As filed with the Securities and Exchange Commission on August 31, 2001
File No. 000-32651
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
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 Incorporation or (I.R.S. Employer
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)
TABLE OF CONTENTS
Page
----
Item 1. Business.......................................................1
Item 2. Financial Information.........................................35
Item 3. Properties....................................................51
Item 4. Security Ownership of Certain Beneficial Owners
and Management................................................51
Item 5. Directors and Executive Officers..............................54
Item 6. Executive Compensation........................................58
Item 7. Certain Relationships and Related Transactions................58
Item 8. Legal Proceedings.............................................60
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters.................60
Item 10. Recent Sales of Unregistered Securities.......................61
Item 11. Description of Registrant's Securities to be Registered.......61
Item 12. Indemnification of Directors and Officers.....................65
Item 13. Financial Statements and Supplementary Data...................65
Item 14. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................67
Item 15. Financial Statements and Exhibits.............................67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................F-1
Certain statements in this registration statement (the "Registration
Statement") contain or may contain forward-looking statements that are
subject to known and unknown risks, uncertainties and other factors which
may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing
numerous assumptions and other factors that could cause actual results to
differ materially from those in the forward-looking statements. These
factors include, but are not limited to, The Nasdaq Stock Market, Inc.'s
("Nasdaq") ability to implement its strategic initiatives, economic,
political and market conditions and fluctuations, government and industry
regulation, interest rate risk, U.S. and global competition, and other
factors. Most of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk
described in connection with any forward-looking statements that may be
made herein. Readers should carefully review this Registration Statement in
its entirety, including but not limited to Nasdaq's financial statements
and the notes thereto and the risks described in "Item 1. Business-Risk
Factors." Except for Nasdaq's ongoing obligations to disclose material
information under the Federal securities laws, Nasdaq undertakes no
obligation to release publicly any revisions to any forward-looking
statements, to report events or to report the occurrence of unanticipated
events. For any forward-looking statements contained in any document,
Nasdaq claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995.
Item 1 Business.
Nasdaq Overview
The Nasdaq Stock Market(R) 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 democratize and extend the reach of 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, issuer services
accounted for revenues of $149.3 million, which represented
approximately 17.9% of Nasdaq's total revenues. For the six
months ended June 30, 2001, issuer services accounted for
revenues of $77.1 million, which represented approximately
17.4% 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.
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 47.4% of Nasdaq's
total revenues. For the six months ended June 30, 2001,
transaction services accounted for revenues of $221.2
million, which represented approximately 49.8% 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 31.0% of Nasdaq's total revenues. For the six
months ended June 30, 2001, market information services
accounted for revenues of $118.7 million, which represented
approximately 26.7% 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 table illustrates the significant business growth
Nasdaq has experienced:
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 0.5 billion 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 pro forma total revenues
increased from $305.0 million in 1996 to $832.7 million in 2000. During the
same period, Nasdaq's pro forma net income increased from $24.1 million in
1996 to $124.4 million in 2000. For the six months ended June 30, 2001,
Nasdaq's total revenues were $444.1 million and net income was $45.8
million. Pro forma amounts assume the change in accounting principle
adopted as of January 1, 2000 is applied retroactively. See "Item 2.
Financial Information--Selected Consolidated Financial Data", "-
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Consolidated Financial Statements--Note 4."
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, 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 "--Products and Services-Transaction Services-Access
Services." Market participants can access the network via the Nasdaq
Workstation II, Nasdaq's proprietary operating system for the network, or
through other customized operating systems. See "--Products and
Services-Transaction Services-Access Services."
Market makers, also known as dealers, provide liquidity (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 includes
other brokerage firms operating as ECNs. ECNs provide electronic facilities
for investors to trade directly with each other without going through a
market maker. ECNs operate as order-matching and order-routing mechanisms
and do not maintain inventories of securities themselves. Nasdaq also
connects to other registered exchanges through SelectNet(R), SOES(sm) and
SuperSoes(sm) (each as described below) for Nasdaq-listed stocks and
through the Intermarket Trading System for exchange-listed stocks. 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.
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 to help them compete and allows
them to 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
Restructuring." 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 filed an application with
the SEC to become registered as a national securities exchange ("Exchange
Registration"). 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 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 assist in the
quotation and transaction reporting of exchange-listed securities. As a
result, the SEC's present position appears to be that the NASD may have to
have a quotation and transaction reporting facility for securities listed
on Nasdaq, the New York Stock Exchange, Inc. (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 of 1934, as
amended (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. 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 other strategic partnerships.
In April 2001, the Nasdaq Board of Directors (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
Traditional stock exchanges, such as the NYSE, require that 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 any one of 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; however, Nasdaq's quote montage is
available to the public. As a fully electronic market, Nasdaq itself does
not have a central trading floor.
In addition to the NYSE's 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 are generally routed electronically 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 in regional
or national alliances. A number of regional stock exchanges still survive
albeit in different form. Some of these exchanges have a few exclusive
"local" stocks, but most 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 ended 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 have resulted in greater competition in the 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 venue 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. For the first six months of 2001, ECNs
accounted for approximately 29% of the total Nasdaq trade volume and
approximately 35% 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. 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 all the
exchanges and Nasdaq (acting under the Delegation Plan) for most equity
securities. 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.
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 the Intermarket Trading System, which 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.
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%
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 have
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 and 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 and 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 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, as summarized below, for initial listing on The Nasdaq
National Market and must meet at least one continued listing standard below
to maintain its listing:
-------------------------------------------------------------------------------------------------------------
Initial Listing Continued Listing
-------------------------------------------------------------------------------------------------------------
Requirements Standard 1 Standard 2 Standard 3 Standard 1 Standard 2
-------------------------------------------------------------------------------------------------------------
Stockholders' Equity $15 million $30 million N/A $10 million N/A
-------------------------------------------------------------------------------------------------------------
Market Capitalization N/A N/A $75 million N/A $50 million
or or
Total Assets
$75 million $50 million
and and
Total Revenue
$75 million $50 million
-------------------------------------------------------------------------------------------------------------
Pretax Income (in $1 million N/A N/A N/A N/A
latest year or 2 of
last 3 years)
-------------------------------------------------------------------------------------------------------------
Public Float (shares) 1.1 million 1.1 million 1.1 million 0.75 million 1.1 million
-------------------------------------------------------------------------------------------------------------
Operating History N/A 2 years N/A N/A N/A
-------------------------------------------------------------------------------------------------------------
Market Value of Public $8 million $18 million $20 million $5 million $15 million
Float
-------------------------------------------------------------------------------------------------------------
Minimum Bid Price $5 $5 $5 $1 $3
-------------------------------------------------------------------------------------------------------------
Shareholders (round 400 400 400 400 400
lot holders)
-------------------------------------------------------------------------------------------------------------
Market Makers 3 3 4 2 4
-------------------------------------------------------------------------------------------------------------
Corporate Governance Yes Yes Yes Yes Yes
-------------------------------------------------------------------------------------------------------------
For initial and continued listing on The Nasdaq SmallCap Market, a company
must meet the list of requirements summarized below:
--------------------------------------------------------------------------------------------------
Requirements Initial Listing Continued Listing
--------------------------------------------------------------------------------------------------
Stockholders' Equity $5 million $2.5 million
or or
Market Capitalization $50 million $35 million
or or
Net Income (in last fiscal year or 2 of last 3 fiscal $0.75 million $0.5 million
years)
--------------------------------------------------------------------------------------------------
Public Float (shares) 1 million 0.5 million
--------------------------------------------------------------------------------------------------
Market Value of Public Float $5 million $1 million
--------------------------------------------------------------------------------------------------
Minimum Bid Price $4 $1
--------------------------------------------------------------------------------------------------
Shareholders (round lot holders) 300 300
--------------------------------------------------------------------------------------------------
Operating History 1 year N/A
or
Market Capitalization $50 million
--------------------------------------------------------------------------------------------------
Market Makers 3 2
--------------------------------------------------------------------------------------------------
Corporate Governance Yes Yes
--------------------------------------------------------------------------------------------------
As used in the tables above, "Public Float" 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, and "Shareholders" is defined as a holder of 100 shares or
more.
Nasdaq charges issuers an initial listing fee, a listing of additional
shares ("LAS") 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. The estimated service period for initial listing
fees is six years. For the years ended December 31, 2000, 1999 and 1998,
Nasdaq's revenues from initial listing fees were $33.9 million, $27.4
million and $23.8 million, respectively. Revenue figures for 1999 and 1998
are pro forma, assuming a retroactive application of the 2000 change in
accounting principle. See "Item 2. Financial Information--Selected
Consolidated Financial Data," "-- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Consolidated Financial
Statements--Note 4." Nasdaq's initial listing fee revenues accounted for
approximately 4.1% of Nasdaq's total revenues for the year ended December
31, 2000. For the six months ended June 30, 2001, Nasdaq's initial listing
fee revenues were $18.0 million, which accounted for approximately 4.1% of
Nasdaq's total revenues for the period.
The fee for LAS is based on the total shares outstanding, which Nasdaq reviews
quarterly. The current fee is $2,000 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. The estimated service period for LAS fees is four years. For the
years ended December 31, 2000, 1999 and 1998, Nasdaq's revenues from LAS fees
were $33.6 million, $30.0 million and $28.1 million, respectively. Revenue
figures for 1999 and 1998 are pro forma, assuming a retroactive application of
the 2000 change in accounting principle. See "Item 2. Financial
Information--Selected Consolidated Financial Data," "--Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements Note 4." Nasdaq's LAS fee revenues
accounted for approximately 4.0% of Nasdaq's total revenues for the year ended
December 31, 2000. For the six months ended June 30, 2001, Nasdaq's LAS fee
revenues were $17.7 million, which accounted for approximately 4.0% of
Nasdaq's total revenues for the period.
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 class of securities and $1,000 for each additional class of
securities. For the years ended December 31, 2000, 1999 and 1998, Nasdaq's
revenues from all annual listing and other issuer services fees were $81.8
million, $78.9 million and $79.3 million, respectively. Nasdaq's annual
listing fees and other issuer services revenues accounted for approximately
9.8% of Nasdaq's total revenues for the year ended December 31, 2000. For
the six months ended June 30, 2001, Nasdaq's annual listing fees and other
issuer services revenues were $41.3 million, which accounted for
approximately 9.3% of Nasdaq's total revenues for the period.
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. A schedule of calls
and visits along with invitations to 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 $149.3 million, $136.4 million and
$131.3 million, respectively. Issuer services accounted for approximately
17.9% of Nasdaq's total revenues for the year ended December 31, 2000.
Revenue figures for 1999 and 1998 are pro forma, assuming the retroactive
application of the 2000 change in accounting principle. See "Item 2.
Financial Information--Selected Consolidated Financial Data", "--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Consolidated Financial Statements Note 4." For the six months ended
June 30, 2001, issuer services revenues were $77.1 million, which accounted
for approximately 17.4% of Nasdaq's total revenues for the period.
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
the one 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.
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 and from 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 systems that
provide for order routing and/or execution:
o The Nasdaq National Market Execution System (also known
as "SuperSoes(sm)") is a new, 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 that occurred
previously (as described below) 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:
o $0.50 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 an 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 are now prohibited from sending
each other SelectNet messages that obligate the receiving
party to a trade. However, market makers that wish to
trade with ECNs still have the ability to send SelectNet
order messages that require an agreement to trade from
the ECN using SelectNet prior to execution of the trade.
ECNs 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 13.6% of Nasdaq's total
revenues for the year ended December 31, 2000. For the
six months ended June 30, 2001, Nasdaq's total revenues
from SelectNet were $63.6 million, which accounted for
approximately 14.3% of Nasdaq's total revenues for the
period.
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:
o $0.50 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 3.9% of Nasdaq's total
revenues for the year ended December 31, 2000 and
approximately 4.3% of Nasdaq's total revenues for the six
months ended June 30, 2001.
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
2.1% of Nasdaq's total revenues for the year ended
December 31, 2000 and approximately 1.0% of Nasdaq's
total revenues for the six months ended June 30, 2001.
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 both the year ended
December 31, 2000 and for the six months ended June 30,
2001.
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 12.0% of Nasdaq's total revenues for the
year ended December 31, 2000. For the six months ended June 30, 2001,
Nasdaq's total revenues from ACT were $47.0 million, which accounted for
approximately 10.6% of Nasdaq's total revenues for the period.
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 are 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, ECNs 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 $121.6 million, $87.6 million and $49.3 million,
respectively. Nasdaq Workstation II fees accounted for approximately 14.6%
of Nasdaq's total revenues for the year ended December 31, 2000. For the
six months ended June 30, 2001, Nasdaq's total revenues from Nasdaq
Workstation II were $74.7 million, which accounted for approximately 16.8%
of Nasdaq's total revenues for the period.
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 on 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 47.4% of Nasdaq's total revenues for the year ended December
31, 2000. For the six months ended June 30, 2001, Nasdaq's total revenues
from transaction services were $221.2 million, which accounted for
approximately 49.8% of Nasdaq's total revenues for the period.
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 19.2% of Nasdaq's total revenues for the year ended
December 31, 2000. For the six months ended June 30, 2001, Nasdaq's total
revenues from Level 1 were $71.4 million, which accounted for approximately
16.1% of Nasdaq's total revenues for the period.
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 9.0% of
Nasdaq's total revenue for the year ended December 31, 2000. For the six
months ended June 30, 2001, Nasdaq's total revenues from Nasdaq's Quotation
Dissemination Service fees were $29.8 million, which accounted for
approximately 6.7% of Nasdaq's total revenues for the period.
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 in order to increase information availability
and thus create the opportunity for a more transparent 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 SIP. 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 that help to cover its expenses. 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 31.0% of Nasdaq's total revenues for the year
ended December 31, 2000. For the six months ended June 30, 2001, Nasdaq's
total revenues from market information services were $118.7 million, which
accounted for approximately 26.7% of Nasdaq's total revenues for the
period.
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 2.6% of
Nasdaq's total revenues for the year ended December 31, 2000 and
approximately 3.4% of Nasdaq's total revenues for the six months ended June
30, 2001. Approximately 90% of the revenues generated from the Nasdaq
InterMarket are derived from the sale of data and are reflected in market
information services revenues, and the remaining amount is derived from
transaction service fees.
For the six months ended June 30, 2001, Nasdaq InterMarket accounted for
approximately 7% of trades in stocks listed on the NYSE and approximately
28% 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 a 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 traded on the OTC Bulletin Board. The OTC Bulletin
Board revenues accounted for less than 1% of Nasdaq's total revenues for
both the year ended December 31, 2000 and for the six months ended June 30,
2001. Revenues generated from the OTC Bulletin Board are included in
transaction services revenues.
Last year, in conjunction with Exchange Registration, 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 the 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,
creating a market for listing and trading single stock futures, and
pursuing global market expansion through the creation of Nasdaq Japan, Inc.
("Nasdaq Japan") and Nasdaq Europe S.A./N.V. ("Nasdaq Europe") and
exploring alliances with foreign exchanges.
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. 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, thus increasing competition and
market transparency. SuperMontage also will provide pre-trade anonymity to
market participants using a Nasdaq system, i.e., 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 others.
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 SuperSoes
automatic execution.
In the January 10, 2001 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 require 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 and
show the top three price levels in any quoted security: 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 will
display the aggregate trading interest in a security at the top of the
screen by aggregating the trading interest of all identified market
participants and any anonymous interest, 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 to 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. On August 21, 2001, the Commodity Futures
Trading Commission approved Nasdaq LIFFE as a futures market and SRO.
Established in 1982, LIFFE is an electronic exchange that enables its users
to manage their exposure 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.
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 "open architecture" of its trading
platform, including unlimited electronic access, has led to the
"democratization" of equity markets in the United States (approximately 50%
of U.S. citizens directly or indirectly own stocks vs. approximately 18% in
Europe and approximately 15% in Japan) and can do the same abroad. Nasdaq
also believes that the foundation to create a global market 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 Asia,
particularly Japan. Establishing centers for price discovery and trading in
these key regions will develop the foundation for electronically linking
these pools of capital within a global platform. Senior officers of Nasdaq
have conducted exploratory discussions with a number of major U.S. and
foreign securities exchanges, regarding inter-exchange 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, 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 provided 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 the 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 a SuperMontage-like trading platform 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 during 2001. As a
start-up operation, Nasdaq Japan has had only operating losses since its
inception. Through the second quarter of 2001, Nasdaq and SOFTBANK had each
made capital contributions of approximately $2.6 million to Nasdaq Japan.
In July 2001, the Nasdaq Board approved an additional $8.0 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% stake for
approximately $48.0 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%. 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 was a pan-European stock market
for emerging growth companies and was headquartered in Brussels. Pursuant
to the investment agreement with EASDAQ, Nasdaq obtained the right to
appoint a majority of EASDAQ's board of directors and granted EASDAQ a loan
in the amount of approximately $2.6 million. In connection with this
investment Nasdaq also restructured EASDAQ into Nasdaq Europe with the goal
to make Nasdaq Europe a globally linked pan-European market. Nasdaq has
granted Nasdaq Europe a free non-exclusive license to use the Nasdaq
trademark and brand name.
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 8.7% ownership stake in Nasdaq Europe
through its earlier investment in EASDAQ. As of June 30, 2001, Nasdaq's
ownership stake in Nasdaq Europe was 52.8%. Nasdaq expects additional
investors in Nasdaq Europe.
Nasdaq Europe 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 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 Canadian broker-dealers, 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 state-of-the-art 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 qualified
investors 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" that 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 with SSI Ltd. of
India, was established in May 2000. Nasdaq Global currently has a 55%
interest in the venture, which will create market platforms 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 new product and/or system ideas 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 are intensely competitive and they are expected to
remain so. Nasdaq competes globally and on a product and/or specific
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 global pools of capital and 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.
Nevertheless, most of Nasdaq's competitors overseas are currently larger
and have a longer operating history in their markets than does Nasdaq.
In light of recent technological and regulatory changes and new product
introductions, 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 building global brand identity, developing
joint marketing opportunities with listed companies, better communication
with key decision makers, and providing other 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.
In terms of obtaining new listings, Nasdaq will continue to focus its
efforts primarily on growth companies. Over the last 12 -14 months, general
market and economic conditions have made it difficult for many companies to
access the public equity markets. Nevertheless, Nasdaq believes that its
market model, strong global reputation 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 larger company 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 $3.1 trillion compared to 2,814 companies listed on the
NYSE with an aggregate domestic market capitalization of $12.3 trillion.
This playing field has never been even as 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 amended, 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, 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:
o Competing stock exchanges or network providers that develop ways
to effectively replicate Nasdaq's network and offer quote,
execution and reporting services at a lower cost and/or a greater
speed and 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, 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, and will add to that Primex, a new price improvement system, and
the introduction of SuperMontage. Nasdaq has also commenced operations in
Europe and Japan to extend the benefits of its information and trading
platform 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 an order entry firm by 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, as participants tend
to seek the market with greatest liquidity. 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. Nonetheless, there is potential
for a significant erosion in Nasdaq's market share of trading activity and
the related market information services revenue if new exchanges arise.
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 addition, these competitors would have to establish a
regulatory structure to ensure the quality of data and support their
responsibility of being SROs. 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 related 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 June 30, 2001, Nasdaq had approximately 1,200 employees. In
connection with efforts to maximize revenues, reduce costs and improve
organizational efficiency, Nasdaq implemented an approximate 10% 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 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 $11.00 per share for an aggregate consideration
of $260,301,206. The NASD sold an aggregate of 6,415,649 warrants to
purchase an aggregate amount of 25,662,596 shares of Common Stock at $11.00
per warrant and an aggregate of 323,496 shares of Common Stock owned by the
NASD at $11.00 per share for an aggregate consideration of $74,130,595.
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 $13.00 per
share for an aggregate consideration of $65,374,361. The NASD sold an
aggregate of 4,391,145 warrants to purchase an aggregate amount of
17,564,580 shares of Common Stock at $14.00 per warrant and an aggregate of
4,219,795 shares of Common Stock owned by the NASD at $13.00 per share for
an aggregate consideration of $116,333,365.
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 regulate the markets more effectively
and efficiently.
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 discipling 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 will perform substantially the same
type and scope of regulatory functions as those NASDR performs for Nasdaq
now prior to Exchange Registration. 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
will perform automated surveillance of trading on the markets operated by
Nasdaq and review 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 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 ability to provide an alternative
facility to NASD members to assist in the quotation and transaction
reporting of exchange-listed securities. As a result, the SEC's present
position appears to be that the NASD may have to have a quotation and
transaction reporting facility for securities listed on Nasdaq, the NYSE
and Amex 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 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. 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 $240.0 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 Subordinated Debentures are convertible at any time into an
aggregate of 12 million shares of Common Stock, reflecting a conversion price
of $20.00 per share, subject to adjustment. Hellman & Friedman owns
approximately 9.8% 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 5% 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 5% 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, Hellman & Friedman
is 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. Effective May
3, 2001, 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 $13.00 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
delisted 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 52.0% 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 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 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--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 July 31, 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, nine of the 18 members of the Nasdaq Board are
currently 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 commencing upon the effectiveness of
Exchange Registration. The NASDR will continue regulating trading activity
on Nasdaq under a 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 performs under the 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 its approval of
Exchange Registration is linked to the NASD's ability to provide an
alternative facility to NASD members to assist in the quotation and
transaction reporting of 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 5% 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, Six Months Ended
June 30,
Statements of Income Date: 1996 1997 1998 1999 2000 2000 2001
------------- ------------ ------------ ------------ -------------- ----------- -----------
(in thousands, except share and per share data and number of listed companies)
(Restated) (Restated)
Revenues:
Transaction services $118,500 $174,741 $ 160,506 $283,652 $395,123 $199,948 $221,192
Market information services 99,446 126,436 152,665 186,543 258,251 134,641 118,670
Issuer services 111,832 113,019 137,344 163,425 149,297 71,029 77,085
Other 2,452 2,530 308 628 30,040 12,901 27,126
------------- ------------ ------------ ------------ -------------- ----------- -----------
Total revenues 332,230 416,726 450,823 634,248 832,711 418,519 444,073
Expenses:
Compensation and benefits 54,080 64,324 78,565 98,129 137,284 62,122 85,809
Marketing and advertising 34,356 53,817 42,483 62,790 45,908 22,873 11,649
Depreciation and amortization 24,405 31,336 34,984 43,696 65,645 28,538 42,664
Professional and contract services 17,233 22,259 35,127 35,282 61,483 21,198 31,566
Computer operations and data
communications 45,757 61,438 72,111 100,493 138,228 61,839 87,948
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 8,002 13,462
Publications, supplies, and postage 4,512 5,223 5,208 4,670 7,181 - -
Other 8,995 13,763 14,742 22,666 25,561 13,608 44,440
------------- ------------ ------------ ------------ -------------- ----------- -----------
Total direct expenses 200,265 264,353 296,324 384,547 508,169 218,180 317,538
Support cost from related parties, net 70,293 85,880 100,841 115,189 128,522 52,797 51,708
------------- ------------ ------------ ------------ -------------- ----------- -----------
Total expenses 270,558 350,233 397,165 499,736 636,691 270,977 369,246
Net operating income 61,672 66,493 53,658 134,512 196,020 147,542 74,827
Interest income 6,341 7,522 9,269 12,201 20,111 5,405 9,977
Interest expense (136) (797) (1,962) (2,143) (2,130) (959) (2,450)
Provision for income taxes (27,522) (33,187) (26,010) (58,421) (90,477) (60,339) (38,561)
Minority interests - - - - 872 - 1,982
------------- ------------ ------------ ------------ -------------- ----------- -----------
Income before cumulative effect of
change in accounting principle 40,355 40,031 34,955 86,149 124,396 91,649 45,775
Cumulative effect of change in
accounting principle - - - - (101,090) (101,090) -
------------- ------------ ------------ ------------ -------------- ----------- -----------
Net income (loss) $40,355 $40,031 $34,955 $86,149 $23,306 $ (9,441) $45,775
============= ============ ============ ============ ============== =========== ===========
Weighted average common shares
outstanding (1) 100,000,000 100,000,000 100,000,000 100,000,000 112,090,493 100,390,062 122,304,373
Basic and diluted earnings (loss)
per share:
Before cumulative effect of
change in accounting principle $0.40 $0.40 $0.35 $0.86 $1.11 $0.91 $ 0.37
------------- ------------ ------------ ------------ -------------- ----------- -----------
Cumulative effect of change in
accounting principle - - - - (0.90) (1.01) -
------------- ------------ ------------ ------------ -------------- ----------- -----------
Net income (loss) $0.40 $0.40 $0.35 $0.86 $0.21 $(0.09) $0.37
============= ============ ============ ============ ============== =========== ===========
Pro forma amounts assuming the change
in accounting principle is
applied retroactively:
Total revenues $305,041 $401,774 $444,764 $607,203 $832,711 $418,519 N/A
Net income 24,095 31,090 31,332 69,944 124,396 91,649 N/A
Basic and diluted earnings
per share $0.24 $0.31 $0.31 $0.70 $1.11 $0.91 N/A
Other Data:
EBITDA(2) $86,077 $97,829 $88,642 $178,208 $261,665 $176,080 $117,491
Capital expenditures 54,361 79,887 33,605 94,193 119,040 24,226 35,717
Net cash provided by operating 62,469 76,755 56,723 134,625 249,320 135,462 112,203
activities
Net cash used in investing activities (50,726) (123,064) (58,150) (130,657) (286,009) (72,104) (71,005)
Net cash provided by financing activities 21 29,766 156 3,876 288,348 281,637 41,393
Number of listed companies (at period end) 5,556 5,487 5,068 4,829 4,734 4,843 4,378
Shares traded (in thousands) 138,100,000 163,900,000 202,000,000 272,600,000 442,800,000 214,500,000 255,600,000
As of December 31, As of June 30,
---------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
---------------------------------------------------------------------------------
Balance Sheet Data:(3) (Restated)
Cash and cash equivalents $20,547 $4,025 $2,754 $10,598 $262,257 $344,848
Working capital(4) 92,953 84,668 120,831 154,372 432,767 527,131
Total assets 270,654 353,134 403,745 578,254 1,171,133 1,366,668
Total long term obligations 14,097 41,362 41,248 78,965 220,705 501,089
Total stockholders' equity 189,135 229,166 266,255 352,012 645,159 513,679
- ----------------------
(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. EBITDA for 2000 is
based on pro forma net income.
(3) Balance sheet data for 1996-1999 has not been restated for the change
in accounting principle adopted as of January 1, 2000.
(4) Working capital is calculated as current assets (reduced for
held-to-maturity investments classified as current assets) less
current liabilities.
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.
Business Environment
In the first half of 2000, the economy continued the expansion experienced
in 1999 as the U.S. enjoyed high productivity levels, low unemployment and
low inflation. This expansionary atmosphere provided a strong environment
for equity issuers and for the broker-dealer industry that drives Nasdaq's
transaction services and market information services businesses. New issues
were at high levels with 342 initial listings, including IPOs, occurring on
Nasdaq in the first half of 2000, leading to strong growth in issuer
services revenues. Additional shares listed by Nasdaq issuers enjoyed
similar growth. The broker-dealer industry continued its expansion leading
to increased subscriptions for market information services. Both share and
trade volume hit record levels as the Nasdaq Composite Index posted its
record high in March 2000, resulting in increased transaction services
revenues. Daily share volume for the first six months of 2000 averaged 1.70
billion shares a day compared to 992 million shares a day in the first half
of 1999, a 71% increase.
To alleviate potential inflationary pressure due to the expansion, the
Federal Reserve gradually raised interest rates to the highest level in
recent years. Economic growth decelerated in the second half of 2000 as
corporate earnings growth and investment slowed, combined with a slowdown
in consumer spending. The equity markets declined significantly creating a
difficult new issue environment and resulting in a decline in issuer
services revenue in the latter part of the year. Despite difficult market
conditions, trading volumes remained strong, resulting in continued growth
in transaction services revenue. Daily share volume in the second half and
full year of 2000 averaged 1.81 billion and 1.76 billion shares a day,
respectively, compared to 1.15 billion and 1.07 billion shares a day in the
second half and full year of 1999, respectively. Market information revenue
from professional services remained strong in the second half of the year
despite a leveling off in growth, while the decrease in online retail
activity led to declines in non-professional market information revenue.
The U.S. economy has continued to weaken. In response, the Federal Reserve
began in January 2001 to reverse the rate increases previously imposed in
an attempt to stimulate the economy. With the outlook for the economy
uncertain, Nasdaq's primary revenue components have experienced a slowdown
and may remain under pressure for the rest of 2001. A continuing weak
equity market may lead to fewer companies proceeding with IPOs or issuing
additional shares, resulting in lower issuer services revenue. In addition,
a weak equity market and corporate earnings environment provide increased
risk of delistings. A difficult capital raising environment may also slow
the pace of merger and acquisition activity, which combined with a
decreased level of new offerings, may provide significant challenges to the
broker-dealer industry. Further reductions in online retail trade activity
and reductions in the staff at the broker-dealers could reduce the demand
for both market information and transaction services. In addition, the
difficulties faced by Nasdaq customers may lead to increased price pressure
across various businesses and products. While trading volume is expected to
remain relatively strong, Nasdaq traditionally experiences slower activity
mid-year, with a pick-up in volume during the fourth quarter of the year.
An economic recovery may partially or fully reverse the impact to the
issuer services, market information services and transactions services
businesses.
Change in Accounting Principle
On August 17, 2001, Nasdaq concluded discussions with the SEC with respect
to the implementation in its financial statements of Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which became effective for SEC public reporting companies in the fourth
quarter of 2000. Nasdaq became a SEC public reporting company on June 29,
2001, the effective date of its Registration Statement on Form 10. As a
result of the discussions with the SEC, Nasdaq changed its method of
accounting for revenue recognition for certain components of its issuer
services revenues. In accordance and consistent with generally accepted
accounting principles, as SAB 101 was adopted effective the fourth quarter
of 2000, the change in accounting principle has been applied as of January
1, 2000. In accordance with applicable accounting guidance prior to SAB
101, Nasdaq recognized revenues for issuer initial listing fees and LAS
fees in the month the listing occurred or in the period additional shares
were issued, respectively. Nasdaq now recognizes revenue related to initial
listing fees and LAS fees on a straight line basis over estimated service
periods, which are six and four years, respectively. As a result, issuer
services revenues for 2000--a period of robust listing and capital raising
activity--substantially decreased, and these revenues for the first six
months of 2001--a period of reduced listing and capital raising
activity--increased. These changes have no effect on cash receipts, cash
flows, or on the underlying economics of Nasdaq's business--merely on the
timing of when these revenues are recognized for financial reporting
purposes.
As a result of this change in accounting principle, Nasdaq recognized a
one-time cumulative effect in the first quarter of 2000. This cumulative
effect of a change in accounting principle decreased net income in the year
ended December 31, 2000 by $101.1 million ($0.90 per share) resulting in
net income of $23.3 million ($0.21 per share). The adjustment to 2000 net
income for the cumulative change to prior years' results consists of the
following:
(amounts in thousands)
Deferred Initial fees $ 108,476
Deferred LAS fees 60,570
--------
Total deferred fees 169,046
Deferred income tax benefit (67,956)
--------
Cumulative effect of change in accounting principle $ 101,090
==========
For the year ended December 31, 2000, Nasdaq recognized $55.7 million in
revenue that was included in the cumulative effect adjustment as of January
1, 2000. This revenue contributed $33.3 million (after income taxes of
$22.4 million) to net income for the year ended December 31, 2000.
Deferred Revenue
Nasdaq's deferred revenue as of December 31, 2000 relating to issuer
services fees will be recognized in the following years:
(amounts in thousands) Initial LAS Annual Total
-------------- -------------- ----------------- -------------
Fiscal year ended
2001 $34,532 $31,646 $ - $66,178
2002 29,739 23,118 - 52,857
2003 25,099 16,219 - 41,318
2004 20,373 5,668 - 26,041
2005 and thereafter 17,950 - - 17,950
-------------- -------------- ----------------- -------------
$127,693 $76,651 $ - $204,344
============== ============== ================= =============
Nasdaq's deferred revenue for the year ended December 31, 2000 is reflected
in the following table. The additions reflect the issuer services fees
charged during the year while the amortization reflects the issuer services
fee revenues recognized during the year based on the accounting methodology
described above.
(amounts in thousands) Initial LAS Annual Total
-------------- --------------- -------------- -------------
Balance at January 1, 2000 $108,476 $60,570 $ - $169,046
Additions 53,129 49,713 81,753 184,595
Amortization (33,912) (33,632) (81,753) (149,297)
-------------- --------------- -------------- -------------
Balance at December 31, 2000 $127,693 $76,651 $ - $204,344
============== =============== ============== =============
Results of Operations
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Nasdaq reported net income of $45.8 million for the six months ended June
30, 2001, compared to a loss of $9.4 million for the six months ended June
30, 2000. Compared to pro forma net income for the first half of 2000 of
$91.6 million, excluding a cumulative effect of the change in accounting
principle, net income decreased by $45.9 million, or 50.0%.
Revenues
Nasdaq's revenues increased from $418.5 million for the six months ended
June 30, 2000 to $444.1 million for the six months ended June 30, 2001,
representing a 6.1% increase.
Nasdaq has three main revenue sources: transaction services, market information
services, and issuer services.
Transaction Services
For the six months ended June 30, 2001, transaction services revenues of
$221.2 million increased $21.3 million from $199.9 million for the six
months ended June 30, 2000, an increase of 10.7%. Transaction services
consist of SelectNet, SOES, ACT, the Nasdaq Workstation II, and other
related execution services.
SelectNet, the high-volume automated execution service, provided revenues
of $63.6 million, an increase of $7.5 million or 13.4%, for the six months
ended June 30, 2001 from $56.1 million for the six months ended June 30,
2000, 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 $19.1 million, an increase of $3.7 million or 24.0%
for the six months ended June 30, 2001 from $15.4 million for the six
months ended June 30, 2000, due to an increase in volume of SOES
executions. SOES fees are charged on a per transaction basis.
On July 30, 2001, Nasdaq fully implemented SuperSoes. SuperSoes is designed
to provide capability for automatic execution of buy and sell orders for
market makers, ECNs, and institutional and retail customers, as well as
streamline Nasdaq's transaction systems. SuperSoes combines features of the
existing SelectNet and SOES execution systems and is only available for
securities listed on The Nasdaq National Market tier of The Nasdaq Stock
Market. Securities listed on The Nasdaq SmallCap Market will continue to be
traded through SOES and SelectNet. SuperSoes is expected to result in the
migration of significant transaction volume, and its corresponding revenue,
from SelectNet and SOES to SuperSoes. The changes in the fee schedule for
SelectNet and the introduction of the SuperSoes fee schedule at the time of
implementation of SuperSoes may have a negative effect on revenue in future
quarters.
ACT, an automated service that provides the post-execution steps of
reporting price, volume comparison and clearing of pre-negotiated trades as
well as risk management services, provided revenues of $47.0 million, a
decrease of $7.7 million or 14.1% for the six months ended June 30, 2001
from $54.7 million for the six months ended June 30, 2000, due to various
pricing changes enacted subsequent to March 31, 2000. These changes include
a cap on risk management fees, price reductions on certain existing
services, and a rule change that eliminated charges for certain
transactions. ACT transaction fees are charged primarily on a per
transaction basis.
Nasdaq Workstation II is the trader's direct connection to Nasdaq's quote
and trade execution facilities, providing quotation services, automated
trade executions, real-time reporting, trade negotiations and clearing.
This trading device, along with application programming interfaces,
provided revenues of $74.7 million, an increase of $17.2 million or 29.9%
for the six months ended June 30, 2001 from $57.5 million for the six
months ended June 30, 2000. This increase is due to a larger customer base
as well as higher fees associated with expanded network capacity. Nasdaq
Workstation II fees are charged monthly based upon the number of authorized
logon identifications.
Market Information Services
For the six months ended June 30, 2001, market information revenues of
$118.7 million decreased $15.9 million or 11.8% from $134.6 million for the
six months ended June 30, 2000. Market information consists of Nasdaq Level
1 service, Nasdaq Quotation Dissemination Service, Nasdaq InterMarket tape
revenues and other related services.
Nasdaq's Level 1 service 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. Nasdaq's Level 1 service revenues decreased by
approximately $11.9 million or 14.3% to $71.4 million for the six months
ended June 30, 2001 from $83.3 million for the six months ended June 30,
2000. This reduction in revenues is due primarily to a decrease in demand
for non-professional per query service.
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 decreased by approximately $9.4 million or 24.0% to $29.8 million
for the six months ended June 30, 2001 from $39.2 million for the six
months ended June 30, 2000. This reduction reflects the introduction of the
non-professional service fee. Although the number of Nasdaq Quotation
Dissemination Service subscribers increased in total, those eligible for
the new reduced non-professional fee led to a decrease in total revenues.
Nasdaq Quotation Dissemination Service revenues are derived from monthly
subscription fees.
Nasdaq InterMarket tape revenues are derived from data revenue generated by
the Consolidated Quotation Plan and Consolidated Tape Association Plan
(collectively, the "CQ/CTA Plans"). The information collected under the
CQ/CTA Plans is sold to data vendors, who in turn sell it to the public.
Nasdaq's InterMarket revenue is directly related to the percentage of
trades in exchange-listed securities that are executed in a Nasdaq facility
and reported through the CQ/CTA Plans. Nasdaq InterMarket tape revenues
increased by approximately $4.0 million or 35.4% to $15.3 million for the
six months ended June 30, 2001, from $11.3 million for the six months ended
June 30, 2000.
Issuer Services
Issuer services revenues increased $6.1 million to $77.1 million for the
six months ended June 30, 2001 from $71.0 million for the six months ended
June 30, 2000, an increase of 8.6%.
Issuer services revenues are derived from fees for initial listings, LAS
and annual renewal fees for companies listed on Nasdaq. Fees are generally
calculated based upon total shares outstanding for the issuing firm. These
fees are initially deferred and amortized over the estimated periods for
which the services are provided. Revenues from initial listings and LAS are
amortized over six and four years, respectively, and annual fees are
amortized on a pro-rata basis over the calendar year.
Initial listing revenues increased $1.8 million or 11.1% from $16.2 million
in the six months ended June 30, 2000 to $18.0 million in the six months
ended June 30, 2001. LAS revenue increased $1.7 million or 10.6% from $16.0
million in the six months ended June 30, 2000 to $17.7 million in the six
months ended June 30, 2001.
Actual initial listing and LAS fees charged during the six months ended
June 30, 2001 decreased due to significantly reduced IPO activity and
capital raising activity by current issuers. The amortization of deferred
initial listing and LAS fees exceeded new fees charged during the six
months ended June 30, 2001 by $10.7 million due to the significant decrease
in initial listings on Nasdaq, including IPOs, from 342 companies in the
six months ended June 30, 2000 to 69 companies in the six months ended June
30, 2001.
Annual renewal and other issuer services fees revenues increased by $2.6
million or 6.7% from $38.7 million for the six months ended June 30, 2000
to $41.3 million for the six months ended June 30, 2001.
Other Revenues
Other revenues for the six months ended June 30, 2001 totaled $27.1
million, up from $12.9 million in the first half of 2000, an increase of
110.1%. This growth was primarily due to increased revenues related to the
Nasdaq 100 Trust.
For further information regarding revenue sources, see the sections in
"Business" entitled "--Products and Services" and "--Competition"
Direct Expenses
Direct expenses increased 45.5% to $317.5 million for the first half of
2001 from $218.2 million for the first half of 2000.
Compensation and benefits expense increased to $85.8 million for the first
half of 2001 from $62.1 million for the first half of 2000, an increase of
$23.7 million or 38.2%. This increase is due to a number of factors,
including the transfer of positions from the NASD associated with the
Restructuring, new positions required to support strategic initiatives, and
severance and outplacement expenses associated with the staff reduction
made during the first six months of 2001. In response to softening market
conditions, Nasdaq implemented a staff reduction plan in June 2001 that
eliminated 137 positions, or approximately 10% of the workforce.
Marketing and advertising expense decreased to $11.6 million for the first
six months of 2001 from $22.9 million for the first six months of 2000, a
decrease of 49.3%, due to the cancellation of the spring advertising
campaign.
Depreciation and amortization expense increased $14.2 million or 49.8% to
$42.7 million for the six months ended June 30, 2001 from $28.5 million for
the six months ended June 30, 2000 due to a higher overall asset base to
support current initiatives, such as SuperMontage and Primex.
Professional and contract services expense increased to $31.6 million for
the first half of 2001 from $21.2 million for the first half of 2000, an
increase of $10.4 million or 49.1%, in support of SuperMontage and Primex
development, future technology design planning, and potential acquisition
costs.
Computer operations and data communications expense increased $26.1 million
or 42.2% to $87.9 million for the six months ended June 30, 2001 from $61.8
for the six months ended June 30, 2000. The computer operations component
of the costs increased $6.7 million from the first half of 2000 to the
first half of 2001 due to increases in maintenance to support a higher
asset base. Data communications costs increased $19.4 million due to
increased charges for upgraded bandwidth and processing speed that is
commensurate with the increase in Nasdaq Workstation II revenues as
discussed above.
Bad debt expense increased to $13.0 million for the first six months of
2001 from $2.1 million for the first half of 2000 reflecting an increase in
bad debt reserves commensurate with growth in Nasdaq's account receivables
and a reserve relating to the bankruptcy filing by Bridge Information
Systems, Inc.
Occupancy expense increased $5.5 million or 68.8% to $13.5 million for the
six months ended June 30, 2001 from $8.0 million for the six months ended
June 30, 2000, primarily due to Nasdaq's new corporate offices, located at
One Liberty Plaza, New York, New York, new office space in Trumbull,
Connecticut and leasehold improvements to the Rockville, Maryland data
center.
The remaining direct expenses increased $19.9 million to $31.4 million for
the six months ended June 30, 2001 from $11.5 million for the six months
ended June 30, 2000, due primarily to increased education, training, travel
and supply expenses from the expanded Nasdaq workforce, a write-off related
to the impairment of certain assets taken during the second quarter of 2001
and foreign losses.
Support Costs
Support costs from related parties decreased by $1.1 million to $51.7
million for the six months ended June 30, 2001 from $52.8 million for the
six months ended June 30, 2000. Surveillance and other regulatory charges
from NASDR increased by $3.1 million to $40.9 million for the six months
ended June 30, 2001 from $37.8 million for the six months ended June 30,
2000. Support costs from the NASD decreased $2.3 million to $16.2 million
for the six months ended June 30, 2001 from $18.5 million for the six
months ended June 30, 2000. In addition, contributing to the decrease was
an increase in the amount of Nasdaq costs charged to Amex of $1.8 million
to $5.4 million for the six months ended June 30, 2001 from $3.6 million
for the six months ended June 30, 2000. 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.
Income Taxes
Nasdaq's income tax provision was $38.6 million for the first half of 2001
compared to $60.3 million for the first half of 2000. The effective tax
rate was 45.7% for the first half of 2001 compared to 39.7% for the first
six months of 2000. The increase in Nasdaq's effective tax rate was
primarily due to its foreign losses for which no tax benefit is taken.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Nasdaq reported net income of $23.3 million for the year ended December 31,
2000, compared to net income of $86.1 million for the year ended December 31,
1999. Compared to pro forma net income for the year ended December 31, 2000 of
$124.4 million, excluding the cumulative effect of the change in accounting
priniciple, net income increased by $54.5 million or 77.9% from pro forma net
income of $69.9 million for the year ended December 31, 1999.
Revenues
Total revenues were $832.7 million for the year ended December 31, 2000,
representing an increase of $198.5 million or 31.3% 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 64.5%, from 1.07 billion shares per day for the year ended
December 31, 1999 to 1.76 billion shares per day for the year ended
December 31, 2000. Pursuant to the change in accounting principle for
issuer services revenues adopted as of 2000, pro forma total revenues for
1999 would have been $607.2 million and the increase for 2000 would have
been $225.5 million, or 37.1%.
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.
SelectNet 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.
SOES 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.
ACT 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.
The Nasdaq Workstation II, along with application programming interfaces,
provided over $121.6 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. This increase is due to a larger
customer base.
Market Information Services
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.
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 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. This increase
is due to growth in the customer population.
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 decreased from $163.4 million for the year ended
December 31, 1999 to $149.3 million for the year ended December 31, 2000, a
decrease of $14.1 million or 8.6%. Initial listing revenues decreased from
$54.9 million to $33.9 million, a decrease of $21.0 million or 38.3%, due
to the effect of the change in accounting principle. Revenue related to LAS
increased from $29.6 million to $33.6 million, an increase of $4.0 million
or 13.5%, driven by an increase in the number of LAS events offset by the
change in accounting principle. Annual listing and other issuer listing
revenues increased from $78.9 million to $81.8 million, an increase of $2.9
million or 3.7%.
Pro forma issuer services revenues increased from $136.4 million for the year
ended December 31, 1999, to $149.3 million for the year ended December 31,
2000, an increase of $12.9 million or 9.5%. Actual initial listing and LAS
fees charged during 2000 increased due to higher IPO activity and capital
raising activity by current issuers. Revenue related to LAS increased from
$30.0 million to $33.6 million, an increase of $3.6 million or 12.0%. Initial
listing revenues increased from $27.4 million to $33.9 million, an increase of
$6.5 million or 23.7%. Pro forma amounts assume the change in accounting
principle adopted as of January 1, 2000 is applied retroactively.
Other Revenues
Other revenues for fiscal 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, which was acquired in
2000.
Direct Expenses
Direct expenses increased $123.7 million or 32.2% to $508.2 million for the
year ended December 31, 2000 from $384.5 million for the year ended
December 31, 1999.
Compensation and benefits costs increased $39.2 million or 40.0% to $137.3
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.
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 in the fall of 2000 as compared to the fall
campaign 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. Also
contributing to this increase is the opening of the MarketSite and
broadcast facility located in Times Square, New York.
Professional and contract services costs 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 driving this
increase include 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 64.5% 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 $15.4 million or 34.8% to $59.6
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, new office space in Trumbull, Connecticut,
increased travel to support international initiatives, and foreign losses.
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 $14.7 million or 22.6% to $79.8
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.
Income Taxes
Nasdaq's income tax provision was $90.5 million for 2000 compared to $58.4
million for 1999. The effective tax rate was 42.1% for 2000 compared to
40.4% for 1999. The increase in Nasdaq's effective tax rate was primarily
due to an increase in its foreign losses for which no tax benefit is taken.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Nasdaq reported net income of $86.1 million for the year ended December 31,
1999, compared to net income of $35.0 million for the year ended December 31,
1998. Compared to pro forma net income for the year ended December 31, 1999 of
$69.9 million, net income increased by $38.6 million or 123.2% from pro forma
net income of $31.3 million for the 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 34% as
compared to the previous year. Pursuant to the change in accounting
principle for issuer services revenue adopted as of 2000, total revenues
for 1999 and 1998 would have been $607.2 million and $444.8 million,
respectively, and the increase would have been $162.4 million or 36.5%.
Transaction Services
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
trade volume of 116.7% 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.
SelectNet provided revenues of $83.1 million, an increase of $40.7 million
or 96.0% for the year ended December 31, 1999 from $42.4 million for the
year ended December 31, 1998, due to an increase in trade volume.
SOES provided revenues of $19.7 million for the year ended December 31,
1999, an increase of $7.3 million or 58.9% from $12.4 million for the year
ended December 31, 1998, due to an increase in volume of SOES executions.
ACT provided revenues of $68.1 million for the year ended December 31,
1999, an increase of $29.9 million or 78.3% from $38.2 million for the year
ended December 31, 1998, due to increases in trade volume.
The Nasdaq Workstation II, along with application programming interfaces,
provided over $87.6 million in revenues for the year ended December 31,
1999, an increase of $38.3 million or 77.7% from $49.3 million in revenues
for the year ended December 31, 1998. The increase was driven by growth in
the number of deployed workstations as well as higher fees associated with
increased network capacity.
Market Information Services
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.
Nasdaq Level 1 services revenues increased by approximately $27.7 million
or 25.8% to $135.0 million for the year ended December 31, 1999 from $107.3
million for the year ended December 31, 1998, primarily driven by increases
in both professional and non-professional users.
Nasdaq Quotation Dissemination Service revenues increased by approximately
$11.3 million or 53.3% to $32.5 million for the year ended December 31,
1999 from $21.2 million for the year ended December 31, 1998. This increase
is due to growth in the number of customers.
Nasdaq InterMarket tape revenues decreased by approximately $4.1 million or
19.2% to $17.2 million for the year ended December 31, 1999 from $21.3
million for the year ended December 31, 1998. This decrease is due to the
initiation of a tape revenue sharing program whereby Nasdaq shares 40% of
its tape revenue with qualifying market participants.
Issuer Services
Issuer services revenues increased from $137.3 million for the year ended
December 31, 1998 to $163.4 million for the year ended December 31, 1999,
an increase of $26.1 million or 19.0%. Initial listing revenues increased
from $29.8 million to $54.9 million, an increase of $25.1 million or 84.2%,
due to an increase in the number and size of IPOs, spin-offs, and movement
of issuers into Nasdaq from other markets. Revenue related to LAS increased
from $28.2 million to $29.6, an increase of $1.4 million or 5.0%, driven by
an increase in the number of events. Annual listing and other listing
revenues decreased from $79.3 million to $78.9 million, a decrease of $0.4
million or 0.5%.
Pro forma issuer services revenues increased from $131.3 million for the year
ended December 31, 1998, to $136.4 million for the year ended December 31,
1999, an increase of $5.1 million or 3.9%. Revenue related to initial listings
increased from $23.8 million to $27.4 million, an increase of $3.6 million or
15.1% and revenue related to LAS increased from $28.1 million to $30.0
million, an increase of $1.9 million or 6.8%. Pro forma amounts assume the
change in accounting principle adopted as of January 1, 2000 is applied
retroactively.
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 229 employees to 1,043 employees as of December 31, 1999,
from 814 employees as of December 31, 1998, a 28.1% increase in headcount.
The new positions were created to support expanded market operations.
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 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 were 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. 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
increase in Enterprise Wide Network II 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 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. Offsetting
these higher expenses were the $14.0 million charged to Amex as support
costs provided to related parties in the year ended December 31, 1999. This
amount, which increased $4.9 million or 53.8% from $9.1 million for the
year ended December 31, 1998, 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.
Income Taxes
Nasdaq's income tax provision was $58.4 million for 1999 compared to $26.0
million for 1998. The effective tax rate was 40.4% for 1999 compared to
42.7% for 1998.
Liquidity and Capital Resources
June 30, 2001 Compared to December 31, 2000
Cash and cash equivalents and available-for-sale securities totaled $600.0
million at June 30, 2001, an increase of $105.7 million from $494.3 million
at December 31, 2000. Working capital increased $94.4 million to $527.1
million as of June 30, 2001, from $432.8 million as of December 31, 2000.
Cash and cash equivalents increased $82.6 million from December 31, 2000 to
$344.8 million as of June 30, 2001, primarily due to cash provided by
operating activities of $112.2 million and cash provided by financing
activities of $41.4 million, partially offset by cash used in investing
activities of $71.0 million.
For the six months ended June 30, 2001, operating activities provided net
cash inflows of $112.2 million, primarily due to cash received from
customers of $441.0 million less cash paid to suppliers, employees, and
related parties of $307.2 million and income taxes paid of $22.3 million.
Net cash used in investing activities was $71.0 million for the six months
ended June 30, 2001, due in part to capital expenditures related to
SuperMontage, Primex, global initiatives and general capacity increases.
The remaining cash used in investing activities is attributable to
purchases of investments with the proceeds of the second phase of Nasdaq's
private placement of Common Stock that closed in January 2001 and receipts
from the sales and maturities of investments.
Cash provided by financing activities was approximately $41.4 million for
the six months ended June 30, 2001. Nasdaq sold Subordinated Debentures to
Hellman & Friedman on May 3, 2001, yielding gross proceeds of approximately
$240.0 million. Nasdaq used the proceeds to repurchase 18,461,538 shares of
common stock from the NASD for $13.00 per share for an aggregate purchase
price of approximately $240.0 million. Nasdaq also received net proceeds
from Phase II that equaled approximately $63.7 million. During this period,
Nasdaq also repaid approximately $20.0 million to the venture partners who
participated in Nasdaq Europe Planning Company Limited. Nasdaq will use the
net cash provided by financing activities to invest in new technology,
implement and form strategic alliances and build its brand through
marketing programs.
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 since 1996 and
believes that it will continue to do so in the future to meet both short
and long term operating requirements.
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 $278.4 million
to $432.8 million as of December 31, 2000, from $154.4 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. (now known as
Nasdaq Tools). 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 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, substantially 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 totaling 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 Nasdaq earnings or cash flows. Nasdaq's exposure to
these risks has not materially changed since December 31, 2000.
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.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"and
SFAS No. 142, "Goodwill and Other Intangible Assets," ("FASB 142")
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests in
accordance with the rules. Other intangible assets will continue to be
amortized over their useful lives. Nasdaq will apply the new rules on
accounting for goodwill and other intangible assets beginning in the first
quarter of 2002. Application of the nonamortization provisions of FASB 142
is not expected to have a material impact to Nasdaq's financial position or
results of operations. During 2002, Nasdaq will perform the first of the
required impairment tests of goodwill and indefinite lived intangible
assets as of January 1, 2002. Nasdaq does not expect the effect of these
tests to have a material impact on its earnings and financial position.
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 5% of the Common
Stock and the beneficial ownership of Nasdaq's Common Stock and Nasdaq Japan's
common stock 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 July 31, 2001, approximately
110,761,355 shares of Common Stock were outstanding, which includes 530,350
shares of restricted Common Stock awarded to officers and employees of Nasdaq,
and approximately 56,400 shares of Nasdaq Japan common stock 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 Stock of Percent
Nasdaq Japan
Beneficially Owned Class Beneficially Owned of Class
- ------------------------------------ ----------------------- ------------ ----------------------- ------------
National Association of Securities 76,995,171(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)................. 12,337,200(21) * 2,268(22) 3.9
- ------------------------------
* Less than one percent
(1) Includes approximately 43,227,176 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 million 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. that,
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 shares of Nasdaq
Japan common stock that were granted by Nasdaq Global (50%) and SOFTBANK (50%).
(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 stock that were granted by Nasdaq Global (50%) and SOFTBANK (50%).
(21) Includes the Subordinated Debentures owned by Hellman & Friedman. See
Note 2 above.
(22) Includes options to purchase an aggregate of 368 shares of Nasdaq
Japan common stock that were granted by Nasdaq Global (50%) and SOFTBANK (50%).
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 and
Acting Chief Financial 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 would 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, Chief Financial
Officer ("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 to 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 finance, 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.
- --------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
Awards Payouts
- --------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary Bonus(1) Compensation Award(s) Options/SARs Payouts Compensation(2)
(a) (b) ($)(c) ($)(d) Awards ($)(e) ($)(f) (#)(g) ($)(h) ($)(i)
- --------------------------------------------------------------------------------------------------------------------------------
Frank G. Zarb, 2000 1,333,333 6,000,000 441,055(4) - 140(5) - 17,892
Chairman, Nasdaq (3)
- --------------------------------------------------------------------------------------------------------------------------------
Alfred R. Berkeley, III, 2000 522,500 650,000 - - - - 13,405
Vice Chairman, Nasdaq
- --------------------------------------------------------------------------------------------------------------------------------
Richard G. Ketchum, 2000 522,500 1,750,000 - - 76(5) - 13,405
President, Nasdaq(6)
- --------------------------------------------------------------------------------------------------------------------------------
John L. Hilley, 2000 450,000 950,000 408,720 237,500(8) - - 13,085
Executive Vice President,
Nasdaq and Chairman and
Chief Executive Officer,
Nasdaq International(7)
- --------------------------------------------------------------------------------------------------------------------------------
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) In 2000, the NASD paid approximately 50% of Mr. Zarb's salary and bonus
for services rendered. Mr. Zarb served as the CEO of Nasdaq 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.
(5) Represents a seven year option to purchase Nasdaq Japan common stock
(after giving effect to the four-for-one stock split which was effective
as of April 2001) that was granted by Nasdaq Global (50%) and SOFTBANK (50%).
(6) In 2000, the NASD paid approximately 25% of Mr. Ketchum's salary and
bonus for services rendered.
(7) In 2000, the NASD paid approximately 52% of Mr. Hilley's salary and
bonus for services rendered.
(8) Represents the grant of an award, effective as of May 12, 2000, of
1,900 shares of restricted common stock of Nasdaq Japan (after giving
effect to the four-for-one stock split that was effective as of April
2001), vesting one-third on each of June 1, 2000, June 1, 2001 and June 1,
2002, based on a value of $125 per share on the grant date (after giving
effect to the four-for-one stock split that was effective as of April
2001). As of December 31, 2000, the aggregate value (after giving effect to
the four-for-one stock split that was effective as of April 2001) of the
then-unvested shares was approximately $7.9 million and the aggregate value
of the then-vested shares was approximately $4 million, in each case based
upon the valuation of shares of Nasdaq Japan sold in a private placement
transaction that occurred in October 2000. Dividends (if any) on restricted
shares are paid to the award holder.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock option grants made in
2000 to the named executive officers with respect to shares of Nasdaq
Japan. No options to acquire shares of Nasdaq were granted in 2000.
- --------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation For
Option Term
- --------------------------------------------------------------------------------------------------------------------------
Name
Number of Percent of Total Exercise or Expiration
Securities Options/ SARs Base Price Date
Underlying Granted to ($/Sh) (d) 5% ($) 10%($)
Option/SARs Employees in Fiscal (c) (e) (f)
Granted (#) Year (4)
(a) (b)
- --------------------------------------------------------------------------------------------------------------------------
Frank G. Zarb 140 (1)(2) 3.6% $125 July 31, 2007 7,124 16,602
-----------------------------------------------------------------------------------------------
Alfred R. Berkeley, III 0
-----------------------------------------------------------------------------------------------
Richard G. Ketchum 76 (1)(3) 2.0% $125 July 31, 2007 3,867 9,012
-----------------------------------------------------------------------------------------------
John L. Hilley 0
-----------------------------------------------------------------------------------------------
J. Patrick Campbell 0
- --------------------------------------------------------------------------------------------------------------------------
(1) Represents options to purchase Nasdaq Japan common stock that were
granted by Nasdaq Global (50%) and SOFTBANK (50%) and reflects
the four-for-one stock split that was effective as of April 2001.
(2) Options become exercisable with respect to 48 shares on July 31,
2001; 48 shares on July 31, 2002 and the remaining 44 shares on July
31, 2003.
(3) The option shall become exercisable at such times and in such portions
as shall be determined by the committee established pursuant to the plan
under which the option was granted.
(4) Represents percentage of total options to purchase shares of Nasdaq
Japan common stock that were granted by Nasdaq Global (50%) and SOFTBANK
(50%) in 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table provides information on the number of options to
purchase common stock of Nasdaq Japan held by the named executive officers
at fiscal year end 2000.
- -------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Value of
(a) Acquired on Realized ($) Securities Unexercised
Exercise (#) (b) (c) Underlying in-the-Money
Unexercised Options/SARs at
Options/SARs at Fiscal Year-End(1)
Fiscal Year-End ($)Exercisable/
(#) Unexercisable
Exercisable/ (e)
Unexercisable
(d)
- -------------------------------------------------------------------------------------------------------------
Frank G. Zarb 0 0 0 / 140 0 / 857,500
------------------------------------------------------------------------------
Alfred R. Berkeley, III 0 0
------------------------------------------------------------------------------
Richard G. Ketchum 0 0 0 / 76 0 / 465,500
------------------------------------------------------------------------------
John L. Hilley 0 0
------------------------------------------------------------------------------
J. Patrick Campbell 0 0
- -------------------------------------------------------------------------------------------------------------
(1) The fair market value per share of Nasdaq Japan common stock on
December 31, 2000 was $6,250 (after giving effect to the four-for-one stock
split that was effective as of April 2001) based upon the valuation of shares
of Nasdaq Japan sold in a private placement transaction that occurred in October
2000.
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 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 (which relinquishment is
expected to occur in September 2001) 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. Upon such relinquishment,
Mr. Zarb will continue to be employed pursuant to 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 (which
benefits may be payable in a lump sum) 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,
Mr. Zarb will be entitled to an annual consulting fee of $100,000 (plus
$2,000 per hour for any hours in excess of 50 hours in any calendar year)
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 30 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 base salary and minimum
incentive compensation that would have been paid to Mr. Zarb for the
remainder of 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 a
base salary at an annual rate not less than the rate of base 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
the NASD'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 Agreements, each Executive is entitled to receive a payment in an
amount equal to two times the Executive's then effective base salary (in the
case of Mr. Hilley his then effective annual salary) (the "Stay Bonus") if the
Executive is (i) employed by Nasdaq as of August 9, 2002, (ii) if the
Executive's employment is terminated due to death or disability, (iii) if the
Executive terminates employment for "good reason" or (iv) Nasdaq terminates
the Executive's employment without "cause."
If Mr. Ketchum's or Mr. Campbell's employment is terminated without "cause" or
if Mr. Ketchum or Mr. Campbell terminates employment for "good reason," Nasdaq
is obligated to pay to Mr. Ketchum or Mr. Campbell, respectively (i) the Stay
Bonus if not previously paid; (ii) a pro rata portion of the incentive
compensation for the year of termination; and (iii) a lump sum cash payment
equivalent to 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
following the date of such termination of employment.
If Mr. Hilley's employment is terminated without "cause" or if Mr. Hilley
terminates employment for "good reason," Nasdaq is obligated to pay Mr. Hilley
(i) the Stay Bonus if not previously paid and (ii) a lump sum cash payment
equivalent to continuation of annual salary until the later of (x) the end of
the term of Employment Agreement or (y) 24 months following the date of such
termination of employment.
In addition, 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 the NASD's qualified and
supplemental defined benefit pensions plans. Under these plans executive
officers earn an aggregate benefit expressed as an annual annuity equal to
6% of their final average compensation for each year of service up to a
maximum of 10 years. Final average compensation is the average annual
salary plus one-third of the annual bonus for the highest five-year period
of service, except in the case of the Mr. Hilley (as described in
"Employment Agreements" above). 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 aggregate annual benefit payable under the
plans 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. 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, Pasternak, Pottruck, Rock, Romano, and Sodhani are members of the
NASD Board as well as members of the Nasdaq Board. Effective as of September
13, 2001, Messrs. Baxter and Pasternak will no longer serve on the NASD 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 commencing upon the effectiveness of Exchange Registration.
The term of the Regulatory Services Agreement is 10 years. The services
will be of the same type and scope as are provided by NASDR to Nasdaq
under the Delegation Plan 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 to be 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 Phase II.
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 million shares
of Common Stock, subject to adjustment. Hellman & Friedman owns approximately
9.8% 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 5% 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 5% 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 is 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 shares of Nasdaq Japan
common stock or options to purchase shares of Nasdaq Japan common stock.
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."
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 9,012,780 shares of Common Stock and 530,350 shares of
restricted Common Stock that were granted to officers and employees of
Nasdaq and its subsidiaries. In addition, there are currently outstanding
warrants to purchase 43,227,176 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
million shares of Common Stock, subject to adjustment.
All 76,995,171 shares of Common Stock beneficially owned by the NASD as of
July 31, 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
million 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 $11.00 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 $13.00 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 million shares of
Common Stock, reflecting a conversion price of $20.00 per share, subject to
adjustment. Hellman & Friedman owns approximately 9.8% 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 June 30, 2001, there was outstanding options to purchase an aggregate
of 9,012,780 shares of Common Stock granted by Nasdaq to officers and
employees of Nasdaq and its subsidiaries pursuant to its Equity Incentive
Plan. In addition, as of June 30, 2001, there was outstanding an aggregate
of 530,350 shares of restricted Common Stock awarded by Nasdaq 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 July 31, 2001, there were
110,761,355 shares of Common Stock outstanding, which includes 530,350
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 5% 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%
of the equity of a broker or dealer, and the broker or dealer
accounts for more than 5% of the gross revenues received by the
consolidated entity; (iii) owns more than 5% of the equity
securities of any broker or dealer, whose investments in brokers
or dealers exceed 10% 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% or more of the professional revenues received by
the director or member or 20% 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% 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% or more of the
professional revenues received by the director or 20% 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 earnings per share information)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1999 1999 1999 1999 Total 1999
Total 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 earnings per share $0.26 $0.27 $0.30 $0.02 $0.86
---------- ---------- ---------- ---------- ----------
Pro forma amounts assuming
the accounting change
is applied retroactively:
Total revenues $133,423 $145,468 $159,875 $168,497 $607,203
Net income (loss) $26,089 $22,650 $24,871 $(3,666) $69,944
Basic and diluted
earnings (loss) per share $0.26 $0.23 $0.25 $(0.04) $0.70
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
2000 2000 2000 2000 Total 2000
(Restated) (Restated) (Restated) (Restated) (Restated)
Total revenues $207,015 $211,504 $202,075 $212,117 $832,711
Total expenses 131,224 139,753 161,409 204,305 636,691
---------- ---------- ---------- ---------- ----------
Net operating income 75,791 71,751 40,666 7,812 196,020
Interest income 2,200 3,205 5,727 8,979 20,111
Interest expense (483) (476) (718) (453) (2,130)
Provision for income taxes (31,158) (29,181) (23,531) (6,607) (90,477)
Minority interests -- -- -- 872 872
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of change in accounting
principle 46,350 45,299 22,144 10,603 124,396
Cumulative effect of change in
accounting principle (101,090) -- -- -- (101,090)
---------- ---------- ---------- ---------- ----------
Net income (loss) $(54,740) $45,299 $22,144 $10,603 $23,306
========== ========== ========== ========== ==========
Basic and diluted earnings per
share:
Before cumulative effect
of change in accounting
principle $0.46 $0.45 $0.18 $0.09 $1.11
Cumulative effect of
change in accounting
principle (1.01) - - - (0.90)
---------- ---------- ---------- ---------- ----------
Net (loss) income $(0.55) $0.45 $0.18 $0.09 $0.21
========== ========== ========== ========== ==========
Pro forma amounts assuming
the accounting change is
applied retroactively:
Total revenues $207,015 N/A N/A N/A $832,711
Net income $46,350 N/A N/A N/A $124,396
Basic and diluted
earnings per share $0.46 N/A N/A N/A $1.11
1st Qtr 2nd Qtr
2001 2001
Total revenues $222,767 $221,306
Total expenses 180,673 188,573
--------- ---------
Net operating income 42,094 32,733
Interest income 6,170 3,807
Interest expense (480) (1,970)
Provision for income taxes (21,808) (16,753)
Minority interests 217 1,765
--------- ---------
Net income $ 26,193 $ 19,582
========= =========
Basic earnings per share $0.21 $0.17
========= =========
Diluted earnings per share $0.21 $0.16
========= =========
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.(+)
10.18.1 Letter Agreement, dated July 22, 2001, among Frank G. Zarb, the
National Association of Securities Dealers, Inc. and The Nasdaq
Stock Market, Inc.
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. 4 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 31, 2001
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following 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-7
Consolidated Statements of Cash Flows....................................F-8
Notes to Consolidated Financial Statements...............................F-9
Unaudited Condensed Consolidated Financial Statements...................F-27
Unaudited Condensed Consolidated Balance Sheets.........................F-27
Unaudited Condensed Consolidated Statements of Income...................F-29
Unaudited Condensed Consolidated Statements of Cash Flows...............F-30
Notes to Unaudited Condensed Consolidated Financial Statements..........F-32
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 4 to the consolidated financial statements, effective
January 1, 2000, Nasdaq changed its method of accounting for certain issuer
services revenues. Also as discussed in Note 3, 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
New York, NY
January 26, 2001, except for Note 4, as
to which the date is August 17, 2001
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
-------------------------------
2000 1999
-------------------------------
(Restated)
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 32,367 5,213
Other current assets 14,869 12,701
-------------------------------
Total current assets 744,460 312,346
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
Non-current deferred tax asset 61,257
Other assets 25,753 2,597
-------------------------------
Total assets $ 1,171,133 $ 578,254
===============================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets (continued)
(In thousands, except share amounts)
December 31,
2000 1999
------------------------------------
(Restated)
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 117,867 $ 68,585
Accrued personnel costs 37,273 30,505
Deferred revenue 66,178 -
Other accrued liabilities 35,374 27,626
Due to banks 13,876 8,819
Payables to related parties 19,158 11,742
------------------------------------
Total current liabilities 289,726 147,277
Long-term debt 25,000 25,000
Accrued pension costs 10,390 7,073
Non-current deferred tax liability, net 32,116 10,928
Deferred revenue non-current 138,166 -
Deferred revenue, investment in warrants, at - 33,480
cost
Other liabilities 15,033 2,484
------------------------------------
Total long-term liabilities 220,705 78,965
Total liabilities 510,431 226,242
Minority interests 15,543 -
Stockholders' Equity
Common stock, $.01 par value, 300,000,000
authorized, shares issued and
outstanding: 123,663,746 in 2000 and
100,000,000 in 1999 1,237 1,000
Additional paid-in capital 273,387 149
Unrealized gains on available-for-sale
investments, net of tax 321 1,742
Foreign currency translation (2,213) -
Retained earnings 372,427 349,121
------------------------------------
Total stockholders' equity 645,159 352,012
------------------------------------
Total liabilities, minority interest and
stockholders' equity $ 1,171,133 $ 578,254
====================================
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
-------------------------------------------------------
(Restated)
Revenues
Transaction services $ 395,123 $ 283,652 $ 160,506
Market information services 258,251 186,543 152,665
Issuer services 149,297 163,425 137,344
Other 30,040 628 308
-------------------------------------------------------
Total revenues 832,711 634,248 450,823
-------------------------------------------------------
Expenses
Compensation and benefits 137,284 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 25,561 22,666 14,742
-------------------------------------------------------
Total direct expenses 508,169 384,547 296,324
-------------------------------------------------------
Support cost from related parties, net 128,522 115,189 100,841
-------------------------------------------------------
Total expenses 636,691 499,736 397,165
-------------------------------------------------------
Net operating income 196,020 134,512 53,658
Interest income 20,111 12,201 9,269
Interest expense (2,130) (2,143) (1,962)
Provision for income taxes (90,477) (58,421) (26,010)
Minority interests 872 - -
-------------------------------------------------------
Income before cumulative effect of
change in accounting principle 124,396 86,149 34,955
-------------------------------------------------------
Cumulative effect of change in
accounting principle, net of taxes
of $67,956 (Note 4) (101,090) - -
-------------------------------------------------------
Net income $ 23,306 $ 86,149 $ 34,955
=======================================================
Basic and diluted earnings per share:
Before cumulative effect of change
in accounting principle $1.11 $0.86 $0.35
-------------------------------------------------------
Cumulative effect of change in
accounting principle (0.90) - -
-------------------------------------------------------
Net income $0.21 $0.86 $0.35
=======================================================
The Nasdaq Stock Market, Inc.
Consolidated Statements of Income (continued)
(In thousands, except share amounts)
Pro forma amounts assuming the $124,396 $69,944 $31,332
accounting change is applied
retroactively:
Net income
=======================================================
Basic and diluted earnings $1.11 $0.70 $0.31
per share =======================================================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share amounts)
Number of Accumulated
Common Additional Other
Shares Common Paid in Retained Comprehensive
Outstanding 1 Stock 1 Capital 1 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
available-for-sale investments,
net of tax of $1,088 - - - - $ 2,020 2,020
-------------
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 - - - 23,306 - 23,306
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) - - - - (2,213) (2,213)
-------------
Comprehensive income - - - - - 19,672
Capital contribution - - 30,000 - - 30,000
Minority interest resulting from
original share of equity in Nasdaq
Europe Planning Company Limited - - (17,600) - - (17,600)
Adjustment to carrying amount of
investment in Nasdaq Japan due to
its private placement - - 7,784 - - 7,784
Net proceeds from Phase I offering 23,663,746 237 253,054 - - 253,291
----------------------------------------------------------------------------------------
Balance, December 31, 2000 (Restated) 123,663,746 $ 1,237 $ 273,387 $ 372,427 $ (1,892) $ 645,159
========================================================================================
See accompanying notes to consolidated financial statements.
- --------------------
1 Gives effect to the June 28, 2000 49,999-for-one stock dividend of
the shares of Common Stock for years December 31, 1998 and 1999.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
2000 1999 1998
-----------------------------------------------------
(Restated)
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 $ 23,306 $ 86,149 $ 34,955
Non-cash items included in net income:
Cumulative effect of change in accounting
principle, net of taxes 101,090 - -
Depreciation and amortization 65,645 43,696 34,984
Stock-based compensation 3,788 - -
Other non-cash items included in net income 3,132 - -
Minority interests (872) - -
Net change in:
Receivables, net (59,885) (39,897) (18,762)
Receivables from related parties (1,082) 2,497 (6,670)
Other current assets (2,168) (6,521) (380)
Deferred tax asset (83,344) (1,316) -
Other assets (6,690) 4,866 (4,688)
Accounts payable and accrued expenses 49,256 18,815 7,607
Accrued personnel costs 6,685 9,660 3,966
Deferred revenue 103,254 1,413 2,758
Accrued liabilities 7,643 2,569 9,545
Payables to related parties 7,416 7,931 (2,052)
Accrued pension costs 3,317 2,507 (3,414)
Non-current deferred tax liability, net 16,280 2,770 -
Other liabilities 12,549 (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 Financial Products Services, Inc. (formerly 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 15).
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,
IndigoMarkets (sm) Ltd. ("IndigoMarkets") 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 that provides investment management services for Nasdaq.
Nasdaq Financial Products 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 Planning Company Limited, in
February 2000 with SOFTBANK Corp. of Japan, 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
Planning Company Limited was transferred to Nasdaq Global.
Nasdaq Europe Planning Company Limited was treated as a consolidated entity
in Nasdaq and the NASD financial statements.
2. Significant Transactions (continued)
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.
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 May 2000, IndigoMarkets was established for the purpose of creating
market systems for Nasdaq global markets, including Nasdaq Japan.
In 1999, the NASD contributed approximately $2.6 million for its initial
50% interest in Nasdaq Japan. After granting a restricted stock award of 4%
of its shares, the NASD transferred its remaining 46% interest to Nasdaq
Global. Nasdaq accounts for its investment in Nasdaq Japan under the equity
method of accounting, and reduced the carrying value of its investment to
zero as a result of recording its share of the operating losses incurred by
Nasdaq Japan.
In October 2000, Nasdaq Japan sold an approximate 15% stake for
approximately $48 million to a group of 13 major Japanese, U.S. and
European brokerages, thereby reducing Nasdaq Global's interest from 46% to
approximately 39%. As a result of the private placement, Nasdaq adjusted
the carrying value of its investment, through stockholders' equity, to
reflect its adjusted share of the book value of Nasdaq Japan. As of
December 31, 2000, the carrying value of Nasdaq Global's investment in
Nasdaq Japan was approximately $8 million.
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 accounting
principles generally accepted in the United States 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.
3. Summary of Significant Accounting Policies (continued)
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, which are included in interest income. 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.
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. For 1999 and 1998,
issuer initial listing fees were recognized in the month listing occurred
and issuer additional share fees were recognized in the period the
incremental shares were issued. Effective January 1, 2000, the accounting
for these fees changed as described in Note 4.
Deferred Revenue
Deferred revenues represent cash received and billed receivables, which are
unearned, until services are provided.
3. Summary of Significant Accounting Policies (continued)
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 years have been reclassified to conform with
the 2000 presentation. In addition, the financial statements for the year
ended December 31, 2000 have been restated for the change in accounting
principle described in Note 4.
4. Change in Accounting Principle
On August 17, 2001, Nasdaq concluded discussions with the SEC with respect
to the implementation in its financial statements of Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which became effective for SEC public reporting companies in the fourth
quarter of 2000. Nasdaq became a SEC public reporting company on June 29,
2001, the effective date of this Registration Statement. As a result of the
discussions with the SEC, Nasdaq changed its method of accounting for
revenue recognition for certain components of its issuer services revenues.
In accordance and consistent with generally accepted accounting principles,
as SAB 101 was adopted effective the fourth quarter of 2000, the change in
accounting principle has been applied as of January 1, 2000. In accordance
with applicable accounting guidance prior to SAB 101, Nasdaq recognized
revenues for issuer initial listing fees and listing of additional shares
("LAS") fees in the month the listing occurred or in the period additional
shares were issued, respectively. Nasdaq now recognizes revenue related to
initial listing fees and LAS fees on a straight line basis over estimated
service periods, which are six and four years, respectively.
Nasdaq recognized a one-time cumulative effect of a change in accounting
principle in the first quarter of 2000. This cumulative effect of a change
in accounting principle decreased net income in the year ended December 31,
2000 by $101.1 million ($0.90 per share) resulting in net income of $23.3
million ($0.21 per share). The adjustment to December 31, 2000 net income
for the cumulative change to prior years' results consists of the
following:
(amounts in thousands)
Deferred Initial fees $ 108,476
Deferred LAS fees 60,570
--------
Total deferred fees 169,046
Deferred income tax benefit (67,956)
--------
Cumulative effect of change in accounting principle $ 101,090
==========
For the year ended December 31, 2000, Nasdaq recognized $55.7 million in
revenue that was included in the cumulative effect adjustment as of January
1, 2000. This revenue contributed $33.3 million (after income taxes of
$22.4 million) to net income for the year ended December 31, 2000.
The change in accounting principle affects the primary financial statements
and income tax and earnings per share disclosures in Notes 8 and 14,
respectively.
Deferred Revenue
Nasdaq's deferred revenue as of December 31, 2000 relating to issuer
services fees will be recognized in the following years:
(amounts in thousands) Initial LAS Annual Total
-------------- -------------- ----------------- -------------
Fiscal year ended
2001 $34,532 $31,646 $ - $66,178
2002 29,739 23,118 - 52,857
2003 25,099 16,219 - 41,318
2004 20,373 5,668 - 26,041
2005 and thereafter 17,950 - - 17,950
-------------- -------------- ----------------- -------------
$127,693 $76,651 $ - $204,344
============== ============== ================= =============
Nasdaq's deferred revenue for the year ended December 31, 2000 is reflected
in the following table. The additions reflect the issuer services fees
charged during the year while the amortization reflects the issuer services
fee revenues recognized during the year based on the accounting methodology
described above.
(amounts in thousands) Initial LAS Annual Total
-------------- --------------- -------------- -------------
Balance at January 1, 2000 $108,476 $60,570 $ - $169,046
Additions 53,129 49,713 81,753 184,595
Amortization (33,912) (33,632) (81,753) (149,297)
-------------- --------------- -------------- -------------
Balance at December 31, 2000 $127,693 $76,651 $ - $204,344
============== =============== ============== =============
5. 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
(amounts 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
----------------------------------------------------------------
Total $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
(amounts 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 $28,579 $45 $32 $28,592
================================================================
5. Investments (continued)
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
(amounts 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
----------------------------------------------------------------
Total $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
(amounts 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 $ 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.
6. Fair Value of Financial Instruments
Nasdaq considers cash and cash equivalents, accounts receivable,
investments, 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.
7. 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 instalments 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 0.5%.
Interest expensed and paid under the agreement totaled approximately $1.9
million for each of the years ended December 31, 2000, 1999 and 1998.
8. Income Taxes
The income tax provision includes the following amounts:
Years Ended December 31,
2000 1999 1998
-----------------------------------------------------
Current income taxes:
Federal $ 75,446 $ 46,482 $ 22,930
State 14,138 11,599 5,196
-----------------------------------------------------
Total current income taxes 89,584 58,081 28,126
Deferred income taxes:
Federal (53,717) 273 (1,695)
State (13,346) 67 (421)
-----------------------------------------------------
Total deferred income taxes (67,063) 340 (2,116)
-----------------------------------------------------
22,521 58,421 26,010
Less deferred tax benefit attributable to
cumulative effect of change in accounting
principle 67,956 -- --
-----------------------------------------------------
Total provision for income taxes $ 90,477 $ 58,421 $ 26,010
=====================================================
Income taxes paid during the periods $ 101,171 $ 49,992 $ 24,131
8. Income Taxes (continued)
Reconciliations of the statutory U.S. 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 3.6 5.2 5.1
Foreign losses without US benefit 2.9 - -
Other, net 0.6 0.2 2.6
-----------------------------------------------------
Effective rate 42.1% 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 $ 82,600 $ 2,233
Compensation and benefits 1,592 179
Bad debts 5,139 2,801
Other 4,293 -
------------------- -----------------
Total deferred tax assets $ 93,624 $ 5,213
=================== =================
Deferred tax liabilities:
Depreciation $ (12,492) (9,966)
Software development costs (19,624) (5,184)
Other - 4,222
------------------- -----------------
Total deferred tax liabilities, net $ (32,116) $ (10,928)
=================== =================
Due to the Nasdaq's foreign operations, it has approximately $5.0 million
of foreign deferred tax assets, primarily Net Operating Losses, 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.
9. 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.
9. Employee Benefits (continued)
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 million,
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
9. 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 totaling $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 December 2000, the Nasdaq Board of Directors 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 had been made under the plans.
In May and July 2000, restricted common stock and options on common stock
of Nasdaq Japan were awarded to certain Nasdaq officers and key employees
who devote substantial time to the business of Nasdaq Japan. These awards
contain restrictions and are subject to vesting provisions. The stock
options were granted at an exercise price of $500 per share, the estimated
fair value of the stock at the time of the award. They are exercisable for
a period of 7.0 years, and are subject to vesting provisions, generally three
years. As of December 31, 2000 there were 205 stock options outstanding to
purchase shares of Nasdaq Japan held by Nasdaq Global, none of them exercisable,
with an approximate value of $24,700 per share. The restricted stock award
was for 475 shares at the estimated fair value of $500 per share. As of
December 31, 2000, the restricted stock had an approximate value of $25,000
per share, and 1/3 of the shares were vested. In April 2001, Nasdaq Japan's
shares split four-for-one.
These awards are marked to market, and the fair value is being expensed
over the vesting periods. Nasdaq recorded approximately $3.8 million in
compensation expense during 2000 related to these awards.
10. 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:
10. Leases (continued)
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
===================
11. 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.
12. 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. Nasdaq believes the
implementation of
12. Commitments and Contingencies (continued)
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 $14.9 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.
13. 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 operations and data communications 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
13. Related Party Transactions (continued)
administrative functions necessary for NASDR's performance of such services
commencing upon the effectiveness of Nasdaq's registration as a national
securites exchange. 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 operations and data communications 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:
13. Related Party Transactions (continued)
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.
14. 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 $ 23,306 $ 86,149 $ 34,955
Denominator for basic weighted average shares 112,090,493 100,000,000 100,000,000
Basic and diluted earnings per share:
Before cumulative effect of change in accounting
principle $ 1.11 $ 0.86 $ 0.35
Cumulative effect of change in accounting principle (0.90) - -
---------------------------------------------------
Net income $ 0.21 $ 0.86 $ 0.35
===================================================
14. Capital Stock and Earnings Per Share (continued)
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.
15. 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., a
pan-European market headquartered in Brussels for approximately $12.5
million. Nasdaq has renamed the company Nasdaq Europe S.A./N.V. ("Nasdaq
Europe") and plans to restructure it into a globally linked, pan-European
market.
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
an aggregate of 12.0 million shares of Common Stock at $20.00 per share,
subject to adjustment.
On a fully diluted basis, Hellman & Friedman 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 5% 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 is
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 $13.00 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. On
August 21, 2001, the Commodity Futures Trading Commission approved Nasdaq
LIFFE as a futures market and self-regulatory organization.
15. Subsequent Events (Unaudited) (continued)
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
534,850 shares of restricted stock to certain employees and officers
pursuant to its Equity Incentive Plan. Under the 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
534,850 shares of restricted stock were awarded at a fair value of $13.00
per share, and are being expensed over the vesting period.
[Page intentionally left blank]
The Nasdaq Stock Market, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
June 30, 2001 December 31, 2000
---------------- ----------------------
Assets:
Current assets:
Cash and cash equivalents $ 344,848 $ 262,257
Investments:
Available-for-sale, at fair value 255,187 232,090
Held-to-maturity, at amortized cost 9,680 21,967
Receivables, net 203,041 172,660
Receivables from related parties 20,390 8,250
Deferred tax asset 37,791 32,367
Other current assets 15,782 14,869
---------------- ----------------------
Total current assets 886,719 744,460
---------------- ----------------------
Investments:
Held-to-maturity, at amortized cost 19,125 6,612
Property and equipment:
Land, buildings and improvements 87,828 80,727
Data processing equipment and software 413,183 370,066
Furniture, equipment and leasehold improvements 166,106 134,638
---------------- ----------------------
667,117 585,431
Less accumulated depreciation and amortization (294,913) (252,380)
---------------- ----------------------
Total property and equipment, net 372,204 333,051
Non-current deferred tax asset 61,105 61,257
Other assets 27,515 25,753
---------------- ----------------------
Total assets $ 1,366,668 $ 1,171,133
================ ======================
See accompanying notes to unaudited condensed consolidated financial statements.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
(In thousands, except share amounts)
June 30, 2001 December 31, 2000
---------------- ------------------
Liabilities:
Current liabilities:
Accounts payable and accrued expenses $124,851 $117,867
Accrued personnel costs 31,679 37,273
Deferred revenue 107,404 66,178
Other accrued liabilities 53,178 35,374
Due to banks 5,107 13,876
Payables to related parties 27,689 19,158
---------------- ------------------
Total current liabilities 349,908 289,726
Long-term debt:
Senior notes 43,431 25,000
Subordinated indebtedness 240,000 -
Accrued pension costs 14,597 10,390
Non-current deferred tax liability 40,407 32,116
Non-current deferred revenue 128,481 138,166
Other liabilities 34,173 15,033
---------------- ------------------
Total long-term liabilities 501,089 220,705
Total liabilities 850,997 510,431
Minority interests 1,992 15,543
Stockholders' Equity
Common stock, $.01 par value, 300,000,000 authorized, Shares
issued: 128,692,543 in 2001 and 123,663,746 in 2000;
Shares outstanding: 110,231,005 in 2001 and 123,663,746
in 2000 1,287 1,237
Additional paid-in capital 337,039 273,387
Common stock in treasury, at cost: 18,461,538 shares in 2001
and 0 shares in 2000 (240,000) -
Unrealized gains on available-for-sale investments, net of tax 1,009 321
Foreign currency translation (5,134) (2,213)
Deferred stock compensation (5,619) -
Common stock issuable 6,895 -
Retained earnings 418,202 372,427
---------------- ------------------
Total stockholders' equity 513,679 645,159
---------------- ------------------
Total liabilities, minority interest and stockholders' equity $ 1,366,668 $ 1,171,133
================ ==================
See accompanying notes to unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except share amounts)
Six months ended
-------------------------------------
June 30, 2001 June 30, 2000
---------------- -----------------
Revenues:
Transaction services $ 221,192 $ 199,948
Market information services 118,670 134,641
Issuer services 77,085 71,029
Other 27,126 12,901
---------------- -----------------
Total revenues 444,073 418,519
---------------- -----------------
Expenses:
Compensation and benefits 85,809 62,122
Marketing and advertising 11,649 22,873
Depreciation and amortization 42,664 28,538
Professional and contract services 31,566 21,198
Computer operations and data communications 87,948 61,839
Bad debt expense 13,003 2,150
Occupancy 13,462 8,002
Other 31,437 11,458
---------------- -----------------
Total direct expenses 317,538 218,180
---------------- -----------------
Support costs from related parties, net 51,708 52,797
---------------- -----------------
Total expenses 369,246 270,977
---------------- -----------------
Net operating income 74,827 147,542
Interest income 9,977 5,405
Interest expense (2,450) (959)
Minority interests 1,982 -
Provision for income taxes (38,561) (60,339)
---------------- -----------------
Income before cumulative effect of change in accounting
principle 45,775 91,649
---------------- -----------------
Cumulative effect of change in accounting principle, net of taxes of - $ (101,090)
$67,956
---------------- -----------------
Net income (loss) $ 45,775 $ (9,441)
================ =================
Basic and diluted earnings per share before cumulative effect of
change in accounting principle $ 0.37 $ 0.91
================ =================
Basic and diluted earnings (loss) per share for change in accounting
principle $ - $ (1.01)
================ =================
Basic and diluted earnings (loss) per share $ 0.37 $ (0.09)
================ =================
See accompanying notes to unaudited condensed consolidated financial statements.
The Nasdaq Stock Market, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands, except share amounts)
Six months ended
June 30, 2001 June 30, 2000
----------------- ------------------
Cash flow from operating activities
Cash received from customers $ 441,027 $ 426,105
Cash paid to suppliers and employees (257,159) (214,998)
Cash paid to related parties, net (50,009) (59,569)
Income taxes paid (22,259) (20,799)
Interest received, net 7,500 4,464
Other (6,897) 259
----------------- ------------------
Cash provided by operating activities 112,203 135,462
----------------- ------------------
Cash flow from investing activities
Proceeds from redemptions of available-for-sale investments 160,979 39,162
Purchases of available-for-sale investments (186,864) (52,411)
Proceeds from maturities of held-to-maturity investments - 3,000
Purchases of held-to-maturity investments (226) (3,203)
Acquisition, net of cash acquired 558 (16,979)
Proceeds from sale of stock in Nasdaq Europe 9,564 -
Proceeds from sales of property and equipment 21,868 3,755
Purchases of property and equipment (76,884) (45,428)
----------------- ------------------
Cash used in investing activities (71,005) (72,104)
----------------- ------------------
Cash flow from financing activities
Decrease in due to banks (8,769) (2,505)
Proceeds from Phase I private placement offering - 254,142
Contributions from minority shareholders - 30,000
Net proceeds from Phase II private placement 63,688 -
Repayment of minority interests in Nasdaq Europe Planning
Company Limited (20,000) -
Payments for treasury stock purchases (240,000) -
Increase in long-term debt 246,474 -
----------------- ------------------
Cash provided by financing activities 41,393 281,637
----------------- ------------------
Increase in cash and cash equivalents 82,591 344,995
Cash and cash equivalents at beginning of period 262,257 10,598
----------------- ------------------
Cash and cash equivalents at end of period $ 344,848 $ 355,593
================= ==================
See accompanying notes to unaudited condensed consolidated financial statements.
Consolidated Statements of Cash Flow (continued)
(Unaudited)
(In thousands, except share amounts)
Six months ended
June 30, 2001 June 30, 2000
----------------- ----------------
Reconciliation of net income (loss) to cash provided by operating
activities
Net income (loss) $ 45,775 $ (9,441)
Non-cash items included in net income (loss):
Cumulative effect of change in accounting principle, net of taxes - 101,090
Depreciation and amortization 42,664 28,538
Stock-based compensation 1,276 -
Minority interests 1,765 -
Other non-cash adjustments included in net income (1,258) -
Net change in:
Receivables, net (29,521) (63,307)
Receivables from related parties (12,140) (14,527)
Deferred tax asset (5,890) (10,964)
Other current assets 454 3,778
Other assets (1,739) (1,228)
Accounts payable and accrued expenses (7,187) (21,366)
Accrued personnel costs (6,021) (9,934)
Deferred revenue 31,347 71,012
Other accrued liabilities 17,663 54,616
Payables to related parties 8,531 7,755
Accrued pension costs 4,207 1,731
Deferred tax liability 5,856 -
Other liabilities 16,421 (2,291)
----------------- ----------------
Cash provided by operating activities $ 112,203 $ 135,462
================= ================
See accompanying notes to unaudited condensed consolidated financial statements.
The Nasdaq Stock Market, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The Nasdaq Stock Market, Inc. ("Nasdaq") is the parent company of Nasdaq
Global Holdings; Quadsan Enterprises, Inc.; Nasdaq Tools, Inc. ("Nasdaq
Tools"); Nasdaq Financial Products Services, Inc. (formerly 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 subsidiary of the National Association of Securities Dealers, Inc.
(the "NASD").
Nasdaq operates in one segment as defined in the Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures About Segments of an
Enterprise and Related Information." Nasdaq uses a multiple market maker
system to operate an electronic, screen-based equity market. Nasdaq's
principal business products are issuer, transaction, and market information
services. The majority of this business is transacted with listed
companies, market data vendors, and firms in the broker-dealer industry
within the United States.
All material intercompany accounts and transactions have been eliminated in
consolidation. Nasdaq's financial statements have been prepared in
accordance with the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC") with respect to the Form 10-Q and reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. Pursuant to such rules and regulations, certain footnote
disclosures, which are normally required under generally accepted
accounting principles, have been omitted. It is recommended that these
financial statements be read in conjunction with the Condensed Consolidated
Financial Statements included in Nasdaq's Registration Statement filed on
Form 10, as amended, for the twelve months ended December 31, 2000.
The nature of Nasdaq's business is such that the results of any interim
period may vary significantly from quarter to quarter and may not be
indicative of the results to be expected for the fiscal year. Certain prior
period amounts reflect reclassifications to conform to the current period's
presentation.
2. Significant Transactions
In June 2001, Nasdaq Europe S.A./N.V. ("Nasdaq Europe"), a pan-European
stock market headquartered in Brussels, sold approximately an 11.0% stake
to a group of eight major U.S. and European securities firms. The sale
yielded net proceeds of approximately $9.6 million and reduced Nasdaq's
ownership in Nasdaq Europe to 60.5% (52.7% after potential dilution of
outstanding warrants). As a result of this transaction, Nasdaq adjusted the
carrying value of its investment in Nasdaq Europe, through stockholders'
equity, to reflect its adjusted share of the book value of Nasdaq Europe.
3. Change in Accounting Principle
On August 17, 2001, Nasdaq concluded discussions with the SEC with respect
to the implementation in its financial statements of Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which became effective for SEC reporting companies in the fourth quarter of
2000. Nasdaq became a SEC public reporting company on June 29, 2001, the
effective date of this Registration Statement. As a result of the
discussions with the SEC, Nasdaq changed its method of accounting for
revenue recognition for certain components of its issuer services revenues.
In accordance and consistent with generally accepted accounting principles,
as SAB 101 was adopted effective the fourth quarter of 2000, the change in
accounting principle has been applied as of January 1, 2000. In accordance
with applicable accounting guidance prior to SAB 101, Nasdaq recognized
revenue for issuer initial listing fees and listing of additional shares
("LAS") fees in the month the listing occurred or in the period additional
shares were issued, respectively. Nasdaq now recognizes revenue related to
initial listing fees and LAS fees on a straight line basis over estimated
service periods, which are six and four years, respectively.
3. Change in Accounting Principle (continued)
As a result of this change in accounting principle, pro forma net income
for the six months ended June 30, 2000, excluding the cumulative effect of
the change in accounting principle on prior years' results, decreased $16.4
million ($0.16 per share) to $91.6 million ($0.91 per share). In addition,
Nasdaq recognized a one-time cumulative effect of a change in accounting
principle in the first quarter of 2000. This cumulative effect of a change
in accounting principle decreased net income in the first six months of
2000 by $101.1 million ($1.01 per share), resulting in a $9.4 million loss
($0.09 per share). The adjustment to first quarter 2000 net income for the
cumulative change to prior years' results consists of the following:
(amounts in thousands)
Deferred initial listing fees $108,476
Deferred LAS fees 60,570
----------
Total deferred fees 169,046
Deferred income tax benefit (67,956)
----------
Cumulative effect of change in accounting principle $101,090
==========
For the six months ended June 30, 2001 and 2000, Nasdaq recognized $24.0
million and $29.3 million in revenue, respectively, that was included in
the cumulative effect adjustment as of January 1, 2000. This revenue
contributed $14.4 million (after income taxes of $9.6 million) and $17.5
million (after income taxes of $11.8 million) to net income for the six
months ended June 30, 2001 and 2000, respectively.
4. Deferred Revenue
Nasdaq's deferred revenue as of June 30, 2001 related to issuer services
fees will be recognized in the following years:
(amounts in thousands)
Fiscal year ended: Initial LAS Annual Total
-------------- -------------- -------------- -----------------
2001 $ 17,426 $16,963 $42,203 $ 76,592
2002 30,989 27,516 - 58,505
2003 26,348 20,617 - 46,965
2004 21,622 10,066 - 31,688
2005 and thereafter 20,762 1,373 - 22,135
-------------- -------------- -------------- -----------------
$ 117,147 $ 76,535 $ 42,203 $235,885
============== ============== ============== =================
Nasdaq's deferred revenue for the six months ended June 30, 2001 and 2000
are reflected in the following tables. The additions reflect the issuer
services fees charged during the quarter while the amortization reflects
the issuer services fee revenues recognized during the period based on the
accounting methodology described in Note 3 above.
(amounts in thousands) Initial LAS Annual Total
--------------- --------------- --------------- ---------------
Balance at January 1, 2001 $ 127,693 $76,651 $ - $ 204,344
Additions 7,496 17,592 83,538 108,626
Amortization (18,042) (17,708) (41,335) (77,085)
--------------- --------------- --------------- ---------------
Balance at June 30, 2001 $ 117,147 $76,535 $ 42,203 $ 235,885
=============== =============== =============== ===============
(amounts in thousands) Initial LAS Annual Total
--------------- --------------- --------------- ---------------
Balance at January 1, 2000 $ 108,476 $60,570 $ - $ 169,046
Additions 30,823 28,734 79,409 138,966
Amortization (16,235) (16,049) (38,745) (71,029)
--------------- --------------- --------------- ---------------
Balance at June 30, 2000 $ 123,064 $ 73,255 $ 40,664 $ 236,983
=============== =============== =============== ===============
5. Long-term debt
During the six months ended June 30, 2001, Nasdaq's consolidated long-term
debt increased by $258.4 million to $283.4 million. The increase reflects
$18.4 million of senior debt of Nasdaq Europe, acquired by Nasdaq during
the first quarter of 2001. Of this total, $2.6 million matures in 2003 with
the remaining $15.8 million maturing in 2004. The debt is Euro-denominated
with $3.5 million containing contractual fixed interest rates and $14.9
million containing interest rates based on a fixed premium above London
Interbank Offered Rates.
The increase also reflects the issuance of $240.0 million of 4% convertible
subordinated debentures due 2006 (the "Subordinated Debentures") to Hellman
& Friedman Capital Partners IV, L.P. and its affiliates (collectively,
"Hellman & Friedman") on May 3, 2001. The annual 4% coupon will be payable
in arrears in cash and the Subordinated Debentures will be convertible at
any time into an aggregate of 12 million shares of Common Stock at $20.00
per share, subject to adjustment.
On a fully diluted basis, Hellman & Friedman 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 the holders of Subordinated Debentures to
vote on an as-converted basis on all matters on which common stockholders
have the right to vote, subject to the current 5% voting
limitation in Nasdaq's Restated Certificate of Incorporation. Nasdaq has
granted Hellman & Friedman certain registration rights with respect to the
shares of Common Stock underlying the Subordinated Debentures. In addition,
Hellman & Friedman is 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. Effective May 3, 2001, F. Warren Hellman was elected
to Nasdaq's Board of Directors pursuant to the foregoing provision.
6. Commitments and Contingencies
In October 2000, Nasdaq entered into a contract with OptiMark, Inc. under
which OptiMark was engaged to provide software development services in
connection with the development of the SuperMontage system. In May 2001,
Nasdaq entered into a revised contract with OptiMark, under which the
Company will make guaranteed payments of $0.7 million per month through
December 31, 2001 related to the design of the system.
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.
7. Comprehensive Income
Comprehensive income is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Comprehensive income combines net income and certain items that
directly affect stockholders' equity, such as foreign currency translation
adjustments. The components of comprehensive income for the six months
ended June 30, 2001 and 2000 were as follows:
(amounts in millions)
Six months ended
June 30,
------------------------------
2001 2000
--------------- -------------
Net income (loss) $45.8 $(9.4)
Unrealized gains on available-for-sale
investments 0.7 (0.4)
Foreign currency translation adjustment (2.9) -
--------------- -------------
Total comprehensive income (loss) $43.6 $(9.8)
=============== =============
8. Capital Stock and Earnings Per Share
On May 3, 2001, Nasdaq used the net proceeds from the sale of the
Subordinated Debentures (see Note 5) to purchase 18,461,538 shares of
Common Stock from the NASD for $13.00 per share for an aggregate purchase
price of approximately $240.0 million. 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 the
NASD.
The following table sets forth the computation of basic and diluted
earnings per share.
Six months ended
------------------------------------
(amounts in thousands, except share and per share data) June 30, 2001 June 30, 2000
--------------- ----------------
Numerator:
Income before cumulative effect of change in accounting principle $ 45,775 $ 91,649
Numerator for basic earnings per share before cumulative effect of
change in accounting principle 45,775 91,649
Cumulative effect of change in accounting principle - (101,090)
Numerator for basic earnings per share for change
in accounting principle - (101,090)
Net income (loss) 45,775 (9,441)
Numerator for basic earnings per share 45,775 (9,441)
Interest impact of convertible debt, net of tax 902 -
Numerator for diluted earnings per share 46,677 (9,441)
Denominator:
Weighted average shares 122,304,373 100,390,062
Denominator for basic earnings per share 122,304,373 100,390,062
Effect of dilutive securities:
Employee stock options - -
Employee restricted stock 26,523 -
Convertible debt assumed converted into common 3,845,304 -
Denominator for diluted earnings per share 126,176,200 100,390,062
Basic earnings per share before cumulative effect of change in accounting
principle $ 0.37 $ 0.91
================== =================
Diluted earnings per share before cumulative effect of change in
accounting principle $ 0.37 $ 0.91
================== =================
Basic earnings (loss) per share for change in accounting principle $ - $ (1.01)
================== =================
Diluted earnings (loss) per share for change in accounting principle $ - $ (1.01)
================== =================
Basic earnings (loss) per share $ 0.37 $ (0.09)
================== =================
Diluted earnings (loss) per share $ 0.37 $ (0.09)
================== =================
8. Capital Stock and Earnings Per Share (continued)
For the six month period ended June 30, 2001, the Subordinated Debentures
were convertible into 12.0 million shares of Common Stock at a conversion
price of $20.00 per share, subject to adjustment. For purposes of
calculating diluted earnings per share, the Subordinated Debentures were
assumed to be converted into shares of Common Stock, on a weighted average
basis, since basic earnings per share exceeded interest (net of tax) per
share obtainable upon conversion.
The option awards made during the first quarter of 2001 were not included
in computing diluted earnings per share as their effect was not dilutive.
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, affective as of December 29, 2000.(+)
10.18.1 Letter Agreement, dated July 22, 2001, among Frank G. Zarb, the
National Association of Securities Dealers, Inc. and The Nasdaq
Stock Market, Inc.
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.
Exhibit 10.18.1
July 22, 2001
H. Furlong Baldwin
Chairman of The Nasdaq Stock Market, Inc.
Management Compensation Committee
Mercantile Bankshares Corporation
2 Hopkins Plaza
Baltimore, MD 21201
Todd Robinson
Chairman of the National Association of Securities Dealers, Inc.
Management Compensation Committee
Chairman and CEO
LPL Financial Services
155 Federal Street
Boston, MA 02110
Dear Messers. Baldwin and Robinson:
The attachment summarizes the previously agreed to terms of my
employment contract with the National Association of Securities Dealers,
Inc. and The Nasdaq Stock Market, Inc., as amended, for (i) the period
beginning on the date I relinquish my position and duties pursuant to
paragraph 1(b) of my employment agreement and ending February 23, 2002, and
(ii) the period beginning February 24, 2002 and ending February 23, 2007.
In addition, although my employment agreement currently provides that I am
entitled to the following benefits, it is no longer necessary that I
receive them and I therefore relinquish my rights to them: (i) a T1-line
telephone system connected to the telephone system of The Nasdaq Stock
Market, Inc. and maintenance thereof, (ii) an efficiency apartment in the
Washington, D.C. metropolitan area, and (iii) a personal bodyguard for my
wife and I. If during the period beginning February 24, 2002 and ending
February 23, 2007, I provide consulting services during any 12-month period
for more than 50 hours to either the National Association of Securities
Dealers, Inc. or The Nasdaq Stock Market, Inc., I will be paid for each such
hour or portion thereof at the rate of $2,000 per hour.
Please sign below to indicate that you agree that my relationship with the
National Association of Securities Dealers, Inc. and The Nasdaq Stock
Market, Inc. will be in accordance with the terms summarized here and in
the attachment.
Sincerely,
/s/ Frank G. Zarb
Frank G. Zarb
/s/ H. Furlong Baldwin 7/24/01 /s/ Todd Robinson 7/26/01
- ----------------------- -------- ------------------------ -----------
H. Furlong Baldwin Date Todd Robinson Date
Attachment
The Period Beginning on the Date Zarb Relinquishes his Position and
Duties Pursuant to Paragraph 1(b) of his Employment Agreement and Ending
February 23,2002
- --------------------------------------------------------------------
Position: Zarb will be an employee, and not an officer, of
the National Association of Securities Dealers,
Inc. (the "Association") and The Nasdaq Stock
Market, Inc. (the "Nasdaq"), but will serve as a
senior advisor (employee) to the Association and
the Nasdaq and will continue to serve as
Chairman of Nasdaq-Europe and as a member of the
Board of Directors of Nasdaq-Japan.
- --------------------------------------------------------------------
Salary and Bonus: Zarb will be paid salary and bonus as
provided in his employment agreement with the
Association and the Nasdaq, as amended (the
"Employment Agreement").
- --------------------------------------------------------------------
SERP: Zarb will continue to accrue benefits under the
SERP as provided in the Employment Agreement.
- --------------------------------------------------------------------
Reimbursement: Zarb will be reimbursed for each of the expenses
provided in the Employment Agreement including,
but not limited to, the following:
(i) all expenses incurred in moving from his
interim residence in New York to a permanent
residence in New York (the Association will
purchase the interim residence for an amount
equal to 100% of its fair market value as
determined in accordance with customary
appraisal and timing standards for such
transaction by one or more appraisers approved
by the Association and reasonably acceptable to
Zarb)(1),
(ii) the cost of installing and maintaining two
telephone lines in each of Zarb's New York and
Florida residences,
- --------
(1) The Zarbs expect to move into their permanent residence by
October 1, 2002.
(iii) the cost for surveillance of Zarb's
personal residences and/or such other reasonable
methods of security as required by Zarb and
(iv) the cost for an appropriate corporate apartment
in the borough of Manhattan.(2)
- --------------------------------------------------------------------
Automobile: Zarb will be entitled to the use of an
automobile as provided by the Employment
Agreement.
- --------------------------------------------------------------------
Health: Zarb will be entitled to participate in health
plans or arrangements as provided by the
Employment Agreement.
- --------------------------------------------------------------------
Office: Zarb will be entitled to appropriate office and
secretarial services.
- --------------------------------------------------------------------
Stock Options and Zarb will be entitled to exercise all stock options
Restricted Stock: in accordance with the provisions in the Employment
Agreement. Also, all restrictions on any restricted
stock awarded to Zarb by the Nasdaq will lapse in
accordance with the provisions in the Employment
Agreement.
- --------------------------------------------------------------------
- --------
(2) The Zarbs are doing a search for a permanent apartment in New York
and will vacate the corporate apartment no later than October, 2002.
The Period Beginning February 24, 2002 and ending February 23,2007
--------------------------------------------------------------------
Position: Zarb will serve as a consultant to the Association
and the Nasdaq.
- --------------------------------------------------------------------
Consulting Fee: Zarb will receive an annual consulting fee as
provided by the Employment Agreement
- --------------------------------------------------------------------
SERP: Zarb will receive the benefits pursuant to the
SERP as provided by the Employment Agreement.
- --------------------------------------------------------------------
Reimbursement: Zarb will be reimbursed for each of the expenses
provided in the Employment Agreement including,
but not limited to, the following;
(i) to the extent Zarb has not previously moved
to his permanent residence in New York, all
expenses incurred in moving from his interim
residence in New York to a permanent residence
in New York (the Association will purchase the
interim residence for an amount equal to 100% of
its fair market value as determined in
accordance with customary appraisal and timing
standards for such transaction by one or more
appraisers approved by the Association and
reasonably acceptable to Zarb)(3),
(ii) the cost of maintaining two telephone lines
in each of Zarb's New York and Florida
residences,
(iii) to the extent the Association or the
Nasdaq has not previously reimbursed Zarb for
the cost of installing a home security system in
Zarb's New York permanent residence, the cost of
installing and maintaining a home security
system in Zarb's New York permanent residence,
(iv) the continued use of the corporate
apartment in Manhattan (until October, 2002),
and
(v) surveillance of Zarb's personal residences
and/or such other reasonable methods of security
as requested by Zarb.
- --------------------------------------------------------------------
- --------
(3) The Zarbs expect to move into their permanent residence by
October 1, 2002.
Automobile: Zarb will be entitled to the use of an
automobile as provided in the Employment
Agreement.
- --------------------------------------------------------------------
Health: Zarb will be entitled to health benefits as
provided in the Employment Agreement
- --------------------------------------------------------------------
Office: Zarb will be entitled to appropriate office and
secretarial services as provided in the
Employment Agreement.
- --------------------------------------------------------------------
Indemnification: Zarb will be indemnified by the Association and
the Nasdaq as provided in the Employment
Agreement.
