As filed with the Securities and Exchange Commission on May 14, 2001
File No. 000-32651
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
To
Form 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
The Nasdaq Stock Market, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
Delaware 52-1165937
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Liberty Plaza
New York, New York 10006
(Address of Principal (Zip Code)
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
Item 1. Business..............................................................
Item 2. Financial Information.................................................
Item 3. Properties............................................................
Item 4. Security Ownership of Certain Beneficial Owners and Management........
Item 5. Directors and Executive Officers......................................
Item 6. Executive Compensation................................................
Item 7. Certain Relationships and Related Transactions........................
Item 8. Legal Proceedings.....................................................
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters.......................................
Item 10. Recent Sales of Unregistered Securities...............................
Item 11. Description of Registrant's Securities to be Registered...............
Item 12. Indemnification of Directors and Officers.............................
Item 13. Financial Statements and Supplementary Data...........................
Item 14. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.............................................
Item 15. Financial Statements and Exhibits.....................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.....................................
Certain statements in this registration statement (the
"Registration Statement") contain or may contain information that is
forward-looking within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Actual results may
differ materially from those described in the forward-looking statements
and will be affected by a variety of risks and factors including, without
limitation, the risks described in "Item 1. Business--Risk Factors" of this
Registration Statement. Readers should carefully review this Registration
Statement in its entirety, including, but not limited to, The Nasdaq Stock
Market, Inc.'s ("Nasdaq") financial statements and the notes thereto.
Nasdaq undertakes no obligation to publicly release any revisions to such
forward-looking statements to reflect events or circumstances after the
date hereof.
Item 1. Business.
Nasdaq Overview
Nasdaq 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 the world's first truly global securities
market. Since its inception in 1971, Nasdaq has been at the forefront of
innovation and a leader in utilizing technology to enhance the securities
markets. Nasdaq's total share volume for the year ended December 31, 2000
increased approximately 63.5% compared to the year ended December 31, 1999
to 442.7 billion shares, which represented approximately 61.6% of the total
shares traded in the United States. Dollar volume for the year ended
December 31, 2000 increased 85.2% compared to the year ended December 31,
1999 to $20.4 trillion, approximately 62.9% of the dollar volume of all
equity shares traded in the United States. For the year ended December 31,
2000, Nasdaq share volume averaged approximately 1.76 billion shares daily
and the dollar volume on Nasdaq averaged $81 billion per day. In addition,
the market value of Nasdaq-listed companies has increased over the last
five years from $1.5 trillion at December 31, 1996 to $3.6 trillion at
December 31, 2000, which represents approximately 22.3% of total U.S.
equity market value compared to 17% five years ago.
There are approximately 4,700 companies listed on Nasdaq, making it the
market of choice for more companies than any other U.S. equities market. As
of December 31, 2000, Nasdaq was home to the highest percentage of
publicly-traded technology and service companies in the U.S., including 77%
of computer hardware and peripherals companies, 96% of computer networking
companies, 87% of computer software and data processing companies, 87% of
semiconductor companies, 72% of telecommunications and electronic
companies, and 81% of biotechnology companies. In addition, as of December
31, 2000, there were over 480 foreign companies listed on Nasdaq, more than
on any other U.S. equities market. Of all U.S. initial public offerings in
the year ended December 31, 2000, 397 companies, or approximately 88% of
initial public offerings on primary U.S. exchanges, were brought to market
on Nasdaq and raised over $52.5 billion in equity capital.
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 March 31, 2001, the companies in
the Nasdaq-100 Index had an average market capitalization of approximately
$16.1 billion and an average daily trading share volume of 11.8 million
shares. From March 31, 1991 to March 31, 2001, the Nasdaq-100 Index rose by
approximately 494%. In addition, the Nasdaq Composite Index(R) rose by
approximately 282% over the same 10 year period, compared with an
approximate 209% gain for the S&P 500 Index(R), an approximate 239% gain
for the Dow Jones Industrial Average, and an approximate 190% gain for the
NYSE Composite Index(R). The Nasdaq Composite Index 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.
Nasdaq, initially an automated quotation system, has evolved into an
electronic screen-based display and execution system to provide price
discovery and high levels of liquidity for thousands of equity securities.
Since its inception, Nasdaq has expanded its services through the
innovative deployment of technology to provide better price discovery and
trade executions, enhanced services for issuer listings, and broader
information dissemination. Nasdaq has three main revenue sources:
o transaction services, which accounted for approximately
45.5% of Nasdaq's revenues for the year ended December
31, 2000;
o market information services, which accounted for
approximately 29.8% of Nasdaq's revenues for the year
ended December 31, 2000; and
o issuer services, which accounted for approximately 21.3%
of Nasdaq's revenues for the year ended December 31,
2000.
Nasdaq's total revenues increased from $332.2 million for the year ended
December 31, 1996 to $868.0 million for the year ended December 31, 2000,
representing a compounded annual growth rate of 27.2% that was primarily
due to a strong increase in market information and transaction services
revenues. Nasdaq's total revenues for the year ended December 31, 2000 of
$868.0 million increased $233.8 million, or 36.9% from $634.2 million for
the year ended December 31, 1999. The growth in revenues for the year
ending December 31, 2000 was due primarily to the growth in trading volumes
and market information services. See "Item 15. Financial Statements and
Exhibits."
Industry Overview
Historically, stock markets have served as gathering points for buyers and
sellers of securities. In the U.S., traditional stock markets operate in an
order-driven "physical" environment-a single trading floor where orders are
routed through a designated dealer called a specialist. Structured to
respond to incoming orders, floor-based stock markets employ an auction
system that channels trades for a particular stock through a specialist.
This gives one specialist an exclusive franchise to make a market in a
particular security. The basic function of a specialist is to maintain an
orderly market while allowing public agency orders to interact with one
another.
Development of advanced communication and computer technology, as well as
certain regulatory developments, changed the needs and expectations of the
securities industry. In response, a new stock market model was pioneered by
Nasdaq in 1971: a quotation-driven, floor-less, screen-based, electronic
dealer market model. This market linked widely dispersed buyers and sellers
without the limitation of a single location or the restriction of
channeling all trades through a single specialist. The Nasdaq model
accommodates a system of multiple geographically dispersed market makers
and alternative trading systems ("ATSs"). These ATSs that are linked
together via a screen-based, electronic trading and execution system
include both crossing systems and electronic communications networks
("ECNs")(1). Nasdaq information technology receives and then simultaneously
broadcasts quotes representing investor orders or market maker interest to
more than 500,000 computer terminals worldwide.
- --------
(1) Crossing systems collect orders to buy and sell, and thereafter,
at predetermined times match buyers and sellers in a batch
processing mode. ECNs are formally defined in Rule 11 Ac1-1 of the
Exchange Act. Their primary function is to act as a venue for the
display of subscriber limit orders.
Market makers openly compete with one another for investors' orders and are
responsible for providing continuous, two-sided quotes (the "bid" and
"ask"). Excluding ECNs, which actively display orders in many stocks of
Nasdaq-listed companies, there is an average of approximately 14 market
makers for each stock traded on Nasdaq. Some of Nasdaq's more actively
traded stocks far exceed this average and some stocks have over 80 market
makers. Collectively, the market makers provide continuous depth (the
numbers of buyers and sellers) and liquidity (the ease with which the
market can absorb volume buying and selling without dramatic fluctuation in
price) while maintaining an orderly market.
Nasdaq has evolved to incorporate features of both quotation-driven
(dealer) and order-driven (auction) markets. The SEC Order Handling Rules
of 1996 generally provide a means for investors to have their best-priced
limit orders (orders to buy or sell stock at a specified price) displayed
to all market participants. When an investor's limit order is priced better
than the market maker quote to which the investor (or his broker) has given
his limit order, the investor's order can determine the inside spread (the
difference between a stock's best buy and sell price). Nasdaq's
implementation of these rules further enhanced both the depth and liquidity
of the market.
The securities industry is once again undergoing sweeping changes, spurred
by factors such as: rapid advances in information technology (in particular
the Internet); globalization of securities trading; the dramatic increase
in trading volume in the stock markets; regulatory changes (in particular
the Order Handling Rules and the SEC's Regulation ATS); and the emergence
of ATSs. These changes present the securities industry with the challenge
of developing a stock market model that can provide a natural center of
liquidity and depth and, therefore, of price discovery. To be successful, a
stock market may be required to provide globally dispersed buyers and
sellers round-the-clock stock price quotation and immediate execution of
trades in a low-cost environment.
Nasdaq's Strategic Initiatives
Nasdaq's strategic initiatives include enhancing its market structure,
pursuing global market expansion through the creation of Nasdaq Japan, Inc.
("Nasdaq Japan") and Nasdaq Europe S.A./N.V. and exploring alliances with
foreign exchanges, competing for listings, competing for trading volume in
exchange-listed securities, and creating a market for listing and trading
single stock futures.
Enhancing Market Structure.
Nasdaq National Market ("NNM") Execution System. The NNM Execution System
(also known as "SuperSOES(sm)") is an improved order execution system
designed to provide automatic execution capability for market makers and
order entry firms and streamline Nasdaq's transaction systems. The NNM
Execution System will combine features of the existing SelectNet(R) and
Small Order Execution System ("SOES(sm)"). SelectNet is an order delivery
and negotiation system that facilitates order execution. It currently links
all market participants that trade Nasdaq stocks and is the primary system
that market makers use to trade with one another. SOES currently provides
for the automatic execution of small orders of public customers. The
central purpose of the NNM Execution System is to encourage and assist
market participants to provide liquidity by increasing their ability to
manage the receipt and execution of the dramatically increased volume of
orders prevalent in today's Nasdaq market.
Among other things, NNM Execution System rules:
o permit automatic execution of both customer and market
maker proprietary orders against the best priced quote in
the market;
o establish a larger maximum automatic execution order
entry size of up to 999,999 shares for NNM securities;
o reduce time delays between NNM executions against the
same market maker at the same price level; and
o enable system interaction with a market maker's reserve
size in NNM securities.
The new system was recently approved by the SEC and is tentatively
scheduled to begin operating in the third quarter of 2001.
Nasdaq Order Display Facility. On January 10, 2001, the SEC approved a rule
proposal to establish the Nasdaq Order Display Facility
("SuperMontage(sm)") to improve the Nasdaq market structure and make it a
strong natural center of liquidity. SuperMontage, a fundamental market
enhancement, is an improved user interface designed to refine how market
participants can access, process, display, and integrate orders and quotes
in Nasdaq. SuperMontage has several strategic implications. First, it is
intended to attract more orders to the Nasdaq market by providing a
comprehensive display of the interest at or near the inside market (i.e,
the highest bid and the lowest offer for a security, which is also called
the "inside quote"). Second, SuperMontage is intended to increase
competition and market transparency. Third, SuperMontage will provide
pre-trade anonymity to market participants using a Nasdaq system. As such,
prior to execution, no one will know the identity of the firm displaying
the order unless such firm reveals its identity.
In the January 10 approval order, the SEC imposed certain conditions on
both Nasdaq and the National Association of Securities Dealers, Inc. (the
"NASD") that must be met prior to the implementation of SuperMontage. These
conditions include that:
o the NASD will offer a quote and trade reporting
alternative that satisfies the Order Handling Rules,
Regulation ATS, and other regulatory requirements for
ATSs and market makers;
o NASD quotes disseminated through the exclusive securities
information processor ("ESIP") will identify the ATS 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(R)
("NWII"), which will show the top three price levels: the best bid/best
offer in Nasdaq, and the two subsequent price levels. In each case, this
display will be accompanied by the aggregate order size at each price
level. Nasdaq market makers and ECNs that are members of The Nasdaq Stock
Market will be able to display their orders anonymously at these price
levels in SuperMontage, thus encouraging display of greater trading
interest. As currently envisioned, SuperMontage displays the aggregate
trading interest in a security at the top of the screen by aggregating
multiple levels of trading interest of identified market participants and
any non-identified interest that exists in such security, which is entered
into the Nasdaq system. Market participants will be able to access the best
prices in SuperMontage electronically using enhanced versions of Nasdaq's
NNM Execution System and SelectNet services. Thus, Nasdaq will provide
order delivery and automatic execution against the prices displayed in
SuperMontage. Nasdaq will continue to offer the ability for market
participants to negotiate transactions with specific market makers and ECNs
electronically at sizes above the quote size in Nasdaq.
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 top price point in the market
maker's book/system. This functionality will also assist market
participants with compliance with the Order Handling Rules. Other system
enhancements will make it easier for ECNs to participate in automatic
execution.
Pursuing Global Market Expansion. The forces of technology and deregulation
are accelerating the pace of globalization in the trading and processing of
securities. Nasdaq believes that the foundation to create a global exchange
should be built on a strong regional presence in the dominant capital
centers of the world. At this time, those centers are the United States,
Europe, and parts of Asia, particularly Japan. By establishing centers for
price discovery and trading in these key regions, the foundation will be
developed for electronically linking these markets to establish a global
platform.
Nasdaq Japan. In June 1999, a joint venture agreement was entered into with
SOFTBANK Corp. of Japan to capitalize a new company, Nasdaq Japan Planning
Company, Inc. (subsequently renamed Nasdaq Japan, Inc.), which is
undertaking to develop and implement a new electronic stock market in Japan
as a section of the Osaka Securities Exchange (the "OSE"). On April 19,
2000, Nasdaq Japan signed a Business Collaboration Agreement with the OSE
to establish Nasdaq Japan Market as a new market section of the OSE. The
Nasdaq Japan Market began operations on June 19, 2000. In its first phase
of operations, prior to its deployment of Nasdaq/Indigo Markets technology,
Nasdaq Japan will recruit initial public offerings of companies for listing
and will trade these securities on the existing OSE system. As of March 31,
2001, 41 companies are trading on the interim trading platform. 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 intends to be competitive in the trading of U.S.
listed securities and exchange-traded funds ("ETFs") in Japan, with the
trading of the Nasdaq-100 QQQ ETF planned to begin in 2001.
On October 24, 2000, Nasdaq Japan sold in a private placement transaction
an approximately 15 percent stake for approximately $48 million to a group
of 13 major Japanese, U.S., and European brokerages, thereby reducing the
ownership interest of Nasdaq Global Holdings ("Nasdaq Global") in Nasdaq
Japan to approximately 39 percent. Nasdaq Global is a wholly- owned
subsidiary of Nasdaq. 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 acquired an initial 68% stake
in EASDAQ S.A./N.V. ("EASDAQ") with an immediate aim to dilute its interest
to 51% through the introduction of other strategic partners as
siareholders. EASDAQ is a pan-European stock market for emerging growth
companies and is headquartered in Brussels. Under the agreement, Nasdaq has
restructured EASDAQ into Nasdaq Europe S.A./N.V., which expects to become a
globally linked pan-European market. By the end of the second quarter of
2001, it is expected that Nasdaq Europe S.A./N.V. will launch the newly
developed European Trading System ("ETS"). ETS is expected to offer similar
functionality as The Nasdaq Stock Market while being adaptable to the needs
and requirements of the European market. In addition, Nasdaq Europe
S.A./N.V. intends to introduce a hybrid market model (similar to
SuperMontage) customized to European best practices later this year. This
market model will integrate market maker quotes into an anonymous,
voluntary limit order book and provide expanded negotiation facilities and
trade reporting.
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. 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. 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.
Competing for Listings. Nasdaq will continue to pursue new listings
aggressively. As of December 31, 2000, there were 4,734 issuers listed on
Nasdaq. From January 1 through December 31, 2000, 397 new issuers listed on
Nasdaq following their initial public offerings, which raised over $52.5
billion. Since 1990, over 88% of companies having initial public offerings
on primary U.S. markets have chosen to list on Nasdaq. Nevertheless,
Nasdaq's overall number of listings has declined in each of the last five
fiscal years from a record high of 5,556 listings as of December 31, 1996
as a result of Nasdaq imposing more rigorous listing standards and
consolidation of listings due to increased merger and acquisition activity.
Nasdaq's strategies for maintaining its current listings and gaining new
listings include marketing and building brand identity, contacting key
decision makers, and providing value-added issuer services.
Marketing. Marketing efforts center on creating a valuable brand-an
important factor in attracting and retaining large world class growth
companies. Nasdaq's branding strategy is designed to convey to the public
that the world's innovative, successful growth companies are listed on
Nasdaq. New and existing companies value being listed on a market that is
recognized around the world, and that helps position them as highly
attractive to investors of all types. Nasdaq employs a variety of
initiatives and tools in its marketing efforts, including media
advertising, Internet publishing (Nasdaq.com), and international road
shows.
Contacting Key Decision Makers. Nasdaq's issuer services directors are
continually engaged with each key Nasdaq-listed company. A schedule of
calls and visits along with contact with various industry and market forums
are used to enhance customer satisfaction, keep companies informed of new
developments at Nasdaq, and discuss the benefits of a listing on Nasdaq.
Nasdaq also has created a program to educate investment bankers, capital
market dealers, institutional investors, and other constituencies that
influence listing decisions.
Issuer Services. Nasdaq provides value-added information services,
products, and programs to Nasdaq-listed companies. This combination of
online real time data and analytical information, along with a series of
seminars and other programs, is designed to help management of listed
companies make better equity management decisions. Nasdaq offers a variety
of value-added products and services to Nasdaq-listed companies, and each
company is assigned a Nasdaq issuer service director.
Competing for Trading Volume in Exchange-Listed Securities. Nasdaq
InterMarket consists of exchange-listed stocks traded off the floor of an
exchange. For the year ended December 31, 2000, Nasdaq InterMarket
accounted for approximately 10.6% of trades in stocks listed on the New
York Stock Exchange, Inc. (the "NYSE") and approximately 16.2% of trades in
stocks listed on the American Stock Exchange LLC ("Amex"). The vast
majority of Nasdaq InterMarket trades are reported to the Consolidated Tape
Association ("CTA") Plan by two major wholesale market makers. One ECN
currently quotes in Nasdaq InterMarket; other ECNs report trades through
Nasdaq systems to CTA and some are planning to begin quoting in Nasdaq
InterMarket. Additionally, there is significant trading activity accounted
for by NASD members that trade exchange-listed stocks away from a
registered exchange. The Nasdaq-like open architecture of Nasdaq
InterMarket allows market participants to provide fast, low-cost executions
for the sector of the market accounted for by online traders.
The current business environment provides the opportunity for a vigorous
Nasdaq InterMarket effort to increase market share by encouraging
additional market makers and ECNs to participate. Nasdaq InterMarket
operates a transaction credit program designed to lower costs for
InterMarket participants executing trades through Nasdaq facilities. The
program allows 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 the InterMarket trading
environment. As more quotes and orders are displayed within Nasdaq
InterMarket, trading among its participants could expand, increasing the
value of the Nasdaq facilities that support Nasdaq InterMarket.
Creating a Single Stock Futures Market. On March 20, 2001, Nasdaq entered
into a non-binding letter of intent and is currently negotiating a
definitive agreement with the London International Financial Futures and
Options Exchange ("LIFFE") to create a new U.S. joint venture company that
will list and trade single stock futures. The products of the new joint
venture are expected to be traded through the LIFFE CONNECT(TM) electronic
system.
Products and Services
Nasdaq's revenue sources can be classified into three principal categories:
(1) transaction services, which accounted for approximately 45.5% of
Nasdaq's revenues for the year ended December 31, 2000; (2) market
information services, which accounted for approximately 29.8% of Nasdaq's
revenues for the year ended December 31, 2000; and (3) issuer services,
which accounted for approximately 21.3% of Nasdaq's revenues for the year
ended December 31, 2000.
Transaction Services. Transaction services provide dealers and traders with
price discovery, order routing and processing, and trade reporting and
comparison tools supported by key technologies.
Dissemination of Quotes. Nasdaq provides quotation collection, processing,
and dissemination to its market participants. Subscribers to the system pay
a monthly fee based generally on the number of display terminals used by
the subscriber. Using the network, market makers and ECN operators enter
quotes that are then processed and broadcast to all other subscribers. The
highest bid and lowest offer combine to set the inside market.
Order Routing and Processing. Historically, orders for Nasdaq-listed stocks
were communicated via the telephone. However, advances in technology made
routing with electronic systems prevalent. Since the late 1980s, Nasdaq has
provided order routing services that during the last few years have
experienced increased usage. Approximately 27% of Nasdaq's share volume
comes from orders routed using a Nasdaq system. The remaining 73% comes
from third-party networks and proprietary systems.
Nasdaq has four systems that provide for order routing and/or execution:
SelectNet, SOES, Advanced Computerized Execution System ("ACES"), and the
Computer Assisted Execution Systemsm ("CAESsm"). SelectNet and SOES, as
well as Nasdaq's plan to leverage them into the NNM Execution System, are
described above. See "--Nasdaq's Strategic Initiatives-Enhancing Market
Structure-Nasdaq National Market ("NNM") Execution System." SelectNet and
SOES accounted for approximately 16.8% of revenues for the year ended
December 31, 2000.
The third Nasdaq trading system, ACES, is an order routing service that is
used by market makers to execute order flow from order entry firms with
which the market maker has a relationship. The order entry firms can route
orders directly to specified market makers through their NWIIs 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 traffic is too sparse to justify the fixed costs of
establishing a proprietary network linkage. ACES fees accounted for
approximately 2.0% of Nasdaq's revenues for the year ended December 31,
2000.
The fourth system, CAES, is the Nasdaq InterMarket transaction service
system. CAES is linked to the Intermarket Trading System ("ITS"), which
links Nasdaq InterMarket with U.S. stock exchanges that are participants in
the ITS Plan. CAES allows NASD member firms to direct orders in
exchange-listed securities to other Nasdaq InterMarket market makers for
automated execution (i.e., automatic response as well as automatic
execution). Technology enhancements made during 2000 allow Nasdaq
InterMarket participants to accept the delivery of CAES and ITS orders if
the recipient provides an automated response. The ITS interface allows
CAES/ITS market makers to direct and receive orders from the securities
eychanges that trade ITS eligible securities. With the exception of the
Cincinnati Stock Exchange, other securities exchanges currently do not
provide for automatic execution of orders sent to them via CAES/ITS. The
current fee for CAES orders is $0.50 for the originating party (i.e., the
sender). The current fee for ITS orders is $1.00 for the originating party
(i.e., the sender). CAES and ITS fees accounted for less than 1% of
Nasdaq's revenues for the year ended December 31, 2000.
Trade Reporting and Comparison--Automated Confirmation Transaction
Service(sm) ("ACTsm"). 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 and disseminated to vendors, which in turn sell it to
the public. This procedure furthers the goal of transparency, a stated
objective of U.S. securities policy designed to protect investors.
Transactions in Nasdaq-listed securities, exchange listed securities traded
over-the-counter ("OTC"), and other equity securities traded OTC 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. Tape-only 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.
ACT fees accounted for approximately 11.5% of Nasdaq's revenues for the
year ended December 31, 2000.
Market Information Services. As a market operator, Nasdaq collects and
disseminates quote and trade information. Using its network system, Nasdaq
accepts orders and quotes from market makers and ECNs and disseminates
these orders and quotes to a wide range of market participants. Of
particular interest among these quotes are the inside quotes.
Broker/dealers also use the Nasdaq system (specifically ACT) to report
transactions promptly. As a result, participants in Nasdaq 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 data products.
Nasdaq has two primary data products designed to serve the varying levels
of detail desired by different brokers and dealers and their customers. The
first product is called Level 1. This product provides subscribers with the
current inside quote and most recent transaction price. Professional
subscribers 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 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. The
second data product, the Nasdaq Quotation Dissemination Service ("NQDS"),
currently priced at $50 per terminal per month for professional subscribers
and $10 per terminal per month for non-professional customers, provides
subscribers with the quotes of each individual market maker and ECN, in
addition to the inside quotes and last transaction price. NQDS is not
priced on a per query basis.
Issuer Services. At December 31, 2000, Nasdaq listed 4,734 domestic and
international companies, the largest number of listings of any equity
market in the world. Since the end of 1994, 3,294 initial public offerings,
approximately 85.5% of all initial public offerings in U.S. primary
markets, listed on Nasdaq. Nasdaq charges issuers an initial listing fee, a
listing of additional shares fee, and an annual fee. The initial listing
fee includes a one-time listing application fee of $5,000 and a total
shares outstanding ("TSO") fee. The total maximum fee for the initial
listing application is $95,000. The fee for listing of additional shares is
based on the TSO, which Nasdaq reviews quarterly. The fee is $2,000, or
$.01 per additional share, whichever is higher, up to a maximum of $17,500
per quarter and an annual maximum of $35,000. Annual fees are based on TSO
and range from $10,710 to $50,000 for NNM securities.
Other Markets
The Nasdaq Stock Market is the flagship market of Nasdaq and has two tiers
of listed companies: The Nasdaq National Marketsm, which includes over
3,700 companies, and The Nasdaq SmallCap Marketsm, with over 850 smaller,
emerging growth companies. Nasdaq also operates the Nasdaq InterMarket,
which is described under "--Nasdaq's Strategic Initiatives-Competing for
Trading Volume in Exchange-Listed Securities," as well as the OTC Bulletin
Board.
OTC Bulletin Board. The OTC Bulletin Board(R) is an electronic,
screen-based market for securities that currently are not listed on Nasdaq
or any primary exchange. 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.
Last year, in conjunction with Nasdaq's application to become registered as
a national securities exchange ("Exchange Registration"), the Nasdaq Board
of Directors (the "Nasdaq Board") and the NASD Board of Governors (the
"NASD Board" and, together with the Nasdaq Board, the "Boards"), approved
several rule changes that are designed to enhance the OTC Bulletin Board
and permit Nasdaq to continue to operate it after Exchange Registration.
First, the Boards approved a program for Nasdaq to enter into a listing
agreement with each OTC Bulletin Board issuer and impose new listing
standards to ensure the quality of these issuers. Second, both Boards
approved the creation of an automated order delivery system for the OTC
Bulletin Board that would allow orders to be delivered and executed via
NWII. Finally, to accompany the new listing standards and order delivery
system, the Boards approved enhanced market rules that provide for limit
osder protection, short interest reporting, and intraday trading halt
authority.
Nasdaq has submitted to the SEC drafts of these proposed rules and has
discussed an exemption request 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.
Technology
Nasdaq was the world's first electronic screen-based stock market and its
use of new computer networking, telecommunications, and information
technologies distinguishes it from other U.S. securities markets. Nasdaq
embraces automation through the effective use of technology as the key to
the future of financial markets. Using technology, Nasdaq eliminates the
need for a physical trading floor and enables securities firms across the
country to compete freely with one another in a screen-based environment.
Nasdaq also employs technology to maximize its ability to communicate with
investors, issuers, traders, the media, and others. Nasdaq technologies
include:
Nasdaq Workstation II. Introduced in 1995, NWII is a proprietary front-end
interface for Nasdaq's quotation network. This network of workstations
gives securities traders access to a centralized 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 NWII, traders are immediately connected to Nasdaq's
electronic trading network. NWII 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.
Also available is an Application Programming Interface ("API") through which
approximately 2,400 users currently customize NWII to meet their own
presentation needs.
The Nasdaq Network. Nasdaq's primary telecommunications network, called the
Enterprise Wide Network II ("EWNII"), was designed, built, and is managed
by WorldCom Inc. This network is one of the world's largest, most reliable,
and sophisticated networks delivering time-sensitive information from
Nasdaq's technology centers to traders nationwide. The EWNII is presently
capable of handling trading four billion shares per day. The advanced
design of the EWNII allows Nasdaq to scale the network to greater levels of
capacity as market conditions dictate. Since the introduction of the EWNII
in August 1999 the capacity of the network has been doubled to meet growing
market demand.
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.
("FSI"), a manufacturer of software products. FSI became a wholly-owned
subsidiary of Nasdaq that has been named Nasdaq Tools, Inc. ("Nasdaq
Tools"). Nasdaq Tools has an order routing and quote management product
that allows for, among other things, automatic execution of a liability
order, automatic updating of a security's market, and the ability to
decline subsequent orders at the same price. Nasdaq Tools is in the process
of introducing a new service bureau product. "Tools Plus" is a position
management system with real-time valuation, including profit and loss
calculations, automatic execution and display of orders, risk management
features, direct ECN access (for SEC Ordering Handling Rule compliance),
and storage of information in a database and/or report format. It also
provides an Order Audit Trail System ("OATS(sm)") 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:
WorldCom. In November 1997, Nasdaq committed to a six-year, $600 million
dollar contract for WorldCom Inc. to build and maintain the EWNII, a custom
Extranet that would 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 EWNII 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.
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.
Primex. On December 9, 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 participants who compete for the orders based on price
within the context of the best quotes publicly displayed. The technology
will be offered exclusively to Nasdaq and is scheduled to launch in 2001.
IndigoMarkets. IndigoMarkets(sm) Ltd., a joint venture company with SSI
Ltd. of India, was established in May 2000. Nasdaq Global currently has a
55% interest in the venture. The company will create market systems for
Nasdaq global markets, including Nasdaq Japan. IndigoMarkets is also
expected to license its products to other customers worldwide. In October
2000, Indigo Markets created a wholly-owned Indian subsidiary, Indigo
Markets India Private Ltd. The purpose of the new subsidiary is to license
products to Indian customers as well as to provide ongoing maintenance and
consulting services.
BIOS Group. On June 25, 1999, Nasdaq and the BIOS Group, a research and
development organization based in Santa Fe, New Mexico, formed the
Nasdaq/BIOS R&D Joint Venture, LLC (the "Nasdaq BIOS JV"). This joint
venture is owned 50% by Nasdaq and 50% by the BIOS Group. The purpose of
the joint venture is to spawn inventions and applied research to advance
the business objectives of Nasdaq. Nasdaq will retain a right of first
refusal on any intellectual property generated as a result of the joint
venture. Nasdaq has the exclusive right to any technologies related to its
business objectives.
Competition
Price Discovery and Trading 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. Competing stock exchanges or
network providers may develop ways to replicate Nasdaq's network more
efficiently than Nasdaq and persuade a critical mass of market participants
to switch to the new network/market. Another threat to Nasdaq's network
revenue could emerge if competing stock exchanges were able to find ways to
link into the network effectively 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. In addition, Nasdaq's order routing systems face a
number of forms of competition from ECNs and third-party service bureaus
that handle order routing.
Issuer Listings. Nasdaq competes primarily with the NYSE for listings.
Every year, a number of Nasdaq-listed companies leave Nasdaq for the NYSE.
For the year ended December 31, 2000, 25 companies moved from Nasdaq to the
NYSE while one switched from the NYSE to Nasdaq.
In addition, for smaller companies, the option of not listing on any market
also exists. Markets for the securities of such companies are made by
securities firms who voluntarily post quotes or indications of interest.
Two leading vehicles for posting of quotes are the OTC Bulletin Board,
currently owned and operated by Nasdaq, and the NQB Pink Sheets owned by
the National Quotation Bureau, a privately-held firm. The National
Quotation Bureau currently operates an electronic version of the Pink
Sheets, allowing for the more frequent updating of quotes. This enhancement
to the Pink Sheets may lead some companies to reconsider the value of a
Nasdaq listing and increase the level of listing competition Nasdaq faces
at the small-company end of the spectrum.
Data and Information Services. Nasdaq's data services revenue is under
competitive threat from other stock exchanges that trade Nasdaq stocks,
including the established regional exchanges. Current SEC regulations
permit national securities exchanges to trade certain securities that are
not listed on an exchange, including NNM securities, pursuant to Nasdaq's
Unlisted Trading Privileges Plan ("UTP Plan") that is submitted to and
approved by the SEC. Currently, only the Chicago Stock Exchange and the
Cincinnati Stock Exchange have developed a quote and trade linkage with
Nasdaq and trade Nasdaq securities. There are, however, three other members
of the UTP Plan that are eligible to, but do not currently, trade Nasdaq
securities in part because these members have not developed the appropriate
linkage. Recently, another exchange has indicated an interest in joining
the UTP Plan. In addition, two ECNs have made application to the SEC to
become registered as national securities exchanges and, if successful, may
become participants in the UTP Plan.
During the last few years, there has been an increase in the number of
ECNs. In general, ECNs subscribe to the network service, report trades to
ACT, and use Nasdaq's order routing systems. On one level, an ECN performs
the same function as a market maker bringing buyers and sellers together.
However, ECNs pose a potential threat to Nasdaq's business because under
the new SEC guidelines, they could register as securities exchanges. In
this case, they would be eligible for a share of the revenue generated by
the sale of Nasdaq's data products, and their use of Nasdaq's systems could
diminish.
Employees
As of December 31, 2000, Nasdaq had approximately 1,200 employees. 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.
Recent Restructuring Transactions
At a special meeting of NASD members held on April 14, 2000, more than a
majority of NASD members approved a plan to restructure and broaden the
ownership in Nasdaq (the "Restructuring") through a two-phase private
placement of (1) newly-issued shares of Common Stock, and (2) warrants
issued by the NASD (the "Warrants") to purchase shares of Common Stock
owned by the NASD. The Restructuring was intended, among other things, to
strategically realign the ownership of Nasdaq, minimize potential conflicts
of interest between Nasdaq and NASD Regulation, Inc. ("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 of the Restructuring ("Phase I"), (1)
the NASD separated Amex from The Nasdaq-Amex Market Group ("Market Group"),
a holding company that was a wholly-owned subsidiary of the NASD; (2)
Market Group was then merged with and into Nasdaq; (3) Nasdaq 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 of
Common Stock to be offered for sale by Nasdaq as part of the Restructuring.
In Phase I, on June 28, 2000, Nasdaq sold an aggregate of 23,663,746 shares
of Common Stock for an aggregate consideration of $260,301,206. The NASD
sold an aggregate of 6,415,049 Warrants to purchase an aggregate amount of
25,660,196 shares of Common Stock and an aggregate of 323,196 shares of
Common Stock owned by the NASD for an aggregate consideration of
$74,120,695.
In the second phase of the Restructuring ("Phase II"), on January 18, 2001,
Nasdaq sold an aggregate of 5,028,797 shares of Common Stock for an
aggregate consideration of $65,374,361. The NASD sold an aggregate of
4,392,345 Warrants to purchase an aggregate amount of 17,569,380 shares of
Common Stock and an aggregate of 4,222,295 shares of Common Stock owned by
the NASD for an aggregate consideration of $116,382,665. Investors in Phase
I and Phase II consisted of NASD members, Nasdaq market participants,
issuers with securities quoted on Nasdaq, and other strategic partners.
On May 3, 2001, Nasdaq issued and sold $240,000,000 in aggregate principal
amount of its 4% Convertible Subordinated Debentures due 2006 (the
"Subordinated Debentures") to Hellman & Friedman Capital Partners IV, L.P.
and certain of its affiliated limited partnerships (collectively, "Hellman
& Friedman"). The Subordinated Debentures are convertible at any time into
an aggregate of 12,000,000 shares of Common Stock, subject to adjustment.
Hellman & Friedman owns approximately 9.8 percent of Nasdaq on an
as-converted basis. In connection with the transaction, Nasdaq has agreed
to use its best efforts to seek stockholder approval of a charter amendment
that would provide for voting debt in order to permit Hellman & Friedman to
vote on an as-converted basis on all matters on which common stockholders
have the right to vote, subject to the five percent voting limitation in
Nasdaq's Restated Certificate of Incorporation (the "Certificate of
Incorporation"). In addition, Nasdaq has also agreed that in the event that
the Nasdaq Board approves an exemption from the foregoing five percent
limitation for any person (other than an exemption granted in connection
with a strategic market alliance) and seeks the concurrence of the SEC with
respect thereto, Nasdaq will grant Hellman & Friedman a comparable
exemption from such limitation and use its best efforts to obtain SEC
concurrence of such exemption. In connection with the transaction, Nasdaq
granted Hellman & Friedman certain registration rights with respect to the
shares of Common Stock underlying the Subordinated Debentures.
Additionally, Nasdaq agreed to permit Hellman & Friedman to designate one
person reasonably acceptable to Nasdaq for nomination as a director of
Nasdaq for so long as Hellman & Friedman owns Subordinated Debentures
and/or shares of Common Stock issued upon conversion representing at least
50% of the shares of Common Stock issuable upon conversion of the
Subordinated Debentures initially purchased. Nasdaq has elected F. Warren
Hellman to fill a vacant directorship on the Nasdaq Board pursuant to the
foregoing provision.
On May 3, 2001, Nasdaq used the net proceeds from the sale of the
Subordinated Debentures to purchase 18,461,538 shares of Common Stock from
the NASD for $13 per share for an aggregate purchase price of $239,999,994.
These repurchased shares have been cancelled and 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.
On April 25, 2001, the Nasdaq Board approved in principle to take steps to
prepare for an initial public offering (the "IPO") of its Common Stock. The
timing of the IPO will depend on a variety of factors including Exchange
Registration, the progress of several important technology initiatives
(e.g., SuperMontage), and market conditions.
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 quarter of 2001, 31 initial public offerings were brought to
market on Nasdaq compared to 165 in the first quarter of 2000. There were
also 95 de-listed companies in the first quarter of 2001 compared to 36
during the same time period last year. Consequently, Nasdaq's issuer
services revenues declined in the first quarter 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.
Nasdaq has spent a considerable amount of time and money in developing its
trading network. While Nasdaq believes that its network is currently the
most widely used, fault tolerant, and efficient network available for
trading equities, 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 seven 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
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 51% of total dollar volume traded on Nasdaq for the year
ended December 31, 2000. The loss of one or more of these issuers would
result in a significant decrease in revenues from Nasdaq's transaction
services. 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.
As of December 31, 2000 only two issuers have transferred from the NYSE to
Nasdaq. A recent amendment to Rule 500 allows 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. Nasdaq believes that Rule 500 in its modified form may continue
to constitute an impediment to Nasdaq's ability to compete for NYSE
listings.
Nasdaq has invested a considerable amount of capital and time competing for
issuer listings with other primary exchanges. In addition to the listing
fee, a listing generates revenue from execution services and sales of
market data. ATSs do not currently provide listing venues, although such
systems can register as an exchange and compete with traditional exchanges
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 ATSs 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 data service 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.
Nasdaq's UTP Plan entitles these exchanges to a share of Nasdaq's data
revenue, roughly proportional to its share of trading as measured by share
volume and number of trades. Currently, only two UTP Plan participants
trade Nasdaq securities and their respective share of trades is minimal.
The Boston Stock Exchange, Philadelphia Stock Exchange, and the Pacific
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. If the UTP Plan participants' share of trades in Nasdaq
stocks increases substantially, Nasdaq's financial condition and operating
results could be adversely affected. In addition, since the allowable costs
that are shared by UTP Plan participants and the fees Nasdaq can charge for
data products are not exclusively set by Nasdaq, Nasdaq's control over its
revenue and cost base under the UTP Plan is limited. Current amendments to
the UTP Plan under negotiation include (i) an increase in the number of the
eligible securities over a one year period from 1,000 to all 4,734 NNM and
SmallCap securities, 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 could lose its status as an exclusive securities information
processor because of recent regulatory developments.
Nasdaq serves as a securities information processor ("SIP") for purposes of
collecting and disseminating quotation and last sale information for
transactions effected in its market. Nasdaq also acts as an ESIP pursuant
to 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 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
Pman, Nasdaq is permitted to deduct certain costs associated with acting as
an ESIP 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 pro-rata share of Tape Fees.
While Nasdaq is currently the ESIP for NNM securities, Nasdaq is working
with the other UTP Plan participants to enter into a Request-for-Proposal
("RFP") process to select a new processor. This process is the result of
the SEC's conditions for extending the UTP Plan beyond its March 2001
termination date. The SEC has required that there be good faith
negotiations among the UTP Plan participants on a revised UTP Plan that
provides for either (i) a fully viable alternative ESIP for all Nasdaq
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 consolidating SIP, a UTP Plan
participant--particularly Nasdaq--should not operate such 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
nascent stages of creating the RFP, and it will likely take months to
solicit competing bids and come to a joint decision on a new SIP. The SEC
also imposed other conditions relating to the NASD's access to the
alternative SIP.
Nasdaq also has been participating in the meetings of the SEC Advisory
Committee on Market Data. The dialogue has touched on potentially
fundamental changes to SEC rules and policies that govern SIPs and national
market system plans. Nasdaq's written position on this issue presents two
alternative approaches that ensure the continuation of broad dissemination
of consolidated national best-bid-and-offer and consolidated last sale
information, but 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 ESIP, but one that is
more limited in scope and function. The SEC Advisory Committee on Market
Data is expected to present its recommendations at the end of September
2001.
Nasdaq may lose trade reporting revenues if more market participants bypass
the comparison feature of its trade reporting system.
If market participants establish clearing relationships with the same
clearing firm, they would not have to utilize ACT for comparison/clearing
purposes. Thus, firms can form joint clearance and settlement arrangements
to reduce ACT comparison fees. In addition, Nasdaq has adopted a rule
establishing a cap on monthly ACT risk management fees that a clearing firm
must pay on behalf of a correspondent firm. Nasdaq has also proposed an
interpretation to the SEC detailing which firms are effectively
"self-clearing" with respect to affiliated correspondents and thus relieved
of their obligation to pay ACT risk management fees for trades cleared on
behalf of those correspondents. Both of these rules will reduce ACT risk
management fees collected by Nasdaq. If more market participants bypass
ACT, Nasdaq's business, financial condition, and operating results could be
materially adversely affected. See "Item 1. Business-Products and Services."
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 level 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
cusrently 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 a
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.
The rapid evolution of the worldwide securities markets requires Nasdaq to
be proactive in addressing developments affecting the securities markets
and to explore the numerous opportunities and alternatives that present
themselves. Consequently, senior officers of Nasdaq have conducted
exploratory discussions with a number of major U.S. and foreign securities
exchanges, regarding cooperation, joint ventures, marketing affiliations,
combinations, or other collaborative activities. Nasdaq anticipates that
such discussions will continue but cannot predict the results of any such
discussions. See "Item 1. Business-Nasdaq's Strategic Initiatives" and
"-Pursuing Global Market Expansion."
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. In June
1999, a joint venture agreement was entered into with SOFTBANK Corp. of
Japan to form a new electronic equity market in Japan. In February 2000,
Nasdaq signed a joint venture agreement to form Nasdaq Europe Planning
Company Limited, to create a new pan-European electronic stock exchange
modeled after Nasdaq. A memorandum of understanding signed by Nasdaq, the
London Stock Exchange, and the Deutsche Borse AG contemplated the merger of
these two European exchanges to form a pan-European growth stock market.
This proposed collaborative venture did not occur and the memorandum of
understanding was cancelled. In March 2001, Nasdaq acquired a majority
interest in EASDAQ, subsequently restructured as Nasdaq Europe S.A./N.V.,
as part of its plans to expand in Europe.
Nasdaq has had only very limited experience in developing localized
versions of its services and in marketing and operating its services
internationally. To date, Nasdaq's international efforts have not yet
achieved profitability. There can be no assurance that Nasdaq will be able
to succeed in marketing its branded services and developing localized
services in international markets. Nasdaq may experience difficulty in
managing its international operations because of, among other things,
competitive conditions overseas, difficulties in supervising foreign
operations, managing currency risk, established domestic markets, language
and cultural differences, political and economic instability, and changes
in regulatory requirements or the failure to obtain requested regulatory
changes and approvals. Any of the above could have an adverse effect on the
success of Nasdaq's international operations and, consequently, on Nasdaq's
business, financial condition, and operating results. See "Item 1.
Business-Nasdaq's Strategic Initiatives" and "-Pursuing Global Market
Expansion."
Strategic relationships undertaken by Nasdaq are unproven for growth.
Nasdaq has recently entered into several important strategic relationships
and its prospects depend to some extent upon the development of these
relationships. A number of Nasdaq's current strategic relationships are new
and, consequently, unproven. For a description of these relationships, see
"Item 1. Business-Nasdaq's Strategic Initiatives." Nasdaq intends to
continue to seek strategic relationships actively, and believes such
relationships will generate a significant portion of its growth in the
medium term. Nasdaq's business, financial condition, and operating results
could be adversely affected if it does not establish additional, and
maintain existing, strategic relationships on commercially reasonable terms
or if any of its strategic relationships do not result in a significant
increase in revenues.
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/ITS, SelectNet, the NQDS, 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 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 participants in Nasdaq are not prepared to handle the additional
capacity, Nasdaq may lose trading volume to more technologically advanced
competitors. In addition, insufficient interest in extended hours trading
could result in decreased liquidity, increased volatility, or degeneration
of price discovery, all of which could potentially undermine the public
confidence in Nasdaq and adversely affect Nasdaq's business, financial
condition, and operating results. In addition, the revenues generated by
trading in the extended hours market may not be sufficient to cover costs
associated with such trading.
Failure to protect its intellectual property rights could harm Nasdaq's
brand-building efforts and ability to compete effectively.
To protect its rights to its intellectual property, Nasdaq relies on a
combination of trademark laws, copyright laws, patent laws, trade secret
protection, confidentiality agreements, and other contractual arrangements
with its employees, affiliates, clients, strategic partners, and others.
The protective steps Nasdaq has taken may be inadequate to deter
misappropriation of its proprietary information. Nasdaq may be unable to
detect the unauthorized use of, or take appropriate steps to enforce, its
intellectual property rights. Nasdaq has registered, or applied to
register, its trademarks in the U.S. and in 40 foreign jurisdictions and
has pending U.S. and foreign applications for other trademarks. Effective
trademark, copyright, patent, and trade secret protection may not be
available in every country in which Nasdaq offers or intends to offer its
services. Failure to protect its intellectual property adequately could
harm its brand and affect its ability to compete effectively. Further,
defending its intellectual property rights could result in the expenditure
of significant financial and managerial resources, which could adversely
affect Nasdaq's business, financial condition, and operating results.
Lack of operating history as a for-profit entity with private ownership
interests.
While Nasdaq has an established operating history, it has only operated as
a for-profit company with private ownership interests since June 28, 2000.
Therefore, Nasdaq is subject to the risks and uncertainties associated with
any newly independent company. Nasdaq has had access to many support
functions of the NASD, including: cash management and other financial
services, real estate, legal, surveillance, and other regulatory services,
information services, and corporate and administrative services. Nasdaq has
entered into, and intends to enter into, various intercompany arrangements
with the NASD and its affiliates for the provision of these services on an
on-going or transitional basis. See "-Nasdaq faces potential conflicts of
interest with related parties" and "-The intercompany agreements may not be
effected on terms as favorable to Nasdaq as could have been obtained from
unaffiliated third parties" and "Item 7. Certain Relationships and Related
Transactions." In addition, Nasdaq's initiatives designed to increase
operating efficiencies may not yield the expected benefits or efficiencies
and may be subject to delays, unexpected costs, and cost overruns, all of
which could have an adverse effect on Nasdaq's business, financial
condition, and operating results.
Failure to attract and retain key personnel may adversely affect Nasdaq's
ability to conduct its business.
Nasdaq's future success depends on the continued service and performance of
its senior management and certain other key personnel. For example, Nasdaq
is dependent on specialized systems personnel to operate, maintain, and
upgrade its systems. The inability of Nasdaq to retain key personnel or
retain other qualified personnel could adversely affect Nasdaq's business,
financial condition, and operating results. See "Item 5. Directors and
Executive Officers."
Nasdaq is subject to risks relating to litigation and potential securities
laws liability.
Many aspects of Nasdaq's business potentially involve substantial risks of
liability. While Nasdaq enjoys immunity for certain self-regulatory
organization activities, it could be exposed to substantial liability under
federal and state securities laws, other federal and state laws and court
decisions, as well as rules and regulations promulgated by the SEC and
other federal and state agencies. These risks include, among others,
potential liability from disputes over the terms of a trade, the claim that
a system failure or delay cost a customer money, that Nasdaq entered into
an unauthorized transaction or that it provided materially false or
misleading statements in connection with a securities transaction. As
Nasdaq intends to defend any such litigation actively, significant legal
expenses could be incurred. An adverse resolution of any future lawsuit or
claim against Nasdaq could have an adverse effect on its business,
financial condition, and operating results.
Nasdaq's networks may be vulnerable to security risks.
As with other computer networks, it is possible that Nasdaq's networks may
be vulnerable to unauthorized access, computer viruses, and other security
problems. Persons who circumvent security measures could wrongfully use
Nasdaq's information or cause interruptions or malfunctions in Nasdaq's
operations. Nasdaq is required to continue to expend significant resources
to protect against the threat of security breaches or to alleviate problems
caused by any such breaches. Although Nasdaq intends to continue to
implement industry-standard security measures, these measures may prove to
be inadequate and result in system failures and delays that could lower
trading volumes and have an adverse effect on Nasdaq's business, financial
condition, and operating results.
Nasdaq faces potential conflicts of interest with related parties.
As of May 4, 2001, the NASD beneficially owns, on a fully diluted basis,
approximately 31% of Nasdaq's outstanding Common Stock (approximately 70%
if no Warrants are exercised). See "Item 10. Recent Sales of Unregistered
Securities." Until Exchange Registration, the shares of Common Stock
underlying any unexpired and unexercised tranches of Warrants sold in the
Restructuring by the NASD, as well as the shares of Common Stock purchased
through the valid exercise of such Warrants, will be voted at the direction
of the NASD. In addition, after giving effect to the increase in the size
of the Nasdaq Board effective immediately after the 2001 Annual Meeting, 10
of the 18 members of the Nasdaq Board will also be members of the NASD
Board. Until Exchange Registration, the NASD will be in a position to
continue to control substantially all matters affecting Nasdaq, including
any determination with respect to the direction and policies of Nasdaq,
acquisition or disposition of assets, future issuances of securities of
Nasdaq, Nasdaq's incurrence of debt, and any dividend payable on the Common
Stock.
Conflicts of interest may arise between Nasdaq and the NASD, or its
affiliates, in a number of areas relating to their past and ongoing
relationships, including the nature, quality, and pricing of services
rendered; shared marketing functions; tax and employee benefit matters;
indemnity agreements; sales or distributions by the NASD of all or any
portion of its ownership interest in Nasdaq; or the NASD's ability to
influence certain affairs of Nasdaq prior to Exchange Registration. There
can be no assurance that the NASD and Nasdaq will be able to resolve any
potential conflict or that, if resolved, Nasdaq would not receive more
favorable resolution if it were dealing with an unaffiliated party.
Conflicts may also arise between Nasdaq and Amex by virtue of commitments
made by the NASD in connection with its acquisition of Amex.
The intercompany agreements may not be effected on terms as favorable to
Nasdaq as could have been obtained from unaffiliated third parties.
For purposes of governing their ongoing relationship, Nasdaq and the NASD,
or their affiliates, have entered into, or intend to enter into, various
agreements involving the provision of services such as market surveillance
and other regulatory functions, cash management and other financial
services, legal, facilities sharing, information services, corporate, and
other administrative services. However, as of the date hereof, Nasdaq has
only fully negotiated a contract with the NASDR pursuant to which NASDR
will regulate Nasdaq trading activity. The NASDR will continue regulating
trading activity on Nasdaq under the new long-term contract that
establishes the various functions NASDR will perform and the price that
Nasdaq will pay for these functions. The functions covered under this
contract are substantially the same type and scope as those NASDR had
previously performed under the Plan of Allocation and Delegation of
Functions by the NASD to Subsidiaries (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 may object to, or
request modifications to amendments proposed by Nasdaq. Failure to resolve
these issues in a timely manner could delay 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.
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 ESIP 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.
The SEC explained that the NASD alternative should be operational
contemporaneously with SuperMontage and should provide a market-neutral
electronic linkage to Nasdaq, as well as other marketplaces. The SEC stated
that this quotation and trade reporting facility must satisfy the Order
Handling Rules, Regulation ATS, and other regulatory requirements for ATSs,
ECNs, and market makers. In a March 2001 order approving a temporary
extension of the UTP Plan, the SEC stated that the revised UTP Plan must
provide for either (1) a fully viable alternative ESIP for all Nasdaq
securities, or (2) a fully viable alternative nonexclusive SIP in the event
that the UTP Plan does not provide for an ESIP. See "-Nasdaq could lose its
status as an exclusive securities information processor because of recent
regulatory developments." In this order, the SEC also stated that under the
revised UTP Plan, the NASD must provide direct or indirect access to the
alternative SIP, whether exclusive or non-exclusive, by any of its members
that qualifies, and to disseminate transaction information and individually
identified quotation information for these members through the SIP. In
addition, the SEC has also indicated that the approval of Exchange
Registration is linked to the NASD's obligation to provide an alternative
facility to allow NASD members to trade exchange listed securities. As a
result, it is likely that the NASD will be required to build a residual
market for Nasdaq, NYSE, and Amex listed securities. If this market becomes
a viable alternative to Nasdaq, then Nasdaq faces the risk of reduced
market share in transactions and market data revenues, which would
adversely affect Nasdaq's business, financial condition, and operating
results.
Nasdaq will not pay cash dividends for the foreseeable future.
Nasdaq anticipates that earnings, if any, will be retained for the
development of its business and that no cash dividends will be declared on
the Common Stock for the foreseeable future.
Provisions of Delaware law and Nasdaq's governing documents may delay or
prevent its takeover.
Nasdaq is organized under the laws of the State of Delaware and was
incorporated in 1979. Certain provisions of Delaware law may have the
effect of delaying or preventing a transaction that would cause a change in
Nasdaq's control. In addition, certain provisions of the Certificate of
Incorporation and Nasdaq's By-Laws (the "By-Laws") may delay, defer, or
prevent this type of transaction, even if Nasdaq's stockholders consider
the transaction to be in their best interests. For example, the Certificate
of Incorporation places limitations on the voting rights of persons, other
than the NASD or any other person as may be approved by the Nasdaq Board
prior to the time such person owns more than 5% of the then outstanding
shares of Common Stock, who otherwise would be entitled to exercise voting
rights in respect of more than 5% of the then outstanding shares of Common
Stock. As a result, third parties are limited from exercising voting
control over Nasdaq. Moreover, it is possible that the SEC might object to
any action of the Nasdaq Board that would permit certain persons from being
exempted from the foregoing restriction on voting power. In addition, in
response to the SEC's concern about a concentration of ownership of Nasdaq,
Nasdaq's Exchange Registration application includes a rule that prohibits
any Nasdaq member or any person associated with a Nasdaq member from
beneficially owning more than five percent of the outstanding shares of
Common Stock. Other provisions make the removal of incumbent directors and
the election of new directors more time consuming and difficult, which may
discourage third parties from attempting to obtain control of Nasdaq, even
if the change in control would be in the best interests of its
stockholders. See "Item 11. Description of Registrant's Securities to be
Registered."
Item 2. Financial Information.
The following table presents summary consolidated financial and operating
data for Nasdaq. The data presented in this table are derived from
"Selected Consolidated Financial Data of Nasdaq" and the consolidated
financial statements and notes thereto which are included elsewhere in this
Registration Statement. You should read those sections for a further
explanation of the financial data summarized here. You should also read the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Nasdaq" section, which describes a number of factors which
have affected Nasdaq's financial results.
Selected Consolidated Financial Data
Year ended December 31,
1996 1997 1998 1999 2000
-------------------------------- ---------------- - ------------- - ---------------
(in thousands, except per share data and
number of listed companies)
Statement of Income Data:
Revenues:
Transaction services $118,500 $174,741 $160,506 $283,652 $395,123
Market information services 99,446 126,436 152,665 186,543 258,251
Issuer services 111,832 113,019 137,344 163,425 184,595
Other 2,452 2,530 308 628 30,040
--------------- --------------- --------------- ------------- ---------------
Total revenues 332,230 416,726 450,823 634,248 868,009
Expenses:
Compensation and benefits 54,090 64,324 78,565 98,129 133,496
Marketing and advertising 34,356 53,817 42,483 62,790 45,908
Depreciation and amortization 24,405 31,336 34,984 43,696 65,645
Professional and contract services 17,233 22,259 35,127 35,282 61,483
Computer operations and data
communications 45,757 61,438 72,111 100,493 138,228
Travel, meetings, and training 6,547 7,310 7,750 10,230 12,113
Occupancy 4,380 4,883 5,354 6,591 14,766
Publications, supplies, and postage 4,512 5,223 5,208 4,670 7,181
Other 9,121 14,560 16,704 24,809 26,505
--------------- --------------- --------------- ------------- ---------------
Total direct expenses 200,401 265,150 298,286 386,690 505,325
Support cost from related parties, net 70,293 85,880 100,841 115,189 128,522
--------------- --------------- --------------- ------------- ---------------
Total expenses 270,694 351,030 399,127 501,879 633,847
Net operating income 61,536 65,696 51,696 132,369 234,162
Interest 6,341 7,522 9,269 12,201 20,111
Provision for income taxes (27,522) (33,187) (26,010) (58,421) (105,018)
Minority interest in earnings - - - - 872
--------------- --------------- --------------- ------------- ---------------
Net income 40,355 40,031 34,955 86,149 150,127
Weighted average common shares
outstanding(1) 100,000,000 100,000,000 100,000,000 100,000,000 112,090,493
Basic and diluted net income per share $0.40 $0.40 $0.35 $0.86 $1.34
Other Data:
EBITDA(2) $ 92,418 $ 97,032 $ 86,680 $ 176,065 $ 322,049
Capital expenditures 54,361 79,887 33,605 94,193 119,040
Net cash provided by operating activities 62,469 76,755 56,723 134,625 232,696
Net cash used in investing activities (50,726) (123,064) (58,150) (130,657) (269,385)
Net cash provided by financing activities 21 29,766 156 3,876 270,748
Number of listed companies 5,556 5,487 5,068 4,829 4,734
Shares traded 138,100,000 163,900,000 202,000,000 272,600,000 442,700,000
As of December 31,
1999 2000
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $10,598 $262,257
Working capital 154,372 472,341
Total assets 578,254 1,075,317
Total stockholders' equity 352,012 764,901
- ------------------------------------
(1) Gives effect to the June 28, 2000, 49,999-for-one stock dividend
of the shares of Common Stock for years ended 1996-2000.
(2) EBITDA consists of earnings before net interest, income taxes,
depreciation, and amortization. EBITDA is presented to clarify
Nasdaq's operating results and it is not intended to represent
cash flow or results of operations in accordance with generally
accepted accounting principles.
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 owns approximately 31% of Nasdaq assuming all
Warrants purchased in Phase I and Phase II are fully exercised
(approximately 70% assuming no Warrants are exercised). Transactions
between Nasdaq and the NASD are on a cost basis and are allocated on a
monthly basis through transfer pricing mechanisms.
Revenues
Nasdaq's revenues increased from $450.8 million for the year ended December
31, 1998 to $868.0 million for the year ended December 31, 2000,
representing a compound annual growth rate of 38.8%. Nasdaq's total
revenues for the year ended December 31, 2000 were $868.0 million,
representing a 36.9% increase from $634.2 million for the year-ended
December 31, 1999.
Nasdaq has three main revenue sources: transaction services, market
information services, and issuer services. For the year ended December 31,
2000, transaction services revenues of $395.1 million increased $111.4
million or 39.3% from $283.7 million for the year ended December 31, 1999.
Transaction services consist of SelectNet, the NWII, SOES, ACT, and other
direct execution and comparison services. SelectNet, the high-volume
automated execution service, provided revenues of $113.5 million, an
increase of $30.4 million or 36.6% for the year ended December 31, 2000
from $83.1 million for the year ended December 31, 1999, primarily due to
an increase in average trade volume.
SOES, a system providing for the automatic execution of small market
orders, provided revenues of $32.2 million for the year ended December 31,
2000, an increase of $12.5 million or 63.2% from $19.7 million for the year
ended December 31, 1999, primarily due to an increase in volume of SOES
executions. The NNM Execution System will result in the migration of
significant volume from SelectNet to SOES upon its implementation, which is
currently scheduled for the third quarter of 2001. The integrated pricing
approach envisioned for the NNM Execution System is consistent with the
volume-based discount pricing introduced in 1999. It is expected that under
this plan lost revenue from migrated SelectNet volume will be replaced by
additional NNM Execution System revenue.
ACT, the automated service that speeds the post-execution steps of
reporting price and volume comparison and clearing of pre-negotiated trades
completed in Nasdaq and OTC Bulletin Board securities, 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,
primarily due to increases in volume.
NWII is the trader's direct connection to Nasdaq. This primary trading
device, along with APIs, 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.
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. The majority of revenues in market information are
generated by Nasdaq's Level 1 and last sale service fees that are based on
the number of terminals or access lines that a user may subscribe to
receive market information or are alternatively assessed on a per-quote fee
basis for non-professional users. These services allow real-time access to:
(1) inside quotes (highest bid and lowest ask) for all securities listed on
the NNM and The Nasdaq SmallCap Market; (2) inside quotes for OTC Bulletin
Board securities; (3) trade price and volume information for Nasdaq, OTC
Bulletin Board, and other over-the-counter equities; (4) intraday
calculations for the major Nasdaq indexes; and (5) daily net asset values
and associated information for over 8,000 money market and mutual funds.
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.
Another major revenue contributor in market information is NQDS. This
continuous stream of quoted trade information allows information vendors to
create a display similar to the NWII. In addition to providing subscribers
with the inside quotes, NQDS provides subscribers with quotes of each
individual market maker and ECNs. NQDS revenues increased by approximately
$42.3 million or 130.6% to $74.8 million for the year ended December 31,
2000 from $32.5 million for the year ended December 31, 1999.
The final major component of market information revenues relates to Nasdaq
InterMarket tape revenues. Nasdaq InterMarket tape revenues increased by
approximately $4.7 million or 27.4% to $21.9 million for the year ended
December 31, 2000, from $17.2 million for the year ended December 31, 1999.
The overall growth in market information revenues is primarily due to an
increase in non-professional demand as measured by the increase in the
number of average non-professional market data terminals in service of
507,000 or 268.0% to 696,000 for the year ended December 31, 2000 from
189,000 for the year ended December 31, 1999. Additionally, the growth was
driven by an increase in the average number of non-professional quote
inquiries of 15.4 million per day or 112.9% to 29.0 million per day for the
year ended December 31, 2000 from 13.6 million per day for the year ended
December 31, 1999.
Issuer services revenues of $184.6 million increased $21.2 million or 13.0%
for the year ended December 31, 2000 from $163.4 million for the year ended
December 31, 1999. Issuer revenues are generated through fees for initial
listings, secondary offerings, and annual renewal fees for companies listed
on Nasdaq.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Total revenues were $868.0 million for the year ended December 31, 2000,
representing a 36.9% increase from $634.2 million for the year ended
December 31, 1999. This increase was largely driven by growth in trading
volumes. Overall average daily share volume on Nasdaq increased by 62.4%,
from 1.08 billion shares per day for the year ended December 31, 1999 to
1.77 billion shares per day for the year ended December 31, 2000. Market
information services revenues of $258.3 million increased $71.8 million or
38.5% for the year ended December 31, 2000 from $186.5 million for the year
ended December 31, 1999, primarily due to an increase in non-professional
demand partially offset by fee adjustments for non-professional market
information users. Transaction services revenues of $395.1 million
increased $111.4 million or 39.3% for the year ended December 31, 2000 from
$283.7 million for the year ended December 31, 1999, primarily due to an
increase in average daily share volume demand partially offset by fee
adjustments. Issuer services revenues of $184.6 million increased $21.2
million or 13.0% for the year ended December 31, 2000 from $163.4 million
for the year ended December 31, 1999, primarily due to a 17.1% increase in
the average size of initial public offerings and secondary offerings.
Direct Expenses
Direct expenses increased $118.6 million or 30.7% to $505.3 million for the
year ended December 31, 2000 from $386.7 million for the year ended
December 31, 1999.
Compensation costs increased $35.4 million or 36.1% to $133.5 million for
the year ended December 31, 2000 from $98.1 million for the year ended
December 31, 1999 primarily due to an increase in headcount of
approximately 171 employees or 16.4% to 1,214 employees as of December 31,
2000, from 1,043 employees as of December 31, 1999. The majority of new
employees are technology staff needed for system enhancements and
development initiatives and are performing services for Nasdaq that would
have been otherwise provided by independent contractors.
Marketing and advertising costs decreased $16.9 million or 26.9% to $45.9
million for the year ended December 31, 2000 from $62.8 million for the
year ended December 31, 1999, primarily due to a decrease in scale of the
media advertising campaign run in the fall of 2000 as compared to the fall
campaign run in 1999.
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, due to significant
investments in software licenses and hardware maintenance costs for the
operating environment to accommodate the growth in share volume.
Professional and contract services costs, net of amounts capitalized under
Statement of Position 98-1 as described in the notes to consolidated
financial statements, increased $26.2 million or 74.2% to $61.5 million for
the year ended December 31, 2000 from $35.3 million for the year ended
December 31, 1999. The main projects included in current year professional
and contract services expense are Nasdaq Global and related international
initiatives, design costs related to Nasdaq.com and Nasdaq online, vendor
services for the new Nasdaq MarketSite(SM)("MarketSite") and broadcast
facility located in Times Square, New York, and helpdesk and desktop
support costs provided by Electronic Data Systems Corporation ("EDS").
Depreciation 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.
The remaining direct expenses increased $14.3 million or 30.9% to $60.6
million for the year ended December 31, 2000 from $46.3 million for the
year ended December 31, 1999. This was primarily due to an increase in
occupancy costs as a result of the MarketSite and broadcast facility in
Times Square, New York.
Support Costs
Support costs from related parties increased by $13.3 million or 11.5% to
$128.5 million for the year ended December 31, 2000 from $115.2 million for
the year ended December 31, 1999. Specifically, Nasdaq incurred increased
surveillance and other regulatory charges from NASDR. Surveillance and
other regulatory charges are comprised primarily of the costs relating to
technological investments for market surveillance as well as direct costs
for enforcement and other regulation services. Surveillance and other
regulatory charges from NASDR increased by $14.8 million or 22.7% to $79.9
million for the year ended December 31, 2000 from $65.1 million for the
year ended December 31, 1999. Additionally, contributing to the increase is
a decline in the amount of Nasdaq costs charged to Amex of $9.1 million or
65.0% to $4.9 million for the year ended December 31, 2000 from $14.0
million for the year ended December 31, 1999. These 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 EDS effective June
1, 1999. Prior to June 1, 1999, these services were provided to Nasdaq by
the NASD. Amounts charged to related parties are netted against charges
from related parties in the "Support cost from related parties, net" line
item on the Consolidated Statements of Income.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Total revenues increased $183.4 million or 40.7% to $634.2 million for the
year ended December 31, 1999 from $450.8 million for the year ended
December 31, 1998. Results for the year ended December 31, 1999 reflect the
strong U.S. equity market performance experienced as evidenced by an
increase in average daily share volume on Nasdaq of approximately 35% as
compared to the previous year. Transaction services revenues of $283.7
million increased $123.2 million or 76.8% for the year ended December 31,
1999 from $160.5 million for the year ended December 31, 1998, primarily
due to an increase in average daily share volume of 108.5% to over 1.3
million average trades per day during the year ended December 31, 1999 as
compared to over 0.6 million average trades per day during the year ended
December 31, 1998. Market information services revenues of $186.5 million
increased $33.4 million or 22.2% for the year ended December 31, 1999 from
$152.7 million for the year ended December 31, 1998, primarily due to a
35.7% growth in the number of subscribers of market quote and trade data
services. Issuer services revenues of $163.4 million increased $26.1
million or 19.0% for the year ended December 31, 1999 from $137.3 million
for the year ended December 31, 1998, primarily due to an increase in the
number and size of initial public offerings, spin-offs, and movement of
issuers into Nasdaq from other markets.
Direct Expenses
Direct expenses increased $88.4 million or 29.6% to $386.7 million for the
year ended December 31, 1999 from $298.3 million for the year ended
December 31, 1998.
Compensation costs increased $19.5 million or 24.8% to $98.1 million for
the year ended December 31, 1999 from $78.6 million for the year ended
December 31, 1998, primarily due to an increase in headcount of
approximately 228 employees to 1,042 employees as of December 31, 1999,
from 814 employees as of December 31, 1998 that represents a 28.0% increase
in headcount. The majority of new employees are technology staff needed for
system enhancements and development initiatives and are performing services
for Nasdaq that would have been otherwise provided by independent
contractors.
Marketing and advertising costs increased $20.3 million or 47.8% to $62.8
million for year ended December 31, 1999 from $42.5 million for the year
ended December 31, 1998, primarily due to an extensive media advertising
campaign run during the fall of 1999 to promote brand-awareness.
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 EWNII in 1998. EWNII is the new Nasdaq network
to connect Nasdaq's computerized market facilities to market participants.
Professional and contract services costs net of amounts capitalized under
Statement of Position 98-1 as described in the notes to consolidated
financial statements included elsewhere in this Registration Statement
increased $0.2 million or 0.6% to $35.3 million for the year ended December
31, 1999, from $35.1 million for the year ended December 31, 1998. The main
projects included in current year professional and contract services
expense are development costs related to the New Amex Equity Book ("NAMEX")
and the Integrated Quote Management System ("IQMS"). NAMEX 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 NAMEX are charged back to Amex as
support costs provided to related parties. Amounts charged to related
parties are netted against charges from related parties in the "Support
cost from related parties, net" line item on the Consolidated Statement of
Income. For the year ended December 31, 1999, approximately $11.7 million
of NAMEX development costs that would have otherwise been capitalized as an
internally developed software cost were expensed in the fourth quarter of
1999 by Nasdaq after a determination not to implement the system. IQMS 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 IQMS.
Depreciation 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.
The remaining direct expenses increased $11.3 million or 32.3% to $46.3
million for the year ended December 31, 1999 from $35.0 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 EWNII 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 EWNII in return for revenues generated by
EWNII and a deposit fee paid by Nasdaq. Although the deposit will
be refunded if Nasdaq attains certain revenue targets, the allowance is
established for any unrecoverable amounts. Other direct expenses also
increased due to Nasdaq's contribution to The Nasdaq Stock Market
Educational Foundation, Inc. of $10.0 million for the year ended December
31, 1999 compared to $5.0 million for the year ended December 31, 1998.
Contributions to The Nasdaq Stock Market Educational Foundation, Inc. were
made in the fourth quarters of the years ended December 31, 1998 and
December 31, 1999. The foundation is a non-profit membership organization
established and operated exclusively to advance educational purposes,
principally involving the study of business, economics, and finance.
Support Costs
Support costs from related parties increased by $14.4 million or 14.3% to
$115.2 million for the year ended December 31, 1999 from $100.8 million for
the year ended December 31, 1998, primarily due to the increase in support
charges from the NASD which largely represent costs incurred by the NASD to
develop and maintain technology on behalf of Nasdaq. Specifically, support
costs from the NASD increased by $11.5 million or 21.9% to $64.1 million
for the year ended December 31, 1999 from $52.6 million for the year ended
December 31, 1998, primarily due to an increase in technology development
costs as a result of Nasdaq Japan, various Year 2000 ("Y2K") initiatives,
and an increase in overall network environment costs necessary to support
the increase in trade volume. In addition, Nasdaq incurred surveillance and
other regulatory charges from NASDR. Surveillance and other regulatory
charges are comprised primarily of the costs relating to technological
investments for market surveillance as well as direct costs for enforcement
and other regulation services. Surveillance and other regulatory charges
from NASDR increased by $7.8 million or 13.6% to $65.1 million for the year
ended December 31, 1999, from $57.3 million for the year ended December 31,
1998. Nasdaq charged Amex $14.0 million as support costs provided to
related parties in the year ended December 31, 1999. This amount consists
of $9.2 million of non-technology services provided such as marketing
services performed by Nasdaq on behalf of Amex as well as $4.8 million of
technological support related to the development of new systems such as
NAMEX and the enhancement of existing Amex systems. Amounts charged to
related parties are netted against charges from related parties in the
"Support cost from related parties, net" line item on the Consolidated
Statements of Income.
Liquidity and Capital Resources
December 31, 2000 compared to December 31, 1999
Cash and cash equivalents and available for sale securities totaled $494.4
million as of December 31, 2000, an increase of $330.2 million from $164.2
million as of December 31, 1999. Working capital increased $318.3 million
to $472.6 million as of December 31, 2000, from $154.3 million as of
December 31, 1999.
Cash and cash equivalents increased $251.7 million to $262.3 million as of
December 31, 2000, primarily due to cash provided by financing activities
as a result of the net proceeds received from Phase I which equaled $253.3
million.
For the year ended December 31, 2000, operating activities provided net
cash inflows of $232.7 million, primarily due to cash received from
customers of $713.0 million less cash paid to suppliers, employees, and
related parties of $403.4 million and income taxes paid of $101.2 million.
Net cash used in investing activities was $269.4 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. 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 which equaled
approximately $253.3 million. Nasdaq will use the proceeds to invest in new
technology, implement and form strategic alliances, implement its pricing
strategies, and build its brand identity through marketing programs.
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.
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 $33.5 million to
$154.3 million as of December 31, 1999, from $120.8 million as of December
31, 1998.
Cash and cash equivalents increased $7.8 million to $10.6 million as of
December 31, 1999, primarily due to cash provided by operating activities
of $134.6 million, partially offset by cash used in investing activities of
$130.7 million.
In the year ended December 31, 1999, operating activities provided net cash
inflows of $134.6 million, primarily due to cash received from customers of
$527.9 million less cash paid to suppliers, employees, and related parties
of $352.9 million.
Net cash used in investing activities was $130.7 million in the year ended
December 31, 1999, due in part to an increase in capital expenditures
related to construction of the new MarketSite and broadcast facility in
Times Square in New York City 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 one
percent fluctuation in market interest rates will have a material effect on
Nasdaq's investment portfolio and outstanding debt.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Statement of Financial
Accounting Standards ("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 believes that the adoption of SFAS No. 133 will
not have a significant impact on its operating results or cash flows.
Item 3. Properties.
Nasdaq's principal technology services, systems engineering, and market
operations are located in approximately 162,000 square feet of Nasdaq-owned
space in Trumbull, Connecticut. Nasdaq also leases 44,000 and 57,000 square
feet of office space in two facilities in Trumbull, Connecticut. A small
back-up site for market operations is located in Norwalk, Connecticut. The
NASD and Nasdaq are in the process of a real estate swap transaction, which
would transfer ownership of an approximate 110,000 square feet facility
housing the Nasdaq data center in Rockville, Maryland to Nasdaq in exchange
for a Nasdaq-owned office building of approximately 58,000 square feet.
Nasdaq also occupies approximately 8,000 square feet in one of the NASD's
Rockville, Maryland locations where Market Watch is co-located with NASDR's
Market Regulation. In Gaithersburg, Maryland, Nasdaq occupies an
approximate 66,000 square feet space, leased by the NASD. This lease
expires in 2001 and will be replaced by a Nasdaq lease of approximately
78,000 square feet in the nearby Blackwell facility in Rockville, Maryland.
Nasdaq has a marketing facility of approximately 26,000 square feet in New
York's Times Square, originally leased by the NASD but scheduled for
assignment to Nasdaq. Nasdaq is currently in the process of relocating its
headquarters in New York, New York from the NASD leased space at 33
Whitehall to One Liberty Plaza, where Nasdaq will occupy approximately
78,000 square feet of space subleased from the NASD. Nasdaq also occupies
an approximate 24,000 square feet space on Rector Street in New York City,
which is an assigned lease from Amex. Nasdaq occupies an approximate 3,500
square feet space in Jersey City, New Jersey, which houses Nasdaq Tools. In
Washington D.C., Nasdaq occupies an approximate 40,000 square feet space
within 1735 and 1801 K Street locations. In addition, Nasdaq leases
administrative and sales facilities in Menlo Park, California, London,
England, and Sao Paulo, Brazil. Nasdaq's Chicago operations will sublease
space from the NASD.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the beneficial ownership of Nasdaq's Common
Stock by all persons who are beneficial owners of more than five percent of
the Common Stock and the beneficial ownership of Nasdaq's Common Stock and
Nasdaq Japan's common shares by (1) each director, (2) Nasdaq's Chief
Executive Officer ("CEO") and the four most highly compensated executive
officers other than the CEO, who were serving as executive officers at the
end of 2000, and (3) all directors and executive officers as a group.
Except as otherwise indicated, Nasdaq believes that the beneficial owners
listed below, based on information furnished by such owners, will have sole
investment and voting power with respect to such shares, subject to
community property laws where applicable. Unless otherwise indicated, the
business address of such persons is One Liberty Plaza, New York, New York,
10006. As of May 4, 2001, approximately 110,765,855 shares of Common Stock
were outstanding, and approximately 56,400 common shares of Nasdaq Japan
were outstanding after giving effect to a four-for-one stock split of Nasdaq
Japan's shares that occurred on April 18, 2001.
Name of beneficial owner Common Stock Percent Common Shares Percent
Beneficially Owned of Class of Nasdaq Japan of Class
Beneficially Owned
- ---------------------------------- ----------------------- ------------ ------------------------- ------------
National Association of
Securities Dealers, Inc............ 76,992,671(1) 69.5 - -
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, California 94111
Dr. Josef Ackermann................ -(3) - - -
H. Furlong Baldwin................. - - - -
Frank E. Baxter.................... -(4) - - -
Alfred R. Berkeley, III............ - - - -
Michael W. Brown................... - - - -
Michael Casey...................... -(5) - - -
Michael W. Clark................... -(6) - - -
William S. Cohen................... - - - -
F. Warren Hellman.................. 12,000,000(2) 9.8 - -
John D. Markese.................... - - - -
E. Stanley O'Neal.................. -(7) - - -
Vikram S. Pandit................... -(8) - - -
Kenneth D. Pasternak............... -(9) - - -
David S. Pottruck.................. -(10) - - -
Arthur Rock........................ - - - -
Richard C. Romano.................. 20,000(11) * - -
Hardwick Simmons................... - - - -
Arvind Sodhani..................... -(12) - - -
Sir Martin Sorrell................. - - - -
Frank G. Zarb...................... 60,000(13) * 140(14) *
Alfred R. Berkeley, III............ 15,900(15) * - -
J. Patrick Campbell................ 30,000(16) * - -
John L. Hilley..................... 30,000(17) * 1,900(18) 3.4
Richard G. Ketchum................. 40,000(19) * 76(20) *
All directors and executive
officers as a group
(33 persons)....................... 333,100 * 2,192 3.9
- ----------------------------
* Less than one percent
(1) Includes approximately 43,231,976 shares of Common Stock underlying the
unexercised, unexpired outstanding Warrants.
(2) Hellman & Friedman owns the Subordinated Debentures. H&F Investors IV,
LLC ("H&F IV"), is the general partner of each of the Hellman & Friedman
limited partnerships. The Subordinated Debentures are currently convertible
into 12,000,000 shares of Common Stock, subject to adjustment. The investment
decisions of each of the Hellman & Friedman limited partnerships are made by
the investment committee of H&F IV, which indirectly exercises sole voting
and investment power with respect to the Subordinated Debentures. Mr. Hellman
is one of nine members of the investment committee. Mr. Hellman disclaims
beneficial ownership of the Subordinated Debentures except to the extent of
his indirect pecuniary interest.
(3) Dr. Ackermann is head of Corporate and Institutional Clients Group of
Deutsche Bank AG which, together with its affiliates, owns an aggregate of
1,500,300 shares of Common Stock. Dr. Ackermann disclaims beneficial
ownership of such shares.
(4) Mr. Baxter is the Chairman of the Jefferies Group, Inc. which, 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 which owns an
aggregate of 10,000 shares of Common Stock. Mr. Casey disclaims beneficial
ownership of such shares.
(6) Mr. Clark is an officer of Credit Suisse First Boston, Inc., which,
together with its affiliates, owns 1,604,650 shares of Common Stock. Mr.
Clark disclaims beneficial ownership of such shares.
(7) Mr. O'Neal is an officer of Merrill Lynch & Co. which, 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. which,
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. which, 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 which,
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 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 which 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 which have not yet vested. Under the terms of this
plan, Mr. Zarb has the right to direct the voting of such shares.
(14) Represents options to purchase an aggregate of 140 Nasdaq Japan common
shares.
(15) Represents 15,900 shares of restricted stock issued under Nasdaq's
Equity Incentive Plan which 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 which 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 which 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 which have not yet vested. Under the terms of this
plan, Mr. Ketchum has the right to direct the voting of such shares.
(20) Represents options to purchase an aggregate of 76 shares of Nasdaq
Japan common shares.
Item 5. Directors and Executive Officers.
The directors and executive officers of Nasdaq are as follows:
Name Age Position
- ------------------------- --------- -----------------------------------
Frank G. Zarb 66 Chairman of the Nasdaq Board Class 2
Hardwick Simmons 60 CEO, Director Nominee Class 1
Dr. Josef Ackermann 53 Director Nominee Class 2
H. Furlong Baldwin 69 Director Class 2
Alfred R. Berkeley, III 56 Vice Chairman and Director Class 1
Frank E. Baxter 64 Director Class 1
Michael W. Brown 55 Director Class 1
Michael Casey 55 Director Class 3
Michael W. Clark 41 Director Nominee Class 1
William S. Cohen 60 Director Nominee Class 1
F. Warren Hellman 66 Director Class 2
John D. Markese 55 Director Class 1
E. Stanley O'Neal 49 Director Class 3
Vikram S. Pandit 45 Director Class 3
Kenneth D. Pasternak 47 Director Nominee 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 37 Executive Vice President--Operations and
Technology and Chief Information Officer
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
Gordon F. Martin 53 Executive Vice President and Chief
Financial Officer
Steven Randich 38 Executive Vice President and Chief
Technology Officer
Denise B. Stires 38 Executive Vice President--Marketing and
Investor Services
John N. Tognino 62 Executive Vice President
John T. Wall 59 President, Nasdaq International
David P. Warren 47 Executive Vice President--Chief
Administrative Officer
David Weild IV 44 Executive Vice President--Issuer Affairs
Frank G. Zarb, a Staff Director, has been Chairman of the Nasdaq Board
since January 2000 and Chairman of the NASD Board since 1997. 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. 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 to be effective immediately following Nasdaq's 2001 annual
meeting of stockholders (the "2001 Annual Meeting"). 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, Merchantile Bankshares Corporation,
Constellation Energy Group, CSX Industries, Offitbank, Wills Group, and The
St. Paul Companies.
Alfred R. Berkeley III, a Staff Director, was elected to the Nasdaq Board in
1996. Mr. Berkeley has been Vice Chairman of Nasdaq since July 2000 and was
President of Nasdaq from June 1996 to July 2000. 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. Mr. Berkeley is not standing for re-election to the
Nasdaq Board when his term ends in connection with the 2001 Annual Meeting.
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 W. Brown, a Non-Industry Director, served as the Chairman of the
Nasdaq Board from 1996 to January 2000 and was elected to the Nasdaq Board
in 1995. Mr. Brown is the former Chief Financial Officer ("CFO") of
Microsoft Corporation a software developer and manufacturer. Mr. Brown
spent 18 years with the public accounting firm of Deloitte and Touche LLP.
Mr. Brown currently serves on the board of directors of Administaff Inc.,
and FatKat Inc. Mr. Brown is a member of the Thomas Weisel Partners
Advisory Board, XML Fund Advisory Board and is a Fellow at Bios, L.P. Mr.
Brown is not standing for re-election to the Nasdaq Board when his term
ends in connection with the 2001 Annual Meeting.
Michael Casey, a Non-Industry Director, was elected to the Nasdaq Board in
January 2001. Mr. Casey has been Executive Vice President, CFO, and Chief
Administrative Officer of Starbucks Corporation, the leading roaster and
retailer of specialty coffee, since September 1997. Prior to his current
position, Mr. Casey was Senior Vice President and CFO of Starbucks from
August 1995 to September 1997.
Michael W. Clark, an Industry Director nominee, is a Managing Director and
Head of Global Equity Trading at Credit Suisse First Boston, Inc. ("CSFB"),
a global investment bank serving institutional, corporate, government, and
individual clients, and a member of its Global Equity Management Committee.
Mr. Clark also serves on the firm's Operating Committee and is a member of
the Managing Director Evaluation Committee and Co-Head of the Global
Recruiting Committee. Mr. Clark joined CSFB as a Vice President in 1991.
Prior to assuming his present role in 1995, Mr. Clark was in charge of
CSFB's global convertible trading and risk management.
William S. Cohen, a Public Director, was elected to the Nasdaq Board in
April 2001 to be effective immediately following the 2001 Annual Meeting.
Secretary Cohen is the Chairman and CEO of The Cohen Group, a strategic
business consulting firm. He was previously the Secretary of Defense during
the Clinton Administration from 1997-2001. Secretary Cohen represented
Maine in the U.S. Senate for three terms and in the U.S. House of
Representatives for three terms before retiring in 1996.
F. Warren Hellman, a Non-Industry Director, was elected to the Nasdaq Board
in March 2001 effective upon the consummation of the sale by Nasdaq
of the Subordinated Debentures to Hellman & Friedman which 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 to be effective immediately following the
2001 Annual Meeting. 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 is Executive Vice President of Merrill Lynch &
Co., Inc., a global financial services firm, and President of its U.S.
Private Client Group since February 2000. Prior to his current positions,
Mr. O'Neal was 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/OTC 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. Mr. Ketchum
serves as a director of the Depository Trust and Clearing Corporation.
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.
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.
Gordon F. Martin became an Executive Vice President and CFO of Nasdaq in
October 2000. Mr. Martin oversees the operation and maintenance of all
corporate financial systems. From February 2000 to October 2000, Mr. Martin
was Executive Vice President and CFO of the NASD. Prior to joining the
NASD, Mr. Martin was a Managing Director for CIBC World Markets Corp. in
New York, a global investment banking firm from 1996 to 2000. Prior to
that, Mr. Martin was Vice President at Westpac Banking Corporation, a
financial services provider, from 1993 to 1996, and a Senior Vice President
of Marine Midland Bank, a financial services firm, from 1976 to 1993.
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 ("STA") and the
STA 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.
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. Mr. Warren oversees human resources and
all administrative services including real estate, property management and
purchasing. Prior to his current position, Mr. Warren was CFO of the Long
Island Power Authority from 1998 to 2000, Deputy Treasurer of the State of
Connecticut from 1995 to 1997, and a Vice President at CSFB from 1987 to
1995.
David Weild IV became Executive Vice President of Issuer Affairs of Nasdaq
in March 2001. Prior to his current position, Mr. Weild held various
positions with Prudential Securities Incorporated, the investment and
brokerage firm, including President of Prudential Securities.Com from 2000
to 2001, Managing Director and Head of High Technology from 1997 to 2000,
Managing Director of Investment Banking and Head of Corporate Finance from
1995 to 1997, and Managing Director and Head of Global Equity Transactions
from 1990 to 1995.
Item 6. Executive Compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth compensation awarded to, earned by, or paid
to the individuals who were, as of December 31, 2000, the CEO and the four
most highly compensated employees other than the CEO, for all services
rendered to Nasdaq and its subsidiaries for the fiscal year ended December
31, 2000.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
Other Securities
Annual Restricted Underlying
Name and Principal Compensation Stock Options/ LTIP All Other
Position Year Salary Bonus(1) Awards Award(s) SARs Payouts Compensation
($) ($) ($) ($) (#) ($) ($)(2)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------------------------------
Frank G. Zarb, 2000 1,333,333 6,000,000 441,055(4) -- -- -- 17,892
Chairman,(3) Nasdaq
- -----------------------------------------------------------------------------------------------------------------------------------
Alfred R. Berkeley, 2000 522,500 650,000 -- -- -- -- 13,405
III, Vice Chairman,
Nasdaq
- -----------------------------------------------------------------------------------------------------------------------------------
Richard G. Ketchum, 2000 522,500 1,750,000 -- -- -- -- 13,405
President, Nasdaq
- -----------------------------------------------------------------------------------------------------------------------------------
John L. Hilley, 2000 450,000 950,000 408,720 -- -- -- 13,085
Executive Vice
President,
Nasdaq and
Chairman and
Chief Executive
Officer, Nasdaq
International
- -----------------------------------------------------------------------------------------------------------------------------------
J. Patrick Campbell, 2000 409,000 750,000 -- -- -- -- 12,764
Executive Vice
President, Chief
Operation Officer,
and President, Nasdaq
U.S. Markets
- --------------------------------------------------------------------------------
- -------------------
(1) Includes $800,000, $130,000, $950,000, $390,000 and
$270,000 with respect to Messrs. Zarb, Berkeley, Ketchum,
Hilley and Campbell, respectively, which amounts will
be paid only if the individuals remain employed by Nasdaq
on December 31, 2002 or in the event of their prior
retirement, permanent disability, death or involuntary
termination without cause.
(2) Represents Nasdaq contributions to 401(k) plan and
payment in respect of a forgiveness of loan in the amount
of $7,692 for Mr. Zarb; $3,205 for each of Messrs. Berkeley and
Ketchum; $2,885 for Mr. Hilley; and $2,564 for
Mr. Campbell.
(3) Mr. Zarb served as the CEO during the fiscal year ended
December 31, 2000 and until February 1, 2001.
(4) Includes $221,735 in respect of the purchase of Mr.
Zarb's residence.
Employment Agreements
The NASD and Nasdaq are parties to an employment agreement with Frank Zarb
(the "Zarb Agreement"). The Zarb Agreement had an initial term of three
years commencing on February 24, 1997 (the "Initial Term") and continues
for an additional period of two years immediately following the Initial
Term (the "Additional Term," the Initial Term and the Additional Term
collectively, referred to as the "Term"). The Zarb Agreement provides for
(i) an annual base salary of $1,200,000 from the commencement of the
Initial Term through October 31, 2000 and $2,000,000 during the period
commencing on November 1, 2000 through the remainder of the Term and (ii)
incentive compensation as the Management Compensation Committee of the NASD
may award in its discretion, provided that the amount of such compensation
for each full year of service during the Term may not be not less than 50%
of Mr. Zarb's base salary for such year, and provided further that such
compensation for the second year of the Additional Term may not be less
than $4,000,000. Under the Zarb Agreement, during the first year of the
Additional Term, the aggregate annual base salary and incentive
compensation paid to Mr. Zarb by the NASD may not be less than the
aggregate annual amount paid to Mr. Zarb for the second or third year of
the Initial Term, whichever was greater and, during the second year of the
Additional Term, the aggregate annual base salary and incentive
compensation paid to Mr. Zarb by the NASD may not be less than the
aggregate annual amount paid to Mr. Zarb for the third year of the Initial
Term or the first year of the Additional Term, whichever was greater. Under
the terms of the Zarb Agreement, Nasdaq will (1) fully vest all stock
options granted to Mr. Zarb upon the earlier of (x) the termination of the
Term or (y) Zarb's relinquishment of his position and duties under the
circumstances set forth in the Zarb Agreement, and shall permit the
exercise of the options during the three month period thereafter for
incentive stock options and during the five year period thereafter for all
other stock options and (2) cause all restrictions on any restricted stock
awarded to Mr. Zarb by Nasdaq to lapse upon the earlier of (i) the
termination of the Term or (ii) Zarb's relinquishment of his position and
duties under the circumstances set forth in the Zarb Agreement.
Under the terms of the Zarb Agreement, Mr. Zarb became fully vested in his
benefits under the NASD Supplemental Executive Retirement Plan upon the
completion of the Initial Term. Under the Zarb Agreement, on February 24,
2002 and for a period of five years thereafter, unless Mr. Zarb terminates
his employment earlier (other than for relinquishment of his position under
the circumstances set forth in the Zarb Agreement), Mr. Zarb will be
entitled to an annual consulting fee of $100,000 and certain fringe
benefits and perquisites, provided that Mr. Zarb makes himself available to
provide consulting services to the CEO of the NASD during such period and
does not commence employment with another employer or recommence employment
with the NASD during such period.
Mr. Zarb's employment may be terminated due to (i) death or disability (ii)
by the NASD for "cause" or (iii) by Mr. Zarb for "good reason" upon
thirty-days written notice. If Mr. Zarb terminates his employment for "good
reason" or if the NASD terminates Mr. Zarb's employment other than for
cause, Mr. Zarb is entitled to (1) a cash payment equal to the product of
(x) the sum of the minimum incentive compensation and base salary described
above multiplied by (y) the remaining number of full and partial months in
the Term, (2) the retirement benefits Mr. Zarb would have been entitled to
had he completed the Term and (3) continuation of certain other benefits.
Nasdaq has entered into an employment agreement (the "Employment
Agreements") with each of Richard G. Ketchum, J. Patrick Campbell and John
L. Hilley (each an "Executive" collectively, the "Executives"). The term of
the Employment Agreements commenced as of December 29, 2000 and will
continue until December 31, 2003 with automatic one-year renewals, unless
either party, at least six months prior to the expiration of the term,
gives a notice of its intent not to renew the term.
The Employment Agreements with Messrs. Ketchum and Campbell provide for an
annual salary at a rate not less than the rate of annual salary in effect
as of the effective date. Mr. Hilley's Employment Agreement provides for an
annual salary at a rate not less than the rate of annual salary in effect
for 1999. The Employment Agreements with Messrs. Ketchum and Campbell
provide for guaranteed incentive compensation for each year during the term
in an amount equal to 100% of base salary as in effect on December 31 of
the preceding year.
Under the terms of the Employment Agreements, the Executives will be fully
vested in their supplemental retirement benefits (the "SERP Benefit") under
Nasdaq's Supplemental Retirement Plan, upon the attainment of age 55 (53 in
the case of Mr. Ketchum) while employed and completion of five years of
service or if the Executives' employment with Nasdaq terminates (i) due to
death or disability (ii) by Nasdaq without "cause" or (iii) by the
Executive for "good reason." With respect to Mr. Hilley, the final average
compensation for purposes of determining SERP benefits will be deemed to be
the sum of (a) one-half of his annual salary and (b) one-third of one-half
of his annual salary. The Executives are also entitled to receive equity
awards under Nasdaq's equity plans and other fringe benefits. Under the
terms of the Employment Agreement, each Executive is entitled to receive a
payment in an amount equal to two times the Executive's then effective base
salary (the "Stay Bonus") if the Executive is (i) employed by Nasdaq as of
August 9, 2003, (ii) if the Executive's employment is terminated due to
death or disability or (iii) if the Executive terminates employment for
"good reason" or Nasdaq terminates the Executive's employment without
"cause."
If the Executive's employment is terminated without "cause" or if the
Executive terminates employment for "good reason," Nasdaq is obligated to
pay to the Executive (i) the Stay Bonus if not previously paid; (ii) a pro
rata portion of the incentive compensation for the year of termination; and
(iii) continuation of base salary and incentive compensation until the
later of (x) the end of the term of the Employment Agreement or (y) 24
months from the date of such termination of employment. If the Executive
becomes subject to any "golden parachute" excise tax, Nasdaq is obligated
to make additional payments to the Executive to offset the effect of such
tax, provided that the Executive agrees to be subject to certain
restrictive covenants relating to non-competition, non-solicitation, non-
disparagement and confidentiality.
PENSION PLAN TABLE
Nasdaq's executive officers participate in Nasdaq's qualified and
supplemental defined benefit pensions plans. Under these plans executive
officers earn a benefit expressed as an annual annuity equal to 6% of their
final average compensation for each year of service. Average annual
compensation is the average annual salary plus one-third of the annual
bonus for the highest five-year period of service. The estimated credited
years of service for Mr. Zarb is 3.85 years, Mr. Berkeley is 4.58 years,
Mr. Ketchum is 9.67 years, Mr. Hilley is 2.85 years, and Mr. Campbell is
3.97 years. The following table sets forth the benefit payable under the
plan for various levels of remuneration and years of service. Such benefits
are not reduced by benefits received under social security or other
offsets.
- -------------------------------------------------------------------------------------------------------
Years of Service
- -------------------------------------------------------------------------------------------------------
Remuneration 5 10 15 20 25 30
- -------------------------------------------------------------------------------------------------------
500,000 150,000 300,000 300,000 300,000 300,000 300,000
600,000 180,000 360,000 360,000 360,000 360,000 360,000
700,000 210,000 420,000 420,000 420,000 420,000 420,000
800,000 240,000 480,000 480,000 480,000 480,000 480,000
900,000 270,000 540,000 540,000 540,000 540,000 540,000
1,000,000 300.000 600,000 600,000 600,000 600,000 600,000
1,500,000 450,000 900,000 900,000 900,000 900,000 900,000
2,000,000 600,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
3,000,000 900,000 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000
- -------------------------------------------------------------------------------------------------------
Item 7. Certain Relationships and Related Transactions.
The NASD
Nasdaq's legal authority to operate as a stock market is delegated to it by
the NASD under the Delegation Plan. Although Nasdaq has initiated the
process with the SEC for Exchange Registration, Exchange Registration is
not expected to occur until later this year at the earliest. As a result,
prior to Exchange Registration, Nasdaq will continue to operate under the
Delegation Plan, under which the NASD has delegated responsibility for
market operation functions to Nasdaq. Though Nasdaq exercises primary
responsibility for market-related functions, including market-related
rulemaking and interpretations, all actions taken pursuant to delegated
authority by the NASD are subject to review, ratification, or rejection by
the NASD Board. As long as the Delegation Plan remains in effect, the NASD
Board will continue to have authority over Nasdaq. The current structure
will continue until Nasdaq is reconstituted as a self-regulatory
organization, which will become effective upon Exchange Registration.
Currently, Mr. Zarb is Chairman of the NASD Board and Messrs. Baldwin,
Baxter, Berkeley, Brown, Markese, Pottruck, Rock, Romano, and Sodhani are
members of the NASD Board as well as members of the Nasdaq Board.
In June 2000, in connection with the Restructuring, the NASD separated Amex
from Market Group, a holding company of the NASD which also held Nasdaq,
and then merged Market Group 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. 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 the Regulatory Services Agreement pursuant to which NASDR or
its subsidiaries will provide regulatory services to Nasdaq and its
subsidiaries of the same type and scope as were provided by NASDR to Nasdaq
prior to June 28, 2000. Each of the services is provided on a function-
by-function basis for a specified number of years, subject to Nasdaq being
able to terminate its receipt of specific services prior to the expiration
of this time under certain conditions. Nasdaq will pay to NASDR the cost of
any services provided plus a fair market mark-up. Nasdaq expects the cost
of these services provided by the NASDR to be approximately $90 million per
year. The Regulatory Services Agreement also provides for Nasdaq's access
to certain NASDR software that has been or will be developed for Nasdaq.
Nasdaq pays the NASD and certain of its subsidiaries for the use of
approximately 298,000 square feet of office space. Nasdaq pays
approximately $14.3 million in the aggregate per year to the NASD for the
use of this space.
On May 3, 2001, Nasdaq repurchased 18,461,538 shares of Common Stock from
the NASD for $13 per share or an aggregate purchase price of $239,999,994.
This price was determined following discussions between members of
management of Nasdaq and members of management of the NASD and is the same
price at which shares of Common Stock were sold in January 2001 in the
second phase of the Restructuring. In connection with the transaction,
Nasdaq and the NASD have agreed to enter into an Investor Rights Agreement
pursuant to which Nasdaq will grant the NASD certain demand and piggyback
registration rights with respect to the shares of Common Stock owned by it.
Hellman & Friedman
On May 3, 2001, Nasdaq issued and sold $240,000,000 in aggregate principal
amount of the Subordinated Debentures to Hellman & Friedman. The
Subordinated Debentures are convertible at any time into an aggregate of
12,000,000 shares of Common Stock, subject to adjustment. Hellman &
Friedman owns approximately 9.8 percent of Nasdaq on an as-converted basis.
In connection with the transaction, Nasdaq has agreed to use its best
efforts to seek stockholder approval of a charter amendment that would
provide for voting debt in order to permit Hellman & Friedman to vote on an
as-converted basis on all matters on which common stockholders have the
right to vote, subject to the five percent voting limitation in the
Certificate of Incorporation. In addition, Nasdaq has also agreed that in
the event that the Nasdaq Board approves an exemption from the foregoing
five percent limitation for any person pursuant to the Certificate of
Incorporation (other than an exemption granted in connection with a
strategic market alliance) and seeks the concurrence of the SEC with
respect thereto, Nasdaq will grant Hellman & Friedman a comparable
exemption from such limitation and use its best efforts to obtain SEC
concurrence of such exemption. Nasdaq has granted Hellman & Friedman
certain registration rights with respect to the shares of Common Stock
underlying the Subordinated Debentures. Additionally, Hellman & Friedman
will be permitted to designate one person reasonably acceptable to Nasdaq
for nomination as a director of Nasdaq for so long as Hellman & Friedman
owns Subordinated Debentures and/or shares of Common Stock issued upon
conversion representing at least 50% of the shares of Common Stock issuable
upon conversion of the Subordinated Debentures initially purchased. Nasdaq
has elected F. Warren Hellman as a director of Nasdaq pursuant to the
foregoing provision. Arthur Rock, a member of the Nasdaq Board of
Directors, is an indirect limited partner of Hellman & Friedman.
Directors and Officers
Mr. Romano, a member of the Nasdaq Board, is the President and majority
stockholder of Romano Brothers & Co., a securities firm registered with the
NASD. As a member of the NASD, Romano Brothers & Co. participated in the
Restructuring through the purchase of 20,000 shares of Common Stock and 300
Warrants to purchase an aggregate of 1,200 shares of Common Stock for an
aggregate purchase price of $263,300.
In July 2000, certain officers of Nasdaq were awarded restricted Nasdaq
Japan common shares as well as options to purchase an Nasdaq Japan common
shares. See "Item 4. Security Ownership of Certain Beneficial Owners and
Management" and "Item 1. Business - Nasdaq's Strategic Initiatives -
Pursuing Global Market Expansion - Nasdaq Japan, Inc."
In connection with Nasdaq's Equity Incentive Plan, officers of Nasdaq
received awards of options to purchase shares of Common Stock and/or
restricted shares of Common Stock. See "Item 9. Market Price of and
Dividends on Registrants' Common Equity and Related Stockholder Matters."
Directors and officers may receive equity-based awards in the future. In
connection with Nasdaq's Employee Stock Purchase Plan, employees (including
employees who are directors) have the opportunity to purchase shares of
Common Stock.
Item 8. Legal Proceedings.
Nasdaq is not currently a party to any litigation that it believes could
have a material adverse effect on its business, financial condition, or
operating results. However, from time to time, Nasdaq has been threatened
with, or named as a defendant, in lawsuits.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
No established public trading market exists for the Common Stock.
As of April 25, 2001 there were outstanding options to purchase an
aggregate of 9,659,290 shares of Common Stock that were granted to officers
and employees of Nasdaq and its subsidiaries. In the first quarter of 2001,
Nasdaq awarded an aggregate of 534,850 shares of restricted Common Stock to
officers and employees of Nasdaq and its subsidiaries. In addition, there
are currently outstanding Warrants to purchase 43,231,976 shares of Common
Stock that were issued in the Restructuring. The shares underlying the
Warrants are all issued and outstanding and held by the NASD. The
Subordinated Debentures will be convertible at any time prior to their
maturity for an aggregate of 12,000,000 shares of Common Stock, subject to
adjustment.
All 76,992,671 shares of Common Stock beneficially owned by the NASD as of
May 3, 2001 are subject to sale pursuant to Rule 144 under the Securities
Act, subject to the limitations set forth therein and other contractual
limitations. In aggregate, Nasdaq has agreed to register, subject to
certain terms and conditions, the shares of Common Stock underlying the
Subordinated Debentures currently held by Hellman & Friedman. The
Subordinated Debentures are currently convertible into an aggregate of
12,000,000 shares of Common Stock, subject to adjustment.
As of April 17, 2001, Nasdaq had approximately 1,878 holders of record of
its Common Stock.
Nasdaq does not pay, and does not anticipate paying in the foreseeable
future, any cash dividends on its common equity.
Item 10. Recent Sales of Unregistered Securities.
In Phase I, on June 28, 2000, Nasdaq sold an aggregate of 23,663,746 shares
of Common Stock for an aggregate consideration of $260,301,206 to investors
consisting of NASD members, Nasdaq market participants, issuers with
securities quoted 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 for an aggregate consideration of $65,374,361 to investors consisting
of NASD members, Nasdaq market participants, issuers with securities quoted
on Nasdaq, and other strategic partners. The shares of Common Stock sold by
Nasdaq in Phase I and Phase II were issued in private transactions exempt
under Regulation D of the Securities Act.
On May 3, 2001, Nasdaq issued and sold $240,000,000 in aggregate principal
amount of its Subordinated Debentures to Hellman & Friedman. The Subordinated
Debentures are currently convertible into an aggregate of 12,000,000
shares of Common Stock, subject to adjustment. Hellman & Friedman owns
approximately 9.8 percent of Nasdaq on an as-converted basis. Nasdaq has
granted Hellman & Friedman certain registration rights with respect to the
shares of Common Stock underlying the Subordinated Debentures. The
Subordinated Debentures were sold in a private transaction pursuant to
Section 4(2) of the Securities Act, which exempts sales of securities that
do not involve a public offering.
As of April 25, 2001, Nasdaq granted options to purchase an aggregate of
9,659,290 shares of Common Stock to officers and employees of Nasdaq and
its subsidiaries pursuant to its Equity Incentive Plan. In addition, in
2001, Nasdaq has awarded an aggregate of 534,850 shares of restricted
Common Stock to officers and employees of Nasdaq and its subsidiaries
pursuant to its Equity Incentive Plan. A maximum of 500,000 shares of
Common Stock have been approved by Nasdaq for sale pursuant to its Employee
Stock Purchase Plan for the first offering period ending June 29, 2001. All
the foregoing grants of options and restricted Common Stock and sales of
shares of Common Stock were made, or will be made, pursuant to Rule 701
under the Securities Act, which exempts issuances of securities under
certain written compensatory employee benefit plans.
Item 11. Description of Registrant's Securities to be Registered.
General
The authorized capital stock of Nasdaq consists of 300,000,000 shares of
Common Stock, par value $.01 per share, and 30,000,000 shares of preferred
stock, par value $.01 per share. As of May 4, 2001, there were 110,765,855
shares of Common Stock outstanding and no shares of preferred stock
outstanding.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders except that any person, other
than the NASD or any other person as may be approved for such exemption by
the Nasdaq Board prior to the time such person owns more than 5% of the
then outstanding shares of Common Stock, who otherwise would be entitled to
exercise voting rights in respect of more than 5% of the then outstanding
shares of Common Stock will be unable to exercise voting rights in respect
of any shares in excess of 5% of the then outstanding shares of Common
Stock. At any meeting of the stockholders of Nasdaq, a majority of the
shares of Common Stock in respect of which voting rights can be exercised
will constitute a quorum for such meeting. In response to the SEC's concern
about a concentration of ownership of Nasdaq, Nasdaq's Exchange
Registration application includes a rule that prohibits any member of
Nasdaq or a person associated with such member from beneficially owning
more than 5% of the outstanding shares of Common Stock.
Nasdaq has agreed to use its best efforts to seek stockholder approval of a
charter amendment that would provide for voting debt in order to permit
holders of the Subordinated Debentures to vote on an as-converted basis on
all matters on which common stockholders have the right to vote, subject to
the five percent voting limitation. Under the Certificate of Incorporation,
Nasdaq's Board may waive the application of the 5% voting limitation to
persons other than brokers, dealers, their affiliates, and persons subject
to statutory disqualification under Section 3(a)(39) of the Exchange Act.
In the event that the Nasdaq Board approves an exemption from the five
percent voting limitation (other than an exemption granted in connection
with a strategic market alliance) and seeks the concurrence of the SEC with
respect thereto, Nasdaq has agreed to grant Hellman & Friedman a comparable
exemption from such limitation and use its best efforts to obtain SEC
concurrence of such exemption.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Nasdaq Board out of funds
legally available for them. In the event of liquidation, dissolution, or
winding up of Nasdaq, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be issued upon completion
of this offering will be fully paid and non-assessable.
Preferred Stock
The Nasdaq Board may provide by resolution for the issuance of preferred
stock, in one or more series, and to fix the powers, preferences, and
rights, and the qualifications, limitations, and restrictions thereof, of
this preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund
psovisions, 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.
The Nasdaq Board has resolved that Frank E. Baxter, Alfred R. Berkeley III,
Michael W. Brown, John D. Markese, and Arvind Sodhani will serve as Class 1
directors whose terms expire at the 2001 Annual Meeting; that H. Furlong
Baldwin, F. Warren Hellman, Richard C. Romano, Sir Martin Sorrell, and
Frank G. Zarb will serve as Class 2 directors whose terms expire at the
2002 annual meeting of stockholders and; that Michael Casey, E. Stanley
O'Neal, Vikram S. Pandit, David S. Pottruck, and Arthur Rock will 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 15, consisting of five Class I directors, five
Class 2 directors, and five Class 3 directors. On April 25, 2001 the Nasdaq
Board resolved to increase the number of voting members from 15 to 18,
increasing the size of each class by one, effective immediately following
the 2001 Annual Meeting. The Nasdaq Board has elected William S. Cohen, a
Class 1 director, Dr. Josef Ackermann, a Class 2 director, and John D.
Markese, a Class 3 director to fill these new vacancies effective upon such
increase in the size of the Nasdaq Board. At the 2001 Annual Meeting,
Nasdaq has nominated Frank E. Baxter, Michael W. Clark, Kenneth D.
Pasternak, Hardwick Simmons, and Arvind Sodhani for election to the Nasdaq
Board. Alfred R. Berkeley, III, Michael W. Brown, and John D. Markese will
not stand for re-election as Class 1 directors at the 2001 Annual Meeting,
although Mr. Markese will be elected as a Class 3 director effective
immediately after the 2001 Annual Meeting.
Pursuant to the By-Laws, the number of Non-Industry Directors (as defined
below), including at least one Public Director (as defined below) and at
least two representatives of Nasdaq- listed companies (an "Issuer
Representative"), is required to equal or exceed the number of Industry
Directors (as defined below), unless the Nasdaq Board consists of 9 or
fewer directors. In such case only one director is required to be an Issuer
Representative.
If a director position becomes vacant, whether because of death,
disability, disqualification, removal, or resignation, Nasdaq's Nominating
Committee will nominate, and the Nasdaq Board will elect by majority vote,
a person satisfying the classification (Industry, Non- Industry, or Public
Director), if applicable, for the directorship to fill such vacancy, except
that if the remaining term is not more than six months, no replacement is
required.
The following is a general description of Nasdaq's director
classifications:
o Industry Director means a Director (excluding any two
officers of Nasdaq, selected at the sole discretion of
the Nasdaq Board, amongst those officers who may be
serving as directors (the "Staff Directors")) who (i) has
served in the prior three years as an officer, director,
or employee of a broker or dealer, excluding an outside
director or a director not engaged in the day-to-day
management of a broker or dealer; (ii) is an officer,
director (excluding an outside director), or employee of
an entity that owns more than 10 percent of the equity of
a broker or dealer, and the broker or dealer accounts for
more than five percent of the gross revenues received by
the consolidated entity; (iii) owns more than five
percent of the equity securities of any broker or dealer,
whose investments in brokers or dealers exceed 10 percent
of his or her net worth, or whose ownership interest
otherwise permits him or her to be engaged in the
day-to-day management of the broker or dealer; (iv)
provides professional services to brokers or dealers, and
such services constitute 20 percent or more of the
professional revenues received by the director or member
or 20 percent or more of the gross revenues received by
the director's or member's firm or partnership; (v)
provides professional services to a director, officer, or
employee of a broker, dealer, or corporation that owns 50
percent or more of the voting stock of a broker or
dealer, and such services relate to the director's,
officer's, or employee's professional capacity and
constitute 20 percent or more of the professional
revenues received by the director or 20 percent or more
of the gross revenues received by the director's or
member's firm or partnership; or (vi) has a consulting or
employment relationship with or provides professional
services to the NASD, NASDR, Nasdaq, or Amex or has had
any such relationship or provided such services at any
time within the prior three years.
o Non-Industry Director means a Director (excluding the
Staff Directors) who is (i) a Public Director; (ii) an
officer or employee of an issuer of securities listed on
The Nasdaq Stock Market, or traded in the
over-the-counter market; or (iii) any other individual
who would not be an Industry Director.
o Public Director means a Director who has no material
business relationship with a broker or dealer, the NASD,
NASDR, or Nasdaq.
Advance Notice Requirements for Stockholder Proposals and Directors Nominations
The By-Laws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at Nasdaq's principal executive offices not less than
90 nor more than 120 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, that in the event that
the annual meeting is called for a date that is not within 30 days before
or 70 days after such anniversary date, notice by the stockholder in order
to be timely must be received not earlier than 120 days prior to the
meeting and not later than the later of 90 days prior to the meeting and
the close of business on the 10th day following the date on which notice of
the date of the annual meeting was first made public. In the case of a
special meeting of stockholders called for the purpose of electing
directors, notice by the stockholder in order to be timely must be received
not earlier than 120 days prior to the meeting and later than the later of
90 days prior to the meeting and the close of business on the 10th day
following the day on which public disclosure of the date of the special
meeting and Nasdaq's nominees was first made. In addition, the By-Laws
specify certain requirements as to the form and content of a stockholder's
notice. These provisions may preclude stockholders from bringing matters
before an annual meeting of stockholders or from making nominations for
directors at an annual or special meeting of stockholders.
Stockholder Action; Special Meeting of Stockholders
The Certificate of Incorporation provides that stockholders are not
entitled to act by written consent in lieu of a meeting. Delaware law vests
the board of directors of a Delaware corporation with the authority to call
special meetings of stockholders and permits the corporation to authorize
in its certificate of incorporation or by-laws other persons to also have
such authority. The Certificate of Incorporation and By-Laws do not vest
any other persons with such authority.
Amendments; Supermajority Vote Requirements
The General Corporation Law of the State of Delaware provides generally
that the affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporation's certificate of
incorporation, unless a corporation's certificate of incorporation requires
a greater percentage. The Certificate of Incorporation imposes
supermajority stockholder vote (66%) requirements in connection with
stockholder amendments to the By- Laws and in connection with the amendment
of certain provisions of the Certificate of Incorporation, including those
provisions of the Certificate of Incorporation relating to the limitations
on voting rights of certain persons, the classified board of directors,
removal of directors, and prohibitions on stockholder action by written
consent.
Authorized But Unissued Shares
The authorized but unissued shares of Common Stock and preferred stock will
be available for future issuance without stockholder approval. These
additional shares may be utilized for a variety of corporate purposes,
including future public or private offerings to raise additional capital,
corporate acquisitions, and employee benefit plans. The existence of
authorized but unissued shares of Common Stock and preferred stock could
render more difficult, or discourage an attempt to obtain control of Nasdaq
by means of a proxy contest, tender offer, merger or otherwise.
Transfer Restrictions on Common Stock
The shares of Common Stock cannot be, directly or indirectly, offered,
sold, gifted, pledged, assigned, transferred, or otherwise disposed of
(each, for the purposes hereof, a "Transfer") except subject to all
applicable laws and:
(1) with the prior written consent of Nasdaq; or
(2) until the earlier of (i) the date on which a registration
statement filed with the SEC in connection with an initial public
offering of shares of Common Stock is declared effective (the
"Effective Date"), or (ii) the expiration of two years following
June 28, 2000 if a registration statement has not been filed with
the SEC in connection with an initial public offering of shares of
Common Stock during such two-year period; provided, however, that
Nasdaq may elect, in its sole discretion, to further restrict the
Transferability of any shares of Common Stock including, without
limitation, the shares of Common Stock purchased upon exercise of
any Warrants, for a period of 180 days following the Effective
Date by giving written notice of such election to holders of
Common Stock at least 10 days prior to the Effective Date; or
(3) to a Majority Affiliate. Any Transfer to a Majority Affiliate for
consideration will require that the transferor deliver to Nasdaq,
an opinion of the transferor's counsel to the effect that the
Transfer of securities by the transferor to a Majority Affiliate
(A) complies with the transfer restriction provisions set forth
herein and (B) does not require registration under the Securities
Act or registration or qualification under any applicable state
securities laws. Any Transfer to a Majority Affiliate without
consideration will require the transferor to make a written
representation to Nasdaq that the Transfer complies with the
provisions set forth in this section and was made without
consideration.
The following terms are defined as set forth below:
"Affiliate" means, with respect to any specified Person, any other
Person who, directly or indirectly, owns or controls, is under common
ownership or control with, or is owned or controlled by, such specified
Person.
"Majority Affiliate" of any Person means an Affiliate of such
Person: (a) a majority of the voting stock or beneficial ownership of which
is owned by such Person, or by any Person who, directly or indirectly, owns
a majority of the voting stock or beneficial ownership of such Person; (b)
who, directly or indirectly, owns a majority of the voting stock or
beneficial ownership of such Person; and (c) any Majority Affiliate of any
Affiliate described in clause (a) or clause (b) above.
"Person" means any individual, company, limited liability company,
corporation, trust, estate, association, nominee, or other entity.
Delaware Business Combination Statute
Nasdaq is organized under Delaware law.
Delaware law generally prohibits a publicly-held or widely-held corporation
from engaging in a "business combination" with an "interested stockholder"
for three years after the stockholder becomes an interested stockholder. An
"interested stockholder" is a person who directly or indirectly owns 15% or
more of the corporation's outstanding voting stock. A "business
combination" includes a merger, asset sale or other transaction that
results in a financial benefit to the interested stockholder. However,
Delaware law does not prohibit these business combinations if:
(1) before the stockholder becomes an interested stockholder the
corporation's board approved either the business combination or
the transaction that resulted in the stockholder becoming an
interested stockholder;
(2) after the transaction that results in the stockholder becoming an
interested stockholder, the interested stockholder owns at least
85% of the corporation's outstanding voting stock (excluding
certain shares); or
(3) the corporation's board approves the business combination and the
holders of at least two-thirds of the corporation's outstanding
voting stock that the interested stockholder does not own
authorize the business combination at a meeting of stockholders.
Item 12. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and any corporate agents in terms
sufficiently broad to indemnify such person under certain circumstances for
liabilities, including reimbursement for expenses, incurred arising under
the Securities Act. The Certificate of Incorporation and By-Laws provide
that Nasdaq shall indemnify its directors, officers, employees, and members
of the Nasdaq Listing and Hearing Review Council to the fullest extent
permitted by Delaware law. Nasdaq, in its discretion, may indemnify its
agents to the fullest extent and under the circumstances permitted by the
Delaware General Corporation Law. The directors and officers of Nasdaq are
covered by insurance policies indemnifying them against certain
liabilities, including certain liabilities arising under the Securities
Act, which might be incurred by them in such capacities and against which
they may not be indemnified by Nasdaq.
Item 13. Financial Statements and Supplementary Data.
The following table presents selected quarterly financial data for Nasdaq.
The data presented in this table are derived from "Selected Consolidated
Financial Data of Nasdaq" and the consolidated financial statements and
notes thereto which are included elsewhere in this Registration Statement.
You should read those sections for a further explanation of the financial
data summarized here. You should also read the "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Nasdaq"
section, which describes a number of factors which have affected Nasdaq's
financial results. The consolidated financial statements are as set forth
in the "Index to Consolidated Financial Statements" on page F-1.
Selected Quarterly Financial Data
(in thousands, except EPS information)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1999 1999 1999 1999 Total 1999
Revenues $133,860 $152,833 $169,136 $178,419 $634,248
Total expenses 93,552 108,610 122,751 176,966 501,879
Net operating income 40,308 44,223 46,385 1,453 132,369
Interest 2,497 3,314 3,425 2,964 12,201
Taxes (16,456) (20,483) (19,332) (2,150) (58,421)
Net income 26,350 27,054 30,478 2,267 86,149
Basic and diluted EPS $0.26 $0.27 $0.30 $0.02 $0.86
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
2000 2000 2000 2000 Total 2000
Revenues $219,312 $226,421 $213,321 $208,954 $868,009
Total expenses 131,708 140,228 162,127 199,783 633,847
Net operating income 87,604 86,193 51,194 9,171 234,162
Interest 2,225 3,240 5,727 8,919 20,111
Taxes (36,114) (35,070) (28,170) (5,663) (105,018)
Net income 53,715 54,362 28,751 13,299 150,127
Basic and Diluted EPS $0.54 $0.54 $0.23 $0.11 $1.34
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 15. Financial Statements and Exhibits.
(a) List separately all financial statements filed.
See "Index to Consolidated Financial Statements."
(b) Exhibits.
Exhibit
Number
3.1 Restated Certificate of Incorporation of The Nasdaq Stock Market,
Inc.(+)
3.2 By-Laws of The Nasdaq Stock Market, Inc.(+)
4.1 Form of Common Stock certificate.(+)
7A Qualitative Disclosure about market risk (incorporated herein by
reference to "Item 2 - Financial Information" of this Form 10).
9.1 Voting Trust Agreement dated June 28, 2000, among The Nasdaq Stock
Market, Inc., the National Association of Securities Dealers, Inc.
and The Bank of New York.(+)
9.2 First Amendment to the Voting Trust Agreement, dated as of January
18, 2001, among The Nasdaq Stock Market, Inc., the National
Association of Securities Dealers, Inc. and The Bank of New York.(+)
10.1 Network Service Agreement, dated November 19, 1997, between MCI
Telecommunications Corporation and The Nasdaq Stock Market, Inc.*(+)
10.2 Consolidated Agreement, between Unisys Corporation and The Nasdaq
Stock Market, Inc.*(+)
10.3 Network User License Agreement, dated November 30, 1993, between
Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.4 Software License and Services Agreement, dated November 30, 1993,
between Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.5 Regulatory Services Agreement, dated June 28, 2000, between NASD
Regulation, Inc. and The Nasdaq Stock Market, Inc.*(+)
10.6 Separation and Common Services Agreement, dated as of June 28,
2000, between the National Association of Securities Dealers, Inc.
and The Nasdaq Stock Market, Inc.(+)
10.7 The Nasdaq Stock Market, Inc. Employee Stock Purchase Plan.(+)
10.8 The Nasdaq Stock Market, Inc. Equity Incentive Plan.(+)
10.9 Securities Purchase Agreement, dated as of March 23, 2001, among
The Nasdaq Stock Market, Inc., Hellman & Friedman Capital Partners
IV, L.P. and the other purchasers listed in the signature pages
thereto.(+)
10.9.1 Securityholders Agreement, dated as of May 3, 2001, among The
Nasdaq Stock Market, Inc., Hellman & Friedman Capital Partners IV,
L.P., and the other securityholders listed on the signature pages
thereto.
10.10 Purchase and Sale Agreement, dated March 23, 2001, by and between
the National Association of Securities Dealers, Inc. and The
Nasdaq Stock Market, Inc.(+)
10.11 Employment Agreement between the National Association of
Securities Dealers, Inc. and Frank G. Zarb effective on February
24, 1997.(+)
10.12 Instrument of Amendment, dated March 18, 1998, to Employment
Agreement between National Association of Securities Dealers, Inc.
and Frank G. Zarb, effective on February 24, 1997.(+)
10.13 Instrument of Amendment, dated as of August 20, 1999, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998.(+)
10.14 Instrument of Amendment, dated March 30, 2000, to Employment
Agreement between National Association of Securities Dealers, Inc.
and Frank G. Zarb, effective on February 24, 1997, as amended
effective March 18, 1998, and subsequently amended in May, 1999.(+)
10.15 Instrument of Amendment, effective as of July 27, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000.(+)
10.16 Instrument of Amendment, effective as of November 1, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000, and as of
July 27, 2000.(+)
10.17 Instrument of Amendment, effective as of April 25, 2001, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as subsequently amended effective March 18, 1998, August 20, 1999,
March 30, 2000, July 27, 2000 and November 1, 2000.(+)
10.18 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and J. Patrick Campbell, effective as of December 29, 2000.(+)
10.19 Employment Agreement by The Nasdaq Stock Market, Inc. and John L.
Hilley, effective as of December 29, 2000.(+)
10.20 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Richard G. Ketchum, effective as of December 29, 2000.(+)
10.21 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Hardwick Simmons, dated as of January 31, 2001.(+)
11 Statement regarding computation of per share earnings (incorporated
herein by reference to "Item 2. Financial Information" of this Form
10).
12 Computations of Ratios (not applicable).
21.1 List of all subsidiaries.(+)
- ------------------------------------
* Confidential treatment has been requested from the 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.
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. 1
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: May 14, 2001
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following audited, and consolidated financial statements of
The Nasdaq Stock Market, Inc. and its subsidiaries are presented herein on
the page indicated:
Report of Independent Auditors.............................................F -2
Consolidated Balance Sheets................................................F -3
Consolidated Statements of Income..........................................F -5
Consolidated Statements of Changes in Stockholders' Equity.................F -6
Consolidated Statements of Cash Flows......................................F -7
Notes to Consolidated Financial Statements.................................F -8
Report of Independent Auditors
Board of Directors
The Nasdaq Stock Market, Inc.
We have audited the accompanying consolidated balance sheets of
The Nasdaq Stock Market, Inc. ("Nasdaq") (a majority owned subsidiary of
the National Association of Securities Dealers, Inc.) as of December 31,
2000 and 1999, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2000. These consolidated financial statements are
the responsibility of Nasdaq's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of The Nasdaq Stock Market, Inc. at December 31, 2000 and 1999,
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 3 to the consolidated financial statements,
effective January 1, 1999, Nasdaq adopted Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."
Ernst & Young LLP
Washington, D.C.
January 26, 2001
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
2000 1999
---------------------------------
Assets
Current assets:
Cash and cash equivalents $ 262,257 $ 10,598
Investments:
Available-for-sale, at fair value 232,090 153,566
Held-to-maturity, at amortized cost 21,967 10,697
Receivables, net 172,660 112,403
Receivables from related parties 8,250 7,168
Deferred tax asset 5,763 5,213
Other current assets 14,869 12,701
---------------------------------
Total current assets 717,856 312,346
Investments:
Held-to-maturity, at amortized cost 6,612 17,720
Property and equipment:
Land, buildings and improvements 80,727 56,173
Data processing equipment and software 370,066 246,999
Furniture, equipment and
leasehold improvements 134,638 101,658
---------------------------------
585,431 404,830
Less accumulated depreciation and amortization (252,380) (192,719)
---------------------------------
Total property and equipment, net 333,051 212,111
Investment in warrants, at cost - 33,480
Other assets 17,798 2,597
---------------------------------
Total assets $ 1,075,317 $ 578,254
=================================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
2000 1999
---------------------------------
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 117,867 $ 68,585
Accrued personnel costs 37,273 30,505
Deferred revenue 6,068 9,787
Other accrued liabilities 29,306 17,839
Due to banks 13,876 8,819
Payables to related parties 19,158 11,742
---------------------------------
Total current liabilities 223,548 147,277
Long-term debt 25,000 25,000
Accrued pension costs 10,390 7,073
Non-current deferred tax liability, net 26,782 10,928
Deferred revenue, investment in warrants, at cost - 33,480
Other liabilities 9,153 2,484
---------------------------------
Total long-term liabilities 71,325 78,965
Total liabilities 294,873 226,242
Minority interests 15,543 -
Stockholders' Equity
Common stock, $.01 par value, 300,000,000 authorized,
123,663,746 issued and outstanding 1,237 1,000
Additional paid-in capital 265,603 149
Unrealized gains on available-for-sale investments, net of tax 321 1,742
Foreign currency translation, net of minority interests (1,508) -
of ($1,185) in 2000
Retained earnings 499,248 349,121
---------------------------------
Total stockholders' equity 764,901 352,012
---------------------------------
Total liabilities, minority interest and stockholders' equity $ 1,075,317 $ 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
------------------------------------------------------------
Revenue
Transaction services $ 395,123 $ 283,652 $ 160,506
Market information services 258,251 186,543 152,665
Issuer services 184,595 163,425 137,344
Other 30,040 628 308
------------------------------------------------------------
Total revenue 868,009 634,248 450,823
------------------------------------------------------------
Expenses
Compensation and benefits 133,496 98,129 78,565
Marketing and advertising 45,908 62,790 42,483
Depreciation and amortization 65,645 43,696 34,984
Professional and contract services 61,483 35,282 35,127
Computer operations and data communications
138,228 100,493 72,111
Travel, meetings and training 12,113 10,230 7,750
Occupancy 14,766 6,591 5,354
Publications, supplies and postage 7,181 4,670 5,208
Other 26,505 24,809 16,704
------------------------------------------------------------
Total direct expenses 505,325 386,690 298,286
------------------------------------------------------------
Support cost from related parties, net 128,522 115,189 100,841
------------------------------------------------------------
Total expenses 633,847 501,879 399,127
------------------------------------------------------------
Net operating income 234,162 132,369 51,696
Interest 20,111 12,201 9,269
Provision for income taxes (105,018) (58,421) (26,010)
Minority interests in earnings 872 - -
------------------------------------------------------------
Net income $ 150,127 $ 86,149 $ 34,955
============================================================
============================================================
Basic earnings per common share $ 1.34 $ 0.86 $ 0.35
============================================================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share amounts)
Accumulated
Number of Additional Other
Common Shares Common Paid in Retained Comprehensive
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, - - - - $ 2,020
net of tax of $1,088 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, - - - - (278) (278)
net of tax of $(149)
----------
Comprehensive income - - - - - 85,871
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 100,000,000 1,000 149 349,121 1,742 352,012
Net income - - - 150,127 - 150,127
Unrealized losses on
available-for-sale investments, net - - - (1,421) (1,421)
of tax of $(765) -
Foreign currency translation, net of
Minority interests of $(1,185) - - - (1,508)
- (1,508)
----------
Comprehensive income - - - - - 147,198
Capital contribution - - 30,000 - - 30,000
Minority interest resulting from
original share of equity in
Nasdaq Europe - - (17,600) - - (17,600)
Net proceeds from Phase I offering 23,663,746 $ 237 253,054 - - 253,291
========================================================================================
Balance, December 31, 2000 123,663,746 $ 1,237 $ 265,603 $ 499,248 $ (1,187) $ 764,901
========================================================================================
See accompanying notes to consolidated financial statements.
(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 Statement of Cash Flows
(In thousands)
Years ended December 31,
2000 1999 1998
-----------------------------------------------------
Cash flow from operating activities
Cash received from customers $ 713,036 $ 527,946 $ 400,918
Cash paid to suppliers and employees (281,387) (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 4,782 (715) (6,194)
-----------------------------------------------------
Cash provided by operating activities 232,696 134,625 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 (237,569) (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)
Purchases of property and equipment, net (186,585) (106,447) (29,371)
-----------------------------------------------------
Cash used in investing activities (269,385) (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 253,291 - -
offering
Contributions from minority shareholders 30,000 - -
-----------------------------------------------------
Cash provided by financing activities 288,348 3,876 156
Increase (decrease) in cash and cash 251,659 7,844 (1,271)
equivalents
Cash and cash equivalents at beginning of 10,598 2,754 4,025
period
-----------------------------------------------------
Cash and cash equivalents at end of period $ 262,257 $ 10,598 $ 2,754
=====================================================
Reconciliation of net income to cash provided
by operating activities
Net income $ 150,127 $ 86,149 $ 34,955
Depreciation and amortization 65,645 43,696 34,984
Minority interests in earnings (872) - -
Increase in receivables, net (60,257) (39,897) (18,762)
(Increase) decrease in receivables from
related parties (1,082) 2,497 (6,670)
Increase in other current assets (2,168) (6,521) (380)
Increase in deferred tax asset (550) (1,316) -
Decrease (increase) in other assets (15,201) 4,866 (4,688)
Increase in accounts payable and accrued 49,282 18,815 7,607
expenses
Increase in accrued personnel costs 6,768 9,660 3,966
(Decrease) increase in deferred revenue (3,719) 1,413 2,758
Increase in other accrued liabilities 11,467 2,569 9,545
Increase (decrease) in payables to related 7,416 7,931 (2,052)
parties
Increase (decrease) in accrued pension costs 3,317 2,507 (3,414)
Increase in non-current deferred tax 15,854 2,770 -
liability, net
Increase (decrease) in other liabilities 6,669 (514) (1,126)
-----------------------------------------------------
Cash provided by operating activities $ 232,696 $ 134,625 $ 56,723
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Notes to Consolidated Financial Statements
(In thousands)
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. ("Quadsan");
Nasdaq Tools, Inc. ("Nasdaq Tools"); Nasdaq Investment Product Services,
Inc. ("NIPS"); and Nasdaq International Market Initiatives, Inc. ("NIMI");
collectively referred to as 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 NASD members,
Nasdaq market participants, Nasdaq issuers, institutional investors and
other strategic partners. The Restructuring is intended, among other
things, to strategically realign the ownership of Nasdaq, minimize
potential conflicts of interest between Nasdaq and NASD Regulation, Inc.
("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, that if fully
exercised, would decrease the NASD's ownership to approximately 60%. The
second phase ("Phase II") of the Restructuring closed on January 18, 2001
(see note 14).
Nasdaq uses a multiple market maker system to operate an electronic,
screen-based equity market. Nasdaq's principal business products are price
discovery and trading services, listing of issues, and the sale of related
data and information. The majority of this business is transacted with
listed companies, market data vendors and firms in the broker/dealer
industry within the United States.
Nasdaq Global, which is incorporated in Switzerland, is the holding company
for Nasdaq's investments in Nasdaq Europe Planning Company Limited, Nasdaq
Europe S.A./N.V. and Nasdaq Japan, Inc. ("Nasdaq Japan"). Quadsan
Enterprises, Inc. ("Quadsan") is a Delaware Investment Holding Company
which provides investment management services for Nasdaq. Nasdaq Investment
Product Services, Inc. ("NIPS") is the sponsor of the Nasdaq-100 Trust,
Series I. Nasdaq International Market Initiatives, Inc. ("NIMI") 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. ("Nasdaq Tools") provides software products
and services related to the broker/dealer industry to be used in
conjunction with the Nasdaq Workstation II ("NWII") software.
2. Significant Transactions
In February 2000, the NASD signed a joint venture agreement to form Nasdaq
Europe Planning Company Limited. To establish Nasdaq Europe Planning
Company Limited, the NASD contributed capital of $10.0 million and three
other investors contributed $10.0 million each. In exchange for the capital
contribution, the NASD received an ownership interest of 56%. As a part of
the Restructuring, the NASD's ownership interest in Nasdaq Europe was
transferred to Nasdaq Global.
On March 7, 2000, Nasdaq acquired Financial Systemware, Inc. ("FSI", now
known as Nasdaq Tools), a company which develops and markets a set of
software utilities which can be loaded on a NWII terminal to enhance the
features and functionalities of the NWII 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 FSI's issued and
outstanding stock for $7.3 million. Goodwill recorded as a result of the
acquisition is being recognized as expense on a straight-line basis over
five years. Additionally, the Nasdaq Tools principals, the sellers, will
collectively be paid $25.0 million. Of this amount, $10.0 million was paid
upon closing and is being recognized as expense on a straight-line basis
over five years. Five cash payments of $3.0 million each will be paid over
the five years following closing, contingent upon the continued employment
and development efforts of the Nasdaq Tools principals. The unamortized
goodwill and other intangible assets related to the acquisition of Nasdaq
Tools are $5.4 million and $8.3 million, respectively, as of December 31,
2000 and are included in other assets in the consolidated balance sheets.
In October 2000, Nasdaq Japan sold an approximately 15 percent stake for
approximately $48 million to a group of 13 major Japanese, U.S. and
European brokerages, thereby reducing Nasdaq Global's interest to
approximately 39.1 percent. Nasdaq Japan will use the proceeds primarily
for working capital and the development of a hybrid market model with quote
and order functionality.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Nasdaq and
its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand cash and all non-restricted
investments purchased with a remaining maturity of three months or less at
the time of purchase. Such investments included in cash and cash
equivalents in the consolidated balance sheets were $218.5 million and $7.1
million at December 31, 2000 and 1999, respectively.
Investments
Under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
management determines the appropriate classification of investments at the
time of purchase. Investments for which Nasdaq does not have the intent or
ability to hold to maturity are classified as "available-for-sale" and are
carried at fair market value, with the unrealized gains and losses, net of
tax, reported as a separate component of stockholders' equity. Investments
for which Nasdaq has the intent and ability to hold to maturity are
classified as "held-to-maturity" and are carried at amortized cost. The
amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion
of discounts and is included in interest income and interest expense as
appropriate. Realized gains and losses on sales of securities are included
in earnings using the specific identification method.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost, that is deemed to be other than temporary, results in
a reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
Receivables, Net
Nasdaq's receivables are concentrated with NASD member firms, market data
vendors and Nasdaq issuers. Receivables are shown net of reserves for
uncollectable accounts. Reserves are calculated based on the age and source
of the underlying receivable and are tied to past collections experience.
Total reserves netted against receivables in the consolidated balance
sheets were $5.4 million and $3.0 million at December 31, 2000 and 1999,
respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Equipment acquired under capital leases is recorded at the lower of fair
market value or the present value of future lease payments. Depreciation
and amortization are provided on the straight-line method. Estimated useful
lives generally range from 10 years to 40 years for buildings and
improvements, 2 years to 5 years for data processing equipment and
software, and 5 years to 10 years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the lesser
of the useful life of the improvement or the term of the applicable lease.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that long-lived assets
or other assets may be impaired, such as obsolesence, an evaluation of
recoverability would be performed. If an evaluation is 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 is required, Nasdaq would prepare a discounted
cash flow analysis to determine the amount of the write-down.
Deferred Revenue
Deferred revenues represent cash received and billed receivables which are
unearned, until services are provided.
Revenue Recognition
Market information services revenues are based on the number of
presentation devices in service and quotes delivered through those devices.
Market information services revenues are recognized in the month that
information is provided. Transaction services revenues are variable based
on service volumes and are recognized as transactions occur. Issuer annual
listing services revenues are recognized ratably over the following 12
month period. Issuer initial listing fees are recognized in the month
listing occurs. Issuer additional share fees are recognized in the period
the incremental shares are issued.
Advertising Costs
Nasdaq expenses advertising costs, which included media advertising and
production cost, in the periods in which the costs are incurred. Media
advertising and production costs included as marketing and advertising in
the consolidated statements of income totaled $35.3 million, $45.3 million
and $36.2 million for 2000, 1999, and 1998, respectively.
Software Costs
Significant purchased application software, and operational software that
is an integral part of computer hardware, are capitalized and amortized on
the straight-line method over their estimated useful lives. 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 represents the minority
owners' share of the income or loss of certain consolidated subsidiaries.
Classifications
Certain amounts for the prior year have been reclassified to conform with
the 2000 presentation.
4. Investments
Investments consist of U.S. Treasury securities, obligations of U.S.
Government sponsored enterprises, municipal bonds, equity securities and
other financial instruments. Following is a summary of investments
classified as available-for-sale which are carried at fair value as of
December 31, 2000:
Gross Unrealized
Amortized
Cost Gain Loss Fair Value
-----------------------------------------------------
Due in one year or less $ 89,094 $ 204 $ (1) $ 89,297
Due after one year through five years 123,433 665 (1,615) 122,483
Equity securities 19,069 3,584 (2,343) 20,310
-----------------------------------------------------
$ 231,596 $ 4,453 $ (3,959) $ 232,090
=====================================================
Following is a summary of investments classified as held-to-maturity which are
carried at amortized cost as of December 31, 2000:
Gross Unrealized
Amortized
Cost Gain Loss Fair Value
-----------------------------------------------------
Due in one year or less $ 21,967 $ 19 $ (32) $ 21,954
Due after one year through five years 6,612 26 - 6,638
-----------------------------------------------------
$ 28,579 $ 45 $ (32) $ 28,592
=====================================================
Following is a summary of investments classified as available-for-sale which are
carried at fair value as of December 31, 1999:
Gross Unrealized
Amortized
Cost Gain Loss Fair Value
-----------------------------------------------------
Due in one year or less $ 17,472 $ 43 $ - $ 17,515
Due after one year through five years 114,288 94 (2,100) 112,282
Equity securities 19,125 5,642 (998) 23,769
-----------------------------------------------------
$ 150,885 $ 5,779 $ (3,098) $ 153,566
=====================================================
Following is a summary of investments classified as held-to-maturity which are
carried at amortized cost as of December 31, 1999:
Gross Unrealized
Amortized
Cost Gain Loss Fair Value
---------------------------------------------------
Due in one year or less $ 10,697 $ 7 $ (178) $ 10,526
Due after one year through five years 17,720 - (439) 17,281
---------------------------------------------------
$ 28,417 $ 7 $ (617) $ 27,807
===================================================
At December 31, 2000 and 1999, investments with a carrying amount of
approximately $28.0 million were pledged as collateral under Nasdaq's $25.0
million note payable.
5. Fair Value of Financial Instruments
Nasdaq considers cash and cash equivalents, accounts receivable,
investments, investments in subsidiaries, accounts payable and accrued
expenses, due to banks, and long-term debt to be its financial instruments.
The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable, investments, accounts payable and accrued
expenses, and due to banks closely approximate their fair values. The
approximate fair value of Nasdaq's long-term debt was estimated using a
discounted cash flow analysis, based on Nasdaq's assumed incremental
borrowing rates for similar types of borrowing arrangements. This analysis
indicates that the fair value of Nasdaq's long-term debt at December 31,
2000 and 1999 approximates its carrying amount. The fair value of its
investments in subsidiaries is not determinable since these investments do
not have quoted market prices.
6. Long-Term Debt
In May 1997, Nasdaq entered into a $25.0 million note payable with a
financial institution (the "Lender"). Principal payments are scheduled to
begin in 2007 and continue in equal monthly installments until maturity in
2012. The note requires monthly interest payments through May 2007 at an
annual rate of 7.41%. After May 2007, Nasdaq will incur interest equal to
the Lender's cost of funds rate, as defined in the agreement, plus .5%.
Interest expensed and paid under the agreement totaled approximately $1.9
million for each of the years ended December 31, 2000, 1999 and 1998.
7. Income Taxes
The income tax provision includes the following amounts:
Years Ended December 31,
2000 1999 1998
-----------------------------------------------------
Current income taxes:
Federal $ 75,727 $ 46,482 $ 22,930
State 14,208 11,599 5,196
------------------------------------------------------
Total current income taxes 89,935 58,081 28,126
Deferred income taxes:
Federal 12,081 273 (1,695)
State 3,002 67 (421)
------------------------------------------------------
Total deferred income taxes 15,083 340 (2,116)
------------------------------------------------------
Total provision for income taxes $ 105,018 $ 58,421 $ 26,010
------------------------------------------------------
Income taxes paid during the periods $ 101,171 $ 49,992 $ 24,131
7. Income Taxes
Reconciliations of the statutory United States federal income tax rates to
the effective tax rates are as follows:
Years Ended December 31,
2000 1999 1998
-----------------------------------------------------
Federal 35.0% 35.0% 35.0%
State 3.8 5.2 5.1
Foreign losses without US benefit 1.8 - -
Other, net 0.6 0.2 2.6
-------------------------------------------------------
Effective rate 41.2% 40.4% 42.7%
=======================================================
Components of Nasdaq's deferred tax assets and liabilities consisted of the
following:
December 31,
2000 1999
-------------------- ---------------------
Deferred tax assets:
Deferred fees $ 453 $ 2,233
Compensation and benefits 171 179
Bad debts 5,139 2,801
-------------------- ---------------------
Total deferred tax assets 5,763 5,213
Deferred tax liabilities:
Depreciation (12,492) (9,966)
Software development costs (19,624) (5,184)
Other 5,334 4,222
-------------------- ---------------------
Total deferred tax liabilities, net $ (26,782) $ (10,928)
==================== =====================
Due to the Nasdaq's foreign operations, it has approximately $3.9 million
of foreign deferred tax assets, primarily Net Operating Losses and Start-Up
costs. These in-country deferred tax assets have been fully reserved by an
offsetting Valuation Allowance as it is not "more likely than not" that
these deferred tax assets will be realized.
8. Employee Benefits
Nasdaq is a participating employer in a noncontributory, defined-benefit
pension plan, along with other arrangements, that the NASD maintains for
the benefit of eligible employees of its subsidiaries. The benefits are
primarily based on years of service and the employees' average salary
during the highest 60 consecutive months of employment. The plan assets
consist primarily of fixed income and equity securities.
The following table sets forth the plans' funded status and amounts
recognized in the Nasdaq balance sheets of December 31:
Pension Benefits
2000 1999
---------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 39,773 $ 33,184
Service cost 4,543 3,304
Interest cost 3,246 2,448
Actuarial losses 5,488 7,363
Benefits paid (1,988) (2,246)
(Gain) loss due to change in discount rate 2,605 (4,280)
---------------------------------------
Benefit obligation at end of year $ 53,667 $ 39,773
---------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 28,312 $ 22,801
Actual return on plan assets 2,058 5,276
Company contributions 3,082 2,480
Benefits paid (1,988) (2,245)
---------------------------------------
Fair value of plan assets at end of year $ 31,464 $ 28,312
---------------------------------------
Funded status of the plan (underfunded) $ (22,203) (11,461)
Unrecognized net actuarial gain 8,393 1,444
Unrecognized prior service cost 906 976
Unrecognized transition obligation/(asset) (390) (447)
---------------------------------------
Accrued benefit cost $ (13,294) $ (9,488)
=======================================
As of December 31, 2000 and 1999, $2.9 million and $2.4, respectively, of
the accrued pension liability is carried as current in the accounts payable
and accrued expenses line of the consolidated balance sheets.
Pension Benefits
2000 1999
------------------------------------
Weighted-average assumptions as of December 31
Discount rate 7.5% 8.0%
Expected return on plan assets 9.0 9.0
Rate of compensation increase 5.2 5.3
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 October 2000, the Nasdaq Board of Directors (the "Nasdaq Board")
approved the implementation of an equity incentive plan and an employee
stock purchase plan. The plans will be submitted to Nasdaq stockholders for
their approval. As of December 31, 2000, no grants have been made under the
plans.
9. Leases
Nasdaq leases certain office space and equipment in connection with its
operations. The majority of these leases contain escalation clauses based
on increases in property taxes and building operating costs. Certain of
these leases also contain renewal options. Rent expense for operating
leases was $9.9 million for the year ended December 31, 2000, $4.0 million
for the year ended December 31, 1999 and $1.4 million for the year ended
December 31, 1998.
Future minimum lease payments under noncancellable operating leases with
initial or remaining terms of one year or more consisted of the following
at December 31, 2000:
Year ending December 31:
2001 $ 13,455
2002 16,034
2003 16,047
2004 16,376
2005 16,234
Remaining years 126,259
--------------------
Total minimum lease payments $ 204,405
====================
Future minimum lease payments under noncancellable capital leases with initial
or remaining terms of one year or more consisted of the following at December
31, 2000:
Year ending December 31:
2001 $ 6,462
2002 6,462
2003 3,231
2004 -
2005 -
Remaining years -
--------------------
Total minimum lease payments $ 16,155
====================
10. Warrants
In connection with the OptiMark, Inc. ("OptiMark") partnership, OptiMark agreed
to issue to Nasdaq warrants to purchase up to an aggregate of 11.25 million
shares of its common stock, $0.01 par value per share. The warrants are
exercisable in several tranches upon the achievement of certain milestones,
which are based primarily upon the average daily share volume of Nasdaq
securities traded through the OptiMark Trading System. The first milestone was
the warrant commencement date, which occurred on October 11, 1999. On that date,
Nasdaq received two fully exercisable warrants from OptiMark to purchase 4.5
million shares. The first 2.25 million shares may be purchased at an exercise
price of $5.00 per share. All remaining warrants provide that shares may be
purchased at an exercise price of $7.00 per share. The warrants are exercisable
through the earlier of (i) the last day that the OptiMark System continues to be
available on all NWII 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 which is considered to be the cost of
these warrants. The deferred revenue associated with these warrants was to be
amortized into income based on share volume traded through the OptiMark System.
In September 2000, OptiMark announced a strategic change in its business that
will allow it to focus on providing technology solutions to electronic
marketplaces. As part of the change, OptiMark decided to suspend trading
operations on the OptiMark System. As a result, Nasdaq management has concluded
that its investment in warrants in OptiMark as well as the realization of the
deferred revenue related to these warrants is impaired. Therefore, in September
2000, Nasdaq reduced its investment in warrants and related deferred revenue to
zero. Nasdaq will monitor OptiMark's implementation of its new business model
and assess the value of the warrants at each balance sheet date.
11. Commitments and Contingencies
In November 1997, Nasdaq entered into an agreement with WorldCom Inc. to replace
the existing data network that connects the Nasdaq market facilities to market
participants. The contract contains a minimum guarantee of $300 million to be
incurred through November 2003. Billings under the contract are $143.3 million
as of December 31, 2000. Management anticipates that the minimum guarantee under
the contract will be achieved.
In October 2000, Nasdaq entered into a contract with OptiMark under which
OptiMark was engaged to provide software development services in connection with
the development of the SuperMontage system. Nasdaq will pay OptiMark for the
SuperMontage development for a period not to exceed twelve months. Additionally,
OptiMark will be entitled to receive incentive payments if it meets certain
delivery milestones agreed to in the contract. If Nasdaq uses OptiMark's
services for the full twelve months of expected development effort and OptiMark
meets all of its deliverables, then Nasdaq will be required to pay up to $14.2
million.
Nasdaq may be subject to claims arising out of the conduct of its business.
Currently, there are certain legal proceedings pending against Nasdaq.
Management believes, based upon the opinion of counsel, that any liabilities or
settlements arising from these proceedings will not have a material effect on
the financial position or results of operations of Nasdaq. Management is not
aware of any unasserted claims or assessments that would have a material adverse
effect on the financial position and the results of operations of Nasdaq.
12. Related Party Transactions
Related party receivables and payables are the result of various transactions
between Nasdaq and its affiliates. Payables to related parties are comprised
primarily of the regulation charge from NASDR, a wholly owned subsidiary of the
NASD. NASDR charges Nasdaq for costs incurred related to Nasdaq market
regulation and enforcement. Support charges from the NASD to Nasdaq represent
another significant component of payables to related parties. The support charge
includes an allocation of a portion of the NASD's administrative expenses as
well as its costs incurred to develop and maintain technology on behalf of
Nasdaq. The remaining component of payables to related parties is cash
disbursements funded by the NASD on behalf of Nasdaq.
Receivables from related parties are primarily attributable to costs incurred by
Amex and funded by Nasdaq related to various Amex technology projects. The
remaining portion of the receivable from related parties balance is related to
cash disbursements funded by Nasdaq on behalf of its affiliates. Disbursements
made by Nasdaq on behalf of affiliates relate mainly to office supply and
utility charges where Nasdaq represents the largest portion.
Surveillance Charge from NASDR
NASDR incurs costs associated with surveillance monitoring, legal and
enforcement activities related to the regulation of Nasdaq. These costs are
charged to Nasdaq based upon the NASD management's estimated percentage of costs
incurred by each NASDR department that are attributable directly to Nasdaq
market surveillance. The following table represents Nasdaq management's estimate
of the costs charged by NASDR to Nasdaq:
December 31,
2000 1999 1998
----------------------------------------------------
Compensation $ 32,018 $ 32,529 $ 29,894
Professional and contract services 27,110 20,000 16,193
Occupancy 399 1,687 1,945
Publications, supplies and postage 2,924 1,661 1,744
Computer ops. and data comm. 5,010 3,430 2,503
Depreciation 8,435 3,831 3,205
Travel, meetings and training 2,848 1,841 1,670
Other 1,106 150 192
----------------------------------------------------
Total $ 79,850 $ 65,129 $ 57,346
====================================================
12. Related Party Transactions (continued)
On June 28, 2000 Nasdaq entered into a Regulatory Services Agreement with
NASDR (the "Regulatory Services Agreement"). Under the terms of this
agreement, NASDR will provide Nasdaq regulatory services and related
administrative functions necessary for NASDR's performance of such
services. Through December 31, 2000, NASDR's fees charged to Nasdaq will
reflect NASDR's cost of furnishing the services. After December 31, 2000,
pricing will be determined on a "cost-plus basis" for each service. The
initial term of the Regulatory Services Agreement expires on June 28, 2010.
Nasdaq is subject to termination fees, payable to NASDR, if it terminates
its receipt of services under the agreement for convenience.
Support Charge from the NASD
The NASD provides various administrative services to Nasdaq including legal
assistance, accounting and managerial services. It is the NASD's policy to
charge these expenses and other operating costs to Nasdaq based upon usage
percentages determined by management of the NASD and Nasdaq. Additionally,
the NASD incurs certain costs related to the development and maintenance of
technology for Nasdaq. Technology development costs are allocated directly
to Nasdaq based upon specific projects requested by Nasdaq. Technology
maintenance costs are allocated based upon Nasdaq's share of computer
usage. The following table represents Nasdaq management's estimate of the
composition of costs charged by the NASD to Nasdaq:
December 31,
2000 1999 1998
--------------------------------------------------
Compensation $ 25,899 $ 25,956 $ 25,942
Professional and contract services 9,986 16,671 7,784
Occupancy 9,576 4,637 5,212
Publications, supplies and postage 1,544 2,295 2,368
Computer ops. and data comm. 1,500 5,243 4,145
Depreciation 2,894 6,514 5,335
Travel, meetings and training 1,504 2,020 1,551
Other 701 759 267
--------------------------------------------------
Total $ 53,604 $ 64,095 $ 52,604
==================================================
On June 28, 2000 Nasdaq entered into a Separation and Common Services
Agreement with the NASD (the "NASD Separation Agreement"). Under the terms
of this agreement, 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 NASD requires to satisfy its obligation to
Amex under the transaction agreement between 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 twelve months.
Nasdaq Charge to the American Stock Exchange LLC ("Amex")
Nasdaq incurs technology costs on behalf of Amex related to development of
new Amex systems and enhancement of existing Amex systems. Additionally,
Nasdaq incurs certain operating costs such as marketing on behalf of Amex.
Amounts are charged based upon specific projects requested by Amex. Amounts
charged from Nasdaq to Amex are included in support costs from related
parties and are summarized as follows:
December 31,
2000 1999 1998
---------------------------------------------------
Compensation $ 345 $ 600 $ 1,128
Professional and contract services 4,389 13,090 7,334
Publications, supplies and postage 11 19 35
Other 187 326 612
---------------------------------------------------
Total $ 4,932 $ 14,035 $ 9,109
===================================================
In the opinion of management, all methods of cost allocation described
above are reasonable for the services rendered.
13. Capital Stock and Earnings Per Share
Each share of Common Stock has one vote, except that any person, other than
the NASD or any other person as may be approved for such exemption by the
Nasdaq Board prior to the time such person owns more than 5% of the
then-outstanding shares of Common Stock, who would otherwise be entitled to
exercise voting rights in respect of more than 5% of the then-outstanding
shares of Common Stock will be unable to exercise voting rights for any
shares in excess of 5% of the then-outstanding shares of Common Stock. 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
wiml be released from the Voting Trust Agreement upon Exchange
Registration. The shares of Common Stock purchased upon a valid exercise of
a Warrant tranche after Exchange Registration will not be subject to the
Voting Trust Agreement.
There are 30,000,000 shares of preferred stock authorized, and none issued
and outstanding.
The following table sets forth the computation of basic earnings per share.
December 31,
2000 1999 1998
--------------------------------------------------
Numerator for basic earnings per share $ 150,127 $ 86,149 $ 34,955
Denominator for basic weighted average shares 112,090,493 100,000,000 100,000,000
Basic earnings per share $ 1.34 $ 0.86 $ 0.35
14. Subsequent Events (Unaudited)
Phase II Private Placement
- --------------------------
Phase II closed on January 18, 2001 with Nasdaq selling approximately 5.0
million shares, yielding net proceeds of approximately $63.7 million.
Subsequent to the closing of Phase II, the NASD owns approximately 74% of
Nasdaq. In the Phase I and Phase II offerings, the NASD sold Warrants to
purchase shares of the common stock of Nasdaq, and if fully exercised, the
NASD's ownership would be decreased to approximately 41%.
Nasdaq Europe S.A./N.V.
- -----------------------
On March 27, 2001, Nasdaq acquired a majority ownership interest in the
European Association of Securities Dealers Automated Quotation S.A./N.V.
("EASDAQ"), a Belgium-based, pan-European stock exchange for $12.5 million.
Nasdaq plans to restructure the company into a globally linked,
pan-European market and rename it Nasdaq Europe S.A./N.V.
Nasdaq's acquisition has been accounted for using the purchase method of
accounting.
Hellman & Friedman
- ------------------
On May 3, 2001, Nasdaq issued and sold $240.0 million in aggregate
principal amount of its 4% convertible subordinated debentures due 2006
(the "Subordinated Debentures") to Hellman & Friedman Capital Partners IV,
L.P. and certain of its affiliated limited partnerships (collectively,
"Hellman & Friedman"). The annual 4% coupon will be payable in arrears in
cash and the Subordinated Debentures will be convertible at any time into
shares of Common Stock at $20.00 per share.
On a fully diluted basis, Hellman & Freidman owns an approximate 9.8%
equity interest in Nasdaq. Nasdaq has agreed to use its best efforts to
seek stockholder approval of a charter amendment that would provide for
voting debt in order to permit Hellman & Friedman to vote on an
as-converted basis on all matters on which common stockholders have the
right to vote, subject to the current five percent voting limitation in
Nasdaq's Restated Certificate of Incorporation (the "Certificate of
Incorporation"). Nasdaq has granted Hellman & Friedman certain registration
rights with respect to the shares of Common Stock underlying the
Subordinated Debentures. Additionally, Hellman & Friedman will be permitted
to designate one person reasonably acceptable to Nasdaq for nomination as a
director of Nasdaq for so long as Hellman & Friedman owns Subordinated
Debentures and/or shares of Common Stock issued upon conversion
representing at least 50% of the shares of Common Stock issuable upon
conversion of the Subordinated Debentures initially purchased.
On May 3, 2001, Nasdaq used the net proceeds from the sale of the
Subordinated Debentures to purchase 18,461,538 shares of Common Stock from
the NASD for $13 per share or an aggregate purchase price of $239,999,994.
LIFFE
- -----
In March 2001, Nasdaq entered into a non-binding letter of intent with the
London International Financial Futures and Options Exchange ("LIFFE") to
create a new U.S. joint venture company which will list single stock
futures. The products of this joint venture are expected to be traded
through the LIFFE CONNECT(TM) electronic system. Nasdaq has committed up to
$15 million plus the rights to use certain trademarks in this venture.
Nasdaq Europe Planning Company Limited
- --------------------------------------
In February and March 2001, Nasdaq repurchased the ownership interests of
certain minority shareholders in Nasdaq Europe Planning Company Limited for
a total of $20 million.
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 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, affective as of December 29, 2000.(+)
10.19 Employment Agreement by The Nasdaq Stock Market, Inc. and John L.
Hilley, effective as of December 29, 2000.(+)
10.20 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Richard G. Ketchum, effective as of December 29, 2000.(+)
10.21 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and Hardwick Simmons, dated as of January 31, 2001.(+)
11 Statement regarding computation of per share earnings (incorporated
herein by reference to "Item 2. Financial Information" of this Form
10).
12 Computations of ratios (not applicable).
21.1 List of all subsidiaries.(+)
* Confidential treatment has been requested from the Securities and
Exchange Commission for certain portions of this exhibit.
(+) Previously filed with The Nasdaq Stock Market, Inc.'s Registration
Statement on Form 10 (file number 000-32651) filed on April 30, 2001.
Exhibit 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 HEREOF
TABLE OF CONTENTS
Page
ARTICLE 1
Definitions
Section 1.01. Definitions............................................1
ARTICLE 2
Rights and Obligations with Respect to Transfer
Section 2.01. Transfer by Holders....................................4
Section 2.02. Restrictive Legends....................................5
ARTICLE 3
Registration Rights
Section 3.01. Demand Registration....................................6
Section 3.02. Piggyback Registration.................................7
Section 3.03. Reduction of Offering..................................7
Section 3.04. Registration Procedures................................8
Section 3.05. Registration Expenses.................................11
Section 3.06. Indemnification by the Company........................11
Section 3.07. Indemnification by Selling Holders....................12
Section 3.08. Conduct of Indemnification Proceedings................13
Section 3.09. Contribution..........................................14
Section 3.10. Participation in Underwritten Registrations...........15
Section 3.11. Rule 144..............................................15
Section 3.12. Holdback Agreements...................................15
Section 3.13. Transfer of Registration Rights.......................16
ARTICLE 4
Pre-emptive Rights
Section 4.01. Pre-emptive Rights....................................16
ARTICLE 5
Board Appointment Obligation; Information Rights; voting rights
Section 5.01. Board Appointment Obligation..........................18
Section 5.02. Information Rights....................................18
Section 5.03. Additional Rights of the Holders......................19
Section 5.04. Voting Rights.........................................19
ARTICLE 6
Miscellaneous
Section 6.01. Notices...............................................20
Section 6.02. Amendments; Waivers...................................20
Section 6.03. Termination...........................................20
Section 6.04. Successors, Assigns, Transferees......................20
Section 6.05. Headings..............................................21
Section 6.06. No Inconsistent Agreements............................21
Section 6.07. Severability..........................................21
Section 6.08. Recapitalization, Etc.................................21
Section 6.09. Specific Performance..................................21
Section 6.10. Other Agreements......................................21
Section 6.11. New York Law..........................................22
Section 6.12. Counterparts..........................................22
Section 6.13. Entire Agreement......................................22
SECURITYHOLDERS AGREEMENT
SECURITYHOLDERS AGREEMENT dated as of May 3, 2001 (this
"Agreement") among The Nasdaq Stock Market, Inc., a Delaware corporation,
(together with any successor thereto, the "Company"), Hellman & Friedman
Capital Partners IV, L.P., a Delaware limited partnership ("HFCP IV"), and
the other securityholders listed on the signature pages hereof (together
with HFCP IV and their respective successors and permitted assigns, the
"Holders").
WHEREAS, the Company and the Holders have entered into a
Securities Purchase Agreement dated as of March 23, 2001 (the "Securities
Purchase Agreement"); and
WHEREAS, it is a condition precedent to the closing of the
transactions contemplated by the Securities Purchase Agreement that the
parties hereto execute and deliver this Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises and covenants set forth herein, the parties hereto agree as
follows:
ARTICLE 1
Definitions
Section 1.01. Definitions. (a) The following terms, as used
herein, have the following meanings:
"Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by or under common control with such
Person. For the purposes of this definition, "control" when used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. Notwithstanding the foregoing, for
purposes of this Agreement, no NASD member shall be considered an
"Affiliate" of the NASD.
"Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized by law
to close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.01 per share,
of the Company.
"Competitor" means any Person that is principally engaged in
transaction services, market information services, or issuer services
related to securities trading on an exchange or similar market.
"Equity Securities" means the Notes and the Note Shares.
"Event of Default" has the meaning set forth in Section 4.1 of the
Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Initial Public Offering" means the first underwritten public
offering by the Company under the Securities Act.
"NASD" means the National Association of Securities Dealers, Inc.
and its successors.
"Note Shares" means the shares of Common Stock issued, or to be
issued, upon conversion of the Notes in accordance with their terms, and
any shares of Common Stock issued pursuant to a stock dividend, stock
split, or recapitalization in respect of such shares.
"Notes" means the 4.0% Convertible Subordinated Notes due 2006 of the
Company.
"Person" means an individual or a corporation, partnership,
association, trust, or any other entity or organization, including a
government or political subdivision or an agency or instrumentality
thereof.
"Preferred Stock" means the preferred stock, par value $0.01 per
share, of the Company.
"Registrable Securities" means the Note Shares; provided, that
such securities shall cease to be Registrable Securities when (i) a
registration statement relating to such securities shall have been declared
effective by the Commission and such securities shall have been disposed of
pursuant to such effective registration statement or (ii) such securities
have been disposed of pursuant to Rule 144 or may be disposed of pursuant
to Rule 144(k).
"Registration Expenses" means all (i) registration and filing
fees, (ii) fees and expenses of compliance with securities or blue sky laws
(including reasonable fees and disbursements of a qualified independent
underwriter, if any, counsel in connection therewith and the reasonable
fees and disbursements of counsel in connection with blue sky
qualifications of the Registrable Securities), (iii) printing expenses,
(iv) internal expenses of the Company (including, without limitation, all
salaries and expenses of officers and employees performing legal or
accounting duties), (v) fees and disbursements of counsel for the Company,
(vi) customary fees and expenses for independent certified public
accountants retained by the Company (including the expenses of any comfort
letters or costs associated with the delivery by independent certified
public accountants of a comfort letter or comfort letters), (vii) fees and
expenses of any special experts retained by the Company in connection with
such registration, (viii) reasonable fees and expenses of one counsel for
the Holders, (ix) fees and expenses of listing the Registrable Securities
on a securities exchange or on the Nasdaq National Market System, (x)
rating agency fees, (xi) reasonable fees and expenses of counsel for the
Underwriter, (xii) reasonable fees and expenses of the Underwriter
(excluding discounts or commissions relating to the distribution of the
Registrable Securities) and (xiii) out-of-pocket expenses of the Company
(including the expenses of any "roadshow" or similar marketing activity
undertaken in connection with the distribution of the Registrable
Securities).
"Rule 144" means Rule 144 under the Securities Act, as such rule
may be amended from time to time.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means a Holder who proposes to Transfer
Registrable Securities pursuant to Article 3.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person.
"Third Party" means a prospective purchaser of Equity Securities
from a Holder in an arm's-length transaction where such purchaser is not
the Company, an Affiliate of the Company or an Affiliate of such Holder.
"Underwriter" means a securities dealer who purchases any
Registrable Securities as a principal in connection with a distribution of
such Registrable Securities and not as part of such dealer's market-making
activities.
(b) Each of the following terms is defined in the Section set
forth opposite each term:
Term Section
---- -------
ATS 2.01(b)
Board 5.01(a)
Damages 3.06
Demand Registrant 3.01(a)
Demand Registration 3.01(a)
ECN 2.01(b)
H&F Designee 5.01(a)
Indemnified Party 3.08
Indemnifying Party 3.08
NASD Priority Termination Date 3.03
New Securities 4.01(a)
Piggyback Registration 3.02
Preemptive Rights 4.01(a)
Proportionate Percentage 4.01(a)
Registration Request 3.01(a)
Shelf Demand 3.01(a)
Shelf Registration 3.01(a)
Transfer 2.01(a)(ii)
ARTICLE 2
Rights and Obligations with Respect to Transfer
Section 2.01. Transfer by Holders. (a) Subject to Section 3.12,
until the earlier of (i) the effective date of the registration statement
filed in connection with the Company's Initial Public Offering, or (ii)
June 28, 2002, without the prior written consent of the Company, no Holder
shall transfer, sell, assign, or otherwise dispose of ("Transfer") its
Equity Securities, in whole or in part, other than to its Affiliates.
(b) Following the expiration of the period set forth in Section
2.01(a):
(i) without the prior written consent of the Company, no
Holder shall Transfer any Equity Securities (other than in a
registered public offering or in compliance with Rule 144) to
another securities exchange, alternative trading system ("ATS"),
electronic communications network ("ECN"), the NASD, any
Competitor, or any Affiliate of any of the foregoing; and
(ii) with respect to any Transfer of Equity Securities by
a Holder other than (A) a Transfer to an Affiliate or a Transfer
in a registered public offering or in compliance with Rule 144,
and (B) a Transfer in accordance with Section 2.01(b)(i), the
Holder shall consult with the Company in good faith prior to such
Transfer, taking into account the circumstances of such proposed
Transfer.
(c) Subject to compliance with all applicable securities laws and
this Agreement, each Holder may Transfer its Equity Securities, in whole or
in part, without restriction; provided that, the transferee (other than in
a Transfer pursuant to a registered public offering under the Securities
Act or in compliance with Rule 144) shall have executed and delivered to
each other party hereto an instrument confirming that such transferee
agrees to be bound by the terms of this Agreement applicable to the
transferor, whereupon such transferee shall become a Holder for purposes of
this Agreement.
Section 2.02. Restrictive Legends. (a) Each certificate for Equity
Securities issued to any Holder or to a subsequent transferee shall (unless
otherwise permitted by the provisions of Section 2.02(b)) include a legend
in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE OR
FOREIGN JURISDICTION AND MAY NOT BE OFFERED OR SOLD EXCEPT IN
COMPLIANCE WITH APPLICABLE FEDERAL, STATE OR FOREIGN SECURITIES
LAWS. THIS SECURITY IS ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER, AS SET FORTH IN THE SECURITYHOLDERS AGREEMENT, DATED AS
OF MAY 3, 2001, A COPY OF WHICH MAY BE OBTAINED FROM THE NASDAQ
STOCK MARKET, INC.
(b) In connection with a proposed Transfer of any Equity
Securities permitted under Section 2.01, any Holder may, (i) upon providing
evidence reasonably satisfactory to the Company that such Equity Security
is not a "restricted security" (as defined in Rule 144) or (ii) after
expiration of the applicable holding period under Rule 144, exchange the
certificate representing such Equity Security for a new certificate that
does not bear the legend set forth in Section 2.02(a).
ARTICLE 3
Registration Rights
Section 3.01. Demand Registration. (a) Request for Registration.
At any time beginning 180 days after the consummation of the Company's
Initial Public Offering, for so long as any Holder owns any Registrable
Securities, any Holder of Notes (a "Demand Registrant") may make a written
request (the "Registration Request") for registration under the Securities
Act of Registrable Securities having a value (based on the average closing
sale price per Common Share for 10 trading days preceding the Registration
Request) of not less than $50,000,000 (or, if less, all of the Registrable
Securities then held by the Holders) (a "Demand Registration"), unless
otherwise agreed by the Company and the Selling Holders. Notwithstanding
the foregoing, the Company shall not be required to file a registration
statement pursuant to a Registration Request within 90 days of the
effective date of any other registration statement filed by the Company
pursuant to the Securities Act, excluding registration statements filed on
Form S-4 or S-8 (or any substitute form that may be adopted by the
Commission). Any Registration Request will specify the number of
Registrable Securities proposed to be sold and the intended method of
disposition thereof. The Holders shall be entitled to request: (i) two
Demand Registrations on Form S-1 or any equivalent registration form;
provided, however, that if on or before July 1, 2002, the Company is
eligible to register securities on Form S-3, the Holders shall only be
entitled to request one Demand Registration on Form S-1 or any equivalent
registration form and (ii) unlimited Demand Registrations on Form S-3 or
any equivalent registration form (but no more than two in any twelve-month
period); and provided further, that if the NASD makes a demand to the
Company for the filing of a shelf registration statement pursuant to a
contractual right of registration, then the Company shall provide notice to
the Holders of such demand by the NASD and, if requested by the Holders (a
"Shelf Demand"), the Company shall file a shelf registration statement
pursuant to Section 415 of the Securities Act covering open market sales of
the Registrable Securities (the "Shelf Registration"), which Shelf
Registration shall be considered a Demand Registration for purposes of this
Agreement. The Holders shall be entitled to request only one Shelf Demand
pursuant to this Agreement.
(b) Effective Registration. A registration requested pursuant to
this Section 3.01 shall not be deemed to be effected (i) if a registration
statement with respect thereto shall not have become effective (other than
due to any action or inaction by a Holder), (ii) if, after it has become
effective, such registration is interfered with for any reason (other than
due to any action or inaction by a Holder) by any stop order, injunction or
other order or requirement of the Commission or any other governmental
agency or any court, and the result of such interference is to prevent the
Holder from disposing of the Registrable Securities to be sold thereunder
in accordance with the intended methods of disposition or (iii) if the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with any underwritten registration
shall not be satisfied or waived with the consent of the Company, the
Demand Registrant or the lead Underwriter, as applicable (other than due to
any action or inaction by a Holder).
(c) Underwriting. The offering of Registrable Securities pursuant
to any Demand Registration shall be in the form of an underwritten
offering, a block trade or an open market transaction, as determined by the
Demand Registrant. The Demand Registrant shall, if applicable, select the
lead Underwriter and any additional investment bankers and managers in
connection with the offering from a list of nationally-recognized
investment banks reasonably agreed to between the Company and the Demand
Registrant.
Section 3.02. Piggyback Registration. If the Company proposes to
file a registration statement under the Securities Act with respect to an
offering of its equity securities (i) for its own account (other than a
registration statement on Form S-4 or S-8 (or any substitute form that may
be adopted by the Commission)) or (ii) for the account of any holders
(other than the Holders) of its securities, then the Company shall give
written notice of such proposed filing to the Holders as soon as
practicable (but in any event not less than 10 days before the anticipated
filing date), and such notice shall offer the Holders the opportunity to
register (a "Piggyback Registration") any or all of the Registrable
Securities. If any Holder wishes to register securities of the same class
or series as covered by the applicable Piggyback Registration, such
registration shall be on the same terms and conditions as such Piggyback
Registration. If, at any time after giving written notice of its intention
to register any equity securities and prior to the effective date of a
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such equity
securities, the Company may, at its election, give written notice of such
determination to each Holder and, thereupon, shall not be obligated to
register any Registrable Securities in connection therewith.
Section 3.03. Reduction of Offering. Notwithstanding any provision
to the contrary contained herein, if the lead Underwriter of an offering
described in Section 3.01 or 3.02 delivers a written opinion to the Company
that the offering price of the securities proposed to be included in such
offering would be materially and adversely affected by inclusion of all the
securities of each class requested to be included, the number of securities
to be registered by each holder shall be reduced to the extent recommended
by such lead Underwriter; provided, that (i) priority in a registration
initiated by a holder of the Company's securities exercising a contractual
right to demand such registration, including, without limitation, by any
Holder making a Registration Request, for a Demand Registration pursuant to
Section 3.01 shall be (a) first, the securities offered for the account of
such holder, (b) second, with respect to a registration for which a
registration statement is filed prior to the NASD Priority Termination Date
only, securities requested to be registered by the NASD pursuant to a
contractual right of registration, and (c) third, pro rata among any other
securities of the Company requested to be registered for its own account or
pursuant to a contractual right of registration, and (ii) priority in a
registration initiated by the Company for its own account pursuant to
Section 3.02 shall be (a) first, securities offered for the account of the
Company, (b) second, with respect to a registration for which a
registration statement is filed prior to the NASD Priority Termination Date
only, securities requested to be registered by the NASD pursuant to a
contractual right of registration, and (c) third, pro rata among other
securities of the Company requested to be registered pursuant to a
contractual right of registration. For purposes of this Section 3.03, "NASD
Priority Termination Date" shall mean the earlier of (i) the date which is
six months after the date on which the Initial Public Offering is
consummated, and (ii) December 31, 2002.
Section 3.04. Registration Procedures. Whenever the Company is
required to effect the registration of Registrable Securities pursuant to
Section 3.01, the Company will use its reasonable best efforts to effect
the registration and the sale of such Registrable Securities in accordance
with the intended method of disposition thereof as promptly as practicable,
and in connection with any such Registration Request:
(a) The Company will as expeditiously as possible prepare and file
with the Commission a registration statement (including any necessary
amendments and supplements), subject to Section 3.01(a), on any form for
which the Company then qualifies or which counsel for the Company shall
deem appropriate and which form shall be available for the sale of the
Registrable Securities to be registered thereunder in accordance with the
intended method of distribution thereof, and the prospectus used in
connection therewith and use its reasonable best efforts to cause such
filed registration statement to become and remain effective, in the case of
registration that is not a Shelf Registration, for a period of 90 days or
such shorter period as necessary to complete the disposition of all
securities covered by such registration statement in accordance with the
intended method or methods of disposition thereof or, in the case of a
Shelf Registration, on a continuous basis until the earlier of (i) the date
on which all of the Registrable Securities covered by such Shelf
Registration are sold and (ii) the date on which the securities covered by
the Shelf Registration cease to be Registrable Securities; provided that if
the Company shall furnish to the Demand Registrant a certificate signed by
either its Chairman, President, or a Vice-President stating that in the
good faith judgment of its Board of Directors, the filing or effectiveness
of such registration statement would materially interfere with any proposed
acquisition, disposition, financing or other transaction involving the
Company or its subsidiaries, notwithstanding anything in this Section 3.04
to the contrary, the Company may postpone for up to 120 days in any
twelve-month period the filing or effectiveness of a registration statement
pursuant to a Holder's Registration Request; however, the Company will
during any such postponement take all action reasonably necessary or
desirable in order to be able to promptly file or request effectiveness of
the registration statement, as the case may be, upon termination of any
such postponement period.
(b) The Company will, if requested, prior to filing a registration
statement or prospectus or any amendment or supplement thereto, furnish to
each Selling Holder and each Underwriter, if any, such number of copies of
such registration statement, each amendment and supplement thereto (in each
case including all exhibits thereto and documents incorporated by reference
therein), the prospectus included in such registration statement (including
each preliminary prospectus) and such other documents as the Selling Holder
or such Underwriter may reasonably request in order to facilitate the sale
of the Registrable Securities. The Company will provide the Selling Holders
and the Underwriters reasonable time to review such documents and the
Company will consider in good faith incorporating any comments or other
information in such documents as the Selling Holder or the lead Underwriter
reasonably requests.
(c) After the filing of the registration statement, the Company
will promptly notify the Selling Holder of any stop order issued or
threatened by the Commission and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered.
(d) The Company will use its reasonable best efforts to (i)
register or qualify the Registrable Securities under such other securities
or blue sky laws of such jurisdictions in the United States as the Selling
Holder reasonably requests to keep such registration or qualification in
effect for so long as such registration statement remains in effect, and to
take any other action which may be reasonably necessary or advisable to
enable the Selling Holder to consummate the disposition in such
jurisdictions of the securities owned by the Selling Holder and (ii) cause
such Registrable Securities to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company, to enable the Selling Holder to
consummate the disposition of such Registrable Securities; provided, that
the Company will not be required to (i) qualify generally to do business in
any jurisdiction where it would not otherwise be required to qualify but
for this paragraph (d), (ii) subject itself to taxation in any such
jurisdiction other than taxation arising with respect to the registration
of securities or (iii) consent to general service of process in any such
jurisdiction.
(e) At any time when a prospectus relating to the sale of
Registrable Securities is required to be delivered under the Securities
Act, the Company will immediately notify the Selling Holder of the
occurrence of an event requiring the preparation of a supplement or
amendment to such prospectus so that, as thereafter delivered to the
Holders of such Registrable Securities, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading and promptly make available to the Selling Holder and the
Underwriters any such supplement or amendment. The Selling Holder agrees
that, upon receipt of any notice from the Company of the happening of any
event of the kind described in the preceding sentence, the Selling Holder
will forthwith discontinue the offer and sale of Registrable Securities
pursuant to the registration statement covering such Registrable Securities
until receipt of the copies of such supplemented or amended prospectus and,
if so directed by the Company, the Selling Holder will deliver to the
Company all copies, other than permanent file copies then in the possession
of the Selling Holder, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice. In the event
the Company shall give such notice, the Company shall extend the period
during which such registration statement shall be maintained effective as
provided in Section 3.04(a) by the number of days during the period from
and including the date of the giving of such notice to the date when the
Company shall make available to the Selling Holder such supplemented or
amended prospectus.
(f) The Company will enter into customary agreements (including an
underwriting agreement in customary form) and take such other actions as
are reasonably required in order to expedite or facilitate the disposition
of such Registrable Securities, including without limitation furnishing the
Underwriters and Selling Holders with reasonable access to, and causing the
cooperation of, all personnel reasonably requested by the Underwriters and
the Selling Holders subject to appropriate confidentiality agreements to
assist in arranging such meetings with third parties as the Underwriters
and the Selling Holders may reasonably request, including without
limitation any "roadshow" or other similar marketing activity undertaken in
connection with the distribution of the Registrable Securities.
(g) The Company will furnish to the Selling Holder and to each
Underwriter, if any, a signed counterpart, addressed to the Selling Holder
or such Underwriter, of (i) an opinion or opinions of counsel to the
Company and (ii) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering such
matters as are customarily covered by opinions and comfort letters, as the
Selling Holder or the lead Underwriter therefor reasonably requests.
(h) The Company will otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the Commission, and
make available to its securityholders, as soon as reasonably practicable,
an earnings statement covering a period of 12 months, beginning within
three months after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act.
(i) The Company will provide and cause to be maintained a transfer
agent and registrar for all Registrable Securities covered by such
registration statement from and after a date not later than the effective
date of such registration statement.
(j) The Company will use its reasonable best efforts (i) to cause
all Registrable Securities covered by such registration statement to be
listed on any national securities exchange (if such Registrable Securities
are not already listed), and on each other securities exchange, on which
similar securities issued by the Company are then listed, if the listing of
such Registrable Securities is then permitted under the rules of such
exchange; or (ii) to secure the designation of all such Registrable
Securities covered by such registration statement as a Nasdaq "national
market system security" within the meaning of Rule 11Aa2-1 of the
Commission or, failing that, to secure Nasdaq authorization for such
Registrable Securities, in each case if the Registrable Securities so
qualify, and, without limiting the generality of the foregoing, to arrange
for at least two market makers to register as such with respect to such
Registrable Securities with the NASD or the Company, as applicable, if
requested by the Holder or by the lead Underwriter.
(k) Subject to the provisions of Section 3.03, the Company may
include in such registration shares of Common Stock for its own account as
well as shares of Common Stock requested to be included in such
registration by any holder of Common Stock (other than the Holders)
pursuant to a contractual right of registration.
Section 3.05. Registration Expenses. Registration Expenses (other
than underwriting discounts and commissions on the Holders' Registrable
Securities) incurred in connection with any registration made or requested
to be made pursuant to this Article 3 will be borne by the Company, whether
or not any such registration statement becomes effective.
Section 3.06. Indemnification by the Company. To the extent
permitted by applicable law, the Company agrees to indemnify and hold
harmless each Selling Holder, its officers, directors and agents, and each
Person, if any, who controls each such Selling Holder within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages, liabilities and expenses
(collectively, "Damages") caused by any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or
prospectus relating to the Registrable Securities (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information furnished in writing to
the Company by or on behalf of any such Selling Holder expressly for use
therein. In addition, the indemnification provided in this Section 3.06
shall not inure to the benefit of any Selling Holder, if the Selling Holder
(or any underwriter or underwriters of the offering) failed to send or give
a copy of the final prospectus or any such amendment thereof or supplement
thereto, whichever is most recent, to the person asserting any such Damages
at or prior to the written confirmation of the sale of the securities by
such underwriter or underwriters to such person if there would have been no
liability if the final prospectus or any such amendment thereof or
supplement thereto had been delivered. The Company also agrees, to the
extent permitted by applicable law, to indemnify any Underwriters of the
Registrable Securities, their officers and directors and each Person who
controls such underwriters on substantially the same basis as that of the
indemnification of the Selling Holders provided in this Section 3.06.
Section 3.07. Indemnification by Selling Holders. To the extent
permitted by applicable law, each Selling Holder agrees, severally but not
jointly, to indemnify and hold harmless the Company, its officers,
directors and agents and each Person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act, to the same extent as the foregoing indemnity from the
Company to such Selling Holder, but only with reference to information
related to such Selling Holder furnished in writing by or on behalf of such
Selling Holder expressly for use in any registration statement or
prospectus relating to the Registrable Securities, or any amendment or
supplement thereto, or any preliminary prospectus. Each Selling Holder also
agrees, to the extent permitted by applicable law, to indemnify and hold
harmless Underwriters of the Registrable Securities, their officers and
directors and each Person who controls such Underwriters on substantially
the same basis as that of the indemnification of the Company provided in
this Section 3.07.
Section 3.08. Conduct of Indemnification Proceedings. In case any
proceeding (including any governmental investigation) shall be instituted
involving any Person in respect of which indemnity may be sought pursuant
to Section 3.06 or 3.07, such Person (the "Indemnified Party") shall
promptly notify the Person against whom such indemnity may be sought (the
"Indemnifying Party") in writing. Notwithstanding the foregoing, the
failure so to give prompt notice to such person will not relieve such
Indemnifying Party from liability, except to the extent such failure or
delay materially prejudices such Indemnifying Party. The Indemnifying Party
shall be entitled to participate in any such action and to assume the
defense thereof, at the Indemnifying Party's expense and with counsel
reasonably satisfactory to the Indemnified Party. After notice from the
Indemnifying Party to such Indemnified Party of its election so to assume
the defense thereof, the Indemnified Party shall have the right to
participate in such action and to retain its own counsel, but the
Indemnifying Party shall not be liable to such Indemnified Party hereunder
for any legal expenses of other counsel or any other expenses, in each
case, subsequently incurred by such Indemnified Party, in connection with
the defense thereof other than reasonable costs of investigation, unless
(i) the Indemnifying Party has agreed to pay such fees and expenses, (ii)
the Indemnifying Party shall have failed to employ counsel reasonably
satisfactory to the Indemnified Party in a timely manner or (iii) the
Indemnified Party shall have been advised by outside counsel that
representation of the Indemnified Party by counsel provided by the
Indemnifying Party pursuant to the foregoing would be inappropriate due to
an actual or potential conflicting interest between the Indemnifying Party
and the Indemnified Party, including situations in which there are one or
more legal defenses available to the Indemnified Party that are different
from or additional to those available to the Indemnifying Party; provided
however, that the Indemnifying Party shall not, in connection with any one
such action or proceeding or separate but substantially similar actions or
proceedings arising out of the same general allegations, be liable for the
fees and expenses of more than one firm of attorneys at one time for the
Indemnified Party. The Indemnifying Party shall not be liable for any
settlement of any proceeding effected without its consent, but if settled
with such consent, or if there be a final judgment for the plaintiff, the
Indemnifying Party shall indemnify and hold harmless such Indemnified
Parties from and against any loss or liability (to the extent stated above)
by reason of such settlement or judgment. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Party is or could have been a party and indemnity could have
been sought hereunder by such Indemnified Party, unless such settlement (x)
includes an unconditional release of such Indemnified Party from all
liability arising out of such proceeding and (y) provides that such
Indemnified Party does not admit any fault or guilt with respect to the
subject matter of such proceeding.
Section 3.09. Contribution. (a) If the indemnification provided
for herein is for any reason unavailable to the Indemnified Parties in
respect of any losses, claims, damages or liabilities referred to herein,
then each such Indemnifying Party, to the extent permitted by applicable
law, in lieu of indemnifying such Indemnified Party, shall contribute to
the amount paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities (i) as between the Company and any
Selling Holder on the one hand and the Underwriters on the other, in such
proportion as is appropriate to reflect the relative benefits received by
the Company and such Selling Holder on the one hand and the Underwriters on
the other from the offering of the securities, or if such allocation is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits but also the relative fault of the
Company and such Selling Holder on the one hand and of the Underwriters on
the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations and (ii) as between the Company on the one hand
and any Selling Holder on the other, in such proportion as is appropriate
to reflect the relative fault of the Company and of such Selling Holder in
connection with such statements or omissions, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
any Selling Holder on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total proceeds from the
offering (net of underwriting discounts and commissions but before
deducting expenses) received by the Company and such Selling Holder bear to
the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of
the prospectus. The relative fault of the Company and any Selling Holder on
the one hand and of the Underwriters on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company and such
Selling Holder or by the Underwriters. The relative fault of the Company on
the one hand and any Selling Holder on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by such party, and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
(b) The Company and each Selling Holder agree that it would not be
just and equitable if contribution pursuant to this Section 3.09 were
determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an
Indemnified Party as a result of the losses, claims, damages or liabilities
referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 3.09, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Registrable Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission, and no
Selling Holder shall be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities of such
Selling Holder were offered to the public (less underwriters' discounts and
commissions) exceeds the amount of any damages which such Selling Holder
has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
Section 3.10. Participation in Underwritten Registrations. No
Person may participate in any underwritten registration hereunder unless
such Person (a) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents reasonably required under the terms of such
underwriting arrangements and these registration rights.
Section 3.11. Rule 144. If the Company shall have filed a
registration statement pursuant to the requirements of Section 12 of the
Exchange Act or a registration statement pursuant to the requirements of
the Securities Act relating to any class of equity securities, the Company
covenants that it will file any reports required to be filed by it under
the Securities Act and the Exchange Act and will take such further action
as the Selling Holder shall reasonably request, all to the extent required
from time to time to enable the Selling Holders to sell Registrable
Securities without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the Securities
Act, as such Rule is amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission.
Section 3.12. Holdback Agreements. (a) Restrictions on Public Sale
by Holders. If and to the extent requested of all shareholders of the
Company by the lead Underwriter of an underwritten public offering of
equity securities of the Company, the Holders agree not to effect, except
as part of such registration, any offer, sale, pledge, transfer or other
distribution or disposition or any agreement with respect to the foregoing,
of the issue being registered or a similar security of the Company, or any
securities convertible into or exchangeable or exercisable for such
securities, including a sale pursuant to Rule 144, during the seven day
period prior to, and during such period that the lead Underwriter may
reasonably request, no greater than 90 days (or 180 days following the
Initial Public Offering), beginning on, the effective date of such
registration statement.
(b) Restrictions on Public Sale by the Company. The Company agrees
(i) not to effect any public sale or distribution of any securities similar
to those being registered in accordance with Section 3.01 or Section 3.02,
or any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to, and during such period as the
lead Underwriter may reasonably request, no greater than 90 days (or 180
days following the Initial Public Offering), beginning on, the effective
date of any registration statement (except as part of such registration
statement and except pursuant to registrations on Form S-4 or S-8 or any
successor or similar form thereto); and (ii) that any agreement entered
into after the date of this Agreement pursuant to which the Company issues
or agrees to issue any privately placed securities shall contain a
provision under which holders of such securities agree not to effect any
public sale or distribution of any such securities during the periods
described in (i) above, in each case including a sale pursuant to Rule 144
(except as part of any such registration, if permitted).
Section 3.13. Transfer of Registration Rights. The rights of each
Holder under this Article 3 are transferable to each transferee of such
Holder to whom the transferor assigns its rights pursuant to a Transfer
that complies with the terms of Section 2.01(c).
ARTICLE 4
Pre-emptive Rights
Section 4.01. Pre-emptive Rights. (a) Prior to the Initial Public
Offering, if the Company shall propose to issue or sell New Securities (as
hereinafter defined) or enter into any contracts, commitments, agreements,
understandings or arrangements of any kind relating to the issuance or sale
of any New Securities, in any such case the primary purpose of which (as
determined in good faith by the Company's Board of Directors) is for the
Company to raise capital, then the Company's Board of Directors shall
consider in good faith the desirability and appropriateness of permitting
the Holders to participate in such offerings of New Securities (the
"Preemptive Rights") including granting each Holder the right to purchase
up to that number of New Securities, at the same price and on the same
terms proposed to be issued or sold by the Company, so that each Holder
would, after the issuance or sale of all such New Securities, hold the same
proportionate interest of the issued and outstanding equity securities of
the Company (calculated a fully-diluted basis) as was held by each Holder
(on a fully-diluted basis) immediately prior to the issuance or sale of
such New Securities (the "Proportionate Percentage"). "New Securities"
means any Common Stock or options, warrants or other securities or rights
convertible or exchangeable into or exercisable for any Common Stock or any
other such equity securities; provided, however, that "New Securities"
shall not include: (i) any securities issued or issuable on conversion of
the Convertible Subordinated Notes or pursuant to the exercise of any
rights, warrants, options or other agreements outstanding on the date of
this Agreement including, without limitation, any security convertible or
exchangeable, with or without consideration, into or for any stock, options
and warrants; (ii) options and securities issued to management, directors
or employees of the Company or its Subsidiaries in the ordinary course of
business and equity securities issuable upon exercise thereof; or (iii)
securities issued in consideration for, or in connection with, any merger,
consolidation or other acquisition of all or substantially all of the
assets constituting a business.
(b) The Company shall give each Holder written notice of its
intention to issue and sell New Securities, describing the type of New
Securities, the price and the general terms and conditions upon which the
Company proposes to issue the same. If the Company's Board of Directors
decides to grant the Holders Preemptive Rights, each Holder shall have 10
days from the giving of such notice to agree to purchase all (or any part)
of its Proportionate Percentage of New Securities for the price and upon
the terms and conditions specified in the notice by giving written notice
to the Company and stating therein the quantity of New Securities to be
purchased. In the event that fewer than all Holders elect to purchase their
portion of the New Securities in the manner described above, those Holders
electing to purchase New Securities shall be offered the opportunity to
purchase the unsubscribed portion, pro rata on the basis of the number of
shares of Common Stock owned by each such Holder (on an as-converted
basis).
(c) If the Holders fail to exercise in full their Preemptive
Rights within such 10 days, the Company shall have 90 days thereafter to
enter into a binding agreement to sell the remainder of the New Securities
in respect of which such Holders' Preemptive Rights were not exercised, at
a price and upon general terms and conditions no more favorable to the
purchasers thereof than specified in the Company's notice to the Holders
pursuant to clause (b) of this Section 4.01. If the Company has not entered
into a binding agreement to sell the New Securities within such 90 days,
the Company shall not thereafter agree to issue or sell any New Securities,
without again offering each Holder the right to purchase its Proportionate
Percentage of the New Securities in the manner provided above.
(d) Notwithstanding anything in this Agreement to the contrary,
each Holder shall have the right to assign its rights under this Article 4
to one or more of its Affiliates; provided that each such Affiliate shall
have agreed to be bound by the terms of this Agreement.
ARTICLE 5
Board Appointment Obligation; Information Rights; voting rights
Section 5.01. Board Appointment Obligation. (a) For so long as the
initial Holders beneficially own Equity Securities representing at least
50% of the number of shares of Common Stock (on an as-converted basis)
initially acquired by such Holders, such Holders shall have the right to
designate one person reasonably acceptable to the Company (the "H&F
Designee") for nomination as director to the board of directors (the
"Board") of the Company. The Company hereby agrees to (i) include the H&F
Designee as one of the nominees to the Board on each slate of nominees for
election to the Board proposed by management of the Company, (ii) to
recommend the election of the H&F Designee to the shareholders of the
Company, and (iii) without limiting the foregoing, to otherwise use its
best efforts to cause the H&F Designee to be elected to the Board. The
Company hereby agrees to use its best efforts to cause the appointment of
the H&F Designee to the Finance Committee of the Board. The initial H&F
Designee shall be F. Warren Hellman.
(b) In the event that the H&F Designee for any reason ceases to
serve as a director during his term of office, to the extent Holders are
entitled to designate an H&F Designee, the resulting vacancy on the Board
shall be filled by a director designated by the initial Holders reasonably
acceptable to the Company.
Section 5.02. Information Rights. Subject to appropriate
confidentiality arrangements, the Company will provide HFCP IV, or such
other Holder as the Holders shall designate:
(a) as soon as available and in any event within 90 days after the
end of each fiscal year of the Company, a balance sheet of the Company as
of the end of such fiscal year and the related statements of profit and
loss and cash flows for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year, and accompanied
by a report thereon of Ernst & Young LLP or other independent public
accountants of nationally recognized standing;
(b) as soon as available and in any event within 45 days after the
end of each of the first three quarters of each fiscal year of the Company,
a balance sheet of the Company as of the end of such quarter and the
related statements of profit and loss and cash flows for such quarter and
for the portion of the Company's fiscal year then ended, setting forth in
each case in comparative form the figures for the corresponding quarter and
the corresponding portion of the Company's previous fiscal year, all
certified (subject to normal year-end adjustments) as to fairness of
presentation, consistency and, except for the absence of footnotes,
generally accepted accounting principles by the chief financial officer or
the chief accounting officer of the Company;
(c) to the extent prepared by the Company and provided to
management of the Company, as soon as available and in any event within 10
days after the end of each month, a balance sheet of the Company as of the
end of such month and the related statements of profit and loss and cash
flows for such month, setting forth in each case, in comparative form the
figures for the corresponding month of the Company's previous fiscal year;
and
(d) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the
chief financial officer or the chief accounting officer of the Company
stating whether any Event of Default exists on the date of such certificate
and, if any Event of Default then exists, setting forth the details thereof
and the action which the Company is taking or proposes to take with respect
thereto.
Section 5.03. Additional Rights of the Holders. For so long as the
initial Holders beneficially own Equity Securities representing at least
25% of the number of shares of Common Stock (on an as-converted basis)
initially acquired by such Holders, promptly upon a request by any Holder
to the chief executive officer, the chief financial officer, the general
counsel or the chief information officer of the Company, the Company will,
subject to appropriate confidentiality arrangements, provide reasonable
access at reasonable times to such aforementioned officers of the Company
and the Company's public accountants to discuss such financial, operating
and other information regarding the business of the Company and its
Subsidiaries as such Holder may reasonably request.
Section 5.04. Voting Rights. If the Board of Directors of the
Company approves an exemption for any Person from the limitation on voting
rights set forth in Section C(2) of Article Fourth of the Company
certificate of incorporation (other than an exemption granted in connection
with the establishment of a strategic alliance with another exchange or
similar market), the Company shall simultaneously grant a similar exemption
to the holders of the Equity Securities and shall use its best efforts to
obtain the concurrence of the Securities and Exchange Commission with
respect thereto.
ARTICLE 6
Miscellaneous
Section 6.01. Notices. Any notice, request, instruction or other
document to be given hereunder by any party hereto to another party hereto
shall be in writing (including fax or similar writing) and shall be given
to such party at its address or telecopier number set forth on its
signature page, or to such other address as the party to whom notice is to
be given may provide in a written notice to the party giving such notice, a
copy of which written notice shall be on file with the Secretary of the
Company. Each such notice, request or other communication shall be
effective (i) if given by fax, when such fax is transmitted to the fax
number specified in this Section and confirmation of receipt is received or
(ii) if given by mail, 72 hours after such communication is deposited in
the mails with first class postage prepaid addressed as aforesaid or (iii)
if given by any other means, when delivered at the address specified in
this Section 6.01.
Section 6.02. Amendments; Waivers. (a) No failure or delay on the
part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of
any other right, power or privilege.
(b) Neither this Agreement nor any term or provision hereof may be
amended or waived in any manner other than by instrument in writing signed,
in the case of an amendment, by the Holders and the Company, or in the case
of a waiver, by the party against whom the enforcement of such waiver is
sought.
Section 6.03. Termination. This Agreement shall terminate and be
of no further force or effect with respect to each Holder upon such date
that such Holder no longer holds any Equity Securities; provided, that the
rights and obligations of the Company and the Holders under Section 3.06
through 3.09 shall survive any such termination.
Section 6.04. Successors, Assigns, Transferees. The provisions of
this Agreement shall be binding upon and accrue to the benefit of the
parties hereto and their respective heirs, successors and assigns. Neither
this Agreement nor any provision hereof shall be construed so as to confer
any right or benefit upon any Person other than the parties to this
Agreement and their respective successors and permitted assigns.
Section 6.05. Headings. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning
or construction of any provisions hereof.
Section 6.06. No Inconsistent Agreements. The Company will not
hereafter enter into any agreement with respect to its securities which is
inconsistent with or grant rights superior to the rights granted to the
Holders of Equity Securities in this Agreement. The Company represents and
warrants to each Holder that it has not previously entered into any
agreement with respect to any of its debt or equity securities granting any
registration rights to any Person, except for an agreement with the NASD.
Section 6.07. Severability. The invalidity or unenforceability of
any provisions of this Agreement in any jurisdiction shall not affect the
validity, legality or enforceability of the remainder of this Agreement in
such jurisdiction or the validity, legality or enforceability of this
Agreement, including any such provision, in any other jurisdiction, it
being intended that all rights and obligations of the parties hereunder
shall be enforceable to the fullest extent permitted by law.
Section 6.08. Recapitalization, Etc. In the event that any capital
stock or other securities are issued in respect of, in exchange for, or in
substitution of, any shares of Common Stock by reason of any
reorganization, recapitalization, reclassification, merger, consolidation,
spin-off, partial or complete liquidation, stock dividend, split-up, sale
of assets, distribution to stockholders or combination of the shares of
Common Stock or any other change in capital structure of the Company,
appropriate adjustments shall be made with respect to the relevant
provisions of this Agreement so as to fairly and equitably preserve, the
original rights and obligations of the parties hereto under this Agreement.
Section 6.09. Specific Performance. The parties hereto agree that
if any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached, irreparable damage
would occur, no adequate remedy at law would exist and damages would be
difficult to determine, and that the parties shall be entitled to specific
performance of the terms hereof and immediate injunctive relief, without
the necessity of proving the inadequacy of money damages as a remedy, in
addition to any other remedy at law or equity.
Section 6.10. Other Agreements. Nothing contained in this
Agreement shall be deemed to be a waiver of, or release from, any
obligations any party hereto may have under, or any restrictions on the
transfer of shares of Common Stock or other securities of the Company or
any direct or indirect subsidiary of the Company imposed by, any other
agreement.
Section 6.11. New York Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York without
giving effect to the conflicts of laws principles thereof.
Section 6.12. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original with the same
effect as if the signatures thereto and hereto were upon the same
instrument.
Section 6.13. Entire Agreement. This Agreement, together with the
Securities Purchase Agreement, the Notes and the amendment to the Company's
certificate of incorporation, constitutes the entire agreement and
understanding of the parties hereto in respect of the subject matter
contained herein and therein, and there are no restrictions, promises,
representations, warranties, covenants, or undertakings with respect to the
subject matter hereof, other than those expressly set forth or referred to
herein or therein. This Agreement, the Securities Purchase Agreement, the
Notes and the amendment to the Company's certificate of incorporation
supersede all prior agreements and understandings between the parties
hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
THE NASDAQ STOCK MARKET, INC.
By /s/ Hardwick Simmons
-----------------------------
Name: Hardwick Simmons
Title: Chief Executive Officer
The Nasdaq Stock Market, Inc.
One Liberty Plaza
New York, New York 10006
Telephone: 212-858-4750
Telecopier: 212-858-5150
HELLMAN & FRIEDMAN CAPITAL PARTNERS IV, L.P.
by its General Partner, H&F Investors IV, LLC
by its Managing Member, H&F Investors III, Inc.
By /s/ Patrick J. Healy
-----------------------------
Name: Patrick J. Healy
Title: Vice President
Address: c/o Hellman & Friedman LLC
One Maritime Plaza
12th Floor
San Francisco, California 94111
Attention: Richard M. Levine
Telephone: (415) 788-5111
Telecopier: (415) 391-4648
H&F EXECUTIVE FUND IV, L.P.
by its General Partner, H&F Investors IV, LLC
by its Managing Member, H&F Investors III, Inc.
By /s/ Patrick J. Healy
-----------------------------
Name: Patrick J. Healy
Title: Vice President
Address: c/o Hellman & Friedman LLC
One Maritime Plaza
12th Floor
San Francisco, California 94111
Attention: Richard M. Levine
Telephone: (415) 788-5111
Telecopier: (415) 391-4648
H&F INTERNATIONAL PARTNERS IV-A, L.P.
by its General Partner, H&F Investors IV, LLC
by its Managing Member, H&F Investors III, Inc.
By /s/ Patrick J. Healy
-----------------------------
Name: Patrick J. Healy
Title: Vice President
Address: c/o Hellman & Friedman LLC
One Maritime Plaza
12th Floor
San Francisco, California 94111
Attention: Richard M. Levine
Telephone: (415) 788-5111
Telecopier: (415) 391-4648
H&F INTERNATIONAL PARTNERS IV-B, L.P.
by its General Partner, H&F Investors IV, LLC
by its Managing Member, H&F Investors III, Inc.
By /s/ Patrick J. Healy
-----------------------------
Name: Patrick J. Healy
Title: Vice President
Address: c/o Hellman & Friedman LLC
One Maritime Plaza
12th Floor
San Francisco, California 94111
Attention: Richard M. Levine
Telephone: (415) 788-5111
Telecopier: (415) 391-4648
