UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period
ended September 30, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to ___________
Commission file number 0-32651
THE NASDAQ STOCK MARKET, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1165937
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
One Liberty Plaza 10006
New York, New York (Zip code)
(Address of Principal
executive offices)
(212) 858-4750
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2001, 111,024,731 shares of the Registrant's Common
Stock, par value $0.01 per share ("Common Stock"), were outstanding.
THE NASDAQ STOCK MARKET, INC.
FORM 10-Q
For the Quarter Ended September 30, 2001
INDEX
PART I. FINANCIAL INFORMATION PAGE
NUMBER
-------
Item 1. Financial Statements - (unaudited)
Condensed Consolidated Statements of Income -
Three and Nine Months Ended
September 30, 2001 and 2000............................ 1
Condensed Consolidated Balance Sheets -
September 30, 2001 and December 31, 2000............... 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended
September 30, 2001 and 2000............................ 5
Notes to Condensed Consolidated Financial Statements... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk. 21
PART II. OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds .............. 22
Item 6. Exhibits and Reports on Form 8-K ....................... 23
SIGNATURES ................................................................ 24
Forward-looking statements in this Quarterly Report on Form 10-Q are
subject to known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing
numerous assumptions and other factors that could cause actual results to
differ materially from those in the forward-looking statements. These
factors include, but are not limited to, The Nasdaq Stock Market, Inc.'s
ability to implement its strategic initiatives, economic, political and
market conditions and fluctuations, government and industry regulation,
interest rate risk, U.S. and global competition, and other factors that are
more fully described under the caption "Business-Risk Factors" in The
Nasdaq Stock Market, Inc.'s Registration Statement on Form 10, as amended.
Most of these factors are difficult to predict accurately and are generally
beyond our control. You should consider the areas of risk described in
connection with any forward-looking statements that may be made herein.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of September 30, 2001. Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report
the occurrence of unanticipated events. For any forward-looking statements
contained in any document, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
THE NASDAQ STOCK MARKET, INC.
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
THE NASDAQ STOCK MARKET, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED
------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------------------------------
Revenues:
Transaction services $ 84,580 $ 91,283
Market information services 58,255 66,155
Corporate Client Group services 39,378 38,537
Other 15,495 6,745
---------------- ----------------
Total revenues 197,708 202,720
---------------- ----------------
Expenses:
Compensation and benefits 45,322 29,807
Marketing and advertising 5,948 9,161
Depreciation and amortization 22,894 17,076
Professional and contract services 22,858 15,679
Computer operations and data communications 43,927 36,706
Bad debt expense 1,457 1,219
Occupancy 6,404 3,460
Disaster related 843 -
Other 16,888 11,335
---------------- ----------------
Total direct expenses 166,541 124,443
---------------- ----------------
Support costs from related parties, net 24,413 37,400
---------------- ----------------
Total expenses 190,954 161,843
---------------- ----------------
Net operating income 6,754 40,877
Interest income 6,672 5,519
Interest expense (2,997) (718)
Minority interests 3,252 -
Provision for income taxes (5,736) (23,649)
---------------- ----------------
Net income $ 7,945 $ 22,029
================ ================
Basic and diluted earnings per common share $ 0.07 $ 0.18
================ ================
See accompanying notes.
THE NASDAQ STOCK MARKET, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
NINE MONTHS ENDED
------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
---------------- ----------------
Revenues:
Transaction services $ 305,772 $ 291,231
Market information services 176,925 200,796
Corporate Client Group services 116,463 109,566
Other 42,621 19,646
---------------- ----------------
Total revenues 641,781 621,239
---------------- ----------------
Expenses:
Compensation and benefits 131,131 91,929
Marketing and advertising 17,597 32,034
Depreciation and amortization 65,558 45,614
Professional and contract services 54,424 36,877
Computer operations and data communications 131,875 98,545
Bad debt expense 14,460 3,369
Occupancy 19,866 11,462
Disaster related 843 -
Other 48,325 22,793
---------------- ----------------
Total direct expenses 484,079 342,623
---------------- ----------------
Support costs from related parties, net 76,121 90,197
---------------- ----------------
Total expenses 560,200 432,820
---------------- ----------------
Net operating income 81,581 188,419
Interest income 16,649 10,924
Interest expense (5,447) (1,677)
Minority interests 5,234 -
Provision for income taxes (44,297) (83,988)
---------------- ----------------
Net income before cumulative effect of change in accounting
principle 53,720 113,678
---------------- ----------------
Cumulative effect of change in accounting principle, net of taxes of
$67,956 $ - $ (101,090)
---------------- ----------------
Net income $ 53,720 $ 12,588
================ ================
Basic earnings per share before cumulative effect of change in
accounting principle $ 0.45 $ 1.05
================ ================
Basic loss per share for change in accounting principle $ - $ (0.93)
================ ================
Diluted earnings per share before cumulative effect of change in
accounting principle $ 0.44 $ 1.05
================ ================
Diluted loss per share for change in accounting principle $ - $ (0.93)
================ ================
Basic earnings per common share $ 0.45 $ 0.12
================ ================
Diluted earnings per common share $ 0.44 $ 0.12
================ ================
See accompanying notes.
THE NASDAQ STOCK MARKET, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
-----------------------------------------
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------- ------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 329,099 $ 262,257
Investments:
Available-for-sale, at fair value 229,498 232,090
Held-to-maturity, at amortized cost 4,596 21,967
Receivables, net 190,043 172,660
Receivables from related parties 17,335 8,250
Deferred tax asset 46,236 32,367
Other current assets 12,921 14,869
------------------- ------------------
Total current assets 829,728 744,460
------------------- ------------------
Investments:
Held-to-maturity, at amortized cost 23,938 6,612
Property and equipment:
Land, buildings and improvements 91,182 80,727
Data processing equipment and software 425,486 370,066
Furniture, equipment and leasehold improvements 178,888 134,638
------------------- ------------------
695,556 585,431
Less accumulated depreciation and amortization (315,147) (252,380)
------------------- ------------------
Total property and equipment, net 380,409 333,051
Non-current deferred tax asset 54,610 61,257
Other assets 29,770 25,753
------------------- ------------------
Total assets $ 1,318,455 $ 1,171,133
=================== ==================
See accompanying notes.
THE NASDAQ STOCK MARKET, INC.
Condensed Consolidated Balance Sheets - (continued)
(In thousands, except share amounts)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------- ------------------
(Unaudited)
Liabilities:
Current liabilities:
Accounts payable and accrued expenses $ 103,742 $ 117,867
Accrued personnel costs 37,562 37,273
Deferred revenue 85,427 66,178
Other accrued liabilities 32,031 35,374
Due to banks 4,105 13,876
Payables to related parties 27,394 19,158
------------------- ------------------
Total current liabilities 290,261 289,726
Long-term debt:
Senior notes 46,500 25,000
Subordinated indebtedness 240,000 -
Accrued pension costs 16,558 10,390
Non-current deferred tax liability 36,246 32,116
Non-current deferred revenue 122,808 138,166
Other liabilities 35,161 15,033
------------------- ------------------
Total long-term liabilities 497,273 220,705
Total liabilities 787,534 510,431
Minority interests 4,447 15,543
Stockholders' equity
Common stock, $.01 par value, 300,000,000 authorized, shares
issued: 128,969,119 in 2001 and 123,663,746 in 2000;
shares outstanding: 110,507,581 in 2001 and 123,663,746 in
2000 1,290 1,237
Additional paid-in capital 338,023 273,387
Common stock in treasury, at cost: 18,461,538 shares in 2001
and 0 shares in 2000 (240,000) -
Unrealized gains on available-for-sale investments, net of tax 1,936 321
Foreign currency translation (2,742) (2,213)
Deferred stock compensation (4,048) -
Common stock issuable 5,868 -
Retained earnings 426,147 372,427
------------------- ------------------
Total stockholders' equity 526,474 645,159
------------------- ------------------
Total liabilities, minority interests and stockholders' equity $ 1,318,455 $ 1,171,133
=================== ===================
See accompanying notes.
THE NASDAQ STOCK MARKET, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
----------------------------------
Cash flow from operating activities
Cash received from customers $ 628,955 $ 676,757
Cash paid to suppliers and employees (456,796) (276,918)
Cash paid to related parties, net (76,970) (82,236)
Income taxes paid (26,520) (65,889)
Interest received, net 11,202 9,247
Other 15,967 (63,122)
---------------- --------------
Cash provided by operating activities 95,838 197,839
---------------- --------------
Cash flow from investing activities
Proceeds from redemptions of available-for-sale investments 280,007 64,096
Purchases of available-for-sale investments (276,515) (150,606)
Proceeds from maturities of held-to-maturity investments 20,865 6,200
Purchases of held-to-maturity investments (20,820) (6,333)
Acquisition, net of cash acquired 558 (16,979)
Proceeds from sale of stock in Nasdaq Europe 9,564 -
Proceeds from sales of property and equipment 13,426 11,831
Purchases of property and equipment (99,541) (100,715)
---------------- --------------
Cash used in investing activities (72,456) (192,506)
---------------- --------------
Cash flow from financing activities
Decrease in due to banks (9,771) (2,071)
Proceeds from Phase I private placement offering - 254,142
Contributions from minority stockholders - 30,000
Net proceeds from Phase II private placement 63,688 -
Repayment of minority interests in Nasdaq Europe Planning
Company Limited (20,000) -
Payments for treasury stock purchases (240,000) -
Increase in long-term debt 249,543 -
-------------- -------------
Cash provided by financing activities 43,460 282,071
Increase in cash and cash equivalents 66,842 287,404
Cash and cash equivalents at beginning of period 262,257 10,598
---------------- --------------
Cash and cash equivalents at end of period $ 329,099 $ 298,002
================ ==============
See accompanying notes.
THE NASDAQ STOCK MARKET, INC.
Condensed Consolidated Statements of Cash Flows - (continued)
(Unaudited)
(In thousands)
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
---------------------------------------
Reconciliation of net income to cash provided by operating
activities
Net income $ 53,720 $ 12,588
Non-cash items included in net income
Cumulative effect of change in accounting principle, net - 101,090
Depreciation and amortization 65,558 45,614
Stock-based compensation 5,252 -
Minority interests (5,234) -
Other non-cash adjustments included in net income 5,178 -
Net change in:
Receivables, net (16,523) (63,703)
Receivables from related parties (9,085) 6,241
Deferred tax asset (7,841) (88,602)
Other current assets 3,315 5,106
Other assets (3,808) (1,130)
Accounts payable and accrued expenses (28,296) (4,878)
Accrued personnel costs (138) (5,157)
Deferred revenue 3,697 119,221
Other accrued liabilities (3,484) 44,889
Payables to related parties 8,236 1,723
Accrued pension costs 6,168 3,335
Deferred tax liability 4,158 10,040
Other liabilities 14,965 11,462
------------------- -----------------
Cash provided by operating activities $ 95,838 $ 197,839
=================== =================
See accompanying notes.
THE NASDAQ STOCK MARKET, INC.
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The Nasdaq Stock Market, Inc. ("Nasdaq") is the parent company of Nasdaq
Global Holdings ("Nasdaq Global"); Quadsan Enterprises, Inc.; Nasdaq Tools,
Inc. ("Nasdaq Tools"); Nasdaq Financial Products Services, Inc.; Nasdaq
International Market Initiatives, Inc.; and Nasdaq Canada, Inc.;
collectively referred to as Nasdaq. These entities are wholly-owned by
Nasdaq. Nasdaq is a subsidiary of the National Association of Securities
Dealers, Inc. (the "NASD").
Nasdaq operates in one segment as defined in the Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures About Segments of an
Enterprise and Related Information." Nasdaq uses a multiple market maker
system to operate an electronic, screen-based equity market. Nasdaq's
principal business products are transaction services, market information
services, and Corporate Client Group services (formerly issuer services).
The majority of this business is transacted with companies listed on The
Nasdaq Stock Market(R), market data vendors, and firms in the broker-dealer
industry within the United States.
All material intercompany accounts and transactions have been eliminated in
consolidation. Nasdaq's financial statements have been prepared in
accordance with the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC") with respect to the Form 10-Q and reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. Pursuant to such rules and regulations, certain footnote
disclosures, which are normally required under generally accepted
accounting principles, have been omitted. It is recommended that these
financial statements be read in conjunction with the Consolidated Financial
Statements included in Nasdaq's Registration Statement filed on Form 10, as
amended, for the year ended December 31, 2000.
The nature of Nasdaq's business is such that the results of any interim
period may vary significantly from quarter to quarter and may not be
indicative of the results to be expected for the fiscal year. Certain prior
period amounts reflect reclassifications to conform to the current period's
presentation.
2. CHANGE IN ACCOUNTING PRINCIPLE
On August 17, 2001, Nasdaq concluded discussions with the SEC with respect
to the implementation in its financial statements of Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which became effective for SEC reporting companies in the fourth quarter of
2000. Nasdaq became a SEC public reporting company on June 29, 2001, the
effective date of its Registration Statement on Form 10. As a result of the
discussions with the SEC, Nasdaq changed its method of accounting for
revenue recognition for certain components of its Corporate Client Group
services revenues.
In accordance with generally accepted accounting principles, as SAB 101 was
adopted effective the fourth quarter of 2000, the change in accounting
principle has been applied as of January 1, 2000. In accordance with
applicable accounting guidance prior to SAB 101, Nasdaq recognized revenue
for issuer initial listing fees and listing of additional shares ("LAS")
fees in the month the listing occurred or in the period additional shares
were issued, respectively. Nasdaq now recognizes revenue related to initial
listing fees and LAS fees on a straight line basis over estimated service
periods, which are six and four years, respectively.
As a result of this change in accounting principle, pro forma net income
for the nine months ended September 30, 2000, excluding the cumulative
effect of the change in accounting principle on prior years' results,
decreased $21.2 million ($0.20 per share) to $113.7 million ($1.05 per
share). In addition, Nasdaq recognized a one-time cumulative effect of a
change in accounting principle in the first quarter of 2000. This
cumulative effect of a change in accounting principle decreased net income
in the first nine months of 2000 by $101.1 million ($0.93 per share),
resulting in net income of $12.6 million ($0.12 per share). The adjustment
to first quarter 2000 net income for the cumulative change to prior years'
results consists of the following:
(amounts in millions)
Deferred initial listing fees $108.5
Deferred LAS fees 60.6
-----------------
Total deferred fees 169.1
Deferred income tax benefit (68.0)
-----------------
Cumulative effect of change in accounting principle $101.1
=================
For the three months ended September 30, 2001 and 2000, Nasdaq recognized
$10.9 million and $13.5 million in revenue, respectively, that was included
in the cumulative effect adjustment as of January 1, 2000. This revenue
contributed $6.5 million (after income taxes of $4.4 million) and $8.1
million (after income taxes of $5.4 million) to net income for the three
months ended September 30, 2001 and 2000, respectively. For the nine months
ended September 30, 2001 and 2000, Nasdaq recognized $34.9 million and
$42.8 million in revenue, respectively, that was included in the cumulative
effect adjustment as of January 1, 2000. This revenue contributed $20.9
million (after income taxes of $14.0 million) and $25.6 million (after
income taxes of $17.2 million) to net income for the nine months ended
September 30, 2001 and 2000, respectively.
3. DEFERRED REVENUE
Nasdaq's deferred revenue as of September 30, 2001 related to Corporate
Client Group services fees will be recognized in the following years:
(amounts in thousands)
Fiscal year ended: Initial LAS Annual Total
-------------- -------------- ------------- ----------------
2001 $ 8,671 $ 8,720 $ 20,989 $ 38,380
2002 31,438 29,731 - 61,169
2003 26,798 22,833 - 49,631
2004 22,072 12,281 - 34,353
2005 and thereafter 21,944 2,758 24,702
-------------- -------------- ------------- ----------------
$ 110,923 $ 76,323 $ 20,989 $ 208,235
============== ============== ============= ================
Nasdaq's deferred revenue for the nine months ended September 30, 2001 and
2000 are reflected in the following tables. The additions reflect Corporate
Client Group services fees charged during the quarter while the amortization
reflects the Corporate Client Group services fee revenues recognized during
the period based on the accounting methodology described in Note 2 above.
(amounts in thousands) Initial LAS Annual Total
--------------- --------------- --------------- ---------------
Balance at January 1, 2001 $ 127,693 $ 76,651 $ - $ 204,344
Additions 10,195 26,453 83,706 120,354
Amortization (26,965) (26,781) (62,717) (116,463)
--------------- --------------- --------------- ---------------
Balance at September 30, 2001 $ 110,923 $ 76,323 $ 20,989 $ 208,235
=============== =============== =============== ===============
(amounts in thousands) Initial LAS Annual Total
--------------- --------------- --------------- ---------------
Balance at January 1, 2000 $ 108,476 $ 60,570 $ - $ 169,046
Additions 46,836 41,298 81,328 169,462
Amortization (24,933) (24,682) (59,951) (109,566)
--------------- --------------- --------------- ---------------
Balance at September 30, 2000 $ 130,379 $ 77,186 $ 21,377 $ 228,942
=============== =============== =============== ===============
4. DISASTER RELATED EXPENSES
As a result of the terrorist attacks on September 11, 2001, Nasdaq incurred
additional costs of $0.84 million ($0.50 million after tax) in the third
quarter. These costs consist primarily of, but will not be limited to, costs
related to the efforts to restore services to market participants; the
testing of trading systems; and the required reconfiguring of technology,
telecommunications and alternative office facilities due to the temporary
relocation of employees. Nasdaq is in the process of determining the total
loss of revenues and additional expenses incurred as well as any applicable
insurance recoveries. Additional expenses and recoveries will be recorded
in future periods.
5. LONG-TERM DEBT
During the nine months ended September 30, 2001, Nasdaq's consolidated
long-term debt increased by $261.5 million to $286.5 million. The increase
reflects the issuance of $240.0 million of 4% convertible subordinated
debentures due 2006 (the "Subordinated Debentures") to Hellman & Friedman
Capital Partners IV, L.P. and certain of its affiliated limited
partnerships (collectively, "Hellman & Friedman") on May 3, 2001. The
annual 4% coupon will be payable in arrears in cash and the Subordinated
Debentures will be convertible at any time into an aggregate of 12 million
shares of Common Stock at $20.00 per share, subject to adjustment, in
general, for any stock split, dividend, combination, recapitalization or
other similar event.
On an as converted basis, Hellman & Friedman owns an approximate 9.8%
equity interest in Nasdaq. Nasdaq has agreed to use its best efforts to
seek stockholder approval of a charter amendment that would provide for
voting debt in order to permit the holders of Subordinated Debentures to
vote on an as-converted basis on all matters on which common stockholders
have the right to vote, subject to the current 5% voting limitation in
Nasdaq's Restated Certificate of Incorporation. Nasdaq has granted Hellman
& Friedman certain registration rights with respect to the shares of Common
Stock underlying the Subordinated Debentures. In addition, Hellman &
Friedman is permitted to designate one person reasonably acceptable to
Nasdaq for nomination as a director of Nasdaq for so long as Hellman &
Friedman owns Subordinated Debentures and/or shares of Common Stock issued
upon conversion representing at least 50% of the shares of Common Stock
issuable upon conversion of the Subordinated Debentures initially
purchased. Effective May 3, 2001, F. Warren Hellman was elected to Nasdaq's
Board of Directors pursuant to the foregoing provision.
The increase also reflects $21.5 million (Euro 23.4 million) of senior debt
of Nasdaq Europe S.A./N.V. Of this total, $9.7 million (Euro 10.6 million)
matures in 2003 with the remaining $11.8 million (Euro 12.8 million)
maturing in 2004. The debt is Euro-denominated with $3.7 million (Euro 4.0
million) containing contractual fixed interest rates and $17.8 million
(Euro 19.4 million) containing interest rates based on a fixed premium
above London Interbank Offered Rates.
6. COMMITMENTS AND CONTINGENCIES
In October 2000, Nasdaq entered into a contract with OptiMark, Inc. under
which OptiMark was engaged to provide software development services in
connection with the development of the SuperMontage system. In May 2001,
Nasdaq entered into a revised contract with OptiMark, under which Nasdaq
will make guaranteed payments of $0.7 million per month through December
31, 2001 related to the design of the system.
Nasdaq may be subject to claims arising out of the conduct of its business.
Currently, there are certain legal proceedings pending against Nasdaq.
Nasdaq believes, based upon the opinion of counsel, that any liabilities or
settlements arising from these proceedings will not have a material effect
on the financial position or results of operations of Nasdaq. Management is
not aware of any unasserted claims or assessments that would have a
material adverse effect on the financial position and the results of
operations of Nasdaq.
7. COMPREHENSIVE INCOME
Comprehensive income is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Comprehensive income combines net income and certain items that
directly affect stockholders' equity, such as foreign currency translation
adjustments. The components of comprehensive income for the three and nine
months ended September 30, 2001 and 2000 were as follows:
(amounts in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- ----------------
Net income $ 7,945 $ 22,029 $ 53,720 $ 12,588
Unrealized gains on available-for-sale
investments 927 1,734 1,615 1,379
Foreign currency translation adjustment 2,392 - (529) -
--------------- ---------------- --------------- ----------------
Total comprehensive income $ 11,264 $ 23,763 $ 54,806 $ 13,967
=============== ================ =============== ================
8. CAPITAL STOCK AND EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share.
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ----------------------------------
(amounts in thousands, except share and per SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
share data) 2001 2000 2001 2000
---------------- ----------------- ---------------- -----------------
NUMERATOR:
Net income before cumulative effect of
change in accounting principle $ 7,945 $ 22,029 $ 53,720 $ 113,678
Numerator for basic earnings per share
before cumulative effect of change in
accounting principle 7,945 22,029 53,720 113,678
---------------- ----------------- ---------------- -----------------
Cumulative effect of change in accounting
principle - - - (101,090)
Numerator for basic earnings per share for
change in accounting principle - - - (101,090)
---------------- ----------------- ---------------- -----------------
Net income $ 7,945 $ 22,029 $ 53,720 $ 12,588
Numerator for basic earnings per share $ 7,945 $ 22,029 $ 53,720 $ 12,588
---------------- ----------------- ---------------- -----------------
Interest impact of convertible debt, net of
tax - - 2,162 -
Numerator for diluted earnings per share $ 7,945 $ 22,029 $ 55,882 $ 12,588
---------------- ----------------- ---------------- -----------------
DENOMINATOR:
Weighted average shares 110,433,331 123,663,746 119,314,785 108,204,583
Denominator for basic earnings per share 110,433,331 123,663,746 119,314,785 108,204,583
---------------- ----------------- ---------------- -----------------
Effect of dilutive securities:
Employee stock options - - - -
Employee restricted stock 140,087 - 90,336 -
Convertible debt assumed converted into
Common Stock - - 6,593,407 -
Denominator for diluted earnings per share 110,573,418 123,663,746 125,998,528 108,204,583
---------------- ----------------- ---------------- -----------------
Basic earnings per share before cumulative
effect of change in accounting principle $ 0.07 $ 0.18 $ 0.45 $ 1.05
================ ================= ================ =================
Diluted earnings per share before cumulative
effect of change in accounting principle $ 0.07 $ 0.18 $ 0.44 $ 1.05
================ ================= ================ =================
Basic earnings (loss) per share for
change in accounting principle $ - $ - $ - $ (0.93)
================ ================= ================ =================
Diluted earnings (loss) per share for change
in accounting principle $ - $ - $ - $ (0.93)
================ ================= ================ =================
Basic earnings per share $ 0.07 $ 0.18 $ 0.45 $ 0.12
================ ================= ================ =================
Diluted earnings per share $ 0.07 $ 0.18 $ 0.44 $ 0.12
================ ================= ================ =================
For the nine month period ended September 30, 2001, the Subordinated
Debentures were convertible into 12.0 million shares of Common Stock at a
conversion price of $20.00 per share, subject to adjustment, in general,
for any stock split, dividend, combination, recapitalization or other
similar event. For purposes of calculating diluted earnings per share for
the nine month period ended September 30, 2001, the Subordinated Debentures
were assumed to be converted into shares of Common Stock, on a weighted
average basis, since basic earnings per share exceeded interest (net of
tax) per share obtainable upon conversion.
The option awards made under The Nasdaq Stock Market, Inc. Equity Incentive
Plan during the first nine months of 2001 were not included in computing
diluted earnings per share as their effect was not dilutive.
THE NASDAQ STOCK MARKET, INC.
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 condensed
consolidated financial statements and notes thereto included elsewhere in
this Form 10-Q.
CHANGE IN ACCOUNTING PRINCIPLE
On August 17, 2001, Nasdaq concluded discussions with the SEC with respect
to the implementation in its financial statements of SAB 101. SAB 101
became effective for SEC public reporting companies in the fourth quarter
of 2000. Nasdaq became an SEC public reporting company on June 29, 2001,
the effective date of its Registration Statement on Form 10. As a result of
the discussions with the SEC, Nasdaq changed its method of accounting for
revenue recognition for certain components of its Corporate Client Group
services revenues.
In accordance and consistent with generally accepted accounting principles,
as SAB 101 was adopted effective the fourth quarter of 2000, the change in
accounting principle has been applied as of January 1, 2000. In accordance
with applicable accounting guidance prior to SAB 101, Nasdaq recognized
revenue for issuer initial listing fees and LAS fees in the month the
listing occurred or in the period additional shares were issued,
respectively. Nasdaq now recognizes revenue related to initial listing fees
and LAS fees on a straight line basis over estimated service periods, which
are six and four years, respectively.
As a result of this change in accounting principle, net income for the nine
months ended September 30, 2000, excluding the cumulative effect of the
change in accounting principle on prior year's results, decreased $21.2
million ($0.20 per share) to $113.7 million ($1.05 per share). In addition,
Nasdaq recognized a one-time cumulative effect of a change in accounting
principle in the first quarter of 2000. This cumulative effect of a change
in accounting principle decreased net income in the first nine months of
2000 by $101.1 million ($0.93 per share), resulting in $12.6 million in net
income ($0.12 per share). The adjustment to first quarter 2000 net income
for the cumulative change to prior years' results consists of the
following:
(amounts in millions)
Deferred initial listing fees $108.5
Deferred LAS fees 60.6
--------------
Total deferred fees 169.1
Deferred income tax benefit (68.0)
--------------
Cumulative effect of change in accounting principle $101.1
==============
For the three months ended September 30, 2001 and 2000, Nasdaq recognized
$10.9 million and $13.5 million in revenue, respectively, that was included
in the cumulative effect adjustment as of January 1, 2000. This revenue
contributed $6.5 million (after income taxes of $4.4 million) and $8.1
million (after income taxes of $5.4 million) to net income for the three
months ended September 30, 2001 and 2000, respectively. For the nine months
ended September 30, 2001 and 2000, Nasdaq recognized $34.9 million and
$42.8 million in revenue, respectively, that was included in the cumulative
effect adjustment as of January 1, 2000. This revenue contributed $20.9
million (after income taxes of $14.0 million) and $25.6 million (after
income taxes of $17.2 million) to net income for the nine months ended
September 30, 2001 and 2000, respectively.
The following table compares net income under the former accounting method
to net income under the new accounting method:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
(amounts in millions)
---------------------- -------------------------
Net income, before implementation of SAB 101 $ 42.2 $ 134.9
Increase due to recognition of prior period fees,
included in the cumulative effect adjustment
as of 1/1/00, net of taxes 20.9 25.6
Increase due to recognition of prior period fees,
subsequent to the cumulative effect adjustment,
net of taxes 9.1 -
Decrease due to deferral of current period fees,
net of taxes (18.5) (46.8)
Cumulative effect of change in accounting principle,
net of taxes - (101.1)
---------------------- -------------------------
Net income $ 53.7 $ 12.6
====================== =========================
BUSINESS ENVIRONMENT
Daily share volume in the third quarter of 2001 slowed to 1.63 billion
shares per trading day (excluding the four-day trading halt due to the
September 11th terrorist attacks) compared to 1.95 billion shares in the
second quarter of 2001 and 1.59 billion shares in the third quarter of 2000.
Total trading activity for the third quarter decreased as a result of the
four-day market closure. While some of the decline in average volume in the
third quarter is due to historical seasonal patterns, the third quarter was
adversely impacted by a further softening economy and particularly weak
volumes for August. Although an increase in volume is expected in the
fourth quarter of 2001, the uncertainty of the recessionary environment and
current military actions, as further discussed below, may produce unstable
market conditions for the remainder of the year. However, Federal Reserve
and federal government attempts to respond to the slowdown with a
combination of monetary and fiscal stimulus may heighten trading interest
and somewhat mitigate the negative impact on fourth quarter share volume.
All of Nasdaq's primary revenue streams were negatively affected in the
third quarter by the continued market slow-down. Lower trading volumes
resulted in reduced transaction services revenues. Market information
services revenue experienced a similar decline as the demand for both
professional and non-professional information softened. While reported
revenues associated with Corporate Client Group activities were favorable
due to the change in accounting methodology for revenue recognition as
discussed in "Change in Accounting Principle" above, actual Corporate
Client Group revenues were down significantly with no initial public
offerings ("IPOs") in the U.S. equity markets in September for the first
time in 25 years. Total new issues of companies listed on The Nasdaq Stock
Market, including IPOs, were 32 in the third quarter of 2001 compared to 38
in the second quarter of 2001 and 163 in the third quarter of 2000. Further
decline or future recovery of these revenue streams will depend largely
upon general market and economic conditions.
In addition to the general economic downturn, Nasdaq's market information
services and transaction services revenues are facing competitive threat
from other stock exchanges that trade Nasdaq-listed stocks, including the
established regional exchanges. Current SEC regulations permit each of
these regional exchanges to trade up to 1,000 securities listed on The
Nasdaq National Market(R) tier of The Nasdaq Stock Market pursuant to
Nasdaq's Unlisted Trading Privileges Plan (the "UTP Plan"). The UTP Plan
entitles these exchanges to a share of Nasdaq's data revenue, roughly
proportional to such exchange's share of trading in Nasdaq-listed
securities as measured by share volume and number of trades. Currently, the
Boston Stock Exchange, the Chicago Stock Exchange, and the Cincinnati Stock
Exchange trade Nasdaq-listed securities pursuant to the UTP Plan. The
American Stock Exchange, LLC and the Philadelphia Stock Exchange have
indicated their intent to commence trading in Nasdaq-listed securities
pursuant to the UTP Plan. In addition, The Island ECN, Inc. has applied for
exchange registration and expressed interest in becoming an UTP Plan
participant and in October 2001, the SEC approved a proposal by the Pacific
Stock Exchange to establish the Archipelago Exchange as an equities trading
facility of the Pacific Stock Exchange. Despite the potential threat,
Nasdaq's market share of trade and share volume under the UTP Plan remains
approximately 97.0% at present, as participants tend to seek the market
with the greatest liquidity. Nonetheless, there is potential for
significant erosion in The Nasdaq Stock Market's market share of trading
activity and the related market information services and transaction
services revenues if new exchanges arise or existing exchanges increase
their market share.
The unprecedented terrorist attacks on the United States on September 11,
2001 have had a significant impact on general economic conditions in the
United States and the operations of Nasdaq and the other U.S. securities
marketplaces. In connection with the attacks, The Nasdaq Stock Market was
closed for four consecutive trading days in an effort to coordinate with
the other U.S. marketplaces so that all would be prepared to open and
operate effectively. The closure of the market and disruption in business
operations of market participants as a result of the terrorist attacks has
adversely affected Nasdaq's operating results for the third quarter of
2001.
As a result of the attacks, Nasdaq's executive offices in New York City
have been temporarily closed and its New York-based employees have been
relocated. In addition, it has been necessary for Nasdaq to make certain
non-budgeted expenditures. September 11th disaster related expenses
include, but will not be limited to, costs related to the efforts to
restore services to market participants; the testing of trading systems;
and the required reconfiguring of technology, telecommunications and
alternative office facilities due to the temporary relocation of employees.
September 11th disaster related expenses of $0.84 million were recorded in
the third quarter of 2001. Nasdaq is in the process of determining the
total loss of revenues and additional expenses incurred as well as any
applicable insurance recoveries. Additional expenses and recoveries will be
recorded in future periods.
These attacks have caused uncertainty in the global financial markets, and
have contributed to downward pressure on stock prices of U.S. publicly
traded companies. This uncertainty may cause customers of Nasdaq's products
and services to reassess their operations, capital raising needs and
employment needs. Any curtailment in the businesses of its customers or a
reduction in the number of users of its services would negatively impact
Nasdaq's operations. The occurrences of similar events and the related
responsive military actions may further exacerbate negative economic,
market or business conditions and uncertainties. In response to the general
economic and market uncertainty after the terrorist attacks, effective as
of September 26, 2001, Nasdaq formally suspended until January 2, 2002 two
requirements for continued listing on both The Nasdaq National Market and
The Nasdaq SmallCap Market(R). The two requirements are (1) minimum bid price,
and (2) market value of public float. The implementation of the moratorium
is not expected to have a material positive effect on Nasdaq's operating
results. However, if weak economic conditions in the United States continue
or worsen or if a wider global recession materializes, Nasdaq's business,
financial condition and results of operations may be materially adversely
affected.
On October 26, 2001, Nasdaq announced a proposed increase in services and
listing fees for Nasdaq-listed companies beginning January 1, 2002, subject
to SEC approval. This would be the first increase in annual listing fees in
10 years for American Depositary Receipts and The Nasdaq SmallCap Market,
and the first such increase in four years for The Nasdaq National Market.
The revenue expected to be generated from the proposed fee increase will be
used primarily to fund enhancements to the services offered Nasdaq-listed
companies, including the establishment of a corporate client information
center.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Nasdaq reported net income of $7.9 million for the quarter ended September
30, 2001, representing a decrease of $14.1 million or 64.1% from net income
of $22.0 million for the quarter ended September 30, 2000.
Revenues
Nasdaq's revenues decreased from $202.7 million for the quarter ended
September 30, 2000 to $197.7 million for the quarter ended September 30,
2001, a decrease of $5.0 million or 2.5%.
Transaction Services
For the quarter ended September 30, 2001, transaction services revenues of
$84.6 million decreased $6.7 million from $91.3 million for the quarter
ended September 30, 2000, a decrease of 7.3%. Transaction services consist
of SelectNet(R), Small Order Execution System ("SOES(sm)"), the Nasdaq
National Market Execution System (also known as "SuperSoes(sm)"), Automated
Confirmation Transaction Service ("ACT(sm)"), the Nasdaq Workstation II,
Computer-to-Computer Interface ("CTCI"), and other related execution
services.
SelectNet, the high-volume automated execution service, provided revenues
of $12.2 million, a decrease of $16.6 million or 57.6% for the quarter
ended September 30, 2001 from $28.8 million for the quarter ended September
30, 2000, due to a decrease in trade volume related to the introduction of
SuperSoes and the closing of The Nasdaq Stock Market for four consecutive
days in September following the terrorist attacks on the United States on
September 11, 2001. SelectNet fees are charged on a per transaction basis.
SOES, a system providing for the automatic execution of small orders,
provided revenues of $3.0 million, a decrease of $4.1 million or 57.7% for
the quarter ended September 30, 2001 from $7.1 million for the quarter
ended September 30, 2000, due to the migration of SOES trading activity
into the new SuperSoes system for securities listed on The Nasdaq National
Market. SOES will continue to operate as an execution system solely for
securities listed on The Nasdaq SmallCap Market. The closing of The Nasdaq
Stock Market for four consecutive days in September following the terrorist
attacks also had a negative impact on revenues. SOES fees are charged on a
per transaction basis. SOES revenues are not expected to be material in
future periods.
On July 30, 2001, Nasdaq fully implemented SuperSoes. SuperSoes is designed
to provide capability for automatic execution of buy and sell orders for
market makers, electronic communication networks ("ECNs"), and
institutional and retail customers, as well as streamline Nasdaq's
transaction systems. SuperSoes combines features of the existing SelectNet
and SOES execution systems and is only available for securities listed on
The Nasdaq National Market tier of The Nasdaq Stock Market. Securities
listed on The Nasdaq SmallCap Market will continue to be traded through
SOES and SelectNet. SuperSoes has resulted in the migration of significant
transaction volume, and its corresponding revenue, from SelectNet and SOES
to SuperSoes. The changes in the fee schedule for SelectNet and the
introduction of the SuperSoes fee schedule at the time of implementation of
SuperSoes has had a negative effect on revenues in the third quarter, but a
new fee structure implemented October 1, 2001 for SuperSoes and SelectNet
is expected to mitigate this negative effect. SuperSoes revenues were $8.2
million for the quarter ended September 30, 2001. SuperSoes fees are
charged on a per transaction basis.
ACT, an automated service that provides the post-execution steps of
reporting price, volume comparison and clearing of pre-negotiated trades as
well as risk management services, provided revenues of $18.6 million, a
decrease of $2.0 million or 9.7% for the quarter ended September 30, 2001
from $20.6 million for the quarter ended September 30, 2000, due to the
closing of The Nasdaq Stock Market for four consecutive days in September
following the terrorist attacks, as well as various fee changes. These fee
changes include a cap on risk management fees, reductions on certain fees
for existing services, and a rule change that eliminated charges for
certain transactions. ACT fees are generally charged on a per transaction
basis.
The Nasdaq Workstation II is the trader's direct connection to Nasdaq's
quote and trade execution facilities, providing quotation services,
automated trade executions, real-time reporting, trade negotiations and
clearing. This trading device, along with application programming
interfaces, provided revenues of $36.9 million, an increase of $6.2 million
or 20.2% for the quarter ended September 30, 2001 from $30.7 million for
the quarter ended September 30, 2000. This increase is due to a larger
customer base as well as higher fees associated with expanded network
capacity. Nasdaq Workstation II fees are charged monthly based upon the
number of authorized logon identifications.
Nasdaq provides CTCI for users to report trades, enter orders into
SuperSoes and receive execution messages. The CTCI links market
participants' automated systems to Nasdaq. This interface is presently
being upgraded to a new protocol and increased line speeds. CTCI revenues
for the third quarter of 2001 were $4.0 million, up $3.2 million from $0.8
million for the third quarter of 2000. New fees associated with the
upgraded interface are driving the increase in revenues. Users are charged
a monthly fee based upon the size of the line.
Market Information Services
For the quarter ended September 30, 2001, market information revenues of
$58.3 million decreased $7.9 million from $66.2 million for the quarter
ended September 30, 2000, a decrease of 11.9%. Market information services
consist of Nasdaq's Level 1 services, Nasdaq Quotation Dissemination
Service, Nasdaq InterMarket tape revenues and other related services.
Nasdaq's Level 1 service provides subscribers with the current inside quote
and most recent price at which the last sale or purchase was transacted for
a specific security. Fees for professional users are based on monthly
subscriptions to terminals or access lines. Non-professional users have the
option to access this information through either a flat monthly rate or a
per query usage charge. Level 1 revenues decreased by approximately $5.5
million or 14.2% to $33.1 million for the quarter ended September 30, 2001
from $38.6 million for the quarter ended September 30, 2000. This reduction
in revenues is due primarily to a decrease in demand for non-professional
per query service and the closing of The Nasdaq Stock Market for four
consecutive days in September following the terrorist attacks.
Nasdaq Quotation Dissemination Service provides subscribers with the quotes
of each individual market maker and ECN, in addition to the inside quotes
and last transaction prices. Nasdaq Quotation Dissemination Service
revenues decreased by approximately $4.2 million or 20.7% to $16.1 million
for the quarter ended September 30, 2001 from $20.3 million for the quarter
ended September 30, 2000. This reduction reflects the introduction of the
new reduced non-professional service fee, and the closing of The Nasdaq
Stock Market for four consecutive days in September following the terrorist
attacks. Although the number of Nasdaq Quotation Dissemination Service
subscribers increased in total, those eligible for the new reduced fee led
to a decrease in total revenues. Nasdaq Quotation Dissemination Services
are derived from monthly subscriptions.
Nasdaq InterMarket tape revenues are derived from data revenue generated by
the Consolidated Quotation Plan and Consolidated Tape Association Plan
(collectively, the "CQ/CTA Plans"). The information collected under the
CQ/CTA Plans is sold to data vendors, who in turn sell it to the public.
Nasdaq's InterMarket revenue is directly related to the percentage of
trades in exchange listed securities that are executed in a Nasdaq facility
and reported through the CQ/CTA Plans. Nasdaq InterMarket tape revenues
increased by approximately $1.9 million or 40.4% to $6.6 million for the
quarter ended September 30, 2001, from $4.7 million for the quarter ended
September 30, 2000.
Corporate Client Group Services
Corporate Client Group services revenues increased to $39.4 million for the
quarter ended September 30, 2001 from $38.5 million for the quarter ended
September 30, 2000, an increase of $0.9 million or 2.3%.
Corporate Client Group services revenues are derived from fees for initial
listings, LAS, and annual renewal fees for companies listed on The Nasdaq
Stock Market. Fees are generally calculated based upon total shares
outstanding for the issuing company. These fees are initially deferred and
amortized over the estimated periods for which the services are provided.
Revenues from initial listings and LAS are amortized over six and four
years, respectively, and annual fees are amortized on a pro-rata basis over
the calendar year.
Initial listing revenues increased $0.9 million or 10.3% from $8.7 million
in the quarter ended September 30, 2000 to $9.6 million in the quarter
ended September 30, 2001. LAS revenue increased $0.2 million or 2.3% from
$8.6 million in the quarter ended September 30, 2000 to $8.8 million in the
quarter ended September 30, 2001.
Actual initial listing and LAS fees charged during the three months ended
September 30, 2001 decreased due to significantly reduced IPO activity and
capital raising activity by current issuers. Initial listings on The Nasdaq
Stock Market declined from 163 companies in the third quarter of 2000 to 32
companies in the third quarter of 2001. Initial listing fees charged in the
quarter decreased $13.3 million or 83.1% from $16.0 million in the quarter
ended September 30, 2000 to $2.7 million in the quarter ended September 30,
2001. LAS fees charged in the quarter decreased $3.7 million or 29.4% from
$12.6 million in the quarter ended September 30, 2000 to $8.9 million in
the quarter ended September 30, 2001.
Annual renewal revenues decreased by $0.2 million or 1.0% from $21.0
million for the quarter ended September 30, 2000 to $20.8 million for the
quarter ended September 30, 2001.
Other Revenues
Other revenues for the quarter ended September 30, 2001 totaled $15.5
million, up from $6.7 million in the third quarter of 2000, an increase of
$8.8 million or 131.3%. This growth was primarily due to increased
trademark and licensing revenues related to the Nasdaq-100 Trust and
related products. Nasdaq earns revenues based on the licensing of the
Nasdaq brand name as well as the asset size of the Nasdaq-100 Trust, a unit
investment trust that holds shares of the top 100 U.S. and international
non-financial stocks listed on The Nasdaq Stock Market that comprise the
Nasdaq-100 Index.
DIRECT EXPENSES
Direct expenses increased $42.1 million or 33.8% to $166.5 million for the
third quarter of 2001 from $124.4 million for the third quarter of 2000.
Compensation and benefits expense increased $15.5 million or 52.0% to $45.3
million for the quarter ended September 30, 2001 from $29.8 million for the
quarter ended September 30, 2000. This increase is due to a number of
factors, including the transfer of positions from the NASD associated with
the restructuring and separation of Nasdaq from the NASD, and new positions
required to support strategic initiatives.
Marketing and advertising expense decreased to $5.9 million for the third
quarter of 2001 from $9.2 million for the third quarter of 2000, a decrease
of $3.3 million or 35.9%, due to the postponement of the fall advertising
campaign.
Depreciation and amortization expense increased $5.8 million or 33.9% to
$22.9 million for the quarter ended September 30, 2001 from $17.1 million
for the quarter ended September 30, 2000 due to a higher overall asset base
to support current initiatives, such as SuperMontage and Primex. Primex is
a new electronic trading platform scheduled to be launched in early 2002.
Professional and contract services expense increased to $22.9 million for
the third quarter of 2001 from $15.7 million for the third quarter of 2000,
an increase of $7.2 million or 45.9%, primarily due to increased support of
SuperMontage and the development of Primex, future technology design
planning, and strategic advisory services. SuperMontage is an improved user
interface designed to refine how market participants can access, process,
display, and integrate orders and quotes in The Nasdaq Stock Market.
Computer operations and data communications expense increased to $43.9
million for the third quarter of 2001 from $36.7 million for the third
quarter of 2000, an increase of $7.2 million or 19.6%. The increase was
primarily due to the data communications component of the costs which
increased due to increased charges for upgraded bandwidth and processing
speed, commensurate with the increase in Nasdaq Workstation II revenues as
discussed above.
Occupancy expense increased $2.9 million or 82.9% to $6.4 million for the
quarter ended September 30, 2001 from $3.5 million for the quarter ended
September 30, 2000. This increase was primarily due to new leased space at
Nasdaq's corporate offices located at One Liberty Plaza, New York, New
York; new office space in Trumbull, Connecticut as well as amortization of
leasehold improvements to the data center in Rockville, Maryland. These
increased costs were slightly offset by an abatement due to closure of One
Liberty Plaza on September 11th.
The remaining direct expenses increased $6.6 million or 52.4% from $12.6
million for the quarter ended September 30, 2000 to $19.2 million for the
quarter ended September 30, 2001. This increase is due to increased travel
and supply expenses for the expanded Nasdaq workforce, disaster related
expenses related to the terrorist attacks, and losses on foreign equity
investments.
SUPPORT COSTS
Support costs from related parties decreased by $13.0 million to $24.4
million for the quarter ended September 30, 2001 from $37.4 million for the
quarter ended September 30, 2000. Surveillance and other regulatory charges
from NASD Regulation, Inc. ("NASDR") decreased by $0.8 million to $20.8
million for the quarter ended September 30, 2001 from $21.6 million for the
quarter ended September 30, 2000. Support costs from the NASD decreased
$7.0 million to $9.1 million for the quarter ended September 30, 2001 from
$16.1 million for the quarter ended September 30, 2000. In addition,
contributing to the decrease was an increase in the amount of Nasdaq costs
charged to the American Stock Exchange, LLC of $5.2 million to $5.5 million
for the three months ended September 30, 2001 from $0.3 million for the
three months ended September 30, 2000. Amounts charged to related parties
are netted against charges from related parties in the "Support costs from
related parties, net" line item on the Condensed Consolidated Statements of
Income.
INCOME TAXES
Nasdaq's income tax provision was $5.7 million for the third quarter of
2001 compared to $23.6 million for the third quarter of 2000. The effective
tax rate was 41.9% for the third quarter of 2001 compared to 51.8% for the
third quarter of 2000. The decrease in Nasdaq's effective tax rate was
primarily due to recognition of permanent items for tax advantaged items
such as tax-exempt interest and dividends received deductions.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Nasdaq reported net income of $53.7 million for the nine months ended
September 30, 2001, compared to net income of $12.6 million for the nine
months ended September 30, 2000. Compared to pro forma net income for the
nine months ended September 30, 2000 of $113.7 million, excluding the
cumulative effect of the change in accounting principle, net income
decreased by $60.0 million, or 52.7%.
REVENUES
Nasdaq's revenues increased from $621.2 million for the nine months ended
September 30, 2000 to $641.8 million for the nine months ended September
30, 2001, representing a $20.6 million or a 3.3% increase.
Transaction Services
For the nine months ended September 30, 2001, transaction services revenues
of $305.8 million increased $14.6 million from $291.2 million for the nine
months ended September 30, 2000, an increase of 5.0%.
SelectNet provided revenues of $75.9 million, a decrease of $9.0 million or
10.6%, for the nine months ended September 30, 2001 from $84.9 million for
the nine months ended September 30, 2000, due to a decrease in trade volume
related to the introduction of SuperSoes and the closing of The Nasdaq
Stock Market for four consecutive days in September following the terrorist
attacks.
SOES provided revenues of $22.1 million, a decrease of $0.3 million or 1.3%
for the nine months ended September 30, 2001 from $22.4 million for the
nine months ended September 30, 2000, due to the migration of SOES trading
activity into the new SuperSoes system for securities listed on The Nasdaq
National Market. SOES will continue to operate as an execution system
solely for securities listed on The Nasdaq SmallCap Market. The closing of
The Nasdaq Stock Market for four consecutive days in September following
the terrorist attacks also had a negative impact on revenues. SOES revenues
are not expected to be material in future periods.
SuperSoes, which was fully implemented on July 30, 2001, provided revenues
of $8.2 million for the nine months ended September 30, 2001.
ACT provided revenues of $65.6 million, a decrease of $9.7 million or 12.9%
for the nine months ended September 30, 2001 from $75.3 million for the
nine months ended September 30, 2000, due to the closing of The Nasdaq
Stock Market for four consecutive days in September following the terrorist
attacks, and various fee changes enacted subsequent to March 31, 2000.
These changes include a cap on risk management fees, fee reductions on
certain existing services, and a rule change that eliminated charges for
certain transactions.
Nasdaq Workstation II, along with application programming interfaces,
provided $111.6 million, an increase of $23.5 million or 26.7% for the nine
months ended September 30, 2001 from $88.1 million for the nine months
ended September 30, 2000. This increase is due to a larger customer base as
well as higher fees associated with expanded network capacity.
CTCI revenues for the nine months ended September 30, 2001 are $11.4
million, up $9.3 million from $2.1 million for the same period prior year.
New fees associated with the upgraded interface are driving the increase in
revenues.
Market Information Services
For the nine months ended September 30, 2001, market information services
revenues of $176.9 million decreased $23.9 million or 11.9% from $200.8
million for the nine months ended September 30, 2000.
Nasdaq's Level 1 service revenues decreased by approximately $16.7 million
or 13.7% to $105.1 million for the nine months ended September 30, 2001
from $121.8 million for the nine months ended September 30, 2000. The
reduction in revenues is due primarily to a decrease in demand for
non-professional per query service and the closing of The Nasdaq Stock
Market for four consecutive days in September following the terrorist
attacks.
Nasdaq Quotation Dissemination Service revenues decreased by approximately
$13.7 million or 23.0% to $45.8 million for the nine months ended September
30, 2001 from $59.5 million for the nine months ended September 30, 2000.
This reduction reflects the introduction of the new reduced
non-professional service fee and the closing of The Nasdaq Stock Market for
four consecutive days in September following the terrorist attacks.
Although the number of Nasdaq Quotation Dissemination Service subscribers
increased in total, those eligible for the new reduced non-professional fee
led to a decrease in total revenues.
Nasdaq InterMarket tape revenues increased by approximately $6.2 million or
39.0% to $22.1 million for the nine months ended September 30, 2001, from
$15.9 million for the nine months ended September 30, 2000.
Corporate Client Group Services
Corporate Client Group services revenues increased to $116.5 million for
the nine months ended September 30, 2001 from $109.6 million for the nine
months ended September 30, 2000, an increase $6.9 million or 6.3%.
Initial listing revenues increased $2.7 million or 10.8% from $24.9 million
in the nine months ended September 30, 2000 to $27.6 million in the nine
months ended September 30, 2001. LAS revenues increased $1.9 million or
7.7% from $24.7 million in the nine months ended September 30, 2000 to
$26.6 million in the nine months ended September 30, 2001.
Actual initial listing and LAS fees charged during the nine months ended
September 30, 2001 decreased due to significantly reduced IPO activity and
capital raising activity by current issuers. Initial listings on The Nasdaq
Stock Market declined from 505 companies in the nine months ended September
30, 2000 to 101 companies in the nine months ended September 30, 2001.
Initial listing fees charged decreased $36.6 million or 78.2% from $46.8
million in the nine months ended September 30, 2000 to $10.2 million in the
nine months ended September 30, 2001. LAS fees charged decreased $14.8
million or 35.8% from $41.3 million in the nine months ended September 30,
2000 to $26.5 million in the nine months ended September 30, 2001.
Annual renewal revenues increased by $2.3 million or 3.9% from $59.3
million for the nine months ended September 30, 2000 to $61.6 million for
the nine months ended September 30, 2001.
Other Revenues
Other revenues for the nine months ended September 30, 2001 totaled $42.6
million, up from $19.6 million in the nine months of 2000, an increase of
$23.0 million or 117.3%. This growth was primarily due to increased
trademark and licensing revenues related to the Nasdaq-100 Trust and
related products.
DIRECT EXPENSES
Direct expenses increased 41.3% to $484.1 million for the nine months ended
September 30, 2001 from $342.6 million for the nine months ended September
30, 2000.
Compensation and benefits expense increased to $131.1 million for the nine
months ended September 30, 2001 from $91.9 million for the nine months
ended September 30, 2000, an increase of $39.2 million or 42.7%. This
increase is due to a number of factors, including the transfer of positions
from the NASD associated with the restructuring, new positions required to
support strategic initiatives, and severance and outplacement expenses
associated with the staff reduction made during the period. In response to
softening market conditions, Nasdaq implemented a staff reduction plan in
June 2001 that eliminated 137 positions, or approximately 10% of the
workforce.
Marketing and advertising expense decreased to $17.6 million for the nine
months ended September 30, 2001 from $32.0 million for the nine months
ended September 30, 2000, a decrease of $14.4 million or 45.0%, due to a
reduced spring campaign and the postponement of the fall advertising
campaign.
Depreciation and amortization expense increased $20.0 million or 43.9% to
$65.6 million for the nine months ended September 30, 2001 from $45.6
million for the nine months ended September 30, 2000 due to a higher
overall asset base to support current initiatives, such as SuperMontage and
Primex.
Professional and contract services expense increased to $54.4 million for
the nine months ended September 30, 2001 from $36.9 million for the nine
months ended September 30, 2000, an increase of $17.5 million or 47.4%, in
support of SuperMontage and Primex development, and future technology
design planning.
Computer operations and data communications expense increased $33.4 million
or 33.9% to $131.9 million for the nine months ended September 30, 2001
from $98.5 million for the nine months ended September 30, 2000. The
computer operations component of the costs increased $6.5 million from the
nine months ended September 30, 2000 to the nine months ended September 30,
2001 due to increases in maintenance to support a higher asset base. Data
communications costs increased $26.9 million due to increased charges for
upgraded bandwidth and processing speed that is commensurate with the
increase in Nasdaq Workstation II revenues as discussed above.
Bad debt expense increased to $14.5 million for the nine months ended
September 30, 2001 from $3.4 million for the nine months ended September
30, 2000 reflecting a $7.5 million reserve relating to the bankruptcy
filing by Bridge Information Systems, Inc. Prior to its bankruptcy filing,
Bridge Information Systems, Inc. was a vendor of Nasdaq's market
information. The remaining increase in bad debt expense was commensurate
with the growth of Nasdaq's accounts receivable.
Occupancy expense increased $8.4 million or 73.0% to $19.9 million for the
nine months ended September 30, 2001 from $11.5 million for the nine months
ended September 30, 2000. This increase was primarily due to Nasdaq's new
corporate offices, located at One Liberty Plaza, New York, New York, new
office space in Trumbull, Connecticut and the amortization of leasehold
improvements to the Rockville, Maryland data center. These increased costs
were slightly offset by an abatement due to closure of One Liberty Plaza on
September 11th.
The remaining direct expenses increased $26.4 million or 115.8% to $49.2
million for the nine months ended September 30, 2001 from $22.8 million for
the nine months ended September 30, 2000, due to increased travel and
supply expenses from the expanded Nasdaq workforce, a write-off related to
the impairment of certain assets taken during the second quarter of 2001,
disaster expenses related to the terrorist attacks and losses in foreign
equity investments.
SUPPORT COSTS
Support costs from related parties decreased by $14.1 million to $76.1
million for the nine months ended September 30, 2001 from $90.2 million for
the nine months ended September 30, 2000. Surveillance and other regulatory
charges from NASDR increased by $2.3 million to $61.7 million for the nine
months ended September 30, 2001 from $59.4 million for the nine months
ended September 30, 2000. Support costs from the NASD decreased $9.4
million to $25.3 million for the nine months ended September 30, 2001 from
$34.7 million for the nine months ended September 30, 2000. In addition,
contributing to the decrease was an increase in the amount of Nasdaq costs
charged to the American Stock Exchange LLC of $7.0 million to $10.9 million
for the nine months ended September 30, 2001 from $3.9 million for the nine
months ended September 30, 2000.
INCOME TAXES
Nasdaq's income tax provision was $44.3 million for the nine months ended
September 30, 2001 compared to $84.0 million for the nine months ended
September 30, 2000. The effective tax rate was 45.2% for the nine months
ended September 30, 2001 compared to 42.5% for the nine months ended
September 30, 2000. The increase in Nasdaq's effective tax rate was
primarily due to its foreign losses for which no tax benefit is taken,
offset by the recognition of permanent items for tax advantaged items such
as tax-exempt interest and dividends received deductions.
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 2001 COMPARED TO DECEMBER 31, 2000
Cash and cash equivalents and available-for-sale securities totaled $558.6
million at September 30, 2001, an increase of $64.3 million from $494.3
million at December 31, 2000. Working capital increased $102.1 million to
$534.9 million as of September 30, 2001, from $432.8 million as of December
31, 2000.
Cash and cash equivalents increased $66.8 million from December 31, 2000 to
$329.1 million as of September 30, 2001, primarily due to cash provided by
operating activities of $95.8 million and cash provided by financing
activities of $43.5 million, partially offset by cash used in investing
activities of $72.5 million.
For the nine months ended September 30, 2001, operating activities provided
net cash inflows of $95.8 million, primarily due to cash received from
customers of $629.0 million less cash paid to suppliers, employees, and
related parties of $533.8 million and income taxes paid of $26.5 million.
Net cash used in investing activities was $72.5 million for the nine months
ended September 30, 2001, due in part to capital expenditures related to
SuperMontage, Primex, global initiatives and general capacity increases.
The remaining cash used in investing activities is attributable to
purchases of investments with the proceeds of the second phase of Nasdaq's
private placement of Common Stock that closed in January 2001 and receipts
from the sales and maturities of investments.
Cash provided by financing activities was approximately $43.5 million for
the nine months ended September 30, 2001. On May 3, 2001, Nasdaq sold
Subordinated Debentures to Hellman & Friedman, yielding gross proceeds of
approximately $240.0 million. Nasdaq used the proceeds to repurchase
18,461,538 shares of Common Stock from the NASD for $13.00 per share for an
aggregate purchase price of approximately $240.0 million. During this
period, Nasdaq also received net proceeds from the second phase of its
private placement that equaled approximately $63.7 million and repaid
approximately $20.0 million to the venture partners who participated in
Nasdaq Europe Planning Company Limited. Nasdaq will use the remaining
proceeds from its financing activities to invest in new technology,
implement and form strategic alliances, implement competitive pricing of
its services and build its brand through marketing programs.
Nasdaq believes that the liquidity provided by existing cash and cash
equivalents, investments, and cash generated from operations will provide
sufficient capital to meet operating requirements. Nasdaq has generated
positive cash flows annually in each of the five years since 1996 and
believes that it will continue to do so in the future to meet both short
and long term operating requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Nasdaq is exposed to potential loss from financial market risks that may
occur as a result of changes in interest rates. Its exposure to these risks
has not materially changed since December 31, 2000.
For a further discussion, refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Quantitative and
Qualitative Disclosure of Market Risk" included in Nasdaq's Registration
Statement on Form 10, as amended.
THE NASDAQ STOCK MARKET, INC.
PART II - OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds
-----------------------------------------
(c) Nasdaq sold approximately 200,676 shares of Common Stock
pursuant to The Nasdaq Stock Market, Inc. 2000 Employee Stock
Purchase Plan to employees and officers of Nasdaq for an aggregate
offering price of approximately $2.1 million. The foregoing sales
of shares of Common Stock were made pursuant to Rule 701 under the
Securities Act of 1933, as amended, which exempts issuances of
securities under certain written compensatory employee benefit
plans.
THE NASDAQ STOCK MARKET, INC.
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibit is filed as part of this Quarterly Report.
11.01 Computation of Per Share Earnings (omitted in accordance
with section (b)(11) of Item 601 of Regulation S-K. The
calculation of per share earnings is set forth in Part I,
Item 1, in Note 8 to the Condensed Consolidated Financial
Statements (Capital Stock and Earnings Per Share)).
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the three months
ended September 30, 2001:
1. On July 27, 2001, Nasdaq filed a Form 8-K, dated July 26,
2001, reporting under Item 5 thereof that Frank G. Zarb,
effective on approval by the Board of Directors in
September 2001, was stepping down as Chairman of Nasdaq
and that Hardwick Simmons would succeed Mr. Zarb as
Chairman.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE NASDAQ STOCK MARKET, INC.
(Registrant)
Date: November 14, 2001 By: /s/ David P. Warren
----------------------------------
Name: David P. Warren
Title: Executive Vice President
and Chief Financial
Officer
Date: November 14, 2001 By: /s/ Edward S. Knight
----------------------------------
Name: Edward S. Knight
Title: Executive Vice President
and General Counsel
