange Registration, the shares of
Common Stock purchased through the valid exercise of warrants will be voted
by the holder of the shares and the shares underlying unexercised and
unexpired warrants will be voted at the direction of the respective warrant
holder. In addition, the NASD has stated that, commencing upon Exchange
Registration, it will vote its shares of Common Stock (other than shares
underlying then-outstanding warrants) in the same proportion as the other
common stockholders of Nasdaq. In addition, on May 22, 2001, Robert
Glauber, Chief Executive Officer and President of the NASD, and Hardwick
Simmons, Chief Executive Officer of Nasdaq, issued a joint letter to the
members of the NASD announcing an arrangement between the two companies
whereby there will continue to be a certain overlap between the members of
the NASD Board and the Nasdaq Board only until such time as Nasdaq is
granted Exchange Registration.
Other Recent Transactions
On May 3, 2001, Nasdaq issued and sold $240 million in aggregate principal
amount of its 4% convertible subordinated debentures due 2006 (the
"Subordinated Debentures") to Hellman & Friedman Capital Partners IV, L.P.
and certain of its affiliated limited partnerships (collectively, "Hellman
& Friedman"). The Subordinated Debentures are convertible at any time into
an aggregate of 12,000,000 shares of Common Stock, reflecting a conversion
price of $20.00 per share, subject to adjustment. Hellman & Friedman owns
approximately 9.8 percent of Nasdaq on an as-converted basis. In connection
with the transaction, Nasdaq has agreed to use its best efforts to seek
stockholder approval of a charter amendment that would provide for voting
debt in order to permit Hellman & Friedman to vote on an as-converted basis
on all matters on which common stockholders have the right to vote, subject
to the five percent voting limitation in Nasdaq's Restated Certificate of
Incorporation (the "Certificate of Incorporation"). In addition, Nasdaq has
also agreed that in the event that the Nasdaq Board approves an exemption
from the foregoing five percent limitation for any person (other than an
exemption granted in connection with a strategic market alliance) and seeks
the concurrence of the SEC with respect thereto, Nasdaq will grant Hellman
& Friedman a comparable exemption from such limitation and use its best
efforts to obtain SEC concurrence of such exemption. In connection with the
transaction, Nasdaq granted Hellman & Friedman certain registration rights
with respect to the shares of Common Stock underlying the Subordinated
Debentures. Additionally, Nasdaq agreed to permit Hellman & Friedman to
designate one person reasonably acceptable to Nasdaq for nomination as a
director of Nasdaq for so long as Hellman & Friedman owns Subordinated
Debentures and/or shares of Common Stock issued upon conversion
representing at least 50% of the shares of Common Stock issuable upon
conversion of the Subordinated Debentures initially purchased. F. Warren
Hellman was elected to the Nasdaq Board pursuant to the foregoing
provision.
On May 3, 2001, Nasdaq used the net proceeds from the sale of the
Subordinated Debentures to purchase 18,461,538 shares of Common Stock from
the NASD for $13 per share for an aggregate purchase price of $239,999,994.
These repurchased shares are no longer outstanding. In connection with the
transaction, Nasdaq and the NASD have agreed to enter into an Investor
Rights Agreement pursuant to which Nasdaq will grant the NASD certain
demand and piggyback registration rights with respect to the shares of
Common Stock owned by it.
Risk Factors
This Registration Statement contains forward-looking statements that
involve risks and uncertainties. Nasdaq's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by Nasdaq described
below and elsewhere in this Registration Statement.
The risks and uncertainties described below are not the only ones facing
Nasdaq. Additional risks and uncertainties not presently known to Nasdaq or
that Nasdaq currently believes to be immaterial may also adversely affect
Nasdaq's business. If any of the following risks actually occur, Nasdaq's
business, financial condition, or operating results could be materially
adversely affected.
Nasdaq's operating results could fluctuate significantly in the future.
Nasdaq's operating results may fluctuate significantly in the future as a
result of a variety of factors, including: (i) a decrease in the trading
volume in Nasdaq; (ii) increased competition from alternative market venues
that might reduce market share and create pricing pressure; (iii)
competition from the NYSE or new competing exchanges for new listings; (iv)
a reduction in market data revenue; (v) the rate at which Nasdaq obtains
new listings and maintains its current listings; (vi) regulatory changes
and compliance costs; (vii) Nasdaq's ability to utilize its capital
effectively; (viii) Nasdaq's ability to manage personnel, overhead, and
other expenses, in particular technology expenses; and (ix) general market
and economic conditions.
Nasdaq's business could be harmed by market fluctuations and other risks
associated with the securities industry generally.
A substantial portion of Nasdaq's revenues is tied to the trading volume of
its listed securities. Trading volume is directly affected by economic and
political conditions, broad trends in business and finance, and changes in
volume and price levels of securities transactions. An adverse change
affecting the economy or the securities markets could result in a decline
in trading volume. Nasdaq is also particularly affected by declines in
trading volume in technology and Internet-related stocks because a
significant portion of its customers trade in these types of stocks and a
large number of technology and Internet-related companies are listed on
Nasdaq. A downturn in the initial public offering market is also likely to
have an adverse effect on Nasdaq's revenues, including, in particular,
revenues from listing fees. A decline in trading volume would lower
transaction services revenues, and Nasdaq's profitability may be adversely
affected if it is unable to reduce costs at the same rate. For example, in
the first six months of 2001, 28 IPOs were brought to market on Nasdaq
compared to 221 in the first six months of 2000. There were also 522
de-listed companies in the first six months of 2001 compared to 395 during
the same time period last year. Consequently, Nasdaq's issuer services
revenues declined in the first six months of 2001. Further downward trends
in general market conditions could adversely affect Nasdaq's revenues and
reduce its profitability if Nasdaq cannot reduce its costs at the same rate
to offset such trends.
Substantial competition could reduce Nasdaq's market share and harm
Nasdaq's financial performance.
It is possible that a competing securities exchange, network provider, or
technology company could develop ways to replicate Nasdaq's network more
efficiently than Nasdaq and persuade a critical mass of market participants
to switch to a new network. The NYSE has announced that it might buy or
build its own electronic network for trading Nasdaq stocks and has
announced that it is in discussions with nine other exchanges in Europe,
Asia, and the Americas to form a set of global alliances that would be
intended to allow investors to trade throughout the day. This could have an
adverse effect on Nasdaq's business, financial condition, and results of
operation.
SelectNet is Nasdaq's automated market service that enables securities
firms to route orders, negotiate terms, and execute trades in Nasdaq-listed
securities. If there is an increase in the number of market makers or ECNs
that determine they do enough order routing traffic to justify setting up a
proprietary network for their traffic, Nasdaq may be forced to reduce its
fees further or risk losing its share of the order routing business. In
addition, certain system providers link many Nasdaq market makers. These
systems may be able to increase the number of orders executed through their
systems versus the Nasdaq systems. A reduction in the order routing
business could have an adverse effect on Nasdaq's business, financial
condition, and operating results.
The traditional products and services offered by markets are being
unbundled. Historically, Nasdaq has provided listings, execution services,
information services, and regulatory services to the investing public.
Currently, there are many competitors operating in the execution services
market. Nasdaq has not historically implemented pricing strategies that
isolate its various businesses. Due to competition in the execution
services business, as well as Nasdaq's past practice of bundling products
and services, it is uncertain whether Nasdaq will be able to compete
successfully in this business. Furthermore, Nasdaq faces multiple pricing
constraints, including in particular, regulatory constraints that may
prevent it from competing effectively in certain markets.
Substantial competition could reduce Nasdaq's issuer services revenues.
Nasdaq faces competition for listings from other primary exchanges,
especially from the NYSE. In addition to competition for initial listings,
Nasdaq also competes with the NYSE to maintain listings. In the past, a
number of issuers listed on Nasdaq have left Nasdaq for the NYSE each year.
The largest 50 Nasdaq-listed issuers (based on U.S. market value) accounted
for approximately 52% of total dollar volume traded on Nasdaq for the six
months ended June 30, 2001. Therefore, the loss of one or more of these
issuers would result in a significant decrease in revenues from Nasdaq's
issuer services.
ECNs do not currently provide listing venues, although such systems can
register as an exchange and compete with traditional exchanges and Nasdaq
for the execution and market data business. At least two ECNs have applied
to become registered as a national securities exchange. If these new
exchanges are successful in attracting trading volume and do not continue
to use Nasdaq transaction systems, traditional listings will become less
profitable to Nasdaq as they will not provide corresponding revenue from
trade executions and the sale of market data. In addition, if ECNs become
exchanges, they may enter the competition for issuer listings. There can be
no assurances that Nasdaq will be able to maintain or increase its listing
revenues. The reduction in initial listings or the loss of a top issuer
could have an adverse effect on Nasdaq's business, financial condition, and
operating results.
Nasdaq's market information services revenues are threatened by other
exchanges trading Nasdaq stocks.
Current SEC regulations permit national securities exchanges to trade
certain securities that are listed on Nasdaq pursuant to the UTP Plan. If
the UTP Plan participants' share of trades in Nasdaq stocks increases
substantially, Nasdaq's financial condition and operating results could be
adversely affected. In addition, since the allowable costs that are shared
by UTP Plan participants and the fees Nasdaq can charge for data products
are not exclusively set by Nasdaq, Nasdaq's control over its revenue and
cost base under the UTP Plan is limited. Current amendments to the UTP Plan
under negotiation include (i) an increase in the number of the eligible
securities over a one year period from 1,000 to all 4,734 securities on The
Nasdaq National Market and The Nasdaq SmallCap Market, and (ii) the
elimination of the floor and ceiling limits on the amount of market data
revenue Nasdaq must share with the UTP Plan participants. These and other
amendments could have a materially adverse effect on Nasdaq's business,
financial condition, and operating results.
Nasdaq's costs may increase if it loses its status as the exclusive SIP under
the UTP Plan.
Under the UTP Plan, Nasdaq collects quotation and last sale information
from competing exchanges (currently the Chicago Stock Exchange and the
Cincinnati Stock Exchange) and consolidates such information with its own.
Nasdaq sells this information for a Tape Fee. Under the revenue sharing
provision of the UTP Plan, Nasdaq is permitted to deduct certain costs
associated with acting as the exclusive SIP from the total amount of Tape
Fees collected. The SEC has stated that as a condition of extending the UTP
Plan, the parties to the UTP Plan must negotiate in good faith to revise
the UTP Plan so that it provides for either (i) a fully viable alternative
exclusive SIP for all Nasdaq securities or a fully viable alternative
non-exclusive SIP. Each UTP participant will have to share in the
development costs to create the new SIP. Therefore, if Nasdaq loses its
status as the exclusive SIP under the UTP Plan, its ongoing costs will
increase.
Nasdaq may lose trade reporting revenues if more market participants bypass
the comparison feature of its trade reporting system.
As market participants continue to establish automated trading links with
one another and lock-in transactions externally from Nasdaq, the use of the
ACT comparison function as a percentage of total trading volume will
continue to decrease. This negatively affects revenue, since firms are
using ACT for trade reporting, but not for comparison. Although ACT
comparison revenue actually increased by more than $10 million in fiscal
year 2000 over fiscal year 1999, this increase was due primarily to
increased trading volumes, particularly during the first quarter of 2000 in
OTC Bulletin Board securities.
Certain Congressional and SEC reviews could result in a reduction in data
fees that could reduce Nasdaq's revenues.
The SEC is reviewing concerns by industry members that the present levels
of data fees do not properly reflect the costs associated with their
collection, processing and distribution. As noted above, the SEC has
established the SEC Advisory Committee on Market Data and its
recommendation is due on September 30, 2001. Nasdaq has argued that there
are regulatory, market capacity, and other related costs of operating the
market. A fee realignment that does not recognize the full market costs of
creating and delivering market data could reduce overall data revenues in
the future and adversely affect Nasdaq's business, financial condition, and
operating results.
Legislation was introduced and hearings were held in the last session of
Congress pertaining to whether stock exchanges and markets have a property
right to quote and trade data. Hearings were held again on this subject in
March and April 2001. Since securities firms are required to supply the
market operator with quote and trade information, some have argued that the
operator has no right to be able to sell the data back to the securities
firms. This issue continues to be debated and the outcome could have a
significant impact on the viability of Nasdaq's data revenue and, as a
consequence, on its business, financial condition, and operating results.
Nasdaq is subject to extensive regulation that may harm its ability to
compete with less regulated entities.
Under current federal securities laws, changes in Nasdaq's rules and
operations, including its pricing structure, must be approved by the SEC.
The SEC may approve, disapprove, or recommend changes to proposals
submitted by Nasdaq. In addition, the SEC may delay the initiation of the
public comment process or the approval process. This delay in approving
changes, or the altering of any proposed change, could have an adverse
effect on Nasdaq's business, financial condition, and operating results.
System limitations and failures could harm Nasdaq's business.
Nasdaq's business depends on the integrity and performance of the computer
and communications systems supporting it. If Nasdaq's systems cannot be
expanded to cope with increased demand or fail to perform, Nasdaq could
experience: (i) unanticipated disruptions in service, (ii) slower response
times, and (iii) delays in the introduction of new products and services.
These consequences could result in lower trading volumes, financial losses,
decreased customer service and satisfaction, litigation or customer claims,
and regulatory sanctions. Nasdaq has experienced occasional systems
failures and delays in the past and it could experience future systems
failures and delays.
Nasdaq uses internally developed systems to operate its business, including
transaction processing systems to accommodate increased capacity. However,
if Nasdaq's trading volume increases unexpectedly, Nasdaq will need to
expand and upgrade its technology, transaction processing systems and
network infrastructure. Nasdaq does not know whether it will be able to
project accurately the rate, timing, or cost of any increases, or expand
and upgrade its systems and infrastructure to accommodate any increases in
a timely manner.
Nasdaq's systems and operations also are vulnerable to damage or
interruption from human error, natural disasters, power loss, sabotage,
computer viruses, intentional acts of vandalism, and similar events. Nasdaq
currently maintains multiple computer facilities to provide full service
during system disruptions, and has facilities in place that are expected to
maintain service during a system disruption. Any system failure that causes
an interruption in service or decreases the responsiveness of Nasdaq's
service could impair its reputation, damage its brand name, and negatively
impact its revenues. Nasdaq also relies on a number of third parties for
systems support. Any interruption in these third-party services or
deterioration in the performance of these services could also be disruptive
to Nasdaq's business and have a material adverse effect on its business,
financial condition, and operating results.
Nasdaq may not be able to keep up with rapid technological and other
competitive changes affecting the structure of the securities markets.
The markets in which Nasdaq competes are characterized by rapidly changing
technology, evolving industry standards, frequent enhancements to existing
services and products, the introduction of new services and products, and
changing customer demands. These market characteristics are heightened by
the emerging nature of the Internet and the trend for companies from many
industries to offer Internet-based products and services. In addition, the
widespread adoption of new Internet, networking, or telecommunications
technologies or other technological changes could require Nasdaq to incur
substantial expenditures to modify or adapt its services or infrastructure.
Nasdaq's future success will depend on its ability to respond to changing
technologies on a timely and cost-effective basis. Nasdaq's operating
results may be adversely affected if it cannot successfully develop,
introduce, or market new services and products. In addition, any failure by
Nasdaq to anticipate or respond adequately to changes in technology and
customer preferences, or any significant delays in other product
development efforts, could have a material adverse effect on Nasdaq's
business, financial condition, and operating results.
Nasdaq may have difficulty managing its growth.
Over the last several years, Nasdaq has experienced significant growth in
its business and the number of its employees. Nasdaq may not be able to
continue to manage its growth successfully. In an attempt to stimulate
future growth, Nasdaq has undertaken several initiatives to increase its
business, including enhancing existing products, developing new products,
and forming strategic relationships. The increased costs associated with
Nasdaq's initiatives may not be offset by corresponding increases in its
revenues. The growth of Nasdaq's business has required, and will continue
to require, Nasdaq to increase its investment in technology, management
personnel, market regulatory services, and facilities. No assurance can be
made that Nasdaq has made adequate allowances for the costs and risks
associated with this expansion, that its systems, procedures, or controls
will be adequate to support its operations, or that its management will be
able to offer and expand its services successfully. If Nasdaq is unable to
manage its growth effectively, its business, financial condition, and
operating results could be adversely affected.
Nasdaq may need additional funds to support its business plan.
Nasdaq depends on the availability of adequate capital to maintain and
develop its business. Nasdaq believes that its current capital requirements
will be met from internally generated funds and from the funds raised in
connection with the Restructuring. However, based upon a variety of
factors, including the rate of market acceptance of Nasdaq's new products,
the cost of service and technology upgrades, and regulatory costs, Nasdaq's
capital requirements may vary from those currently planned. There can be no
assurance that additional capital will be available on a timely basis, or
on favorable terms or at all.
Nasdaq may not be successful in executing its international strategy.
In order to take advantage of anticipated opportunities that will arise
outside the United States, Nasdaq intends to invest significant resources
in developing strategic partnerships with non-U.S. stock markets. Nasdaq
has had only very limited experience in developing localized versions of
its services and in marketing and operating its services internationally.
To date, Nasdaq's international efforts have not yet achieved
profitability. There can be no assurance that Nasdaq will be able to
succeed in marketing its branded services and developing localized services
in international markets. Nasdaq may experience difficulty in managing its
international operations because of, among other things, competitive
conditions overseas, difficulties in supervising foreign operations,
managing currency risk, established domestic markets, language and cultural
differences, political and economic instability, and changes in regulatory
requirements or the failure to obtain requested regulatory changes and
approvals. Any of the above could have an adverse effect on the success of
Nasdaq's international operations and, consequently, on Nasdaq's business,
financial condition, and operating results. See "Item 1. Business-Nasdaq's
Strategic Initiatives" and "-Pursuing Global Market Expansion."
Extended hours trading may have a negative impact on Nasdaq's business.
Today, market participants, including some ECNs, are trading beyond
traditional market hours (9:30 a.m. to 4:00 p.m., Eastern time). Extending
trading hours may put additional stress on the financial services industry.
Nasdaq has extended the availability of its trade reporting and quotation
systems from 8:00 a.m. until 6:30 p.m. Eastern time. Specifically, the
systems involved include ACT, ACES, CAES/InterMarket Trading System,
SelectNet, the Nasdaq Quotation Display System, Nasdaq Trade Dissemination
Service, and Nasdaq Level 1 Service (which disseminates real-time, inside
quote updates, as well as the 4:00 p.m. closing prices). Certain Nasdaq
market participants have been unable to modify their technology to
accommodate the expansion of trading hours and attendant regulatory
requirements. To date, volume in extended hours trading remains relatively
low. However, to the extent that a large extended hours session develops
and Nasdaq market participants are not prepared to handle the additional
capacity, Nasdaq may lose trading volume to more technologically advanced
competitors. In addition, insufficient interest in extended hours trading
could result in decreased liquidity, increased volatility, or degeneration
of price discovery, all of which could potentially undermine the public
confidence in Nasdaq and adversely affect Nasdaq's business, financial
condition, and operating results. In addition, the revenues generated by
trading in the extended hours market may not be sufficient to cover costs
associated with such trading.
Failure to protect its intellectual property rights could harm Nasdaq's
brand-building efforts and ability to compete effectively.
To protect its rights to its intellectual property, Nasdaq relies on a
combination of trademark laws, copyright laws, patent laws, trade secret
protection, confidentiality agreements, and other contractual arrangements
with its employees, affiliates, clients, strategic partners, and others.
The protective steps Nasdaq has taken may be inadequate to deter
misappropriation of its proprietary information. Nasdaq may be unable to
detect the unauthorized use of, or take appropriate steps to enforce, its
intellectual property rights. Nasdaq has registered, or applied to
register, its trademarks in the U.S. and in 40 foreign jurisdictions and
has pending U.S. and foreign applications for other trademarks. Effective
trademark, copyright, patent, and trade secret protection may not be
available in every country in which Nasdaq offers or intends to offer its
services. Failure to protect its intellectual property adequately could
harm its brand and affect its ability to compete effectively. Further,
defending its intellectual property rights could result in the expenditure
of significant financial and managerial resources, which could adversely
affect Nasdaq's business, financial condition, and operating results.
Lack of operating history as a for-profit entity with private ownership
interests.
While Nasdaq has an established operating history, it has only operated as
a for-profit company with private ownership interests since June 28, 2000.
Therefore, Nasdaq is subject to the risks and uncertainties associated with
any newly independent company. Nasdaq has had access to many support
functions of the NASD, including: cash management and other financial
services, real estate, legal, surveillance, and other regulatory services,
information services, and corporate and administrative services. Nasdaq has
entered into, and intends to enter into, various intercompany arrangements
with the NASD and its affiliates for the provision of these services on an
on-going or transitional basis. See "-Nasdaq faces potential conflicts of
interest with related parties" and "-The intercompany agreements may not be
effected on terms as favorable to Nasdaq as could have been obtained from
unaffiliated third parties" and "Item 7. Certain Relationships and Related
Transactions." In addition, Nasdaq's initiatives designed to increase
operating efficiencies may not yield the expected benefits or efficiencies
and may be subject to delays, unexpected costs, and cost overruns, all of
which could have an adverse effect on Nasdaq's business, financial
condition, and operating results.
Failure to attract and retain key personnel may adversely affect Nasdaq's
ability to conduct its business.
Nasdaq's future success depends on the continued service and performance of
its senior management and certain other key personnel. For example, Nasdaq
is dependent on specialized systems personnel to operate, maintain, and
upgrade its systems. The inability of Nasdaq to retain key personnel or
retain other qualified personnel could adversely affect Nasdaq's business,
financial condition, and operating results. See "Item 5. Directors and
Executive Officers."
Nasdaq is subject to risks relating to litigation and potential securities
laws liability.
Many aspects of Nasdaq's business potentially involve substantial risks of
liability. While Nasdaq enjoys immunity for certain self-regulatory
organization activities, it could be exposed to substantial liability under
federal and state securities laws, other federal and state laws and court
decisions, as well as rules and regulations promulgated by the SEC and
other federal and state agencies. These risks include, among others,
potential liability from disputes over the terms of a trade, the claim that
a system failure or delay cost a customer money, that Nasdaq entered into
an unauthorized transaction or that it provided materially false or
misleading statements in connection with a securities transaction. As
Nasdaq intends to defend any such litigation actively, significant legal
expenses could be incurred. An adverse resolution of any future lawsuit or
claim against Nasdaq could have an adverse effect on its business,
financial condition, and operating results.
Nasdaq's networks may be vulnerable to security risks.
As with other computer networks, it is possible that Nasdaq's networks may
be vulnerable to unauthorized access, computer viruses, and other security
problems. Persons who circumvent security measures could wrongfully use
Nasdaq's information or cause interruptions or malfunctions in Nasdaq's
operations. Nasdaq is required to continue to expend significant resources
to protect against the threat of security breaches or to alleviate problems
caused by any such breaches. Although Nasdaq intends to continue to
implement industry-standard security measures, these measures may prove to
be inadequate and result in system failures and delays that could lower
trading volumes and have an adverse effect on Nasdaq's business, financial
condition, and operating results.
Nasdaq faces potential conflicts of interest with related parties.
As of May 4, 2001, the NASD beneficially owns, on a fully diluted basis,
approximately 28% of Nasdaq's outstanding Common Stock (approximately 70%
on a non-diluted basis). See "Item 10. Recent Sales of Unregistered
Securities." Until Exchange Registration, the shares of Common Stock
underlying any unexpired and unexercised tranches of warrants sold in the
Restructuring by the NASD, as well as the shares of Common Stock purchased
through the valid exercise of such warrants, will be voted at the direction
of the NASD. In addition, after giving effect to the increase in the size
of the Nasdaq Board effective immediately after the 2001 Annual Meeting, 10
of the 18 members of the Nasdaq Board will also be members of the NASD
Board. Until Exchange Registration, the NASD will be in a position to
continue to control substantially all matters affecting Nasdaq, including
any determination with respect to the direction and policies of Nasdaq,
acquisition or disposition of assets, future issuances of securities of
Nasdaq, Nasdaq's incurrence of debt, and any dividend payable on the Common
Stock.
Conflicts of interest may arise between Nasdaq and the NASD, or its
affiliates, in a number of areas relating to their past and ongoing
relationships, including the nature, quality, and pricing of services
rendered; shared marketing functions; tax and employee benefit matters;
indemnity agreements; sales or distributions by the NASD of all or any
portion of its ownership interest in Nasdaq; or the NASD's ability to
influence certain affairs of Nasdaq prior to Exchange Registration. There
can be no assurance that the NASD and Nasdaq will be able to resolve any
potential conflict or that, if resolved, Nasdaq would not receive more
favorable resolution if it were dealing with an unaffiliated party.
Conflicts may also arise between Nasdaq and Amex by virtue of commitments
made by the NASD in connection with its acquisition of Amex.
The intercompany agreements may not be effected on terms as favorable to
Nasdaq as could have been obtained from unaffiliated third parties.
For purposes of governing their ongoing relationship, Nasdaq and the NASD,
or their affiliates, have entered into, or intend to enter into, various
agreements involving the provision of services such as market surveillance
and other regulatory functions, cash management and other financial
services, legal, facilities sharing, information services, corporate, and
other administrative services. However, as of the date hereof, Nasdaq has
only fully negotiated a contract with the NASDR pursuant to which NASDR
will regulate Nasdaq trading activity. The NASDR will continue regulating
trading activity on Nasdaq under the new long-term contract that
establishes the various functions NASDR will perform and the price that
Nasdaq will pay for these functions. The functions covered under this
contract are substantially the same type and scope as those NASDR had
previously performed under Delegation Plan.
The terms of the other intercompany agreements have not yet been fully
negotiated. Although it is the intention of the parties to negotiate
agreements that provide for arm's length, fair market value pricing, there
can be no assurance that these contemplated agreements, or the transactions
provided in them, will be effected on terms as favorable to Nasdaq as could
have been obtained from unaffiliated third parties. The cost to Nasdaq for
such services could increase at a faster rate than its revenues and could
adversely affect Nasdaq's business, financial condition, and operating
results. See "Item 7. Certain Relationships and Related Transactions."
The SEC may challenge or not approve Nasdaq's plan to become a national
securities exchange or it may require changes in the manner Nasdaq conducts
its business before granting this approval.
The SEC may not approve Nasdaq's proposal to be registered as a national
securities exchange or may require changes in the manner Nasdaq conducts
its business before granting this approval. Failure to be so registered
could adversely effect Nasdaq's competitive position and could have a
material adverse effect on Nasdaq's business conditions and business
prospects.
In connection with Exchange Registration, certain changes must be made to
the national market system plans. Certain participants in the plans may
object to, or request modifications to amendments proposed by Nasdaq.
Failure to resolve these issues in a timely manner could delay Exchange
Registration. In addition, the SEC has also stated that the approval of
Exchange Registration is linked to the NASD's obligation to provide an
alternative facility to allow NASD members to report trades and disseminate
quotations in exchange listed securities. Any significant delay or failure
on the part of the NASD to build this residual market could also delay the
SEC's approval of Exchange Registration.
There can be no assurance that Exchange Registration will occur or that the
registration process will occur in a timely manner. Because of the nature
of the regulatory process and the variety of market structure issues that
would have to be resolved across all markets, the registration process
could be lengthy. The failure to be approved as an exchange by the SEC may
have negative implications on the ability of Nasdaq to fund its planned
initiatives.
In addition, the SEC has not yet agreed and may not agree to Nasdaq's
proposal to continue to operate the OTC Bulletin Board after Exchange
Registration.
Nasdaq may face competition from the establishment of a "residual market"
by the NASD.
In the SEC's January 2001 order approving SuperMontage, it noted that in
order to address concerns that Nasdaq's position as an exclusive SIP would
compel participation in SuperMontage, the NASD has committed to provide
NASD members with the ability to opt-out of SuperMontage by providing an
alternative quotation and transaction reporting facility for NASD members.
In addition, the SEC has also stated that the approval of Exchange
Registration is linked to the NASD's obligation to provide an alternative
facility to allow NASD members to report trades and disseminate quotations
in exchange listed securities. If this market becomes a viable alternative
to Nasdaq, then Nasdaq faces the risk of reduced market share in
transactions and market information services revenues, which would
adversely affect Nasdaq's business, financial condition, and operating
results.
Nasdaq will not pay cash dividends for the foreseeable future.
Nasdaq anticipates that earnings, if any, will be retained for the
development of its business and that no cash dividends will be declared on
the Common Stock for the foreseeable future.
Provisions of Delaware law and Nasdaq's governing documents may delay or
prevent its takeover.
Nasdaq is organized under the laws of the State of Delaware and was
incorporated in 1979. Certain provisions of Delaware law may have the
effect of delaying or preventing a transaction that would cause a change in
Nasdaq's control. In addition, certain provisions of the Certificate of
Incorporation and Nasdaq's By-Laws (the "By-Laws") may delay, defer, or
prevent this type of transaction, even if Nasdaq's stockholders consider
the transaction to be in their best interests. For example, the Certificate
of Incorporation places limitations on the voting rights of persons, other
than the NASD or any other person as may be approved by the Nasdaq Board
prior to the time such person owns more than 5% of the then outstanding
shares of Common Stock, who otherwise would be entitled to exercise voting
rights in respect of more than 5% of the then outstanding shares of Common
Stock. As a result, third parties are limited from exercising voting
control over Nasdaq. Moreover, it is possible that the SEC might object to
any action of the Nasdaq Board that would permit certain persons from being
exempted from the foregoing restriction on voting power. In addition, in
response to the SEC's concern about a concentration of ownership of Nasdaq,
Nasdaq's Exchange Registration application includes a rule that prohibits
any Nasdaq member or any person associated with a Nasdaq member from
beneficially owning more than five percent of the outstanding shares of
Common Stock. Other provisions make the removal of incumbent directors and
the election of new directors more time consuming and difficult, which may
discourage third parties from attempting to obtain control of Nasdaq, even
if the change in control would be in the best interests of its
stockholders. See "Item 11. Description of Registrant's Securities to be
Registered."
Item 2. Financial Information.
The following table presents summary consolidated financial and operating
data for Nasdaq. The data presented in this table are derived from
"Selected Consolidated Financial Data of Nasdaq" and the consolidated
financial statements and notes thereto which are included elsewhere in this
Registration Statement. You should read those sections for a further
explanation of the financial data summarized here. You should also read the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Nasdaq" section, which describes a number of factors which
have affected Nasdaq's financial results.
Selected Consolidated Financial Data
Year Ended December 31,
1996 1997 1998 1999 2000
--------------------------------------------------------------
(in thousands, except per share data and number of listed
companies)
Statement of Income Data:
Revenues:
Transaction services $118,500 $174,741 $ 160,506 $283,652 $395,123
Market information services 99,446 126,436 152,665 186,543 258,251
Issuer services 111,832 113,019 137,344 163,425 184,595
Other 2,452 2,530 308 628 30,040
------------ --------- ---------- --------- ---------
Total revenues 332,230 416,726 450,823 634,248 868,009
Expenses:
Compensation and benefits 54,080 64,324 78,565 98,129 133,496
Marketing and advertising 34,356 53,817 42,483 62,790 45,908
Depreciation and amortization 24,405 31,336 34,984 43,696 65,645
Professional and contract 17,233 22,259 35,127 35,282 61,483
services
Computer operations and data
communications 45,757 61,438 72,111 100,493 138,228
Travel, meetings, and training 6,547 7,310 7,750 10,230 12,113
Occupancy 4,380 4,883 5,354 6,591 14,766
Publications, supplies, and 4,512 5,223 5,208 4,670 7,181
postage
Other 8,995 13,763 14,742 22,666 24,375
------------ --------- ---------- --------- ---------
Total direct expenses 200,265 264,353 296,324 384,547 503,195
Support cost from related
parties, net 70,293 85,880 100,841 115,189 128,522
------------ --------- ---------- --------- ---------
Total expenses 270,558 350,233 397,165 499,736 631,717
Net operating income 61,672 66,493 53,658 134,512 236,292
Interest income 6,341 7,522 9,269 12,201 20,111
Interest expense (136) (797) (1,962) (2,143) (2,130)
Provision for income taxes (27,522) (33,187) (26,010) (58,421) (105,018)
Minority interest in earnings - - - - 872
------------ --------- ---------- --------- ---------
Net income 40,355 40,031 34,955 86,149 150,127
Weighted average common shares 100,000,000 100,000,000 100,000,000 100,000,000 112,090,493
outstanding1
Basic and diluted earnings per share $0.40 $0.40 $0.35 $0.86 $1.34
Other Data:
EBITDA2 $86,077 $97,829 $88,642 $178,208 $301,937
Capital expenditures 54,361 79,887 33,605 94,193 119,040
Net cash provided by operating 62,469 76,755 56,723 134,625 249,320
activities
Net cash used in investing activities (50,726) (123,064) (58,150) (130,657) (286,009)
Net cash provided by financing
activities 21 29,766 156 3,876 288,348
Number of listed companies 5,556 5,487 5,068 4,829 4,734
Shares traded 138,100,000 163,900,000 202,000,000 272,600,000 442,800,000
As of December 31,
1996 1997 1998 1999 2000
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 20,547 $ 4,025 $ 2,754 10,598 262,257
Working capital 92,953 84,668 120,831 154,372 472,341
Total assets 270,654 353,134 403,745 578,254 1,075,317
Total long term obligations 14,097 41,362 41,248 78,965 71,325
Total stockholders' equity 189,135 229,166 266,255 352,012 764,901
- ----------------------
(1) Gives effect to the June 28, 2000, 49,999-for-one stock dividend of
the shares of Common Stock for years ended 1996-2000.
(2) EBITDA represents income before net interest, income taxes, and
depreciation and amortization expense. EBITDA is not a measure of
performance under generally accepted accounting principles and should not
be considered as an alternative to net income as a measure of operating
results or cash flows as a measure of liquidity. Nasdaq believes that
investors find EBITDA a good measure of Nasdaq's cash flow and ability to
incur and service indebtedness. EBITDA as defined may not be comparable to
similarly titled measures reported by other companies.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of Nasdaq should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this
Registration Statement. This discussion contains forward-looking statements
that involve risks and uncertainties. Nasdaq's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth
under "Item 1. Business-- Risk Factors" and elsewhere in this Registration
Statement.
Overview
As of December 31, 2000, the NASD owned approximately 60% of Nasdaq
assuming all warrants purchased in Phase I are fully exercised
(approximately 81% assuming no warrants are exercised). Phase II of the
Restructuring closed in January 2001. Subsequent to the closing of Phase II
and the repurchase by Nasdaq of 18,461,538 shares of Common Stock from the
NASD on May 3, 2001, the NASD beneficially owns approximately 28% of Nasdaq
on a fully diluted basis (approximately 70% on a non-diluted basis).
Transactions between Nasdaq and the NASD are on a cost basis and are
allocated on a monthly basis through transfer pricing mechanisms.
Revenues
Nasdaq's revenues increased from $450.8 million for the year ended December
31, 1998 to $868.0 million for the year ended December 31, 2000, representing
a compound annual growth rate of 38.8%. Nasdaq's total revenues for the year
ended December 31, 2000 represented a 36.9% increase from $634.2 million for
the year ended December 31, 1999.
Nasdaq has three main revenue sources: transaction services, market
information, and issuer services.
Transaction Services
For the year ended December 31,2000, transaction services revenues of
$395.1 million increased $111.4 million or 39.3% from $283.7 million for
the year ended December 31, 1999. Transaction services consist of
SelectNet, SOES, ACT, the Nasdaq Workstation, and other related execution
services.
SelectNet, the high-volume automated execution service, provided revenues
of $113.5 million, an increase of $30.4 million or 36.6% for the year ended
December 31, 2000 from $83.1 million for the year ended December 31, 1999,
due to an increase in trade volume. SelectNet fees are charged on a per
transaction basis.
SOES, a system providing for the automatic execution of small orders,
provided revenues of $32.2 million for the year ended December 31, 2000, an
increase of $12.5 million or 63.5% from $19.7 million for the year ended
December 31, 1999, due to an increase in volume of SOES executions. SOES
fees are charged on a per transaction basis.
ACT, an automated service that provides the post-execution steps of
reporting price, volume comparison and clearing of pre-negotiated trades
completed in Nasdaq and OTC Bulletin Board securities as well as risk
management services, provided revenues of $100.0 million for the year ended
December 31, 2000, an increase of $31.9 million or 46.8% from $68.1 million
for the year ended December 31, 1999, due to increases in trade volume. ACT
fees are primarily transaction based.
The Nasdaq Workstation II is the trader's direct connection to Nasdaq,
providing quotation services, automated trade executions, real-time
reporting, trade negotiations and clearing. This trading device, along with
application programming interfaces, provided over $121.5 million in
revenues for the year ended December 31, 2000, an increase of $34.0 million
or 38.8% from $87.6 million in revenues for the year ended December 31,
1999. Nasdaq Workstation II fees are charged monthly based upon logins.
Market Information
For the year ended December 31, 2000, market information revenues of $258.3
million increased $71.8 million or 38.5% from $186.5 million for the year
ended December 31, 1999. Market information consists of Level 1, Nasdaq
Quotation Dissemination Service and Nasdaq InterMarket tape revenues.
Nasdaq's Level 1 service is the largest component of market information
revenues. Level 1 provides subscribers with current inside quote and most
recent price at which the last sale or purchase was transacted for a
specific security. Fees for professional users are based on monthly
subscriptions to terminals or access lines. Non-professional users have the
option to access this information through either a flat monthly rate or a
per query usage charge. Level 1 revenues increased by approximately $24.6
million or 18.2% to $159.6 million for the year ended December 31, 2000
from $135.0 million for the year ended December 31, 1999, primarily driven
by an increase in demand for non-professional services including both per
month and per query usage.
Nasdaq Quotation Dissemination Service is the other primary contributor to
market information revenue. Nasdaq Quotation Dissemination Service provides
subscribers with the quotes of each individual market maker and ECN, in
addition to the inside quotes and last transaction prices. Nasdaq Quotation
Dissemination Service revenues increased by approximately $42.3 million or
130.2% to $74.8 million for the year ended December 31, 2000 from $32.5
million for the year ended December 31, 1999. Nasdaq Quotation
Dissemination Service revenues are derived from monthly subscription fees.
Nasdaq InterMarket tape revenues are also included in market information
revenues. Revenues for Nasdaq InterMarket are derived from data revenue
generated by the CQA/CTA in Tape A and Tape B trades. Nasdaq's revenue is
directly related to the percentage of trades in exchange listed securities
that are executed in a Nasdaq facility and reported through the CQA/CTA.
Nasdaq InterMarket tape revenues increased by approximately $4.7 million or
27.3% to $21.9 million for the year ended December 31, 2000, from $17.2
million for the year ended December 31, 1999.
Issuer Services
Issuer services revenues of $184.6 million increased $21.2 million or 13.0%
for the year ended December 31, 2000 from $163.4 million for the year ended
December 31, 1999. Issuer revenues are generated through fees for initial
listings, listing of additional shares, and annual renewal fees for
companies listed on Nasdaq. The increase in the year ended December 31,
2000 was driven by the fee increase for additional listings. Revenue
related to additional listings increased 67.9% from 29.6 million in 1999 to
$49.6 million in 2000. Annual listing fees which accounted for
approximately 9.3% of Nasdaq's revenues for the year ended December 31,
2000 increased by $3.8 million from $77.3 million to $81.1 million.
However, initial listing fees decreased $1.8 million from $54.9 million for
year ended December 31, 1999 to $53.1 million for the year ended December
31, 2000 due to fewer IPOs. Fees are primarily calculated based upon total
shares outstanding.
An uncertain and slowing economy, and lower per share prices experienced in
2001 could result in:
o reductions in the number of employees at broker-dealers that
may result in a decrease in the number of Level 1 terminals
and non-professional devices used, which would reduce market
information services revenue; and
o fewer companies are expected to go public or issue additional
shares if share prices remain depressed, thus reducing issuer
services revenue. However, the trends related to trade volume
remain relatively strong. Despite lower prices and fewer new
issuances, indications are that average trade volume for 2001
will remain consistent and be reflected in transaction
services fee revenue.
Other Revenue
Other revenues for the year 2000 totaled $30.0 million, up significantly
from $0.6 million in 1999. This growth is attributable to increased
trademark and licensing revenues, new banner advertising revenues for
nasdaq.com, revenue generated by the newly opened Nasdaq MarketSite(sm)
("MarketSite"), and revenues related to Nasdaq Tools, acquired in 2000.
For further information regarding revenue sources, see the sections in
"Business" entitled "--Products and Services" and "--Competition."
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Total revenues were $868.0 million for the year ended December 31, 2000,
representing a 36.9% increase from $634.2 million for the year ended
December 31, 1999. This increase was largely driven by growth in trading
volumes. Overall average daily share volume on Nasdaq increased by 62.4%,
from 1.08 billion shares per day for the year ended December 31, 1999 to
1.77 billion shares per day for the year ended December 31, 2000.
Transaction services revenues of $395.1 million increased $111.4 million or
39.3% for the year ended December 31, 2000 from $283.7 million for the year
ended December 31, 1999, primarily due to an increase in average daily
share volume demand partially offset by fee adjustments. Market information
services revenues of $258.3 million increased $71.8 million or 38.5% for
the year ended December 31, 2000 from $186.5 million for the year ended
December 31, 1999, primarily due to an increase in non-professional demand
partially offset by fee adjustments for non-professional market information
users. Issuer services revenues of $184.6 million increased $21.2 million
or 13.0% for the year ended December 31, 2000 from $163.4 million for the
year ended December 31, 1999, primarily due to a 17.1% increase in the
average size of IPOs and secondary offerings. Other revenue increased $29.4
million in 2000 compared to 1999 primarily as a result of Nasdaq 100
trademark and licensing fees of $11.7 million, Nasdaq Tools revenues of $
6.8 million, Nasdaq.com advertising revenues of $5.9 million, and
MarketSite revenues of $4.2 million. Nasdaq Tools, Nasdaq.com and the
MarketSite had no revenue in 1999.
Direct Expenses
Direct expenses increased $118.7 million or 30.9% to $503.2 million for the
year ended December 31, 2000 from $384.5 million for the year ended
December 31, 1999.
Compensation and benefits costs increased $35.4 million or 36.1% to 133.5
million for the year ended December 31, 2000 from $98.1 million for the year
ended December 31, 1999. This increase is primarily due to growth in the
number of employees required to support business and operational demands
created by the rapid expansion of the market during 2000. The number of
employees increased by 171, or 16.4%, to 1,214 employees as of December 31,
2000, from 1,043 employees as of December 31, 1999. As a result salaries for
the period increased $20.8 million. This growth is comprised of $10 million to
support increased capacity in the data center, $6.9 million to manage system
enhancements and production support from system engineering, and $3.9 million
for sales and retention, marketing, legal, and corporate management.
Additionally, recruiting costs increased $1.8 million for the period. Also
contributing to the increase in compensation is a $4.7 million, or 18%,
increase for incentive compensation, a $4.6 million, or 69%, increase in
retirement and savings plan expenses, and a $3.5 million increase in other
compensation. In response to the softening market conditions, management
implemented a staff reduction plan that eliminated 137 positions, or about 10%
of the workforce in June 2001. This action is anticipated to reduce
compensation expense (net of severance expense) by $4.5 million in 2001 and
$15.1 million in 2002. With this reduction, management believes that the
workforce is correctly sized for the current and foreseeable market
conditions.
Marketing and advertising costs decreased $16.9 million or 26.9% to $45.9
million for the year ended December 31, 2000 from $62.8 million for the
year ended December 31, 1999, primarily due to a decrease in scale of the
media advertising campaign run in the fall of 2000 as compared to the fall
campaign run in 1999. During 1999, additional media events were scheduled
to establish the Nasdaq and Amex brand following the NASD's 1998
acquisition of Amex.
Depreciation and amortization expense increased $21.9 million or 50.1% to
$65.6 million for the year ended December 31, 2000 from $43.7 million for the
year ended December 31, 1999, primarily due to purchases of computer hardware
necessary to handle the growth in trading volumes.
Professional and contract services costs, excluding amounts capitalized under
Statement of Position 98-1 as described in the notes to consolidated
financial statements, increased $26.2 million or 74.2% to $61.5 million for
the year ended December 31, 2000 from $35.3 million for the year ended
December 31, 1999. The main projects included in current year professional
and contract services expense are Nasdaq Global and related international
initiatives, design costs related to Nasdaq.com and Nasdaq online, vendor
services for the new MarketSite and broadcast facility located in Times
Square, New York, and helpdesk and desktop support costs provided by
Electronic Data Systems Corporation.
Computer operations and data communications costs increased $37.7 million
or 37.5% to $138.2 million for the year ended December 31, 2000 from $100.5
million for the year ended December 31, 1999. This overall increase was
required to support additional capacity. Nasdaq's total share volume for
the year ended December 31, 2000 increased approximately 63.5% compared to
the year ended December 31, 1999. The computer operations and data
communications complex was upgraded to provide the capability for
processing four billion shares on a peak day. The computer operations
component of the costs increased $14.4 million between 1999 and 2000 to
support this capacity. This increase resulted from help desk and network
license increases of $2.3 million, hardware maintenance increases of $5.4
million, Tandem lease increases of $1.3 million, software leases and
maintenance increases of $3.9 million, and computer supplies and cabling
increases of $1.5 million. Data communications costs increased $23.3
million due to the increased Enterprise Wide Network II charges from
WorldCom for T-1 communications lines for new customers and upgraded
bandwidth and processing speed.
The remaining direct expenses increased $14.2 million or 32.1% to $58.4
million for the year ended December 31, 2000 from $44.2 million for the
year ended December 31, 1999. This was primarily due to an increase in
occupancy costs as a result of the MarketSite and broadcast facility in
Times Square, New York.
Support Costs
Support costs from related parties increased by $13.3 million or 11.5% to
$128.5 million for the year ended December 31, 2000 from $115.2 million for
the year ended December 31, 1999. Specifically, Nasdaq incurred increased
surveillance and other regulatory charges from NASDR. Surveillance and
other regulatory charges are comprised primarily of the costs relating to
technological investments for market surveillance as well as direct costs
for enforcement and other regulation services. Surveillance and other
regulatory charges from NASDR increased by $14.8 million or 22.7% to $79.9
million for the year ended December 31, 2000 from $65.1 million for the
year ended December 31, 1999. Additionally, contributing to the increase is
a decline in the amount of Nasdaq costs charged to Amex of $9.1 million or
65.0% to $4.9 million for the year ended December 31, 2000 from $14.0
million for the year ended December 31, 1999. Nasdaq provides systems and
technology support to Amex in the form of market data storage and
dissemination, web development and hosting and customer relationship
management application support. The support cost increases are partially
offset by a decrease in support costs from the NASD of $10.5 million or
16.4% to $53.6 million for the year ended December 31, 2000 from $64.1
million for the year ended December 31, 1999, primarily since support of
Nasdaq's computer desktop operations was outsourced to Electronic Data
Systems effective June 1, 1999. Prior to June 1, 1999, the NASD provided
these services to Nasdaq. The NASD provides certain administrative,
corporate and infrastructure services, including cash management and other
financial services, real estate, legal and human resource services. Amounts
charged to related parties are netted against charges from related parties
in the "Support cost from related parties, net" line item on the
Consolidated Statements of Income.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Total revenues increased $183.4 million or 40.7% to $634.2 million for the
year ended December 31, 1999 from $450.8 million for the year ended
December 31, 1998. Results for the year ended December 31, 1999 reflect the
strong U.S. equity market performance experienced as evidenced by an
increase in average daily share volume on Nasdaq of approximately 35% as
compared to the previous year. Transaction services revenues of $283.7
million increased $123.2 million or 76.8% for the year ended December 31,
1999 from $160.5 million for the year ended December 31, 1998, primarily
due to an increase in average daily share volume of 108.5% to over 1.3
million average trades per day during the year ended December 31, 1999 as
compared to over 0.6 million average trades per day during the year ended
December 31, 1998. Market information services revenues of $186.5 million
increased $33.8 million or 22.1% for the year ended December 31, 1999 from
$152.7 million for the year ended December 31, 1998, primarily due to a
35.7% growth in the number of subscribers of market quote and trade data
services. Issuer services revenues of $163.4 million increased $26.1
million or 19.0% for the year ended December 31, 1999 from $137.3 million
for the year ended December 31, 1998, primarily due to an increase in the
number and size of IPOs, spin-offs, and movement of issuers into Nasdaq
from other markets.
Direct Expenses
Direct expenses increased $88.2 million or 29.8% to $384.5 million for the
year ended December 31, 1999 from $296.3 million for the year ended
December 31, 1998.
Compensation and benefits costs increased $19.5 million or 24.8% to $98.1
million for the year ended December 31, 1999 from $78.6 million for the year
ended December 31, 1998, primarily due to an increase in headcount of
approximately 228 employees to 1,042 employees as of December 31, 1999, from
814 employees as of December 31, 1998 that represents a 28.0% increase in
headcount. The majority of new employees are technology staff needed for
system enhancements and development initiatives and are performing services
for Nasdaq that would have been otherwise provided by independent contractors.
Marketing and advertising costs increased $20.3 million or 47.8% to $62.8
million for year ended December 31, 1999 from $42.5 million for the year
ended December 31, 1998, primarily due to an extensive media advertising
campaign run during the fall of 1999 to promote brand-awareness.
Depreciation and amortization expense increased $8.7 million or 24.9% to $43.7
million for the year ended December 31, 1999 from $35.0 million for the year
ended December 31, 1998, primarily due to purchases of computer hardware
necessary to handle the growth in Nasdaq trading volume.
Professional and contract services costs excluding amounts capitalized under
Statement of Position 98-1 as described in the notes to consolidated
financial statements included elsewhere in this Registration Statement
increased $0.2 million or 0.6% to $35.3 million for the year ended December
31, 1999, from $35.1 million for the year ended December 31, 1998. The main
projects included in current year professional and contract services
expense are development costs related to the New Amex Equity Book and the
Integrated Quote Management System. The New Amex Equity Book displays to
market professionals the aggregate size and price of equity orders on the
book away from the best bid and offer. The costs incurred by Nasdaq in
assisting Amex in the development of the New Amex Equity Book are charged
back to Amex as support costs provided to related parties. Amounts charged
to related parties are netted against charges from related parties in the
"Support cost from related parties, net" line item on the Consolidated
Statement of Income. For the year ended December 31, 1999, Nasdaq expensed
approximately $11.7 million of the New Amex Equity Book development costs
that would have otherwise been capitalized as an internally developed
software cost in the fourth quarter of 1999 after a determination not to
implement the system. The Integrated Quote Management System was intended
to replace Nasdaq's current quotation environment, consolidate Nasdaq's
various quotation applications and enable Nasdaq to handle decimalization,
an industry-wide initiative to convert securities systems pricing figures
from fractions to decimals. In May 2000, it was determined that designing
the current system to handle the decimalization would present lower
technological risk than would further work on the Integrated Quote
Management System.
Computer operations and data communications costs increased $28.4 million
or 39.4% to $100.5 million for the year ended December 31, 1999 from $72.1
million for the year ended December 31, 1998, primarily due to the initial
installation of circuits for the Enterprise Wide Network II in 1998. The
Enterprise Wide Network II is the new Nasdaq network to connect Nasdaq's
computerized market facilities to market participants. The Enterprise Wide
Network II increase in installations in 1998 resulted in increased
recurring costs in 1999 for the communications lines as customers converted
from Enterprise Wide Network I circuits to the Enterprise Wide Network II
T-1 lines at nearly double the cost.
The remaining direct expenses increased $11.1 million or 33.5% to $44.2
million for the year ended December 31, 1999 from $33.1 million for the
year ended December 31, 1998. This was primarily due to an increase in
other direct expenses that includes a $5.6 million increase in the
allowance related to performance under the Enterprise Wide Network II
contract with WorldCom Inc. Nasdaq partnered with WorldCom Inc. to deploy a
state of the art communications infrastructure to link Nasdaq's
computerized market facilities to the market participants. WorldCom Inc.
provides networking and management services to the Enterprise Wide Network
II in return for revenues generated by the Enterprise Wide Network II and a
deposit fee paid by Nasdaq. Although the deposit will be refunded if Nasdaq
attains certain revenue targets, the allowance is established for any
unrecoverable amounts. Other direct expenses also increased due to Nasdaq's
contribution to The Nasdaq Stock Market Educational Foundation, Inc. of
$10.0 million for the year ended December 31, 1999 compared to $5.0 million
for the year ended December 31, 1998. Contributions to The Nasdaq Stock
Market Educational Foundation, Inc. were made in the fourth quarters of the
years ended December 31, 1998 and December 31, 1999. The foundation is a
non-profit membership organization established and operated exclusively to
advance educational purposes, principally involving the study of business,
economics, and finance.
Support Costs
Support costs from related parties increased by $14.4 million or 14.3% to
$115.2 million for the year ended December 31, 1999 from $100.8 million for
the year ended December 31, 1998, primarily due to the increase in support
charges from the NASD which largely represent costs incurred by the NASD to
develop and maintain technology on behalf of Nasdaq. Specifically, support
costs from the NASD increased by $11.5 million or 21.9% to $64.1 million
for the year ended December 31, 1999 from $52.6 million for the year ended
December 31, 1998, primarily due to an increase in technology development
costs as a result of Nasdaq Japan, various Year 2000 initiatives, and an
increase in overall network environment costs necessary to support the
increase in trade volume. In addition, Nasdaq incurred surveillance and
other regulatory charges from NASDR. Surveillance and other regulatory
charges are comprised primarily of the costs relating to technological
investments for market surveillance as well as direct costs for enforcement
and other regulation services. Surveillance and other regulatory charges
from NASDR increased by $7.8 million or 13.6% to $65.1 million for the year
ended December 31, 1999, from $57.3 million for the year ended December 31,
1998. Nasdaq charged Amex $14.0 million as support costs provided to
related parties in the year ended December 31, 1999. This amount consists
of $9.2 million of non-technology services provided such as marketing
services performed by Nasdaq on behalf of Amex as well as $4.8 million of
technological support related to the development of new systems such as the
New Amex Equity Book and the enhancement of existing Amex systems. Amounts
charged to related parties are netted against charges from related parties
in the "Support cost from related parties, net" line item on the
Consolidated Statements of Income.
Liquidity and Capital Resources
December 31, 2000 compared to December 31, 1999
Cash and cash equivalents and available for sale securities totaled $494.3
million as of December 31, 2000, an increase of $330.1 million from $164.2
million as of December 31, 1999. Working capital increased $318.0 million
to $472.3 million as of December 31, 2000, from $154.3 million as of
December 31, 1999.
Cash and cash equivalents increased $251.7 million to $262.3 million as of
December 31, 2000, primarily due to cash provided by financing activities
as a result of the net proceeds received from Phase I that equalled $253.3
million.
For the year ended December 31, 2000, operating activities provided net
cash inflows of $249.3 million, primarily due to cash received from
customers of $713.4 million less cash paid to suppliers, employees, and
related parties of $403.8 million and income taxes paid of $101.2 million.
Net cash used in investing activities was $286.0 million for the twelve
months ended December 31, 2000, due in part to capital expenditures to
complete construction of the MarketSite and broadcast facility in Times
Square and the acquisition of Financial Systemware, Inc. In addition,
Nasdaq continued to make capital investments in technology to continue to
support Nasdaq's system capacity needs. The remaining cash used in
investing activities is attributable to purchases of investments with the
proceeds of the Phase I offering that exceeded the sales and maturities of
investments.
Cash provided by financing activities was $288.3 million as of December 31,
2000, primarily due to the net proceeds received from Phase I that equalled
approximately $253.3 million. Nasdaq will use the proceeds to invest in new
technology, implement and form strategic alliances, implement its pricing
strategies, and build its brand identity through marketing programs. Also
contributing to cash provided from financing activities was $30.0 million
in capital contributions to Nasdaq Europe Planning Company Limited from the
minority shareholders.
Additionally, in connection with the closing of Phase II on January 18,
2001, Nasdaq yielded net proceeds of approximately $63.7 million. Nasdaq
believes that the liquidity provided by existing cash and cash equivalents,
investments, and cash generated from operations will provide sufficient
capital to meet operating requirements. Nasdaq has generated positive cash
flows annually in each of the five years included in this filing and
believes it will continue to do so in the future to meet both short and
long term operating requirements.
December 31, 1999 compared to December 31, 1998
Cash and cash equivalents and available for sale securities totaled $164.2
million as of December 31, 1999, an increase of $31.6 million from $132.6
million as of December 31, 1998. Working capital increased $33.6 million to
$154.4 million as of December 31, 1999, from $120.8 million as of December
31, 1998.
Cash and cash equivalents increased $7.8 million to $10.6 million as of
December 31, 1999, primarily due to cash provided by operating activities
of $134.6 million, partially offset by cash used in investing activities of
$130.7 million.
In the year ended December 31, 1999, operating activities provided net cash
inflows of $134.6 million, primarily due to cash received from customers of
$527.9 million less cash paid to suppliers, employees, and related parties
of $352.9 million.
Net cash used in investing activities was $130.7 million in the year ended
December 31, 1999, due in part to an increase in capital expenditures
related to construction of the new MarketSite and broadcast facility in
Times Square in New York City totalling approximately $31.0 million. In
addition, Nasdaq made capital investments of approximately $60.0 million in
technology to continue to support Nasdaq's system capacity needs. The
remaining cash used in investing activities is attributable to purchases of
investments that exceeded the proceeds from sales and maturities of
investments.
Nasdaq had no significant financing activities during the year ended
December 31, 1999, as the cash generated by operations was sufficient to
fund planned growth and capital requirements.
Quantitative and Qualitative Disclosure About Market Risk
Market risk represents the risks of changes in the value of a financial
instrument, derivative or non-derivative, caused by fluctuations in
interest rates, foreign exchange rates, and equity prices. As of December
31, 2000, Nasdaq's investment portfolio consists primarily of floating rate
securities, obligations of U.S. Government sponsored enterprises, municipal
bonds, and commercial paper. Nasdaq's primary market risk is associated
with fluctuations in interest rates and the effects that such fluctuations
may have on its investment portfolio and outstanding debt. The weighted
average maturity of the fixed income portion of the portfolio is 1.05 years
as of December 31, 2000. Nasdaq's outstanding debt obligation specifies a
fixed interest rate until May 2007 and a floating interest rate based on
the lender's cost of funds until maturity in 2012. The investment portfolio
is held primarily in short-term investments with maturities averaging
approximately one year. Therefore, management does not believe that a 100
basis point fluctuation in market interest rates will have a material
effect on the carrying value of Nasdaq's investment portfolio or
outstanding debt, or on the Company's earnings or cash flows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, the FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133" that defers the date of adoption of
SFAS No. 133 such that it is effective for fiscal years beginning after June
15, 2000. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities-an Amendment of FASB
Statement No. 133" that addresses a limited number of issues causing
implementation difficulties for a large number of entities preparing to apply
SFAS No. 133. Nasdaq adopted SFAS 133 with no transition adjustments recorded
and no impact on the financial statements.
Item 3. Properties.
The following is a description of Nasdaq's material properties as of June
30, 2001.
- ----------------------------------------------------------------------------------------------------------------------
Location Use Size (Approximate, in Type of Possession
square feet)
- ----------------------------------------------------------------------------------------------------------------------
Gaithersburg, Maryland General office space 66,000 Leased by the NASD.
Nasdaq reimburses the NASD
for the amounts due under
the lease
- ----------------------------------------------------------------------------------------------------------------------
New York, New York Location of MarketSite 26,000 Leased by the NASD, which
will be making an
assignment to Nasdaq
- ----------------------------------------------------------------------------------------------------------------------
New York, New York Nasdaq headquarters 78,000 Sublease from the NASD
- ----------------------------------------------------------------------------------------------------------------------
New York, New York General office space 24,000 Leased by Nasdaq
- ----------------------------------------------------------------------------------------------------------------------
Rockville, Maryland Location of Nasdaq data center 110,000 Ownership will be
transferred to Nasdaq by
the NASD in exchange for
the transfer by Nasdaq of
a 58,000 s.f. office
building to the NASD
- ----------------------------------------------------------------------------------------------------------------------
Rockville, Maryland General office space 78,000 Leased by Nasdaq effective
October, 2001
- ----------------------------------------------------------------------------------------------------------------------
Trumbull, Connecticut Location for Nasdaq's principal 162,000 Owned by Nasdaq
technology services, systems
engineering and market operations
- ----------------------------------------------------------------------------------------------------------------------
Trumbull, Connecticut General office space 101,000 (two locations) Leased by Nasdaq
- ----------------------------------------------------------------------------------------------------------------------
Washington, D.C. General office space 48,000 (three Occupied pursuant to a
locations) shared facilities
agreement with the NASD
- ----------------------------------------------------------------------------------------------------------------------
In addition to the above, Nasdaq leases administrative and sales facilities
in Menlo Park, California, London, England, Sao Paulo, Brazil, Montreal,
Canada and Shanghai, China. Nasdaq's Chicago operations will sublease space
from the NASD.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the beneficial ownership of Nasdaq's Common
Stock by all persons who are beneficial owners of more than five percent of
the Common Stock and the beneficial ownership of Nasdaq's Common Stock and
Nasdaq Japan's common shares by (1) each director, (2) Nasdaq's Chief
Executive Officer ("CEO") and the four most highly compensated executive
officers other than the CEO, who were serving as executive officers at the
end of 2000, and (3) all directors and executive officers as a group.
Except as otherwise indicated, Nasdaq believes that the beneficial owners
listed below, based on information furnished by such owners, will have sole
investment and voting power with respect to such shares, subject to
community property laws where applicable. Unless otherwise indicated, the
business address of such persons is One Liberty Plaza, New York, New York,
10006. As of June 30, 2001, approximately 110,765,855 shares of Common
Stock were outstanding, which includes 534,850 shares of restricted Common
Stock awarded to officers and employees of Nasdaq, and approximately 56,400
common shares of Nasdaq Japan were outstanding after giving effect to a
four-for-one stock split of Nasdaq Japan's shares that occurred on April
18, 2001.
Name of beneficial owner Common Stock Percent of Common Shares of Percent
Nasdaq Japan
Beneficially Owned Class Beneficially Owned of Class
- --------------------------------------------------------------------------------------------------------------
National Association of Securities 76,992,671(1) 69.5 - -
Dealers, Inc...................
1735 K Street, N.W.
Washington, D.C. 20006
Hellman & Friedman Capital
Partners IV, L.P. ............. 12,000,000(2) 9.8 - -
One Maritime Plaza 12th Floor
San Francisco, CA 94111
Dr. Josef Ackermann............ -(3) - - -
H. Furlong Baldwin............. - - - -
Frank E. Baxter................ -(4) - - -
Michael Casey.................. -(5) - - -
Michael W. Clark............... -(6) - - -
William S. Cohen............... - - - -
F. Warren Hellman.............. 12,000,000(2) 9.8 - -
John D. Markese................ - - - -
E. Stanley O'Neal.............. -(7) - - -
Vikram S. Pandit............... -(8) - - -
Kenneth D. Pasternak........... -(9) - - -
David S. Pottruck.............. -(10) - - -
Arthur Rock.................... - - - -
Richard C. Romano.............. 20,000(11) * - -
Hardwick Simmons............... - - - -
Arvind Sodhani................. -(12) - - -
Sir Martin Sorrell............. - - - -
Frank G. Zarb.................. 60,000(13) * 140(14) *
Alfred R. Berkeley, III........ 15,900(15) * - -
J. Patrick Campbell............ 30,000(16) * - -
John L. Hilley................. 30,000(17) * 1,900(18) 3.4
Richard G. Ketchum............. 40,000(19) * 76(20) *
All directors and executive
officers as a group
(33 persons)................... 333,100 * 2,192 3.9
- ------------------------------
* Less than one percent
(1) Includes approximately 43,231,976 shares of Common Stock underlying the
unexercised, unexpired outstanding warrants.
(2) Hellman & Friedman owns the Subordinated Debentures. H&F Investors IV,
LLC ("H&F IV"), is the general partner of each of the Hellman & Friedman
limited partnerships. The Subordinated Debentures are currently convertible
into 12,000,000 shares of Common Stock, subject to adjustment. The
investment decisions of each of the Hellman & Friedman limited partnerships
are made by the investment committee of H&F IV, which indirectly exercises
sole voting and investment power with respect to the Subordinated
Debentures. Mr. Hellman is one of nine members of the investment committee.
Mr. Hellman disclaims beneficial ownership of the Subordinated Debentures
except to the extent of his indirect pecuniary interest.
(3) Dr. Ackermann is head of Corporate and Institutional Clients Group of
Deutsche Bank AG that, together with its affiliates, owns an aggregate of
1,522,300 shares of Common Stock. Dr. Ackermann disclaims beneficial
ownership of such shares.
(4) Mr. Baxter is the Chairman of the Jefferies Group, Inc. that, together
with its affiliates, owns an aggregate of 115,912 shares of Common Stock.
Mr. Baxter disclaims beneficial ownership of such shares.
(5) Mr. Casey is an officer of Starbucks Corporation that owns an aggregate
of 10,000 shares of Common Stock. Mr. Casey disclaims beneficial ownership
of such shares.
(6) Mr. Clark is an officer of Credit Suisse First Boston, Inc., which,
together with its affiliates, owns 1,604,650 shares of Common Stock. Mr.
Clark disclaims beneficial ownership of such shares.
(7) Mr. O'Neal is an officer of Merrill Lynch & Co. that, together with its
affiliates, owns 1,875,000 shares of Common Stock. Mr. O'Neal disclaims
beneficial ownership of such shares.
(8) Mr. Pandit is an officer of Morgan Stanley Dean Witter & Co. that,
together with its affiliates, owns 1,126,200 shares of Common Stock. Mr.
Pandit disclaims beneficial ownership of such shares.
(9) Mr. Pasternak is Chairman, CEO, and President of Knight Trading Group,
Inc. that, together with its affiliates, owns an aggregate of 1,125,000
shares of Common Stock. Mr. Pasternak disclaims beneficial ownership of
such shares.
(10) Mr. Pottruck is an officer of The Charles Schwab Corporation that,
together with its affiliates, owns 1,125,000 shares of Common Stock. Mr.
Pottruck disclaims beneficial ownership of such shares.
(11) Represents an aggregate of 20,000 shares of Common Stock owned by
Romano Brothers & Co. Mr. Romano is the President and majority stockholder
of Romano Brothers & Co.
(12) Mr. Sodhani is an officer of Intel Corporation that owns 430,000
shares of Common Stock. Mr. Sodhani disclaims beneficial ownership of such
shares.
(13) Represents 60,000 shares of restricted stock issued under Nasdaq's
Equity Incentive Plan that have not yet vested. Under the terms of this
plan, Mr. Zarb has the right to direct the voting of such shares.
(14) Represents options to purchase an aggregate of 140 Nasdaq Japan common
shares.
(15) Represents 15,900 shares of restricted stock issued under Nasdaq's
Equity Incentive Plan that have not yet vested. Under the terms of this
plan, Mr. Berkeley has the right to direct the voting of such shares.
(16) Represents 30,000 shares of restricted stock issued under Nasdaq's
Equity Incentive Plan that have not yet vested. Under the terms of this
plan, Mr. Campbell has the right to direct the voting of such shares.
(17) Represents 30,000 shares of restricted stock issued under Nasdaq's
Equity Incentive Plan that have not yet vested. Under the terms of this
plan, Mr. Hilley has the right to direct the voting of such shares.
(18) Represents shares of restricted stock.
(19) Represents 40,000 shares of restricted stock issued under Nasdaq's
Equity Incentive Plan that have not yet vested. Under the terms of this
plan, Mr. Ketchum has the right to direct the voting of such shares.
(20) Represents options to purchase an aggregate of 76 shares of Nasdaq
Japan common shares.
Item 5. Directors and Executive Officers.
The directors and executive officers of Nasdaq are as follows:
Name Age Position
- --------------------------------------------------------------------------------------------------------------------
Frank G. Zarb 66 Chairman of the Nasdaq Board Class 2
Hardwick Simmons 61 CEO, Director Class 1
Dr. Josef Ackermann 53 Director Class 2
H. Furlong Baldwin 69 Director Class 2
Frank E. Baxter 64 Director Class 1
Michael Casey 55 Director Class 3
Michael W. Clark 41 Director Class 1
William S. Cohen 60 Director Class 1
F. Warren Hellman 66 Director Class 2
John D. Markese 55 Director Class 3
E. Stanley O'Neal 49 Director Class 3
Vikram S. Pandit 45 Director Class 3
Kenneth D. Pasternak 47 Director Class 1
David S. Pottruck 52 Director Class 3
Arthur Rock 74 Director Class 3
Richard C. Romano 68 Director Class 2
Arvind Sodhani 47 Director Class 1
Sir Martin Sorrell 56 Director Class 2
Richard G. Ketchum 50 President
Gregor S. Bailar 38 Executive Vice President--Operations and Technology and
Chief Information Officer
Alfred R. Berkeley, III 56 Vice Chairman
J. Patrick Campbell 52 Executive Vice President, Chief Operating Officer, and
President of Nasdaq U.S. Markets
Steven Dean Furbush 42 Executive Vice President--Transaction Services
John M. Hickey 64 Executive Vice President
John L. Hilley 53 Executive Vice President--Strategic Development and Chairman
and Chief Executive Officer of Nasdaq International
Edward S. Knight 50 Executive Vice President and General Counsel
Steven Randich 38 Executive Vice President and Chief Technology Officer
Denise B. Stires 39 Executive Vice President--Marketing and Investor Services
John N. Tognino 62 Executive Vice President
Bruce C. Turner 36 Executive Vice President--Transaction Services
John T. Wall 59 President, Nasdaq International
David P. Warren 47 Executive Vice President--Chief Administrative Officer
David Weild IV 44 Executive Vice President--Issuer Affairs
Frank G. Zarb, a Staff Director, has been Chairman of the Nasdaq Board
since January 2000 and Chairman of the NASD Board since 1997. In July 2001,
Mr. Zarb announced plans to step down as both the Chairman of Nasdaq and
the Chairman of the NASD to become effective upon the applicable board
approvals scheduled for September 2001. Mr. Zarb was the CEO of Nasdaq from
1997 to February 2001 and CEO of the NASD from 1997 to November 2000. Prior
to joining the NASD in 1997, Mr. Zarb was Chairman, CEO, and President of
Alexander & Alexander Services, Inc., an insurance brokerage and
professional services consulting firm, from June 1994 through January 1997.
Mr. Zarb is a member of the Board of Trustees of the Gerald R. Ford
Foundation and a former Chairman of the Board of Hofstra University, where
he still serves as a Board member.
Hardwick Simmons, a Staff Director nominee, became CEO of Nasdaq in
February 2001. In July 2001, it was announced that Mr. Simmons will also
become Chairman of Nasdaq upon the effective date of Mr. Zarb's resignation
that is scheduled for September 2001. Prior to joining Nasdaq, Mr. Simmons
served from May 1991 to December 2000 as President and CEO of Prudential
Securities Incorporated, the investment and brokerage firm, and Prudential
Securities Group Inc., the firm's holding company. Mr. Simmons is a former
member of Prudential Securities' Operating Committee, Operating Council,
and the board of directors of Prudential Securities Group Inc. Prior to
joining Prudential Securities in 1991, Mr. Simmons was President of the
Private Client Group at Shearson Lehman Brothers, Inc.
Dr. Josef Ackermann, an Industry Director, was elected to the Nasdaq Board
in April 2001 and began serving in May 2001. Dr. Ackermann is Chairman of
Corporate and Investment Banking of Deutsche Bank AG, a global bank and
financial services firm, and will become Speaker of the Board of Managing
Directors at Deutsche Bank AG in 2002. Dr. Ackermann has served on the
Board of Managing Directors of Deutsche Bank AG since 1996. Prior to this
position, Dr. Ackermann was President of the Executive Board of Credit
Suisse from 1993. Dr. Ackermann serves on the board of directors of
Vodafone Group Plc and Stora Enso Oyj.
H. Furlong Baldwin, a Non-Industry Director, was elected to the Nasdaq
Board in July 2000. Mr. Baldwin has been a member of the NASD Board since
1999. Mr. Baldwin is Chairman of the Mercantile Bankshares Corporation, a
multibank holding company. Mr. Baldwin joined Mercantile-Safe Deposit &
Trust Company in 1956 and was elected President in 1970 of Mercantile-Safe
Deposit & Trust Company and Mercantile Bankshares Corporation and Chairman
and CEO in 1976. Mr. Baldwin serves on the board of directors of Mercantile
Safe Deposit & Trust Company, Mercantile Bankshares Corporation,
Constellation Energy Group, CSX Industries, Offitbank, Wills Group, and The
St. Paul Companies.
Frank E. Baxter, an Industry Director, was elected to the Nasdaq Board in
1998. Mr. Baxter is Chairman of the Jefferies Group, Inc., a holding
company whose affiliated companies offer a variety of services for
institutional investors. Mr. Baxter joined Jefferies & Co. in 1974 and
during his time has served as President, Chief Operating Officer ("COO")
and CEO. Mr. Baxter is a Director of Investment Technology Group, Inc. and
Burdett, Buckeridge, & Young, Australia.
Michael Casey, a Non-Industry Director, was elected to the Nasdaq Board in
January 2001. Mr. Casey has been Executive Vice President, CFO, and Chief
Administrative Officer of Starbucks Corporation, the leading roaster and
retailer of specialty coffee, since September 1997. Prior to his current
position, Mr. Casey was Senior Vice President and CFO of Starbucks from
August 1995 to September 1997.
Michael W. Clark, an Industry Director nominee, is a Managing Director and
Head of Global Equity Trading at Credit Suisse First Boston, Inc. ("CSFB"),
a global investment bank serving institutional, corporate, government, and
individual clients, and a member of its Global Equity Management Committee.
Mr. Clark also serves on the firm's Operating Committee and is a member of
the Managing Director Evaluation Committee and Co-Head of the Global
Recruiting Committee. Mr. Clark joined CSFB as a Vice President in 1991.
Prior to assuming his present role in 1995, Mr. Clark was in charge of
CSFB's global convertible trading and risk management.
William S. Cohen, a Public Director, was elected to the Nasdaq Board in
April 2001 and began serving in May 2001 and began serving in May 2001.
Secretary Cohen is the Chairman and CEO of The Cohen Group, a strategic
business consulting firm. He was previously the Secretary of Defense during
the Clinton Administration from 1997-2001. Secretary Cohen represented
Maine in the U.S. Senate for three terms and in the U.S. House of
Representatives for three terms before retiring in 1996.
F. Warren Hellman, a Non-Industry Director, was elected to the Nasdaq Board
in March 2001 effective upon the consummation of the sale by Nasdaq of the
Subordinated Debentures to Hellman & Friedman that closed on May 3, 2001.
Mr. Hellman is a co-founder and is currently the Chairman of Hellman &
Friedman LLC, a private equity investment firm, as well as Chairman of the
San Francisco Foundation. Prior to his current positions, Mr. Hellman was a
general partner of Hellman, Ferri Investment Associates, Matrix Management
Company I and II, and President of Lehman Brothers. Mr. Hellman serves on
the board of directors of WPP Group plc, Levi Strauss & Co., D.N.&E. Walter
& Co., and Il Fornaio (America) Corp., and the University of California at
Berkeley Business School Advisory Board.
John D. Markese, a Public Director, was elected to the Nasdaq Board as a
Class 3 director in April 2001 and began serving as a Class 3 director in
May 2001. Mr. Markese has been a member of the Nasdaq Board since 1996. Mr.
Markese is President of the American Association of Individual Investors, a
not-for-profit organization specializing in providing education in stock
investment and mutual funds, since 1992 and an Executive Vice President
from 1986 to 1992. Mr. Markese holds a Doctorate in Finance from the
University of Illinois. Mr. Markese also serves on the board of directors
of the Alliance for Investor Education.
E. Stanley O'Neal, an Industry Director, was elected to the Nasdaq Board in
January 2001. Mr. O'Neal has been the President and Chief Operating Officer
of Merrill Lynch & Co., Inc., a global financial services firm, since July
2000. Prior to his current positions, Mr. O'Neal was Executive Vice
President of Merrill Lynch and President of its U.S. Private Client Group
from February 2000 to July 2000, Executive Vice President and CFO of
Merrill Lynch from March 1998 to February 2000; Executive Vice President
and Co-Head of Corporate and Institutional Client Group from April 1997 to
March 1998 and Managing Director and Head of Global Capital Markets Group
from April 1995 to April 1997. Mr. O'Neal joined Merrill Lynch in 1987.
Vikram S. Pandit, an Industry Director, was elected to the Nasdaq Board in
January 2001. Since September 2000 Mr. Pandit has been Co-President and
Chief Operating Officer of the Institutional Securities Group of Morgan
Stanley Dean Witter & Co. ("MSDW"), a global financial services firm. Prior
to his current position, Mr. Pandit was Head of MSDW's Worldwide
Institutional Equity Division from May 1997 until September 2000; Head of
Morgan Stanley Group Inc.'s Equity Division from January 1997 until May
1997; and Head of Morgan Stanley Group Inc.'s Equity Derivatives business
from May 1994 until December 1996. Mr. Pandit has been a Managing Director
of Morgan Stanley & Co. Incorporated since January 1990.
Kenneth D. Pasternak, an Industry Director nominee, is Chairman of the
Board, CEO and President of Knight Trading Group, Inc. ("Knight"), a market
maker in U.S. equity securities. Mr. Pasternak was named Chairman of the
Board of Knight in October 2000 and has been a member of its board of
directors since July 1998. Since 1995, Mr. Pasternak has been the CEO and a
trading room supervisor for Knight Securities, L.P., Knight's wholly-owned
Nasdaq/over-the-counter securities market maker, and its President from
1995 to 1999. Prior to Knight, Mr. Pasternak served as Senior Vice
President, Limited Partner, and Trading Room Manager for Spear Leeds &
Kellogg/Troster Singer from 1979 until 1994. Mr. Pasternak serves on the
NASD Board and on the Advisory Committee of BRASS Utility, LLC (BRUT).
David S. Pottruck, an Industry Director, was elected to the Nasdaq Board in
July 2000. Mr. Pottruck has been a member of the NASD Board since 2000. Mr.
Pottruck is President and Co-Chief Executive Officer and a member of the
board of directors of The Charles Schwab Corporation, a holding company
whose subsidiaries engage in securities brokerage and financial services.
Mr. Pottruck joined The Charles Schwab Corporation in 1984 and became
President in 1992. Mr. Pottruck serves on the board of directors of Intel
Corporation, McKesson HBOC Inc., Dovebid, and the U.S. Ski and Snowboard
Team Foundation. Mr. Pottruck is also a trustee of the University of
Pennsylvania.
Arthur Rock, a Non-Industry Director, was elected to the Nasdaq Board in
July 2000. Mr. Rock has been a member of the NASD Board since 1998. Mr.
Rock is Principal of Arthur Rock & Co., a venture capital firm in San
Francisco, California he founded in 1969. Mr. Rock is currently a Director
Emeritus of Intel Corporation and serves on the board of directors of
Echelon Corporation.
Richard C. Romano, an Industry Director, was elected to the Nasdaq Board in
July 2000. Mr. Romano has been President of Romano Brothers & Company, a
securities broker dealer, since 1964. Mr. Romano is Vice Chairman of the
NASD Small Firm Advisory Board.
Arvind Sodhani, a Non-Industry Director, was elected to the Nasdaq Board in
1997. From July 2000 to December 2000, Mr. Sodhani served as a non-voting
member of the Nasdaq Board. Mr. Sodhani is Vice President and Treasurer of
Intel Corporation, a semiconductor manufacturer of chips and computer
networking products. Mr. Sodhani joined Intel in 1981 and became a Vice
President in 1990.
Sir Martin Sorrell, a Non-Industry Director, was elected to the Nasdaq
Board in January 2001. Sir Martin is a founder and, since 1986, has been
Group Chief Officer of WPP Group plc, a global communication services
organization. Prior to this position, Sir Martin was the Group Finance
Director of Saatchi & Saatchi Company, PLC.
Richard G. Ketchum became President of Nasdaq in July 2000. Mr. Ketchum is
responsible for all aspects of Nasdaq's operations, including the
development and formulation of legal, regulatory, and market policies, as
well as international initiatives. Prior to his current position, Mr.
Ketchum served as President of the NASD since 1998, COO of the NASD since
1993 and Executive Vice President of the NASD since 1991.
Gregor S. Bailar became Executive Vice President and Chief Information
Officer ("CIO") of Nasdaq in October 2000. As CIO, Mr. Bailar oversees all
aspects of information technology at Nasdaq and works closely with the
organization's executive management. Prior to his current position, Mr.
Bailar served as an Executive Vice President and CIO of the NASD since
December 1997. Mr. Bailar joined the NASD from Citicorp N.A., a financial
services company, where he served as Managing Director and Vice President
of Advanced Development for Global Corporate Banking from 1994 to 1997.
Alfred R. Berkeley III, has been Vice Chairman of Nasdaq since July 2000
and was President of Nasdaq from June 1996 to July 2000. Mr. Berkeley was a
member of the Nasdaq Board from June 1996 to May 2001. Prior to joining
Nasdaq, Mr. Berkeley served for five years as Managing Director and Senior
Banker of the Corporate Finance Department of Alex. Brown & Sons
Incorporated, a financial services firm. Mr. Berkeley is a member of the
board of directors of Princeton Capital Management, Inc.
J. Patrick Campbell became Executive Vice President, President U.S. Markets
and COO of Nasdaq in October 2000. Mr. Campbell is responsible for the
day-to-day operation of Nasdaq. Prior to his current position, Mr. Campbell
served as an Executive Vice President, Market Services of the NASD since
1997. Prior to joining the NASD, Mr. Campbell was Senior Executive Vice
President of The Ohio Company, a regional brokerage firm, where he was also
a member of that firm's Board of Directors and Executive Committee. Mr.
Campbell was at The Ohio Company since 1973. While a senior executive for
The Ohio Company, Mr. Campbell was a member of the Board of Directors from
1990 to 1993.
Steven Dean Furbush became an Executive Vice President of Nasdaq
Transaction Services in January 2001. Prior to his current position, Mr.
Furbush was Senior Vice President of Nasdaq Transaction Services from
October 2000 to January 2000, Managing Director of Nasdaq InterMarket from
October 1999 to October 2000, and Chief Economist from June 1995 to October
1999.
John M. Hickey became an Executive Vice President and Senior Technology
Advisor in November 2000. Prior to his current position, Mr. Hickey was
Executive Vice President and Chief Technology Officer of the NASD from
January 1995 to November 2000. Prior to joining the NASD in January 1984,
Mr. Hickey was Vice President in charge of Corporate Systems Development at
Chemical Bank, a bank and financial services firm, from 1974 to 1984.
John L. Hilley became an Executive Vice President of Strategic Development
in January 2001 and has been Chairman and CEO of Nasdaq International since
July 1999. Mr. Hilley joined the NASD as Executive Vice President for
Strategic Development in February 1998. Prior to joining the NASD, Mr.
Hilley served in the White House as senior advisor to President Clinton
since February 1996. Mr. Hilley has also held a number of senior staff
positions in the U.S. Senate.
Edward S. Knight became an Executive Vice President and General Counsel in
October 2000. Prior to his current position, Mr. Knight served as Executive
Vice President and Chief Legal Officer of the NASD since July 1999. Prior
to joining the NASD, Mr. Knight served as General Counsel of the U.S.
Department of the Treasury from September 1994 to June 1999.
Steven Randich became Executive Vice President and Chief Technology Officer
of Nasdaq in October 2000. Prior to his current position, Mr. Randich was
Executive Vice President and CIO for the Chicago Stock Exchange from
November 1996 to October 2000. Prior to that, Mr. Randich held management
positions with International Business Machines Corporation, the software
and hardware manufacturer, from October 1990 to November 1996.
Denise B. Stires became Executive Vice President of Marketing and Investor
Services in March 2001. Ms. Stires was Chief Marketing Officer of
BuyandHold Inc., an online financial services company providing
dollar-based brokerage services to individuals and corporations, from 2000
to 2001. Prior to that, Ms. Stires was Senior Vice President, Marketing
Director of DLJdirect, the online discount brokerage service of CSFB from
1997 to 2000, and Vice President, Marketing of SWATCH, a division of SMH,
Incorporated based in Switzerland, a manufacturer of watches from 1995 to
1996.
John N. Tognino became Executive Vice President of Nasdaq Global Sales and
Member Affairs in January 1999. Prior to his current position, Mr. Tognino
was President and CEO of the Security Traders Association and the Security
Traders Association Foundation. Mr. Tognino has been in the securities
industry for 42 years and spent more than 35 of those years with Merrill
Lynch & Co., Inc. At the time of his retirement from Merrill Lynch & Co.,
Inc. in 1993, Mr. Tognino was a Managing Director for Global Equities. Mr.
Tognino also served as a member of the Board of Directors from 1984 to
1987, and again in 1995.
Bruce C. Turner became an Executive Vice President of Nasdaq Transaction
Services in July 2001. Prior to his current position, Mr. Turner was Head
of Nasdaq Trading at Salomon Smith Barney, a global investment banking
firm, from January 1997 to July 2000, and a position trader, at Salomon
Smith Barney from July 1992 to January 1997.
John T. Wall became an Executive Vice President of Nasdaq in February 1994
and President of Nasdaq International in October 1997. Mr. Wall is
responsible for the strategic development and international marketing of
Nasdaq's products and services. Mr. Wall is also responsible for non-U.S.
company listings, as well as promoting and directing the overall
globalization of the marketplace. Mr. Wall established Nasdaq's operations
in London and negotiates the sale of Nasdaq's computerized systems to other
world markets. Mr. Wall joined the NASD in 1965 and during his tenure has
been head of Regulation, Membership, and Qualifications Testing. Mr. Wall
currently sits on Hong Kong's International Committee for Listing New
Enterprises.
David P. Warren became Executive Vice President and Chief Administrative
Officer of Nasdaq in April 2001 and acting CFO in July 2001. Mr. Warren
oversees human resources and all administrative services including real
estate, property management and purchasing. Prior to his current position,
Mr. Warren was CFO of the Long Island Power Authority from 1998 to 2000,
Deputy Treasurer of the State of Connecticut from 1995 to 1997, and a Vice
President at CSFB from 1987 to 1995.
David Weild IV became Executive Vice President of Issuer Affairs of Nasdaq
in March 2001. Prior to his current position, Mr. Weild held various
positions with Prudential Securities Incorporated, the investment and
brokerage firm, including President of Prudential Securities.Com from 2000
to 2001, Managing Director and Head of High Technology from 1997 to 2000,
Managing Director of Investment Banking and Head of Corporate Finance from
1995 to 1997, and Managing Director and Head of Global Equity Transactions
from 1990 to 1995.
Item 6. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation awarded to, earned by, or paid
to the individuals who were, as of December 31, 2000, the CEO and the four
most highly compensated employees other than the CEO, for all services
rendered to Nasdaq and its subsidiaries for the fiscal year ended December
31, 2000.
- --------------------------------------------------------------------------------------------------------------------------------
Name and Principal All Other
Position Year Compensation
(a) (b) Annual Compensation Long-Term Compensation ($)(2) (i)
----------------------------------- -------------------------------
Awards Payouts
Other Annual --------------------------------
Salary Bonus(1) Compensation
($) (c) ($) (d) Awards ($)(e)
- --------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
Stock Underlying LTIP All Other
Award(s) Options/ SARs Payouts Compensation
($) (f) (#) (g) ($) (h) ($)(2)(i)
- --------------------------------------------------------------------------------------------------------------------------------
Frank G. Zarb, 2000 1,333,333 6,000,000 441,055(4) - - - 17,892
Chairman,(3) Nasdaq
- --------------------------------------------------------------------------------------------------------------------------------
Alfred R. Berkeley, III, 2000 522,500 650,000 - - - - 13,405
Vice Chairman, Nasdaq
- --------------------------------------------------------------------------------------------------------------------------------
Richard G. Ketchum, 2000 522,500 1,750,000 - - - - 13,405
President, Nasdaq
- --------------------------------------------------------------------------------------------------------------------------------
John L. Hilley, Executive 2000 450,000 950,000 408,720 - - - 13,085
Vice President, Nasdaq
and Chairman and Chief
Executive Officer, Nasdaq
International
- --------------------------------------------------------------------------------------------------------------------------------
J. Patrick Campbell, 2000 409,000 750,000 - - - - 12,764
Executive Vice President,
Chief Operation Officer,
and President, Nasdaq
U.S. Markets
- --------------------------------------------------------------------------------------------------------------------------------
- ----------------------
(1) Includes $800,000, $130,000, $950,000, $390,000 and $270,000 with
respect to Messrs. Zarb, Berkeley, Ketchum, Hilley and Campbell,
respectively, which amounts will be paid only if the individuals remain
employed by Nasdaq on December 31, 2002 or in the event of their prior
retirement, permanent disability, death or involuntary termination without
cause.
(2) Represents Nasdaq contributions to 401(k) plan and payment in
respect of a forgiveness of loan in the amount of $7,692 for Mr. Zarb;
$3,205 for each of Messrs. Berkeley and Ketchum; $2,885 for Mr. Hilley; and
$2,564 for Mr. Campbell.
(3) Mr. Zarb served as the CEO during the fiscal year ended December
31, 2000 and until February 1, 2001.
(4) Includes $221,735 in respect of the purchase of Mr. Zarb's
residence.
Employment Agreements
The NASD and Nasdaq are parties to an employment agreement with Frank Zarb
(the "Zarb Agreement"). The Zarb Agreement had an initial term of three
years commencing on February 24, 1997 (the "Initial Term") and continues
for an additional period of two years immediately following the Initial
Term (the "Additional Term," the Initial Term and the Additional Term
collectively, referred to as the "Term"). The Zarb Agreement provides for
(i) an annual base salary of $1,200,000 from the commencement of the
Initial Term through October 31, 2000 and $2,000,000 during the period
commencing on November 1, 2000 through the remainder of the Term and (ii)
incentive compensation as the Management Compensation Committee of the NASD
may award in its discretion, provided that the amount of such compensation
for each full year of service during the Term may not be not less than 50%
of Mr. Zarb's base salary for such year, and provided further that such
compensation for the second year of the Additional Term may not be less
than $4,000,000. Under the Zarb Agreement, during the first year of the
Additional Term, the aggregate annual base salary and incentive
compensation paid to Mr. Zarb by the NASD may not be less than the
aggregate annual amount paid to Mr. Zarb for the second or third year of
the Initial Term, whichever was greater and, during the second year of the
Additional Term, the aggregate annual base salary and incentive
compensation paid to Mr. Zarb by the NASD may not be less than the
aggregate annual amount paid to Mr. Zarb for the third year of the Initial
Term or the first year of the Additional Term, whichever was greater. Under
the terms of the Zarb Agreement, Nasdaq will (1) fully vest all stock
options granted to Mr. Zarb upon the earlier of (x) the termination of the
Term or (y) Zarb's relinquishment of his position and duties under the
circumstances set forth in the Zarb Agreement, and shall permit the
exercise of the options during the three month period thereafter for
incentive stock options and during the five year period thereafter for all
other stock options and (2) cause all restrictions on any restricted stock
awarded to Mr. Zarb by Nasdaq to lapse upon the earlier of (i) the
termination of the Term or (ii) Zarb's relinquishment of his position and
duties under the circumstances set forth in the Zarb Agreement.
Under the terms of the Zarb Agreement, Mr. Zarb became fully vested in his
benefits under the NASD Supplemental Executive Retirement Plan upon the
completion of the Initial Term. Under the Zarb Agreement, on February 24,
2002 and for a period of five years thereafter, unless Mr. Zarb terminates
his employment earlier (other than for relinquishment of his position under
the circumstances set forth in the Zarb Agreement), Mr. Zarb will be
entitled to an annual consulting fee of $100,000 and certain fringe
benefits and perquisites, provided that Mr. Zarb makes himself available to
provide consulting services to the CEO of the NASD during such period and
does not commence employment with another employer or recommence employment
with the NASD during such period.
Mr. Zarb's employment may be terminated due to (i) death or disability (ii)
by the NASD for "cause" or (iii) by Mr. Zarb for "good reason" upon
thirty-days written notice. If Mr. Zarb terminates his employment for "good
reason" or if the NASD terminates Mr. Zarb's employment other than for
cause, Mr. Zarb is entitled to (1) a cash payment equal to the product of
(x) the sum of the minimum incentive compensation and base salary described
above multiplied by (y) the remaining number of full and partial months in
the Term, (2) the retirement benefits Mr. Zarb would have been entitled to
had he completed the Term and (3) continuation of certain other benefits.
Nasdaq has entered into an employment agreement (the "Employment
Agreements") with each of Richard G. Ketchum, J. Patrick Campbell and John
L. Hilley (each an "Executive" collectively, the "Executives"). The term of
the Employment Agreements commenced as of December 29, 2000 and will
continue until December 31, 2003 with automatic one-year renewals, unless
either party, at least six months prior to the expiration of the term,
gives a notice of its intent not to renew the term.
The Employment Agreements with Messrs. Ketchum and Campbell provide for an
annual salary at a rate not less than the rate of annual salary in effect
as of the effective date. Mr. Hilley's Employment Agreement provides for an
annual salary at a rate not less than the rate of annual salary in effect
for 1999. The Employment Agreements with Messrs. Ketchum and Campbell
provide for guaranteed incentive compensation for each year during the term
in an amount equal to 100% of base salary as in effect on December 31 of
the preceding year.
Under the terms of the Employment Agreements, the Executives will be fully
vested in their supplemental retirement benefits (the "SERP Benefit") under
Nasdaq's Supplemental Retirement Plan, upon the attainment of age 55 (53 in
the case of Mr. Ketchum) while employed and completion of five years of
service or if the Executives' employment with Nasdaq terminates (i) due to
death or disability (ii) by Nasdaq without "cause" or (iii) by the
Executive for "good reason." With respect to Mr. Hilley, the final average
compensation for purposes of determining SERP benefits will be deemed to be
the sum of (a) one-half of his annual salary and (b) one-third of one-half
of his annual salary. The Executives are also entitled to receive equity
awards under Nasdaq's equity plans and other fringe benefits. Under the
terms of the Employment Agreement, each Executive is entitled to receive a
payment in an amount equal to two times the Executive's then effective base
salary (the "Stay Bonus") if the Executive is (i) employed by Nasdaq as of
August 9, 2003, (ii) if the Executive's employment is terminated due to
death or disability or (iii) if the Executive terminates employment for
"good reason" or Nasdaq terminates the Executive's employment without
"cause."
If the Executive's employment is terminated without "cause" or if the
Executive terminates employment for "good reason," Nasdaq is obligated to
pay to the Executive (i) the Stay Bonus if not previously paid; (ii) a pro
rata portion of the incentive compensation for the year of termination; and
(iii) continuation of base salary and incentive compensation until the
later of (x) the end of the term of the Employment Agreement or (y) 24
months from the date of such termination of employment. If the Executive
becomes subject to any "golden parachute" excise tax, Nasdaq is obligated
to make additional payments to the Executive to offset the effect of such
tax, provided that the Executive agrees to be subject to certain
restrictive covenants relating to non-competition, non-solicitation, non-
disparagement and confidentiality.
PENSION PLAN TABLE
Nasdaq's executive officers participate in Nasdaq's qualified and
supplemental defined benefit pensions plans. Under these plans executive
officers earn a benefit expressed as an annual annuity equal to 6% of their
final average compensation for each year of service. Average annual
compensation is the average annual salary plus one-third of the annual
bonus for the highest five-year period of service. The estimated credited
years of service for Mr. Zarb is 3.85 years, Mr. Berkeley is 4.58 years,
Mr. Ketchum is 9.67 years, Mr. Hilley is 2.85 years, and Mr. Campbell is
3.97 years. The following table sets forth the benefit payable under the
plan for various levels of remuneration and years of service. Such benefits
are not reduced by benefits received under social security or other
offsets.
- ----------------------------------------------------------------------------------------------------------------------
Remuneration Years of Service
- ----------------------------------------------------------------------------------------------------------------------
5 10 15 20 25 30
- ----------------------------------------------------------------------------------------------------------------------
500,000 150,000 300,000 300,000 300,000 300,000 300,000
-----------------------------------------------------------------------------------------------
600,000 180,000 360,000 360,000 360,000 360,000 360,000
-----------------------------------------------------------------------------------------------
700,000 210,000 420,000 420,000 420,000 420,000 420,000
-----------------------------------------------------------------------------------------------
800,000 240,000 480,000 480,000 480,000 480,000 480,000
-----------------------------------------------------------------------------------------------
900,000 270,000 540,000 540,000 540,000 540,000 540,000
-----------------------------------------------------------------------------------------------
1,000,000 300,000 600,000 600,000 600,000 600,000 600,000
-----------------------------------------------------------------------------------------------
1,500,000 450,000 900,000 900,000 900,000 900,000 900,000
-----------------------------------------------------------------------------------------------
2,000,000 600,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
-----------------------------------------------------------------------------------------------
3,000,000 900,000 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000
- ----------------------------------------------------------------------------------------------------------------------
Item 7. Certain Relationships and Related Transactions.
The NASD
Nasdaq's legal authority to operate as a stock market is delegated to it by
the NASD under the Delegation Plan. Although Nasdaq has initiated the
process with the SEC for Exchange Registration, Exchange Registration is
not expected to occur until later this year at the earliest. As a result,
prior to Exchange Registration, Nasdaq will continue to operate under the
Delegation Plan, under which the NASD has delegated responsibility for
market operation functions to Nasdaq. Though Nasdaq exercises primary
responsibility for market-related functions, including market-related
rulemaking and interpretations, all actions taken pursuant to delegated
authority by the NASD are subject to review, ratification, or rejection by
the NASD Board. As long as the Delegation Plan remains in effect, the NASD
Board will continue to have authority over Nasdaq. The current structure
will continue until Nasdaq is reconstituted as a self-regulatory
organization, which will become effective upon Exchange Registration.
Currently, Mr. Zarb is Chairman of the NASD Board and Messrs. Baldwin,
Baxter, Markese, Pottruck, Rock, Romano, and Sodhani are members of the
NASD Board as well as members of the Nasdaq Board.
In June 2000, in connection with the Restructuring, the NASD separated Amex
from The Nasdaq-Amex Market Group, Inc., a holding company of the NASD that
also held Nasdaq, and then merged The Nasdaq-Amex Market Group, Inc., with
and into Nasdaq. Following this merger, Nasdaq effected a 49,999-for-one
stock dividend creating 100 million shares of Common Stock, all of which
were initially owned by the NASD.
On June 28, 2000, the NASD and Nasdaq entered into a Separation and Common
Services Agreement pursuant to which the NASD continues to provide Nasdaq
certain administrative, corporate, and infrastructure services that were
provided by the NASD to Nasdaq prior to June 28, 2000, including cash
management and other financial services, real estate, legal, human
resources, surveillance and other regulatory services, information services
and corporate and administrative services. Nasdaq pays to the NASD the cost
of any services provided, including the incidental expenses associated with
such services. Nasdaq expects the cost of the services provided by the NASD
to be approximately $9 million per year under this agreement. Under the
Separation and Common Services Agreement, Nasdaq has also agreed to provide
the NASD the access to Nasdaq technology that the NASD requires to satisfy
its obligations to Amex under the transaction agreement the NASD entered
into in connection with the 1998 acquisition of the assets of Amex, for so
long as such obligations may continue. Additionally, Nasdaq has agreed to
continue to provide all services it provided to Amex as of June 28, 2000,
for so long as such obligations may continue. The NASD reimburses Nasdaq
for the cost of rendering such services and access to Amex. The Separation
and Common Services Agreement continues until December 31, 2001 and will
automatically renew until December 31, 2002 in the event it is not
superceded by another separation and services agreement between the NASD
and Nasdaq.
On June 28, 2000 Nasdaq and NASDR, a wholly-owned subsidiary of the NASD,
entered into a Regulatory Services Agreement pursuant to which NASDR or
its subsidiaries will provide regulatory services to Nasdaq and its
subsidiaries. The term of the Regulatory Services Agreement is 10 years.
The services will be of the same type and scope as were provided by NASDR
to Nasdaq prior to June 28, 2000 and will include (i) the provision of
services to Nasdaq's market participants, including registration and
education services, (ii) surveillance and investigation services, (iii)
formal disciplinary proceedings and (iv) dispute resolution services. Under
the Regulatory Services Agreement, each of the services is provided on a
function-by-function basis. Each service is to be provided for a minimum of
five years, after which time the parties may determine to terminate the
provision by NASDR of a particular service. The termination of a particular
service will generally be based upon a review of pricing and the need for
such services. Nasdaq will pay to NASDR the cost of any services provided
plus a fair market mark-up. Nasdaq expects the cost of these services
provided by the NASDR to be approximately $90 million per year. The
Regulatory Services Agreement also provides for Nasdaq's access to certain
NASDR software that has been or will be developed for Nasdaq.
Nasdaq pays the NASD and certain of its subsidiaries for the use of
approximately 298,000 square feet of office space. Nasdaq pays
approximately $14.3 million in the aggregate per year to the NASD for the
use of this space.
On May 3, 2001, Nasdaq repurchased 18,461,538 shares of Common Stock from
the NASD for $13 per share or an aggregate purchase price of $239,999,994.
This price was determined following discussions between members of
management of Nasdaq and members of management of the NASD and is the same
price at which shares of Common Stock were sold in January 2001 in the
second phase of the Restructuring. In connection with the transaction,
Nasdaq and the NASD have agreed to enter into an Investor Rights Agreement
pursuant to which Nasdaq will grant the NASD certain demand and piggyback
registration rights with respect to the shares of Common Stock owned by it.
Hellman & Friedman
On May 3, 2001, Nasdaq issued and sold $240 million in aggregate principal
amount of the Subordinated Debentures to Hellman & Friedman. The
Subordinated Debentures are convertible at any time into an aggregate of
12,000,000 shares of Common Stock, subject to adjustment. Hellman &
Friedman owns approximately 9.8 percent of Nasdaq on an as-converted basis.
In connection with the transaction, Nasdaq has agreed to use its best
efforts to seek stockholder approval of a charter amendment that would
provide for voting debt in order to permit Hellman & Friedman to vote on an
as-converted basis on all matters on which common stockholders have the
right to vote, subject to the five percent voting limitation in the
Certificate of Incorporation. In addition, Nasdaq has also agreed that in
the event that the Nasdaq Board approves an exemption from the foregoing
five percent limitation for any person pursuant to the Certificate of
Incorporation (other than an exemption granted in connection with a
strategic market alliance) and seeks the concurrence of the SEC with
respect thereto, Nasdaq will grant Hellman & Friedman a comparable
exemption from such limitation and use its best efforts to obtain SEC
concurrence of such exemption. Nasdaq has granted Hellman & Friedman
certain registration rights with respect to the shares of Common Stock
underlying the Subordinated Debentures. Additionally, Hellman & Friedman
will be permitted to designate one person reasonably acceptable to Nasdaq
for nomination as a director of Nasdaq for so long as Hellman & Friedman
owns Subordinated Debentures and/or shares of Common Stock issued upon
conversion representing at least 50% of the shares of Common Stock issuable
upon conversion of the Subordinated Debentures initially purchased. Nasdaq
has elected F. Warren Hellman as a director of Nasdaq pursuant to the
foregoing provision. Arthur Rock, a member of the Nasdaq Board of
Directors, is an indirect limited partner of Hellman & Friedman.
Directors and Officers
Mr. Romano, a member of the Nasdaq Board, is the President and majority
stockholder of Romano Brothers & Co., a securities firm registered with the
NASD. As a member of the NASD, Romano Brothers & Co. participated in the
Restructuring through the purchase of 20,000 shares of Common Stock and 300
warrants to purchase an aggregate of 1,200 shares of Common Stock for an
aggregate purchase price of $263,300.
Certain officers of Nasdaq were awarded restricted Nasdaq
Japan common shares as well as options to purchase Nasdaq Japan common
shares. See "Item 4. Security Ownership of Certain Beneficial Owners and
Management" and "Item 1. Business - Nasdaq's Strategic Initiatives -
Pursuing Global Market Expansion - Nasdaq Japan, Inc."
In connection with Nasdaq's Equity Incentive Plan, officers of Nasdaq
received awards of options to purchase shares of Common Stock and/or
restricted shares of Common Stock. See "Item 9. Market Price of and
Dividends on Registrants' Common Equity and Related Stockholder Matters."
Directors and officers may receive equity-based awards in the future. In
connection with Nasdaq's Employee Stock Purchase Plan, employees (including
employees who are directors) have the opportunity to purchase shares of
Common Stock.
Item 8. Legal Proceedings.
Nasdaq is not currently a party to any litigation that it believes could
have a material adverse effect on its business, financial condition, or
operating results. However, from time to time, Nasdaq has been threatened
with, or named as a defendant, in lawsuits.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
No established public trading market exists for the Common Stock.
As of June 30, 2001 there were outstanding options to purchase an aggregate
of 9,659,290 shares of Common Stock that were granted to officers and
employees of Nasdaq and its subsidiaries. In the first quarter of 2001,
Nasdaq awarded an aggregate of 534,850 shares of restricted Common Stock to
officers and employees of Nasdaq and its subsidiaries. In addition, there
are currently outstanding warrants to purchase 43,231,976 shares of Common
Stock that were issued in the Restructuring. The shares underlying the
warrants are all issued and outstanding and held by the NASD. The
Subordinated Debentures will be convertible at any time prior to their
maturity for an aggregate of 12,000,000 shares of Common Stock, subject to
adjustment.
All 76,992,671 shares of Common Stock beneficially owned by the NASD as of
May 4, 2001 are subject to sale pursuant to Rule 144 under the Securities
Act, subject to the limitations set forth therein and other contractual
limitations. In aggregate, Nasdaq has agreed to register, subject to
certain terms and conditions, the shares of Common Stock underlying the
Subordinated Debentures currently held by Hellman & Friedman. The
Subordinated Debentures are currently convertible into an aggregate of
12,000,000 shares of Common Stock, subject to adjustment.
As of April 17, 2001, Nasdaq had approximately 1,878 holders of record of
its Common Stock.
Nasdaq does not pay, and does not anticipate paying in the foreseeable
future, any cash dividends on its common equity.
Item 10. Recent Sales of Unregistered Securities.
In Phase I, on June 28, 2000, Nasdaq sold an aggregate of 23,663,746 shares
of Common Stock at $11 per share for an aggregate consideration of
$260,301,206 to investors consisting of NASD members, Nasdaq market
participants, issuers with securities listed on Nasdaq, and other strategic
partners. In Phase II, on January 18, 2001, Nasdaq sold an aggregate of
5,028,797 shares of Common Stock at $13 per share for an aggregate
consideration of $65,374,361 to investors consisting of NASD members,
issuers with securities listed on Nasdaq, institutional investment firms
and providers of technology services to Nasdaq. The number of shares of
Common Stock offered in both Phases I and II to each category of investor
was based upon a variety of factors, including the offeree's contributions
to Nasdaq's growth. The shares of Common Stock sold by Nasdaq in Phase I
and Phase II were issued to "accredited investors" in private transactions
exempt under Regulation D of the Securities Act. See "Item 1.
Business---The Restructuring."
On May 3, 2001, Nasdaq issued and sold $240 million in aggregate principal
amount of its Subordinated Debentures to Hellman & Friedman. The
Subordinated Debentures are currently convertible into an aggregate of
12,000,000 shares of Common Stock, reflecting a conversion price of $20 per
share, subject to adjustment. Hellman & Friedman owns approximately 9.8
percent of Nasdaq on an as-converted basis. Nasdaq has granted Hellman &
Friedman certain registration rights with respect to the shares of Common
Stock underlying the Subordinated Debentures. The Subordinated Debentures
were sold in a private transaction pursuant to Section 4(2) of the
Securities Act, which exempts sales of securities that do not involve a
public offering.
As of April 25, 2001, Nasdaq granted options to purchase an aggregate of
9,659,290 shares of Common Stock to officers and employees of Nasdaq and its
subsidiaries pursuant to its Equity Incentive Plan. In addition, in 2001,
Nasdaq has awarded an aggregate of 534,850 shares of restricted Common Stock
to officers and employees of Nasdaq and its subsidiaries pursuant to its
Equity Incentive Plan. Nasdaq has approved a maximum of 500,000 shares of
Common Stock for sale pursuant to its Employee Stock Purchase Plan for each of
the offering periods ending June 29, 2001 and December 31, 2001. All the
foregoing grants of options and restricted Common Stock and sales of shares of
Common Stock were made, or will be made, pursuant to Rule 701 under the
Securities Act, which exempts issuances of securities under certain written
compensatory employee benefit plans.
Item 11. Description of Registrant's Securities to be Registered.
General
The authorized capital stock of Nasdaq consists of 300,000,000 shares of
Common Stock, par value $.01 per share, and 30,000,000 shares of preferred
stock, par value $.01 per share. As of May 4, 2001, there were 110,765,855
shares of Common Stock outstanding, which includes 534,850 shares of
restricted Common Stock awarded to officers and employees of Nasdaq, and no
shares of preferred stock outstanding.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders except that any person, other
than the NASD or any other person as may be approved for such exemption by
the Nasdaq Board prior to the time such person owns more than 5% of the
then outstanding shares of Common Stock, who otherwise would be entitled to
exercise voting rights in respect of more than 5% of the then outstanding
shares of Common Stock will be unable to exercise voting rights in respect
of any shares in excess of 5% of the then outstanding shares of Common
Stock. At any meeting of the stockholders of Nasdaq, a majority of the
shares of Common Stock in respect of which voting rights can be exercised
will constitute a quorum for such meeting. In response to the SEC's concern
about a concentration of ownership of Nasdaq, Nasdaq's Exchange
Registration application includes a rule that prohibits any member of
Nasdaq or a person associated with such member from beneficially owning
more than 5% of the outstanding shares of Common Stock.
Nasdaq has agreed to use its best efforts to seek stockholder approval of a
charter amendment that would provide for voting debt in order to permit
holders of the Subordinated Debentures to vote on an as-converted basis on
all matters on which common stockholders have the right to vote, subject to
the five percent voting limitation. Under the Certificate of Incorporation,
Nasdaq's Board may waive the application of the 5% voting limitation to
persons other than brokers, dealers, their affiliates, and persons subject
to statutory disqualification under Section 3(a)(39) of the Exchange Act.
In the event that the Nasdaq Board approves an exemption from the five
percent voting limitation (other than an exemption granted in connection
with a strategic market alliance) and seeks the concurrence of the SEC with
respect thereto, Nasdaq has agreed to grant Hellman & Friedman a comparable
exemption from such limitation and use its best efforts to obtain SEC
concurrence of such exemption.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Nasdaq Board out of funds
legally available for them. In the event of liquidation, dissolution, or
winding up of Nasdaq, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be issued upon completion
of this offering will be fully paid and non-assessable.
Preferred Stock
The Nasdaq Board may provide by resolution for the issuance of preferred
stock, in one or more series, and to fix the powers, preferences, and
rights, and the qualifications, limitations, and restrictions thereof, of
this preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund
provisions, if any, and the number of shares constituting any series or the
designation of such series. The issuance of preferred stock could have the
effect of decreasing the market price of the Common Stock and could
adversely affect the voting and other rights of the holders of Common
Stock.
Certain Provisions of the Certificate of Incorporation and By-Laws
Some provisions of the Certificate of Incorporation and By-Laws, which
provisions are summarized above and in the following paragraphs, may be
deemed to have an anti-takeover effect and may delay, defer, or prevent a
tender offer or takeover attempt that a stockholder might consider in its
best interest, including those attempts that might result in a premium over
the market price for the shares held by stockholders.
Classified Board of Directors
The Nasdaq Board is divided into three classes, with one class to be
elected each year to serve a three-year term. As a result, approximately
one-third of the Nasdaq Board will be elected each year. These provisions,
when coupled with the provision limiting the voting rights of certain
persons, other than the NASD, and the provision authorizing the Nasdaq
Board to fill vacant directorships or increase the size of the Nasdaq
Board, may prevent a stockholder from removing incumbent directors and
simultaneously gaining control of the Nasdaq Board by filling the vacancies
created by such removal with its own nominees. In addition, stockholders of
Nasdaq can only remove directors for cause with an affirmative vote of the
holders of not less than 66 2/3% of the outstanding shares of capital stock
of Nasdaq eligible to vote for directors.
Frank E. Baxter, Michael W. Clark, William S. Cohen, Kenneth D. Pasternak,
Hardwick Simmons and Arvind Sodhani serve as Class 1 directors whose terms
expire at the 2004 annual meeting of stockholders; Dr. Josef Ackermann, H.
Furlong Baldwin, F. Warren Hellman, Richard C. Romano, Sir Martin Sorrell,
and Frank G. Zarb serve as Class 2 directors whose terms expire at the 2002
annual meeting of stockholders and; Michael Casey, John D. Markese, E.
Stanley O'Neal, Vikram S. Pandit, David S. Pottruck, and Arthur Rock serve
as Class 3 directors whose terms expire at the 2003 annual meeting of
stockholders.
Pursuant to the Certificate of Incorporation and the By-Laws, the Nasdaq
Board, at its discretion, is authorized to fix the number of directors
constituting the Nasdaq Board. The number of voting directors on the Nasdaq
Board is currently fixed at 18.
Pursuant to the By-Laws, the number of Non-Industry Directors (as defined
below), including at least one Public Director (as defined below) and at
least two representatives of Nasdaq-listed companies (an "Issuer
Representative"), is required to equal or exceed the number of Industry
Directors (as defined below), unless the Nasdaq Board consists of 9 or
fewer directors. In such case only one director is required to be an Issuer
Representative.
If a director position becomes vacant, whether because of death,
disability, disqualification, removal, or resignation, Nasdaq's Nominating
Committee will nominate, and the Nasdaq Board will elect by majority vote,
a person satisfying the classification (Industry, Non-Industry, or Public
Director), if applicable, for the directorship to fill such vacancy, except
that if the remaining term is not more than six months, no replacement is
required.
The following is a general description of Nasdaq's director
classifications:
o Industry Director means a Director (excluding any two
officers of Nasdaq, selected at the sole discretion of the
Nasdaq Board, amongst those officers who may be serving as
directors (the "Staff Directors")) who (i) has served in the
prior three years as an officer, director, or employee of a
broker or dealer, excluding an outside director or a director
not engaged in the day-to-day management of a broker or
dealer; (ii) is an officer, director (excluding an outside
director), or employee of an entity that owns more than 10
percent of the equity of a broker or dealer, and the broker
or dealer accounts for more than five percent of the gross
revenues received by the consolidated entity; (iii) owns more
than five percent of the equity securities of any broker or
dealer, whose investments in brokers or dealers exceed 10
percent of his or her net worth, or whose ownership interest
otherwise permits him or her to be engaged in the day-to-day
management of the broker or dealer; (iv) provides
professional services to brokers or dealers, and such
services constitute 20 percent or more of the professional
revenues received by the director or member or 20 percent or
more of the gross revenues received by the director's or
member's firm or partnership; (v) provides professional
services to a director, officer, or employee of a broker,
dealer, or corporation that owns 50 percent or more of the
voting stock of a broker or dealer, and such services relate
to the director's, officer's, or employee's professional
capacity and constitute 20 percent or more of the
professional revenues received by the director or 20 percent
or more of the gross revenues received by the director's or
member's firm or partnership; or (vi) has a consulting or
employment relationship with or provides professional
services to the NASD, NASDR, Nasdaq, or Amex or has had any
such relationship or provided such services at any time
within the prior three years.
o Non-Industry Director means a Director (excluding the Staff
Directors) who is (i) a Public Director; (ii) an officer or
employee of an issuer of securities listed on The Nasdaq
Stock Market, or traded in the over-the-counter market; or
(iii) any other individual who would not be an Industry
Director.
o Public Director means a Director who has no material business
relationship with a broker or dealer, the NASD, NASDR, or
Nasdaq.
Advance Notice Requirements for Stockholder Proposals and Directors Nominations
The By-Laws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at Nasdaq's principal executive offices not less than
90 nor more than 120 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, that in the event that
the annual meeting is called for a date that is not within 30 days before
or 70 days after such anniversary date, notice by the stockholder in order
to be timely must be received not earlier than 120 days prior to the
meeting and not later than the later of 90 days prior to the meeting and
the close of business on the 10th day following the date on which notice of
the date of the annual meeting was first made public. In the case of a
special meeting of stockholders called for the purpose of electing
directors, notice by the stockholder in order to be timely must be received
not earlier than 120 days prior to the meeting and later than the later of
90 days prior to the meeting and the close of business on the 10th day
following the day on which public disclosure of the date of the special
meeting and Nasdaq's nominees was first made. In addition, the By-Laws
specify certain requirements as to the form and content of a stockholder's
notice. These provisions may preclude stockholders from bringing matters
before an annual meeting of stockholders or from making nominations for
directors at an annual or special meeting of stockholders.
Stockholder Action; Special Meeting of Stockholders
The Certificate of Incorporation provides that stockholders are not
entitled to act by written consent in lieu of a meeting. Delaware law vests
the board of directors of a Delaware corporation with the authority to call
special meetings of stockholders and permits the corporation to authorize
in its certificate of incorporation or by-laws other persons to also have
such authority. The Certificate of Incorporation and By-Laws do not vest
any other persons with such authority.
Amendments; Supermajority Vote Requirements
The General Corporation Law of the State of Delaware provides generally
that the affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporation's certificate of
incorporation, unless a corporation's certificate of incorporation requires
a greater percentage. The Certificate of Incorporation imposes
supermajority stockholder vote (66%) requirements in connection with
stockholder amendments to the By-Laws and in connection with the amendment
of certain provisions of the Certificate of Incorporation, including those
provisions of the Certificate of Incorporation relating to the limitations
on voting rights of certain persons, the classified board of directors,
removal of directors, and prohibitions on stockholder action by written
consent.
Authorized But Unissued Shares
The authorized but unissued shares of Common Stock and preferred stock will
be available for future issuance without stockholder approval. These
additional shares may be utilized for a variety of corporate purposes,
including future public or private offerings to raise additional capital,
corporate acquisitions, and employee benefit plans. The existence of
authorized but unissued shares of Common Stock and preferred stock could
render more difficult, or discourage an attempt to obtain control of Nasdaq
by means of a proxy contest, tender offer, merger or otherwise.
Transfer Restrictions on Common Stock
The shares of Common Stock cannot be, directly or indirectly, offered,
sold, gifted, pledged, assigned, transferred, or otherwise disposed of
(each, for the purposes hereof, a "Transfer") except subject to all
applicable laws and:
(1) with the prior written consent of Nasdaq; or
(2) until the earlier of (i) the date on which a registration
statement filed with the SEC in connection with an initial public
offering of shares of Common Stock is declared effective (the
"Effective Date"), or (ii) the expiration of two years following
June 28, 2000 if a registration statement has not been filed with
the SEC in connection with an initial public offering of shares of
Common Stock during such two-year period; provided, however, that
Nasdaq may elect, in its sole discretion, to further restrict the
Transferability of any shares of Common Stock including, without
limitation, the shares of Common Stock purchased upon exercise of
any warrants, for a period of 180 days following the Effective
Date by giving written notice of such election to holders of
Common Stock at least 10 days prior to the Effective Date; or
(3) to a Majority Affiliate. Any Transfer to a Majority Affiliate for
consideration will require that the transferor deliver to Nasdaq,
an opinion of the transferor's counsel to the effect that the
Transfer of securities by the transferor to a Majority Affiliate
(A) complies with the transfer restriction provisions set forth
herein and (B) does not require registration under the Securities
Act or registration or qualification under any applicable state
securities laws. Any Transfer to a Majority Affiliate without
consideration will require the transferor to make a written
representation to Nasdaq that the Transfer complies with the
provisions set forth in this section and was made without
consideration.
The following terms are defined as set forth below:
"Affiliate" means, with respect to any specified Person, any other
Person who, directly or indirectly, owns or controls, is under common
ownership or control with, or is owned or controlled by, such specified
Person.
"Majority Affiliate" of any Person means an Affiliate of such
Person: (a) a majority of the voting stock or beneficial ownership of which
is owned by such Person, or by any Person who, directly or indirectly, owns
a majority of the voting stock or beneficial ownership of such Person; (b)
who, directly or indirectly, owns a majority of the voting stock or
beneficial ownership of such Person; and (c) any Majority Affiliate of any
Affiliate described in clause (a) or clause (b) above.
"Person" means any individual, company, limited liability company,
corporation, trust, estate, association, nominee, or other entity.
Delaware Business Combination Statute
Nasdaq is organized under Delaware law.
Delaware law generally prohibits a publicly-held or widely-held corporation
from engaging in a "business combination" with an "interested stockholder"
for three years after the stockholder becomes an interested stockholder. An
"interested stockholder" is a person who directly or indirectly owns 15% or
more of the corporation's outstanding voting stock. A "business
combination" includes a merger, asset sale or other transaction that
results in a financial benefit to the interested stockholder. However,
Delaware law does not prohibit these business combinations if:
(1) before the stockholder becomes an interested stockholder the
corporation's board approved either the business combination or
the transaction that resulted in the stockholder becoming an
interested stockholder;
(2) after the transaction that results in the stockholder becoming an
interested stockholder, the interested stockholder owns at least
85% of the corporation's outstanding voting stock (excluding
certain shares); or
(3) the corporation's board approves the business combination and the
holders of at least two-thirds of the corporation's outstanding
voting stock that the interested stockholder does not own
authorize the business combination at a meeting of stockholders.
Item 12. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and any corporate agents in terms
sufficiently broad to indemnify such person under certain circumstances for
liabilities, including reimbursement for expenses, incurred arising under
the Securities Act. The Certificate of Incorporation and By-Laws provide
that Nasdaq shall indemnify its directors, officers, employees, and members
of the Nasdaq Listing and Hearing Review Council to the fullest extent
permitted by Delaware law. Nasdaq, in its discretion, may indemnify its
agents to the fullest extent and under the circumstances permitted by the
Delaware General Corporation Law. The directors and officers of Nasdaq are
covered by insurance policies indemnifying them against certain
liabilities, including certain liabilities arising under the Securities
Act, which might be incurred by them in such capacities and against which
they may not be indemnified by Nasdaq.
Item 13. Financial Statements and Supplementary Data.
The following table presents selected quarterly financial data for Nasdaq.
The data presented in this table are derived from "Selected Consolidated
Financial Data of Nasdaq" and the consolidated financial statements and
notes thereto which are included elsewhere in this Registration Statement.
You should read those sections for a further explanation of the financial
data summarized here. You should also read the "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Nasdaq"
section, which describes a number of factors which have affected Nasdaq's
financial results. The consolidated financial statements are as set forth
in the "Index to Consolidated Financial Statements" on page F-1.
Selected Quarterly Financial Data
(in thousands, except EPS information)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1999 1999 1999 1999 Total 1999
Revenues $133,860 $152,833 $169,136 $178,419 $634,248
Total expenses 93,080 108,115 122,244 176,297 499,736
Net operating income 40,780 44,718 46,892 2,122 134,512
Interest income 2,498 3,314 3,425 2,964 12,201
Interest expense (472) (495) (507) (669) (2,143)
Provision for income taxes (16,456) (20,483) (19,332) (2,150) (58,421)
Net income 26,350 27,054 30,478 2,267 86,149
Basic and Diluted EPS $0.26 $0.27 $0.30 $0.02 $0.86
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
2000 2000 2000 2000 Total 2000
Revenues $219,312 $226,421 $213,321 $208,955 $868,009
Total expenses 131,225 139,753 161,409 199,330 631,717
Net operating income 88,087 86,668 51,912 9,625 236,292
Interest income 2,225 3,240 5,727 8,919 20,111
Interest expense (483) (476) (718) (453) (2,130)
Provision for income taxes (36,114) (35,070) (28,170) (5,664) (105,018)
Minority interest in earnings -- -- -- 872 872
Net income 53,715 54,362 28,751 13,299 150,127
Basic and Diluted EPS $0.54 $0.54 $0.23 $0.11 $1.34
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 15. Financial Statements and Exhibits.
(a) List separately all financial statements filed.
See "Index to Consolidated Financial Statements."
(b) Exhibits.
Exhibit
Number
3.1 Restated Certificate of Incorporation of The Nasdaq Stock Market,
Inc.(+)
3.2 By-Laws of The Nasdaq Stock Market, Inc.(+)
4.1 Form of Common Stock certificate.(+)
7A Qualitative Disclosure about market risk (incorporated herein by
reference to "Item 2 - Financial Information" of this Form 10).
9.1 Voting Trust Agreement dated June 28, 2000, among The Nasdaq Stock
Market, Inc., the National Association of Securities Dealers, Inc.
and The Bank of New York.(+)
9.2 First Amendment to the Voting Trust Agreement, dated as of January
18, 2001, among The Nasdaq Stock Market, Inc., the National
Association of Securities Dealers, Inc. and The Bank of New
York.(+)
10.1 Network Service Agreement, dated November 19, 1997, between MCI
Telecommunications Corporation and The Nasdaq Stock Market,
Inc.*(+)
10.2 Consolidated Agreement, between Unisys Corporation and The Nasdaq
Stock Market, Inc.*(+)
10.3 Network User License Agreement, dated November 30, 1993, between
Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.4 Software License and Services Agreement, dated November 30, 1993,
between Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.5 Regulatory Services Agreement, dated June 28, 2000, between NASD
Regulation, Inc. and The Nasdaq Stock Market, Inc.*(+)
10.6 Separation and Common Services Agreement, dated as of June 28,
2000, between the National Association of Securities Dealers, Inc.
and The Nasdaq Stock Market, Inc.(+)
10.7 The Nasdaq Stock Market, Inc. Employee Stock Purchase Plan.(+)
10.8 The Nasdaq Stock Market, Inc. Equity Incentive Plan.(+)
10.9 Securities Purchase Agreement, dated as of March 23, 2001, among
The Nasdaq Stock Market, Inc., Hellman & Friedman Capital Partners
IV, L.P. and the other purchasers listed in the signature pages
thereto.(+)
10.9.1 Securityholders Agreement, dated as of May 3, 2001, among The
Nasdaq Stock Market, Inc., Hellman & Friedman Capital Partners IV,
L.P., and the other securityholders listed on the signature pages
thereto.(^)
10.10 Purchase and Sale Agreement, dated March 23, 2001, by and between
the National Association of Securities Dealers, Inc. and The
Nasdaq Stock Market, Inc.(+)
10.11 Employment Agreement between the National Association of
Securities Dealers, Inc. and Frank G. Zarb effective on February
24, 1997.(+)
10.12 Instrument of Amendment, dated March 18, 1998, to Employment
Agreement between National Association of Securities Dealers, Inc.
and Frank G. Zarb, effective on February 24, 1997.(+)
10.13 Instrument of Amendment, dated as of August 20, 1999, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998.(+)
10.14 Instrument of Amendment, dated March 30, 2000, to Employment
Agreement between National Association of Securities Dealers, Inc.
and Frank G. Zarb, effective on February 24, 1997, as amended
effective March 18, 1998, and subsequently amended in May,
1999.(+)
10.15 Instrument of Amendment, effective as of July 27, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000.(+)
10.16 Instrument of Amendment, effective as of November 1, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000, and as of
July 27, 2000.(+)
10.17 Instrument of Amendment, effective as of April 25, 2001, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as subsequently amended effective March 18, 1998, August 20, 1999,
March 30, 2000, July 27, 2000 and November 1, 2000.(+)
10.18 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and J. Patrick Campbell, effective as of December 29, 2000.(+)
10.19 Employment Agreement by The Nasdaq Stock Market, Inc. and John L.
Hilley, effective as of December 29, 2000.(+)
10.20 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Richard G. Ketchum, effective as of December 29, 2000.(+)
10.21 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Hardwick Simmons, dated as of January 31, 2001.(+)
11 Statement regarding computation of per share earnings
(incorporated herein by reference to "Item 2. Financial
Information" of this Form 10).
12 Computations of Ratios (not applicable).
21.1 List of all subsidiaries.(+)
- ---------------------
* Confidential treatment has been requested from the U.S. Securities
and Exchange Commission for certain portions of this exhibit.
(+) Previously filed with The Nasdaq Stock Market, Inc.'s Registration
Statement on Form 10 (file number 000-32651) filed on April 30,
2001.
(^) Previously filed with The Nasdaq Stock Market, Inc.'s Amendment
No. 1 to Registration Statement on Form 10 (file number 000-32651)
filed on May 14, 2001.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this Amendment No. 3 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE NASDAQ STOCK MARKET, INC.
By: /s/ Edward S. Knight
--------------------------------
Name: Edward S. Knight
Title: Executive Vice President
and General Counsel
Date: August 8, 2001
The Nasdaq Stock Market, Inc.
Notes to the Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following audited, and consolidated financial statements of The Nasdaq
Stock Market, Inc. and its subsidiaries are presented herein on the page
indicated:
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets...............................................F-3
Consolidated Statements of Income.........................................F-5
Consolidated Statements of Changes in Stockholders' Equity................F-6
Consolidated Statements of Cash Flows.....................................F-7
Notes to Consolidated Financial Statements................................F-8
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Nasdaq Stock Market, Inc.
We have audited the accompanying consolidated balance
sheets of The Nasdaq Stock Market, Inc. ("Nasdaq") (a majority owned
subsidiary of the National Association of Securities Dealers, Inc.) as of
December 31, 2000 and 1999, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These consolidated
financial statements are the responsibility of Nasdaq's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of The Nasdaq Stock Market, Inc. at
December 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 3 to the consolidated financial
statements, effective January 1, 1999, Nasdaq adopted Statement of Position
98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use."
Ernst & Young LLP
Washington, D.C.
January 26, 2001
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
-------------------------------
2000 1999
-------------------------------
Assets
Current assets:
Cash and cash equivalents $ 262,257 $ 10,598
Investments:
Available-for-sale, at fair value 232,090 153,566
Held-to-maturity, at amortized cost 21,967 10,697
Receivables, net 172,660 112,403
Receivables from related parties 8,250 7,168
Deferred tax asset 5,763 5,213
Other current assets 14,869 12,701
-------------------------------
Total current assets 717,856 312,346
Investments:
Held-to-maturity, at amortized cost 6,612 17,720
Property and equipment:
Land, buildings and improvements 80,727 56,173
Data processing equipment and software 370,066 246,999
Furniture, equipment and leasehold improvements 134,638 101,658
-------------------------------
585,431 404,830
Less accumulated depreciation and amortization (252,380) (192,719)
-------------------------------
Total property and equipment, net 333,051 212,111
Investment in warrants, at cost - 33,480
Other assets 17,798 2,597
-------------------------------
Total assets $ 1,075,317 $ 578,254
===============================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
2000 1999
------------------------------------
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 117,867 $ 68,585
Accrued personnel costs 37,273 30,505
Deferred revenue 6,068 9,787
Other accrued liabilities 29,306 17,839
Due to banks 13,876 8,819
Payables to related parties 19,158 11,742
------------------------------------
Total current liabilities 223,548 147,277
Long-term debt 25,000 25,000
Accrued pension costs 10,390 7,073
Non-current deferred tax liability, net 26,782 10,928
Deferred revenue, investment in warrants, at - 33,480
cost
Other liabilities 9,153 2,484
------------------------------------
Total long-term liabilities 71,325 78,965
Total liabilities 294,873 226,242
Minority interests 15,543 -
Stockholders' Equity
Common stock, $.01 par value, 300,000,000
authorized, 123,663,746 issued and
outstanding 1,237 1,000
Additional paid-in capital 265,603 149
Unrealized gains on available-for-sale
investments, net of tax 321 1,742
Foreign currency translation, net of
minority interests of ($1,185) in 2000 (1,508) -
Retained earnings 499,248 349,121
------------------------------------
Total stockholders' equity 764,901 352,012
------------------------------------
Total liabilities, minority interest and $ 1,075,317 $ 578,254
stockholders' equity
====================================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Income
(In thousands, except share amounts)
Years ended December 31,
2000 1999 1998
-------------------------------------------------------
Revenue
Transaction services $ 395,123 $ 283,652 $ 160,506
Market information services 258,251 186,543 152,665
Issuer services 184,595 163,425 137,344
Other 30,040 628 308
-------------------------------------------------------
Total revenue 868,009 634,248 450,823
-------------------------------------------------------
Expenses
Compensation and benefits 133,496 98,129 78,565
Marketing and advertising 45,908 62,790 42,483
Depreciation and amortization 65,645 43,696 34,984
Professional and contract services 61,483 35,282 35,127
Computer operations and data
communications 138,228 100,493 72,111
Travel, meetings and training 12,113 10,230 7,750
Occupancy 14,766 6,591 5,354
Publications, supplies and postage 7,181 4,670 5,208
Other 24,375 22,666 14,742
-------------------------------------------------------
Total direct expenses 503,195 384,547 296,324
-------------------------------------------------------
Support cost from related parties, net 128,522 115,189 100,841
-------------------------------------------------------
Total expenses 631,717 499,736 397,165
-------------------------------------------------------
Net operating income 236,292 134,512 53,658
Interest income 20,111 12,201 9,269
Interest expense (2,130) (2,143) (1,962)
Provision for income taxes (105,018) (58,421) (26,010)
Minority interests in earnings 872 - -
-------------------------------------------------------
Net income $ 150,127 $ 86,149 $ 34,955
=======================================================
=======================================================
Basic and diluted
earnings per common share $ 1.34 $ 0.86 $ 0.35
=======================================================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share amounts)
Accumulated
Number of Additional Other
Common Shares Common Paid in Retained Comprehensive
Outstanding1 Stock1 Capital1 Earnings Income (Loss) Total
-------------------------------------------------------------------------------------------
Balance, January 1, 1998 100,000,000 1,000 $ 149 $ 228,017 - $229,166
Net income - - - 34,955 - 34,955
Unrealized gains on - - - - $ 2,020 2,020
available-for-sale
investments, net
of tax of $1,088
Comprehensive income - - - - - 36,975
-------------------------------------------------------------------------------------------
Balance, December 31, 1998 100,000,000 1,000 149 262,972 2,020 266,141
Net income - - - 86,149 - 86,149
Unrealized losses on
available-for-sale
investments, net
of tax of $(149) - - - - (278) (278)
Comprehensive income - - - - - 85,871
--------------------------------------------------------------------------------------------
Balance, December 31, 1999 100,000,000 1,000 149 349,121 1,742 352,012
Net income - - - 150,127 - 150,127
Unrealized losses on
available-for-sale
investments, net
of tax of $(765) - - - - (1,421) (1,421)
Foreign currency translation,
net of Minority interests
of $(1,185) - - - - (1,508) (1,508)
Comprehensive income - - - - - 147,198
Capital contribution - - 30,000 - - 30,000
Minority interest resulting
from original share of
equity in Nasdaq Europe - - (17,600) - - (17,600)
Net proceeds from Phase I offering 23,663,746 $ 237 253,054 - - 253,291
============================================================================================
Balance, December 31, 2000 $123,663,746 $ 1,237 $ 265,603 $ 499,248 $ (1,187) $ 764,901
============================================================================================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
2000 1999 1998
-----------------------------------------------------
Cash flow from operating activities
Cash received from customers $ 713,408 $ 527,946 $ 400,918
Cash paid to suppliers and employees (281,601) (248,173) (212,006)
Cash paid to related parties, net (122,188) (104,761) (109,563)
Income taxes paid (101,171) (49,992) (24,131)
Interest received, net 19,624 10,320 7,699
Other 21,248 (715) (6,194)
-----------------------------------------------------
Cash provided by operating activities 249,320 134,625 56,723
Cash flow from investing activities
Proceeds from redemptions of
available-for-sale investments 154,931 107,328 -
Purchases of available-for-sale investments (237,241) (131,291) -
Proceeds from maturities of held-to-maturity
investments 10,811 30,743 100,845
Purchases of held-to-maturity investments (10,973) (30,990) (129,624)
Acquisition, net of cash acquired (16,979) - -
Purchases of property and equipment (189,666) (110,489) (39,729)
Proceeds from sales of property and equipment 3,108 4,042 10,358
-----------------------------------------------------
Cash used in investing activities (286,009) (130,657) (58,150)
Cash flow from financing activities
Increase in due to banks 5,057 3,876 156
Proceeds from Phase I private placement
offering 253,291 - -
Contributions from minority shareholders 30,000 - -
-----------------------------------------------------
Cash provided by financing activities 288,348 3,876 156
Increase (decrease) in cash and cash
equivalents 251,659 7,844 (1,271)
Cash and cash equivalents at beginning of
period 10,598 2,754 4,025
-----------------------------------------------------
Cash and cash equivalents at end of period $ 262,257 $ 10,598 $ 2,754
=====================================================
Reconciliation of net income to cash provided
by operating activities
Net income $ 150,127 $ 86,149 $ 34,955
Depreciation and amortization 65,645 43,696 34,984
Minority interests in earnings (872) - -
Increase in receivables, net (59,885) (39,897) (18,762)
(Increase) decrease in receivables from
related parties (1,082) 2,497 (6,670)
Increase in other current assets (2,168) (6,521) (380)
Increase in deferred tax asset (550) (1,316) -
Decrease (increase) in other assets 1,265 4,866 (4,688)
Increase in accounts payable and accrued
expenses 49,256 18,815 7,607
Increase in accrued personnel costs 6,685 9,660 3,966
(Decrease) increase in deferred revenue (3,719) 1,413 2,758
Increase in other accrued liabilities 11,362 2,569 9,545
Increase (decrease) in payables to related
parties 7,416 7,931 (2,052)
Increase (decrease) in accrued pension costs 3,139 2,507 (3,414)
Increase in non-current deferred tax
liability, net 15,854 2,770 -
Increase (decrease) in other liabilities 6,847 (514) (1,126)
-----------------------------------------------------
Cash provided by operating activities $ 249,320 $ 134,625 $ 56,723
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Notes to the Consolidated Financial Statements
1. Organization and Nature of Operations
The Nasdaq Stock Market, Inc. ("Nasdaq") is the parent company of Nasdaq
Global Holdings ("Nasdaq Global"); Quadsan Enterprises, Inc.; Nasdaq Tools,
Inc.; Nasdaq Investment Product Services, Inc.; and Nasdaq International
Market Initiatives, Inc.; collectively referred to as Nasdaq. These
entities are wholly-owned by Nasdaq. Nasdaq is a majority owned subsidiary
of the National Association of Securities Dealers, Inc. (the "NASD").
At a special meeting of the NASD members held on April 14, 2000, more than
a majority of NASD members approved a plan to broaden the ownership in
Nasdaq through a two-phase private placement of (1) newly-issued shares of
Common Stock, and (2) Common Stock and warrants to purchase shares of
Common Stock owned by the NASD (the "Restructuring"), to all NASD members,
Nasdaq issuers and institutional investor firms. The Restructuring is
intended, among other things, to strategically realign the ownership of
Nasdaq, minimize potential conflicts of interest between Nasdaq and NASDR
and allow Nasdaq to respond to current and future competitive challenges
caused by technological advances and the increasing globalization of
financial markets.
In connection with the first phase ("Phase I") of the Restructuring, (1)
the NASD separated the American Stock Exchange LLC ("Amex") from The
Nasdaq-Amex Market Group, Inc. ("Market Group"), a holding company which
was a subsidiary of the NASD; (2) Market Group was then merged with and
into Nasdaq; (3) Nasdaq then effected a 49,999-for-one stock dividend
creating 100 million shares of Common Stock outstanding (all of which were
initially owned by the NASD); and (4) Nasdaq authorized the issuance of an
additional 30.9 million in new shares to be offered for sale by Nasdaq. All
share and per share amounts have been retroactively adjusted to reflect the
June 28, 2000 49,999-for-one stock dividend.
Phase I of the Restructuring closed on June 28, 2000 with Nasdaq selling
23.7 million of its newly issued shares, yielding net proceeds of
approximately $253.3 million. As of December 31, 2000, the NASD owned
approximately 81% of Nasdaq. During Phase I of the Restructuring, the NASD
sold warrants to purchase shares of Nasdaq Common Stock, which if fully
exercised, would decrease the NASD's ownership to approximately 60%. The
second phase ("Phase II") of the Restructuring closed on January 18, 2001
(see note 14).
Nasdaq operates in one segment as defined in the Statement of Financial
Accounting Standards No. 131 "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131"). Nasdaq uses a multiple market maker
system to operate an electronic, screen-based equity market. Nasdaq's
principal business products are price discovery and trading services,
listing of issues, and the sale of related data and information. The
majority of this business is transacted with listed companies, market data
vendors and firms in the broker-dealer industry within the United States.
Nasdaq Global, which is incorporated in Switzerland, is the holding company
for Nasdaq's investments in Nasdaq Europe Planning Company Limited ("Nasdaq
Europe"), Indigo Markets (sm) Ltd. ("Indigo Markets") and Nasdaq Japan, Inc.
("Nasdaq Japan") in which it has 56.0%, 55.0% and 39.2% interests,
respectively, as of December 31, 2000. Quadsan Enterprises, Inc. is a Delaware
Investment Holding Company which provides investment management services for
Nasdaq. Nasdaq Investment Product Services, Inc. is the sponsor of the
Nasdaq-100 Trust. Nasdaq International Market Initiatives, Inc. offers a
variety of consulting services to assist emerging and established securities
markets around the world with both technology applications and regulation.
Nasdaq Tools, Inc. provides software products and services related to the
broker-dealer industry to be used in conjunction with the Nasdaq Workstation
II software.
2. Significant Transactions
The NASD formed a joint venture, Nasdaq Europe, in February 2000 with
SOFTBANK, Vivendi, and Epartners, whereby each partner contributed $10
million in cash. The NASD contributed $10 million cash, licensing of its
brand and provided technology expertise and management leadership in
exchange for a 56% interest in this venture. As part of the Restructuring,
the NASD's ownership interest in Nasdaq Europe was transferred to Nasdaq
Global Holdings.
Nasdaq Europe was treated as a consolidated entity in Nasdaq and the NASD
financial statements.
On March 7, 2000, Nasdaq acquired Financial Systemware, Inc. (now known as
Nasdaq Tools), a company that develops and markets a set of software
utilities that can be loaded on a Nasdaq Workstation II terminal to enhance
the features and functionalities of the Nasdaq Workstation II software.
This acquisition has been accounted for using the purchase method of
accounting, and accordingly, assets acquired and liabilities assumed have
been recorded at their estimated fair values at the date of acquisition.
The results of operations of Nasdaq Tools are included in the consolidated
statements of income and stockholders' equity from the acquisition date.
Periods prior to the acquisition date are not included in the consolidated
statements of income and stockholders' equity.
In May 2000, IndigoMarkets was established for the purpose of creating market
systems for Nasdaq global markets, including Nasdaq Japan.
Upon closing of the transaction, Nasdaq acquired 100% of Financial
Systemware's issued and outstanding stock for $7.3 million. Goodwill of
$6.5 million recorded as a result of the acquisition is being amortized on
a straight-line basis over five years. Additionally, the Nasdaq Tools
principals, the sellers, will collectively be paid $25.0 million. Of this
amount, $10.0 million was paid upon closing and is being recognized as
expense on a straight-line basis over five years. Five cash payments of
$3.0 million each will be paid over the five years following closing,
contingent upon the continued employment and development efforts of the
Nasdaq Tools principals. The unamortized goodwill and other intangible
assets related to the acquisition of Nasdaq Tools are $5.4 million and $8.3
million, respectively, as of December 31, 2000 and are included in other
assets in the consolidated balance sheets.
In October 2000, Nasdaq Japan sold an approximately 15 percent stake for
approximately $48 million to a group of 13 major Japanese, U.S. and
European brokerages, thereby reducing Nasdaq Global's interest to
approximately 39.2 percent. Nasdaq Japan will use the proceeds primarily
for working capital and the development of a hybrid market model with quote
and order functionality.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Nasdaq and
its majority owned subsidiaries. All non-majority owned investments are
accounted for under the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand cash and all non-restricted
investments purchased with a remaining maturity of three months or less at
the time of purchase. Such investments included in cash and cash
equivalents in the consolidated balance sheets were $218.5 million and $7.1
million at December 31, 2000 and 1999, respectively.
Investments
Under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
management determines the appropriate classification of investments at the
time of purchase. Investments for which Nasdaq does not have the intent or
ability to hold to maturity are classified as "available-for-sale" and are
carried at fair market value, with the unrealized gains and losses, net of
tax, reported as a separate component of stockholders' equity. Investments
for which Nasdaq has the intent and ability to hold to maturity are
classified as "held-to-maturity" and are carried at amortized cost. The
amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion
of discounts and is included in interest income and interest expense as
appropriate. Realized gains and losses on sales of securities are included
in earnings using the specific identification method.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost, that is deemed to be other than temporary, results in
a reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
Receivables, Net
Nasdaq's receivables are concentrated with NASD member firms, market data
vendors and Nasdaq issuers. Receivables are shown net of reserves for
uncollectable accounts. Reserves are calculated based on the age and source
of the underlying receivable and are tied to past collections experience.
Total reserves netted against receivables in the consolidated balance
sheets were $5.4 million and $3.0 million at December 31, 2000 and 1999,
respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Equipment acquired under capital leases is recorded at the lower of fair
market value or the present value of future lease payments. Depreciation
and amortization are provided on the straight-line method. Estimated useful
lives generally range from 10 years to 40 years for buildings and
improvements, 2 years to 5 years for data processing equipment and
software, and 5 years to 10 years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the lesser
of the useful life of the improvement or the term of the applicable lease.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that long-lived assets
or other assets may be impaired, such as obsolescence, an evaluation of
recoverability would be performed. If an evaluation were required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down is
required. If a write-down were required, Nasdaq would prepare a discounted
cash flow analysis to determine the amount of the write-down.
Deferred Revenue
Deferred revenues represent cash received and billed receivables, which are
unearned, until services are provided.
Revenue Recognition
Market information services revenues are based on the number of
presentation devices in service and quotes delivered through those devices.
These revenues are recorded net of amounts due under revenue sharing
arrangements with market participants. Market information services revenues
are recognized in the month that information is provided. Transaction
services revenues are variable based on service volumes and are recognized
as transactions occur. Issuer annual listing services revenues are
recognized ratably over the following 12-month period. Issuer initial
listing fees are recognized in the month listing occurs. Issuer additional
share fees are recognized in the period the incremental shares are issued.
Advertising Costs
Nasdaq expenses advertising costs, which included media advertising and
production cost, in the periods in which the costs are incurred. Media
advertising and production costs included as marketing and advertising in
the consolidated statements of income totaled $35.3 million, $45.3 million
and $36.2 million for 2000, 1999, and 1998, respectively.
Software Costs
Significant purchased application software, and operational software that is
an integral part of computer hardware, are capitalized and amortized on the
straight-line method over their estimated useful lives, generally two to five
years. All other purchased software is charged to expense as incurred.
Nasdaq adopted Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use"
effective January 1, 1999. The provisions of this SOP require certain costs
incurred in connection with developing or obtaining internal use software
to be capitalized. Unamortized capitalized software development costs of
$37.8 million and $14.7 million as of December 31, 2000 and 1999,
respectively, are carried in data processing equipment and software in the
consolidated balance sheets. Amortization of costs capitalized under SOP
98-1 totaled $2.3 million and $0.5 million for 2000 and 1999 and is
included in depreciation and amortization in the consolidated statements of
income.
Income Taxes
Nasdaq and its subsidiaries are taxable entities. Deferred tax assets and
liabilities are determined based on differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities (i.e., temporary differences) and are measured at the enacted
rates that will be in effect when these differences reverse.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local
currency environment are translated to U.S. dollars at exchange rates in
effect at the balance sheet date. Translation adjustments resulting from
this process are charged or credited to other comprehensive income. Revenue
and expenses are translated at average exchange rates during the year.
Gains and losses on foreign currency translations are included in other
expenses.
Minority Interests
Minority interests in the consolidated balance sheets represents the
minority owners' share of equity as of the balance sheet date. Minority
interests in the consolidated statements of income represent the minority
owners' share of the income or loss of certain consolidated subsidiaries.
Classifications
Certain amounts for the prior year have been reclassified to conform with
the 2000 presentation.
4. Investments
Investments consist of U.S. Treasury securities obligations of U.S.
Government sponsored enterprises, municipal bonds, equity securities and
other financial instruments. Following is a summary of investments
classified as available for sale which are carried at fair value as of
December 31, 2000:
Available-for-Sale Securities
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
----------------------------------------------------------------
December 31, 2000
U.S. Treasury securities and
obligations of U.S. government
agencies 109,350 542 59 109,834
Obligations of states and political
subdivisions 43,664 55 954 42,765
Asset-backed securities 52,846 202 513 52,535
U.S. corporate securities 6,018 61 90 5,988
Other debt securities
649 9 - 658
----------------------------------------------------------------
Total debt securities 212,527 869 1,616 211,780
Equity securities 19,069 3,584 2,343 20,310
----------------------------------------------------------------
231,596 4,453 3,959 232,090
================================================================
Following is a summary of investments classified as held to maturity which
are carried at amortized cost as of December 31, 2000:
Held-to-Maturity Securities
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
----------------------------------------------------------------
December 31, 2000
U.S. Treasury securities and
obligations of U.S. government
agencies 28,579 45 32 28,592
Obligations of states and political
subdivisions - - - -
Asset-backed securities - - - -
U.S. corporate securities - - - -
Other debt securities - - - -
----------------------------------------------------------------
Total debt securities 28,579 45 32 28,592
Equity securities
----------------------------------------------------------------
28,579 45 32 28,592
================================================================
Following is a summary of investments classified as available for sale
which are carried at fair value as of December 31, 1999:
Available-for-Sale Securities
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
----------------------------------------------------------------
December 31, 1999
U.S. Treasury securities and
obligations of U.S. government
agencies 68,751 135 487 68,399
Obligations of states and political
subdivisions 37,140 - 792 36,348
Asset-backed securities 16,814 1 657 16,158
U.S. corporate securities 9,055 1 164 8,892
Other debt securities - - - -
----------------------------------------------------------------
Total debt securities 131,760 137 2,100 129,797
Equity securities 19,125 5,642 998 23,769
----------------------------------------------------------------
150,885 5,779 3,098 153,566
================================================================
Following is a summary of investments classified as held to maturity which
are carried at amortized cost as of December 31, 1999:
Held-to-Maturity Securities
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
----------------------------------------------------------------
December 31, 1999
U.S. Treasury securities and
obligations of U.S. government
agencies 28,417 7 617 27,807
Obligations of states and political
subdivisions - - - -
Asset-backed securities - - - -
U.S. corporate securities - - - -
Other debt securities - - - -
----------------------------------------------------------------
Total debt securities 28,417 7 617 27,807
Equity securities
----------------------------------------------------------------
28,417 7 617 27,807
================================================================
During the years ended December 31, 2000, and 1999, debt and marketable
equity available-for-sale securities with a fair value at the date of sale
of $72.7 million and $145.6 million, respectively, were sold. The gross
realized gains on such sales totaled $2.8 million and $830,000,
respectively, and the gross realized losses totaled $955,000 and $998,000,
respectively. The net adjustment to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of
shareholders' equity totaled $(224,000) and $3.0 million, respectively.
Nasdaq accounts for investments under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Management thereby determines the appropriate
classification of investments at the time of purchase. Investments for
which Nasdaq does not have the intent or ability to hold to maturity are
classified as "available-for-sale" and are carried at fair market value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Investments for which Nasdaq has the
intent and ability to hold to maturity are classified as "held-to-maturity"
and are carried at amortized cost. The amortized cost of debt securities
classified as held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts and is included in
interest income and interest expense as appropriate. Realized gains and
losses on sales of securities are included in earnings using the specific
identification method. A decline in the market value of any
available-for-sale or held-to-maturity security below cost, that is deemed
to be other than temporary, results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a new cost basis for
the security is established.
5. Fair Value of Financial Instruments
Nasdaq considers cash and cash equivalents, accounts receivable,
investments, investments in subsidiaries, accounts payable and accrued
expenses, due to banks, and long-term debt to be its financial instruments.
The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable, investments, accounts payable and accrued
expenses, and due to banks closely approximate their fair values. The
approximate fair value of Nasdaq's long-term debt was estimated using a
discounted cash flow analysis, based on Nasdaq's assumed incremental
borrowing rates for similar types of borrowing arrangements. This analysis
indicates that the fair value of Nasdaq's long-term debt at December 31,
2000 and 1999 approximates its carrying amount. The fair value of its
investments in subsidiaries is not determinable since these investments do
not have quoted market prices.
6. Long-Term Debt
In May 1997, Nasdaq entered into a $25.0 million note payable with a
financial institution (the "Lender"). Principal payments are scheduled to
begin in 2007 and continue in equal monthly installments until maturity in
2012. The note requires monthly interest payments through May 2007 at an
annual rate of 7.41%. After May 2007, Nasdaq will incur interest equal to
the Lender's cost of funds rate, as defined in the agreement, plus .5%.
Interest expensed and paid under the agreement totaled approximately $1.9
million for each of the years ended December 31, 2000, 1999 and 1998.
7. Income Taxes
The income tax provision includes the following amounts:
Years Ended December 31,
2000 1999 1998
-----------------------------------------------------
Current income taxes:
Federal $ 75,727 $ 46,482 $ 22,930
State 14,208 11,599 5,196
-----------------------------------------------------
Total current income taxes 89,935 58,081 28,126
Deferred income taxes:
Federal 12,081 273 (1,695)
State 3,002 67 (421)
-----------------------------------------------------
Total deferred income taxes 15,083 340 (2,116)
-----------------------------------------------------
Total provision for income taxes $ 105,018 $ 58,421 $ 26,010
-----------------------------------------------------
Income taxes paid during the periods $ 101,171 $ 49,992 $ 24,131
Reconciliations of the statutory United States federal income tax rates to
the effective tax rates are as follows:
Years Ended December 31,
2000 1999 1998
-----------------------------------------------------
Federal 35.0% 35.0% 35.0%
State 3.8 5.2 5.1
Foreign losses without US benefit 1.8 - -
Other, net 0.6 0.2 2.6
-----------------------------------------------------
Effective rate 41.2% 40.4% 42.7%
=====================================================
Components of Nasdaq's deferred tax assets and liabilities consisted of the
following:
December 31,
2000 1999
-------------------------------------
Deferred tax assets:
Deferred fees $ 453 $ 2,233
Compensation and benefits 171 179
Bad debts 5,139 2,801
------------------- -----------------
Total deferred tax assets 5,763 5,213
Deferred tax liabilities:
Depreciation $ (12,492) (9,966)
Software development costs (19,624) (5,184)
Other 5,334 4,222
------------------- -----------------
Total deferred tax liabilities, net $ (26,782) $ (10,928)
=================== =================
Due to the Nasdaq's foreign operations, it has approximately $3.9 million of
foreign deferred tax assets, primarily Net Operating Losses and Start-Up
costs, the majority of which expire in seven years. These in-country deferred
tax assets have been fully reserved by an offsetting Valuation Allowance as it
is not "more likely than not" that these deferred tax assets will be realized.
8. Employee Benefits
Nasdaq is a participating employer in a noncontributory, defined-benefit
pension plan, along with other arrangements, that the NASD maintains for
the benefit of eligible employees of its subsidiaries. The benefits are
primarily based on years of service and the employees' average salary
during the highest 60 consecutive months of employment. The plan assets
consist primarily of fixed income and equity securities.
The following table sets forth the plans' funded status and amounts
recognized in the Nasdaq balance sheets of December 31:
Pension Benefits
2000 1999
------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 39,773 $ 33,184
Service cost 4,543 3,304
Interest cost 3,246 2,448
Actuarial losses 5,488 7,363
Benefits paid (1,988) (2,246)
(Gain) loss due to change in discount rate 2,605 (4,280)
------------------------------------
Benefit obligation at end of year $ 53,667 $ 39,773
------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 28,312 $ 22,801
Actual return on plan assets 2,058 5,276
Company contributions 3,082 2,480
Benefits paid (1,988) (2,245)
------------------------------------
Fair value of plan assets at end of year $ 31,464 $ 28,312
------------------------------------
Funded status of the plan (underfunded) $ (22,203) (11,461)
Unrecognized net actuarial gain 8,393 1,444
Unrecognized prior service cost 906 976
Unrecognized transition obligation/(asset) (390) (447)
------------------------------------
Accrued benefit cost $ (13,294) $ (9,488)
====================================
As of December 31, 2000 and 1999, $2.9 million and $2.4, respectively, of
the accrued pension liability is carried as current in the accounts payable
and accrued expenses line of the consolidated balance sheets.
Pension Benefits
2000 1999
------------------------------------
Weighted-average assumptions as of December 31
Discount rate 7.5% 8.0%
Expected return on plan assets 9.0 9.0
Rate of compensation increase 5.2 5.3
8. Employee Benefits (continued)
Pension Benefits
2000 1999 1998
-----------------------------------------------------
Components of net periodic benefit cost
Service cost $ 4,543 $ 3,304 $ 2,817
Interest cost 3,246 2,448 2,039
Expected return on plan assets (2,533) (2,261) (1,693)
Amortization of unrecognized transition asset (57) (57) (57)
Recognized net actuarial loss 145 101 65
Prior service cost recognized 131 133 131
Curtailment/settlement loss recognized 1,296 - -
-----------------------------------------------------
Benefit cost $ 6,771 $ 3,668 $ 3,302
=====================================================
Nasdaq also participates in a voluntary savings plan for eligible employees
of the NASD and its subsidiaries. Employees are immediately eligible to
make contributions to the plan and are also eligible for an employer
contribution match at an amount equal to 100% of the first 4% of eligible
employee contributions. Eligible plan participants may also receive an
additional discretionary match from Nasdaq. Savings plan expense for the
years ended December 31, 2000, 1999, 1998 was $3.7 million, $2.9 million,
and $2.0 million, respectively. The expense included a discretionary match
authorized by the NASD Board of Governors totalling $1.3 million for the
year ended December 31, 2000, $1.3 million for the year ended December 31,
1999, and $1.0 million for the year ended December 31, 1998.
In October 2000, the Nasdaq Board of Directors (the "Nasdaq Board")
approved the implementation of an equity incentive plan and an employee
stock purchase plan. The plans will be submitted to Nasdaq stockholders for
their approval. As of December 31, 2000, no grants have been made under the
plans.
9. Leases
Nasdaq leases certain office space and equipment in connection with its
operations. The majority of these leases contain escalation clauses based
on increases in property taxes and building operating costs. Certain of
these leases also contain renewal options. Rent expense for operating
leases was $9.9 million for the year ended December 31, 2000, $4.0 million
for the year ended December 31, 1999 and $1.4 million for the year ended
December 31, 1998.
Future minimum lease payments under noncancellable operating leases with
initial or remaining terms of one year or more consisted of the following
at December 31, 2000:
Year ending December 31:
2001 $ 13,455
2002 16,034
2003 16,047
2004 16,376
2005 16,234
Remaining years 126,259
--------------------
Total minimum lease payments $ 204,405
====================
Future minimum lease payments under noncancellable capital leases with
initial or remaining terms of one year or more consisted of the following
at December 31, 2000:
Year ending December 31:
2001 $ 6,462
2002 6,462
2003 3,231
2004 -
2005 -
Remaining years -
--------------------
Total minimum lease payments $ 16,155
====================
10. Warrants
In connection with the OptiMark, Inc. ("OptiMark") partnership, OptiMark
agreed to issue to Nasdaq warrants to purchase up to an aggregate of 11.25
million shares of its common stock, $0.01 par value per share. The warrants
are exercisable in several tranches upon the achievement of certain
milestones, which are based primarily upon the average daily share volume
of Nasdaq securities traded through the OptiMark Trading System. The first
milestone was the warrant commencement date, which occurred on October 11,
1999. On that date, Nasdaq received two fully exercisable warrants from
OptiMark to purchase 4.5 million shares. The first 2.25 million shares may
be purchased at an exercise price of $5.00 per share. All remaining
warrants provide that shares may be purchased at an exercise price of $7.00
per share. The warrants are exercisable through the earlier of (i) the last
day that the OptiMark System continues to be available on all Nasdaq
Workstation II workstations and (ii) the fifth anniversary of the warrant
commencement date, or October 11, 2004. As of October 11, 1999, these
warrants had a combined value of $33.5 million that is considered to be the
cost of these warrants. The deferred revenue associated with these warrants
was to be amortized into income based on share volume traded through the
OptiMark System.
In September 2000, OptiMark announced a strategic change in its business
that will allow it to focus on providing technology solutions to electronic
marketplaces. As part of the change, OptiMark decided to suspend trading
operations on the OptiMark System. As a result, Nasdaq management has
concluded that its investment in warrants in OptiMark as well as the
realization of the deferred revenue related to these warrants is impaired.
Therefore, in September 2000, Nasdaq reduced its investment in warrants and
related deferred revenue to zero. Nasdaq will monitor OptiMark's implementation
of its new business model and assess the value of the warrants at each balance
sheet date.
11. Commitments and Contingencies
In November 1997, Nasdaq entered into a $600 million six-year agreement
with WorldCom to replace the existing data network that connects the Nasdaq
market facilities to market participants. The contract contains a series of
market participant usage related guarantees. Nasdaq paid a deposit of $8
million related to the agreement. Nasdaq has guaranteed WorldCom that the
market participants will generate a minimum of $300 million in usage under
the contract from inception through November 2003. If $350 million of the
service is used, $4 million of the deposit will be returned to Nasdaq. If
$400 million of usage is achieved, the full $8 million will be returned.
Cumulative billings under the contract were $143.3 million as of December
31, 2000. As of December 31, 2000 the deposit has been fully reserved,
based on projected usage under the contract. The implementation of
SuperMontage will preclude Nasdaq from reaching the $350 million usage
level and receiving a refund of the deposit.
In October 2000, Nasdaq entered into a contract with OptiMark under which
OptiMark was engaged to provide software development services in connection
with the development of the SuperMontage system. Nasdaq will pay OptiMark
for the SuperMontage development for a period not to exceed twelve months.
Additionally, OptiMark will be entitled to receive incentive payments if it
meets certain delivery milestones agreed to in the contract. If Nasdaq uses
OptiMark's services for the full twelve months of expected development
effort and OptiMark meets all of its deliverables, then Nasdaq will be
required to pay up to $14.2 million.
Nasdaq may be subject to claims arising out of the conduct of its business.
Currently, there are certain legal proceedings pending against Nasdaq.
Management believes, based upon the opinion of counsel, that any
liabilities or settlements arising from these proceedings will not have a
material effect on the financial position or results of operations of
Nasdaq. Management is not aware of any unasserted claims or assessments
that would have a material adverse effect on the financial position and the
results of operations of Nasdaq.
12. Related Party Transactions
Related party receivables and payables are the result of various
transactions between Nasdaq and its affiliates. Payables to related parties
are comprised primarily of the regulation charge from NASDR, a wholly-owned
subsidiary of the NASD. NASDR charges Nasdaq for costs incurred related to
Nasdaq market regulation and enforcement. Support charges from the NASD to
Nasdaq represent another significant component of payables to related
parties. The support charge includes an allocation of a portion of the
NASD's administrative expenses as well as its costs incurred to develop and
maintain technology on behalf of Nasdaq. The remaining component of
payables to related parties is cash disbursements funded by the NASD on
behalf of Nasdaq.
Receivables from related parties are primarily attributable to costs
incurred by Amex and funded by Nasdaq related to various Amex technology
projects. The remaining portion of the receivable from related parties
balance is related to cash disbursements funded by Nasdaq on behalf of its
affiliates. Disbursements made by Nasdaq on behalf of affiliates relate
mainly to office supply and utility charges where Nasdaq represents the
largest portion.
Surveillance Charge from NASDR
NASDR incurs costs associated with surveillance monitoring, legal and
enforcement activities related to the regulation of Nasdaq. These costs are
charged to Nasdaq based upon the NASD management's estimated percentage of
costs incurred by each NASDR department that are attributable directly to
Nasdaq market surveillance. The following table represents Nasdaq
management's estimate of the costs charged by NASDR to Nasdaq:
December 31,
----------------------------------------------------
2000 1999 1998
-------------- --------------- ------------------
Compensation $ 32,018 $ 32,529 $ 29,894
Professional and contract services 27,110 20,000 16,193
Occupancy 399 1,687 1,945
Publications, supplies and postage 2,924 1,661 1,744
Computer ops. and data comm. 5,010 3,430 2,503
Depreciation 8,435 3,831 3,205
Travel, meetings and training 2,848 1,841 1,670
Other 1,106 150 192
----------------------------------------------------
Total $ 79,850 $ 65,129 $ 57,346
====================================================
On June 28, 2000 Nasdaq entered into a Regulatory Services Agreement with
NASDR (the "Regulatory Services Agreement"). Under the terms of this
agreement, NASDR will provide Nasdaq regulatory services and related
administrative functions necessary for NASDR's performance of such
services. Through December 31, 2000, NASDR's fees charged to Nasdaq will
reflect NASDR's cost of furnishing the services. After December 31, 2000,
pricing will be determined on a "cost-plus basis" for each service. The
initial term of the Regulatory Services Agreement expires on June 28, 2010.
Nasdaq is subject to termination fees, payable to NASDR, if it terminates
its receipt of services under the agreement for convenience.
Support Charge from the NASD
The NASD provides various administrative services to Nasdaq including legal
assistance, accounting and managerial services. It is the NASD's policy to
charge these expenses and other operating costs to Nasdaq based upon usage
percentages determined by management of the NASD and Nasdaq. Additionally,
the NASD incurs certain costs related to the development and maintenance of
technology for Nasdaq. Technology development costs are allocated directly
to Nasdaq based upon specific projects requested by Nasdaq. Technology
maintenance costs are allocated based upon Nasdaq's share of computer
usage. The following table represents Nasdaq management's estimate of the
composition of costs charged by the NASD to Nasdaq:
December 31,
----------------------------------------------------
2000 1999 1998
--------------- -------------- ------------------
Compensation $ 25,899 $ 25,956 $ 25,942
Professional and contract services 9,986 16,671 7,784
Occupancy 9,576 4,637 5,212
Publications, supplies and postage 1,544 2,295 2,368
Computer ops. and data comm. 1,500 5,243 4,145
Depreciation 2,894 6,514 5,335
Travel, meetings and training 1,504 2,020 1,551
Other 701 759 267
----------------------------------------------------
Total $ 53,604 $ 64,095 $ 52,604
====================================================
On June 28, 2000 Nasdaq entered into a Separation and Common Services
Agreement with the NASD (the "NASD Separation Agreement"). Under the terms
of this agreement, the NASD will provide Nasdaq the same administrative,
corporate and infrastructure services it currently provides. The rates and
methodology to be used in determining the cost of such services will be
consistent with past practices. Nasdaq intends to develop its internal
capabilities in the future in order to reduce its reliance on the NASD for
such services. In addition, Nasdaq will provide the NASD continued access
to such Nasdaq technology as the NASD requires to satisfy its obligation to
Amex under the transaction agreement between the NASD and Amex in
connection with the NASD's 1998 acquisition of Amex. Nasdaq will also
continue to provide all services it currently provides to Amex. Nasdaq's
costs for rendering such access and services will be recoverable from the
NASD. Nasdaq and the NASD are negotiating a more detailed "Master
Agreement" to supersede the NASD Separation Agreement that expires December
31, 2001. If such a Master Agreement is not executed prior to January 1,
2002, the NASD Separation Agreement automatically renews for an additional
12 months.
Nasdaq Charge to the American Stock Exchange LLC ("Amex")
Nasdaq incurs technology costs on behalf of Amex related to development of
new Amex systems and enhancement of existing Amex systems. Additionally,
Nasdaq incurs certain operating costs such as marketing on behalf of Amex.
Amounts are charged based upon specific projects requested by Amex. Amounts
charged from Nasdaq to Amex are included in support costs from related
parties and are summarized as follows:
December 31,
------------------------------------------------------
2000 1999 1998
--------------- --------------- -----------------
Compensation $ 345 $ 600 $ 1,128
Professional and contract services 4,389 13,090 7,334
Publications, supplies and postage 11 19 35
Other 187 326 612
-------------------------------------------------------
Total $ 4,932 $ 14,035 $ 9,109
=======================================================
In the opinion of management, all methods of cost allocation described
above are reasonable for the services rendered.
13. Capital Stock and Earnings Per Share
Each share of Common Stock has one vote, except that any person, other than
the NASD or any other person as may be approved for such exemption by the
Nasdaq Board prior to the time such person owns more than 5% of the
then-outstanding shares of Common Stock, who would otherwise be entitled to
exercise voting rights in respect of more than 5% of the then-outstanding
shares of Common Stock will be unable to exercise voting rights for any
shares in excess of 5% of the then-outstanding shares of Common Stock. In
connection with Phase I of the Restructuring, the NASD sold approximately
6,415,649 warrants to purchase up to an aggregate of 25,662,596 outstanding
shares of Common Stock owned by the NASD. The voting rights associated with
the shares of Common Stock underlying the warrants, as well as the shares
of Common Stock purchased through the valid exercise of warrants, will be
governed by the voting trust agreement (the "Voting Trust Agreement")
entered into by the NASD, Nasdaq and The Bank of New York, as voting
trustee (the "Voting Trustee"). Initially, the holders of the warrants
(each, a "Warrant Holder" and, collectively, the "Warrant Holders") will
not have any voting rights with respect to the shares of Common Stock
underlying such warrants. Until Nasdaq becomes registered with the
Securities and Exchange Commission as a national securities exchange
("Exchange Registration"), the shares of Common Stock underlying
unexercised and unexpired warrant tranches, as well as the shares of Common
Stock purchased through the exercise of warrants, will be voted by the
Voting Trustee at the direction of the NASD. The voting rights associated
with the shares of Common Stock underlying unexercised and expired warrant
tranches will revert to the NASD. However, the NASD has determined,
commencing upon Exchange Registration, to vote its shares of Common Stock
(other than shares underlying then outstanding warrants) in the same
proportion as the other stockholders of Nasdaq. Upon Exchange Registration,
the Warrant Holders will have the right to direct the Voting Trustee as to
the voting of the shares of Common Stock underlying unexercised and
unexpired warrant tranches until the earlier of the exercise or the
expiration of such warrant tranches. The shares of Common Stock purchased
upon a valid exercise of a warrant tranche prior to Exchange Registration
will be released from the Voting Trust Agreement upon Exchange
Registration. The shares of Common Stock purchased upon a valid exercise of
a warrant tranche after Exchange Registration will not be subject to the
Voting Trust Agreement.
There are 30,000,000 shares of preferred stock authorized, and none issued
and outstanding.
The following table sets forth the computation of basic earnings per share.
December 31,
----------------------------------------------------
2000 1999 1998
---------------- --------------- --------------
Numerator for basic earnings per share $ 150,127 $ 86,149 $ 34,955
Denominator for basic weighted average shares 112,090,493 100,000,000 100,000,000
Basic earnings per share $ 1.34 $ 0.86 $ 0.35
Diluted earnings per share are the same as basic earnings per share for all
periods presented, as there were no dilutive potential common shares
outstanding during the periods presented.
14. Subsequent Events (Unaudited)
Phase II Private Placement
Phase II closed on January 18, 2001 with Nasdaq selling approximately 5.0
million shares, yielding net proceeds of approximately $63.7 million. As of
May 4, 2001, the NASD owns approximately 70% of Nasdaq. On a fully-diluted
basis, the NASD's ownership would be decreased to approximately 28%.
Nasdaq Europe S.A./N.V.
On March 27, 2001, Nasdaq acquired a majority ownership interest in the
European Association of Securities Dealers Automated Quotation S.A./N.V.
("EASDAQ"), a Belgium-based, pan-European stock exchange for $12.5 million.
Nasdaq plans to restructure the company into a globally linked,
pan-European market and rename it Nasdaq Europe S.A./N.V.
Nasdaq's acquisition has been accounted for under the purchase method of
accounting, resulting in the recording of goodwill of approximately $4.9
million.
Hellman & Friedman
On May 3, 2001, Nasdaq issued and sold $240.0 million in aggregate
principal amount of its 4% convertible subordinated debentures due 2006
(the "Subordinated Debentures") to Hellman & Friedman Capital Partners IV,
L.P. and certain of its affiliated limited partnerships (collectively,
"Hellman & Friedman"). The annual 4% coupon will be payable in arrears in
cash and the Subordinated Debentures will be convertible at any time into
shares of Common Stock at $20.00 per share, subject to adjustment.
On a fully diluted basis, Hellman & Freidman owns an approximate 9.8%
equity interest in Nasdaq. Nasdaq has agreed to use its best efforts to
seek stockholder approval of a charter amendment that would provide for
voting debt in order to permit Hellman & Friedman to vote on an
as-converted basis on all matters on which common stockholders have the
right to vote, subject to the current five percent voting limitation in
Nasdaq's Restated Certificate of Incorporation (the "Certificate of
Incorporation"). Nasdaq has granted Hellman & Friedman certain registration
rights with respect to the shares of Common Stock underlying the
Subordinated Debentures. Additionally, Hellman & Friedman will be permitted
to designate one person reasonably acceptable to Nasdaq for nomination as a
director of Nasdaq for so long as Hellman & Friedman owns Subordinated
Debentures and/or shares of Common Stock issued upon conversion
representing at least 50% of the shares of Common Stock issuable upon
conversion of the Subordinated Debentures initially purchased.
On May 3, 2001, Nasdaq used the net proceeds from the sale of the
Subordinated Debentures to purchase 18,461,538 shares of Common Stock from
the NASD for $13 per share or an aggregate purchase price of $239,999,994.
LIFFE
On June 1, 2001, Nasdaq and the London International Financial Futures and
Options Exchange ("LIFFE") formed Nasdaq LIFFE, LLC, a new U.S. joint
venture company to list and trade single stock futures. The products of
this joint venture are expected to be traded through a modified version of
the LIFFE CONNECT(TM) electronic system. Nasdaq has committed up to $15
million plus the rights to use certain trademarks in this venture.
Nasdaq Europe Planning Company Limited
In February and March 2001, Nasdaq repurchased the ownership interests of
certain minority shareholders in Nasdaq Europe Planning Company Limited for
a total of $20 million.
Stock-Based Awards to Officers and Employees
As of February 14, 2001 Nasdaq granted 9.6 million stock options and
approximately 534,000 shares of restricted stock to certain employees and
officers pursuant to its Equity Incentive Plan. Under this plan, Nasdaq grants
stock options with an exercise price equal to the fair market value of the
stock at the date of the grant. Nasdaq accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") and accordingly, recognizes no
compensation expense related to such grants.
Restricted stock awards are awarded in the name of the employee or officer
at fair value at the date of the grant. The awards contain restrictions on
sales and transfers, and are subject to a five-year vesting period. The
534,000 shares of restricted stock were awarded at a fair value of $13.00
per share, and are being expensed over the vesting period.
EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of The Nasdaq Stock Market,
Inc.(+)
3.2 By-Laws of The Nasdaq Stock Market, Inc.(+)
4.1 Form of Common Stock certificate.(+)
7A Qualitative Disclosure about market risk (incorporated herein by
reference to "Item 2. Financial Information" of this Form 10).
9.1 Voting Trust Agreement dated June 28, 2000, among The Nasdaq Stock
Market, Inc., the National Association of Securities Dealers, Inc.
and The Bank of New York.(+)
9.2 First Amendment to the Voting Trust Agreement, dated as of January
18, 2001, among The Nasdaq Stock Market, Inc., the National
Association of Securities Dealers, Inc. and The Bank of New York.(+)
10.1 Network Service Agreement, dated November 19, 1997, between MCI
Telecommunications Corporation and The Nasdaq Stock Market, Inc.*(+)
10.2 Consolidated Agreement, between Unisys Corporation and The Nasdaq
Stock Market, Inc.*(+)
10.3 Network User License Agreement, dated November 30, 1993, between
Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.4 Software License and Services Agreement, dated November 31, 1993,
between Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.5 Regulatory Services Agreement, dated June 28, 2000, between NASD
Regulation, Inc. and The Nasdaq Stock Market, Inc.*(+)
10.6 Separation and Common Services Agreement, dated as of June 28, 2000,
between the National Association of Securities Dealers, Inc. and
The Nasdaq Stock Market, Inc.(+)
10.7 The Nasdaq Stock Market, Inc. Employee Stock Purchase Plan.(+)
10.8 The Nasdaq Stock Market, Inc. Equity Incentive Plan.(+)
10.9 Securities Purchase Agreement, dated as of March 23, 2001, among The
Nasdaq Stock Market, Inc., Hellman & Friedman Capital Partners IV,
L.P. and the other purchasers listed in the signature pages
thereto.(+)
10.9.1 Securityholders Agreement, dated as of May 3, 2001, among The Nasdaq
Stock Market, Inc., Hellman & Friedman Capital Partners IV, L.P.,
and the other securityholders listed on the signature pages
thereto.(^)
10.10 Purchase and Sale Agreement, dated March 23, 2001, by and between the
National Association of Securities Dealers, Inc. and The Nasdaq Stock
Market, Inc.(+)
10.11 Employment Agreement between the National Association of Securities
Dealers, Inc. and Frank G. Zarb effective on February 24, 1997.(+)
10.12 Instrument of Amendment, dated March 18, 1998, to Employment Agreement
between National Association of Securities Dealers, Inc. and Frank G.
Zarb, effective on February 24, 1997.(+)
10.13 Instrument of Amendment, dated as of August 20, 1999, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998.(+)
10.14 Instrument of Amendment, dated March 30, 2000, to Employment
Agreement between National Association of Securities Dealers, Inc.
and Frank G. Zarb, effective on February 24, 1997, as amended
effective March 18, 1998, and subsequently amended in May,
1999.(+)
10.15 Instrument of Amendment, effective as of July 27, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000.(+)
10.16 Instrument of Amendment, effective as of November 1, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000, and as of
July 27, 2000.(+)
10.17 Instrument of Amendment, effective as of April 25, 2001, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as subsequently amended effective March 18, 1998, August 20, 1999,
March 30, 2000, July 27, 2000 and November 1, 2000.(+)
10.18 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and J. Patrick Campbell, effective as of December 29, 2000.(+)
10.19 Employment Agreement by The Nasdaq Stock Market, Inc. and John L.
Hilley, effective as of December 29, 2000.(+)
10.20 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Richard G. Ketchum, effective as of December 29, 2000.(+)
10.21 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Hardwick Simmons, dated as of January 31, 2001.(+)
11 Statement regarding computation of per share earnings (incorporated
herein by reference to "Item 2. Financial Information" of this
Form 10).
12 Computations of ratios (not applicable).
21.1 List of all subsidiaries.(+)
* Confidential treatment has been requested from the Securities and
Exchange Commission for certain portions of this exhibit.
(+) Previously filed with The Nasdaq Stock Market, Inc.'s Registration
Statement on Form 10 (file number 000-32651) filed on April 30, 2001.
(^) Previously filed with The Nasdaq Stock Market, Inc.'s Amendment No. 1
to Registration Statement on Form 10 (file number 000-32651) filed
on May 14, 2001.
