As filed with the Securities and Exchange Commission on June 29, 2001
File No. 000-32651
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
To
Form 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
The Nasdaq Stock Market, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
Delaware 52-1165937
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Liberty Plaza 10006
New York, New York (Zip Code)
(Address of Principal
Executive Offices)
Registrant's telephone number,
including area code:
212-858-4750
Copies to:
Edward S. Knight, Esq. Matthew J. Mallow, Esq.
The Nasdaq Stock Market, Inc. Eric J. Friedman, Esq.
One Liberty Plaza New York, Skadden, Arps, Slate, Meagher & Flom LLP
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)
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EXPLANATORY NOTE
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10 shall have automatically become effective on June 29, 2001.
However, material amendments to the information contained herein may be
forthcoming due to ongoing discussions between The Nasdaq Stock Market,
Inc. and members of the staff of the Securities and Exchange Commission
regarding the information contained in this Form 10, including the
financial statements contained herein. Accordingly, the information
contained herein should not be relied upon and remains subject to further
revision.
TABLE OF CONTENTS
Page
Item 1. Business...........................................................1
Item 2. Financial Information.............................................28
Item 3. Properties........................................................37
Item 4. Security Ownership of Certain Beneficial Owners and Management....38
Item 5. Directors and Executive Officers..................................41
Item 6. Executive Compensation............................................45
Item 7. Certain Relationships and Related Transactions....................48
Item 8. Legal Proceedings.................................................50
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters............................50
Item 10. Recent Sales of Unregistered Securities...........................50
Item 11. Description of Registrant's Securities to be Registered...........51
Item 12. Indemnification of Directors and Officers.........................55
Item 13. Financial Statements and Supplementary Data.......................55
Item 14. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............................56
Item 15. Financial Statements and Exhibits.................................56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................F-1
This registration statement (the "Registration Statement")
contains "forward-looking" statements based on our current expectations,
assumptions, estimates and projections about The Nasdaq Stock Market, Inc.
("Nasdaq") and our industry. Actual results may differ materially from
those described in the forward-looking statements and will be affected by a
variety of risks and factors including, without limitation, the risks
described in "Item 1. Business-- Risk Factors" of this Registration
Statement. Readers should carefully review this Registration Statement in
its entirety, including, but not limited to, Nasdaq's financial statements
and the notes thereto. Nasdaq undertakes no obligation to publicly release
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof.
Item 1. Business.
Nasdaq Overview
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. 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.
Prior to June 28, 2000, Nasdaq was wholly-owned by the National Association
of Securities Dealers, Inc. (the "NASD"). The NASD, which operates subject
to the SEC's oversight, is the largest self-regulatory organization ("SRO")
in the United States with a membership that includes virtually every
broker/dealer that engages in securities business with the U.S. public. See
"-- The NASD." 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. As of May 4, 2001, the NASD owns approximately 31%
of Nasdaq assuming all Warrants purchased in both phases of the
Restructuring are fully exercised (approximately 70% assuming no Warrants
are exercised). See "-- Nasdaq's Relationship with the NASD and its
Affiliates" and "-- The Restructuring."
Nasdaq's legal authority to operate as a stock market is delegated to it by
the NASD under the Plan of Allocation and Delegation of Functions by the
NASD to Subsidiaries (the "Delegation Plan"). Nasdaq has initiated the
process with the SEC to become registered as a national securities exchange
("Exchange Registration") by filing an application for Exchange
Registration with the SEC. If Nasdaq obtains Exchange Registration it will
receive its own SRO status, separate from that of the NASD. As a SRO,
Nasdaq will have its own rules regarding listing, membership, trading and
regulation-rules that are distinct and separate from those administered by
the NASD. Broker/dealers will be able to choose to become members of
Nasdaq, in addition to their other SRO memberships. See "-- Nasdaq's
Relationship with the NASD and its Affiliates."
Nasdaq's market model is one of "open architecture." Participation in the
trading activities on Nasdaq is not limited to any fixed number of market
participants. This allows a large number of broker-dealers with widely
different business models and trading technologies to participate in the
Nasdaq network and compete with one another. The Nasdaq network, formally
called the "Enterprise Wide Network II" ("EWNII"), is a telecommunications
network that Nasdaq uses to deliver transaction and market information
services to its market participants. See "--The Nasdaq Network." Market
participants can access the network via Nasdaq Workstation II ("NWII"),
Nasdaq's proprietary operating system for the network, or through other
customized operating systems. See "--Nasdaq Workstation II." Nasdaq's
market participants include market makers, electronic communication
networks ("ECNs") and order entry firms, each of which is described below.
Market makers, also known as dealers, provide liquidity (which refers to
the ability of a stock to absorb a large amount of buying and selling
without substantial movement in price) by being willing to buy or sell
securities at all times at publicly-quoted prices for their own account and
by maintaining an inventory of securities for their customers. Market
makers in a particular stock are required at all times to post their bid
and offer prices (i.e., price at which they will buy and sell) into the
Nasdaq network where they can be viewed and accessed by all market
participants. Over 400 market makers participate in Nasdaq. The average
Nasdaq stock has over 19 market makers; some stocks have over 80 market
makers.
In addition to traditional market makers, the Nasdaq network also connects
other trading systems such as ECNs. ECNs provide electronic facilities for
investors to trade directly with each other without going through a market
maker. They operate simply as order-matching mechanisms and do not maintain
inventories of securities of their own. The flexibility of the Nasdaq
network means that innovators with new trading technologies or strategies
have an opportunity to implement them quickly in the Nasdaq marketplace.
An order entry firm is a broker-dealer, but not a market maker or an ECN
for a particular security. An order entry firm can use Nasdaq services to
view price quotations and route customer orders for securities to a market
maker or ECN posting quotes in Nasdaq for that security so that such orders
can be executed.
Nasdaq itself does not force investors to trade with any particular person
or to go through any particular market method. Instead, Nasdaq provides
systems that link all of the liquidity providers in a given stock together
where they can compete with each other and lets participants choose with
whom they are going to trade. Nasdaq also gathers the trade and quote
information from all of these participants and passes it on to data vendors
who resell this information to the investment community and the general
public. As a fully computerized market, Nasdaq itself does not have a
central trading floor.
Industry Overview
On traditional stock exchanges such as the New York Stock Exchange (the
"NYSE"), all trades in a single stock take place in a single physical
location on a trading floor. At that location, a member of the exchange
known as a specialist oversees the trading in that stock. The specialist
has an obligation to maintain a "fair and orderly market" and acts as both
a market maker and an auctioneer. Similar to Nasdaq's market makers, the
specialist is required to post bid and offer price quotations at all times.
The specialist also acts as an auctioneer, trying to match the orders of
other customers that are sent to the exchange floor. The specialist
oversees the "order book" of orders that are electronically routed to the
floor of the NYSE.
In addition to the specialist, there are numerous floor brokers who
negotiate larger orders face-to-face for their customers. Typically, a
floor broker receives an order from a brokerage firm and then walks over to
the specialist post where the stock is traded. The floor broker then
negotiates with the specialist and any other floor brokers interested in
the same stock to try to fill the order. Smaller orders on a traditional
exchange may be electronically routed to the specialist's order book.
Exchanges usually limit the number of their members. In order to become a
member, one has to purchase a membership, called a seat, from another
member who wants to sell.
Stock exchanges naturally sprang up in many cities to accommodate the needs
of local investors. Advances in communication reduced the need for so many
exchanges, and many of them merged with other stock exchanges. However, a
number of these so-called regional stock exchanges still survive. Although
some of these exchanges have a few exclusive "local" stocks, these
exchanges mostly compete in the business of trading the more active NYSE-
and Nasdaq-listed stocks. The regional exchanges resemble Nasdaq market
makers more than the NYSE floor. Although some of the regional exchanges
still have physical trading floors, for the most part their specialists are
acting as dealers filling electronically submitted orders from retail
firms. The regional exchanges include the Boston, Chicago, Cincinnati,
Pacific and Philadelphia exchanges.
National Market System
Until the 1970s, each exchange acted independently to disseminate its
market information on its own terms. Beginning in the 1970s, Congress
passed legislation and the Commission adopted rules to create a national
market system ("NMS"). As a result, U.S. market participants have access to
a consolidated stream of quotation and transaction information from the
exchanges and Nasdaq (acting under delegated authority from the NASD) for
most equity securities, which can be traded off the exchange or market that
lists the security. The exchanges and Nasdaq act jointly to collect and
disseminate this information under NMS plans ("NMS Plans") approved by the
Commission. The price and transaction information collected under these NMS
Plans is sold to data vendors, who in turn sell the information to the
public. After costs are deducted, the revenue generated by the sale of the
information to the data vendors is distributed pro-rata among the
participants in each of the NMS Plans. The NMS Plans include:
o The Nasdaq Unlisted Trading Privileges Plan ("UTP Plan"), which
collects and disseminates price and transaction information for
approximately 1,000 securities listed on Nasdaq. Members of the
plan are NASD and certain regional exchanges that trade Nasdaq
securities.
o The Consolidated Quotation Plan, which collects and disseminates
quotation information for securities listed on the New York
Stock Exchange and the American Stock Exchange. All of the
exchanges and NASD are members of this plan.
o The Consolidated Tape Association Plan, which collects and
disseminates transaction information for NYSE and Amex
securities. All of the exchanges and the NASD are members of
this plan.
o Nasdaq, acting under delegated NASD authority, participates in a
fourth national market system plan, the InterMarket Trading
System Plan (the "ITS Plan"). The Intermarket Trading System
("ITS") is a communications system that allows orders to be sent
to the exchange or market quoting the best price. All of the
exchanges and the NASD are members of the ITS Plan. The ITS Plan
is described in more detail in "--Nasdaq InterMarket."
Nasdaq intends to become a member of each of these plans when it becomes an
exchange.
Securities Information Processor
Nasdaq serves as a securities information processor ("SIP") for purposes of
collecting and disseminating quotation and last sale information for all
transactions effected in its market. Nasdaq also acts as an exclusive
securities information processor ("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
for approximately 1,000 Nasdaq-listed securities. Nasdaq sells this
information to vendors for a fee ("Tape Fees"), and the data vendors in
turn sell the last sale and quotation data publicly. Under the revenue
sharing provision of the UTP Plan, Nasdaq is permitted to deduct certain
costs associated with acting as an 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
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
Request-for-Proposal, and it will likely take months to solicit competing
bids and come to a joint decision on a new SIP. The SEC 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
Products and Services
Nasdaq's products and services fall 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 include:
o Price Discovery. Nasdaq provides collection, processing and
dissemination of price quotations of Nasdaq-listed securities
to its market participants. Price quotations are made up of
two parts-the bid and the offer. The bid is the displayed
price at which the quoting market maker or ECN is prepared to
buy the security from any seller in the marketplace. The
offer is the displayed price at which the quoting market
maker or ECN is prepared to sell the security to any buyer in
the marketplace. Since market makers and ECNs may wish to pay
differing amounts to buy or sell a particular security,
Nasdaq looks at all the price quotations of the market makers
and ECNs in that security and independently ranks the bids
and offers so that one can easily determine who is willing to
sell the security for the lowest price and the one who is
willing to buy the security at the highest price. This
combination of the best bid and the best offer is the "inside
market" or "inside quote." Included in the price quotations
collected by Nasdaq are the quotes of the exchanges that
trade Nasdaq-listed securities under the UTP Plan. Currently,
only the Chicago Stock Exchange and the Cincinnati Stock
Exchange display quotes on Nasdaq pursuant to the UTP Plan.
Once price quotations have been entered into the Nasdaq
system, Nasdaq processes the price quotations by updating the
posted price and size (i.e., number of shares the posting
party will buy or sell at that price) in response to messages
received from the party posting the price quotation. Only
registered market makers, ECNs and UTP Plan exchanges have
the ability to adjust their price and size quotations in the
Nasdaq system.
In addition to quotations in Nasdaq-listed securities, Nasdaq
also collects and disseminates quotations in securities
authorized for trading on the Over-the Counter Bulletin Board
Service (R) ("OTC Bulletin Board") as well as exchange listed
securities that are traded in the over-the-counter market by
NASD members. See "--Nasdaq InterMarket."
Market participants pay a monthly fee based generally on the
number of display terminals they use for these services.
o Order Routing and Execution. Historically, orders for
Nasdaq-listed stocks were communicated via the telephone.
However, advances in technology made routing of orders with
electronic systems prevalent. Since the late 1980s, Nasdaq
has provided electronic routing of buy and sell orders for
Nasdaq-listed stocks to a market maker or ECN and the
execution of those orders through the use of automated
systems. Order routing and execution are the terms generally
used to describe how orders to buy and sell securities are
directed to market participants as well as how these orders are
handled once they reach their destination. Order routing
refers to the act of transmitting orders to another market
participant for action. Order execution describes how orders
are to be executed, or responded to, once received by a
market participant. During the last few years Nasdaq has
experienced increased usage of its electronic order routing
and execution systems. Approximately 27% of Nasdaq's share
volume (based on the aggregate number of shares traded) comes
from orders routed and executed using a Nasdaq system. The
remaining 73% comes from third-party networks and proprietary
systems. Nasdaq has the following four systems that provide
for order routing and/or execution:
o SelectNet, which is an automated Nasdaq market service that
facilitates order execution by linking all market
participants that trade Nasdaq-listed stocks. SelectNet is
the primary system that market makers use to trade with one
another. It is also the Nasdaq system used to access ECN
price quotations and through which ECNs receive the price
quotations of other market makers. SelectNet operates as a
messaging system, allowing market participants to direct an
order message to a particular counter-party or to broadcast
such order to all market participants offering to buy or sell
a security at a particular or market price. If the order
routed via SelectNet and the posted price quotation to which
the order is directed are of a price and size such that a
trade should take place, SEC and NASD rules generally require
the party making the price quotation to respond through
SelectNet agreeing to the trade. Once the agreement to the
trade is sent by the poster of the price quotation back to
the party directing the order, the trade is executed and both
parties receive a confirmation of the transaction. SelectNet
is available for use by all market participants and also
provides the capability for users to independently negotiate
the terms of trades. The current fees for SelectNet are a
$2.50 activity fee for the originating party (i.e., the
sender) for orders broadcast to all market participants, a
$1.00 activity fee for the originating party for orders
directed to a particular counter-party and a $0.25 fee for
cancelled orders. For the years ended December 31, 2000, 1999
and 1998 Nasdaq's total revenues from SelectNet were $113.5
million, $83.1 million and $42.4 million, respectively.
o Small Order Execution System ("SOES(sm)"), routes small
orders of public customers to market makers and, based on
their quotes, immediately executes trades without a formal
response from the market maker. The SOES system is restricted
to orders of no greater than 1,000 shares and cannot be used
by market makers for their own trading activity. It is also
not available to access ECN price quotations or for ECNs to
receive the price quotations of other market participants.
Unlike SelectNet, a trade on SOES is executed without the
requirement for the party providing the price quotation to
respond with an agreement to trade. After execution, the
party providing the price quotation is informed by SOES that
a trade has been executed and sent to settlement. Under
current NASD rules, all market makers that provide price
quotations for a Nasdaq National Market security must
participate in SOES and consent to its automatic executions.
If a market maker has posted the best price quotation to buy
or sell a security and has posted a share size amount that
would satisfy multiple SOES orders, the system automatically
delays seventeen seconds between the delivery of each SOES
execution to give the market maker an opportunity to adjust
its price quotation to a new level. The current fees for SOES
are a $0.50 activity fee for the originating party (i.e., the
sender) and a $0.25 fee for cancelled orders. For the years
ended December 31, 2000, 1999 and 1998 Nasdaq's total
revenues from SOES were $32.2 million, $19.7 million and
$12.4 million, respectively. SelectNet and SOES accounted for
approximately 16.8% of Nasdaq's revenues for the year ended
December 31, 2000.
o Advanced Computerized Execution System ("ACES"), is an order
routing service that is used by market makers to execute
order flow from order entry firms. Order entry firms
generally route buy and sell orders to the best price quotes
displayed in the market or enter into agreements with a
particular market maker where the market maker agrees to fill
the order entry firm's orders at the best price displayed in
the market. Order entry firms can route buy and sell orders
directly to specified market makers through NWII or
their own proprietary systems. These orders are executed
within the market makers' internal trading systems and
execution reports are routed back to the order entry firms.
ACES is often used by market makers to connect with firms
whose order volume is too low to justify the fixed costs of
establishing a proprietary network linkage. The current fee
for ACES is a $1.00 activity fee per execution charged to the
market maker only. ACES fees accounted for approximately 2.0%
of Nasdaq's revenues for the year ended December 31, 2000.
o Computer Assisted Execution System(sm) ("CAES(sm)"), is the
transaction service system for Nasdaq InterMarket, which is
an electronic marketplace where NASD members can trade
securities listed on the NYSE or the American Stock Exchange
("Amex"). CAES is linked to ITS. CAES allows users to direct
orders in exchange-listed securities to other Nasdaq
InterMarket market makers for automated response and
execution, and also provides access to the ITS. ITS is a
communications system that allows exchange specialists,
exchange floor brokers and NASD members to send orders for
execution to the market quoting the best price. Access to
both systems (CAES/ITS) costs InterMarket participants $100
per month, per terminal. The current fee for CAES orders is
$0.50 for the originating party (i.e., the sender). The
current fee for CAES orders is $0.50 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.
o Trade Reporting and Comparison--Automated Confirmation
Transaction Service(sm) ("ACT(sm)"). U.S. securities laws
require that all registered stock exchanges and securities
associations establish a transaction reporting plan by which
information (specifically price and volume) concerning trades
executed in qualified securities in those markets is
centrally collected. Transactions in Nasdaq-listed
securities, exchange listed securities traded
over-the-counter, and other equity securities traded
over-the-counter are reported to ACT. A protocol establishes
which of the two parties to the trade are assigned reporting
responsibility. During market open hours, members are to
report trades within 90 seconds. Alternative procedures are
in place for reporting trades executed after hours. ACT has a
schedule of fees that reflect the services it provides.
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.
The function that ACT performs depends on the information
provided to ACT by the parties to the trade. ACT fees
accounted for approximately 11.5% of Nasdaq's revenues for
the year ended December 31, 2000. ACT risk management fees
are $17.25 per month plus $0.13 for each correspondent per
transaction. A cap on ACT risk management fees was
implemented in April 2000, limiting the monthly payment by
clearing firm by correspondent to $10,000. This led to over a
$1 million decrease in ACT risk management revenue from
fiscal year 1999 to fiscal year 2000 despite the
significantly higher trading volumes in the year 2000.
Further changes to the pricing structure currently under
consideration might have additional downward effect on ACT
revenues. In a current filing with the SEC, Nasdaq proposes
an interpretation of which firms classify as effectively
"self-clearing" with respect to affiliated correspondents,
and relieves them of the obligation of paying ACT risk
management fees. Nasdaq is contemplating a further
clarification to this rule, which would require SEC approval
and which specifies that clearing firms will only be charged
ACT risk management fees for those correspondents they choose
to monitor through ACT risk management. This means that firms
will selectively have the ability to discontinue the use of
this service for certain correspondents and not pay ACT risk
management fees, thus reducing Nasdaq's revenue.
Market Information Services. As a market operator, Nasdaq collects and
disseminates quote and trade information. Nasdaq's market participants have
real-time access to quote and trade data. Interested parties that are not
direct market participants in Nasdaq also can receive real-time information
through a number of market information services products.
Nasdaq has two primary market information services products designed to
provide the varying levels of detail desired by different broker-dealers and
their customers. The first product is called Level 1. This product provides
subscribers with the current inside quote and most recent price at which
the last sale or purchase was transacted for a specific security.
Professional subscribers 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, provides
subscribers with the quotes of each individual market maker and ECN, in
addition to the inside quotes and last transaction price. This service is
currently priced at $50 per terminal per month for professional subscribers
and $10 per terminal per month for non-professional customers. This service
is not priced on a per query basis.
For the years ended December 31, 2000, 1999 and 1998 Nasdaq's total
revenues from market information services were $258.3 million, $186.5
million and $152.7 million, respectively.
Issuer Services. The Nasdaq Stock Market is the flagship market of Nasdaq
and has two tiers of listed companies: The Nasdaq National Market(sm)
("NNM"), which includes over 3,700 companies, and The Nasdaq SmallCap
Market(sm), with over 850 smaller, emerging growth companies. 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.
A company must meet all of the requirements under at least one of three
listing standards below for initial listing on the NNM and meet at least
one continued listing standard below to maintain its listing on the NNM:
Initial Listing Continued Listing
- --------------------------------------------------------------------------------------------------------------------
Requirements Standard 1 Standard 2 Standard 3 Standard 1 Standard 2
- --------------------------------------------------------------------------------------------------------------------
Net Tangible Assets $6 million $18 million N/A $4 million N/A
- --------------------------------------------------------------------------------------------------------------------
Market N/A N/A $75 million N/A $50 million
Capitalization or or
Total Assets $75 million $50 million
or or
Total Revenue
$75 million $50 million
- --------------------------------------------------------------------------------------------------------------------
Pretax Income $1 million N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Shares Outstanding 1.1 million 1.1 million 1.1 million .75 million 1.1 million
- --------------------------------------------------------------------------------------------------------------------
Operating History N/A 2 years N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Market Value of Shares $8 million $18 million $20 million $5 million $15 million
Outstanding
- --------------------------------------------------------------------------------------------------------------------
Minimum Bid Price $5 $5 $5 $1 $5
- --------------------------------------------------------------------------------------------------------------------
Shareholders 400 400 400 400 400
- --------------------------------------------------------------------------------------------------------------------
Market Makers 3 3 4 2 4
- --------------------------------------------------------------------------------------------------------------------
For initial and continued listing on the Nasdaq SmallCap Market, a company
must meet the requirements listed below:
- -------------------------------------------------------------------------------------------------------------
Requirements Initial Listing Continued Listing
- -------------------------------------------------------------------------------------------------------------
Net Tangible Assets $4 million $2 million
or or
Market Capitalization $50 million $35 million
or or
Net Income (in last fiscal year or 2 of last 3 fiscal $.75 million $50 million
years)
- -------------------------------------------------------------------------------------------------------------
Shares Outstanding 1 million .5 million
- -------------------------------------------------------------------------------------------------------------
Market Value of Shares Outstanding $5 million $1 million
- -------------------------------------------------------------------------------------------------------------
Minimum Bid Price $4 $1
- -------------------------------------------------------------------------------------------------------------
Shareholders 300 300
- -------------------------------------------------------------------------------------------------------------
Operating History 1 year N/A
or
Market Capitalization $50 million
- -------------------------------------------------------------------------------------------------------------
Market Makers 3 2
- -------------------------------------------------------------------------------------------------------------
As used in the charts above, "Shares Outstanding" refers to those shares
that are not directly or indirectly held by any officer or director of the
issuer or any beneficial owner of more than ten percent of the total number
of shares outstanding. "Shareholders" is defined as a holder of 100 shares
or more.
Nasdaq charges issuers an initial listing fee, a listing of additional
shares fee, and an annual fee. The initial listing fee for securities
listed on the NNM or the Nasdaq SmallCap Market includes a one-time listing
application fee of $5,000 and a total shares outstanding fee. The total
maximum fee for the initial listing application is $95,000 for the NNM and
$10,000 for the Nasdaq SmallCap. The fee for listing of additional shares
is based on the total shares outstanding, 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 for NNM securities are based on total shares outstanding and range
from $10,710 to $50,000. The annual fee for securities listed on the Nasdaq
SmallCap Market is $4,000 for the first issue and $1,000 for each
additional issue. An "issue" refers to the process (i.e., initial public
offering or private placement) by which the securities of any company are
sold and distributed.
For the years ended December 31, 2000, 1999 and 1998 Nasdaq's total
revenues from issuer services were $184.6 million, $163.4 million and
$137.3 million, respectively.
Other Markets
Nasdaq operates the Nasdaq InterMarket as well as the OTC Bulletin Board.
Nasdaq InterMarket. Nasdaq InterMarket is an electronic marketplace where
NASD members can trade securities listed on the NYSE and the Amex. Users
can trade on Nasdaq InterMarket among themselves using the CAES order
delivery system, or with another participating stock exchange through the
ITS. For the years ended December 31, 2000, 1999 and 1998 Nasdaq's total
revenues from the Nasdaq InterMarket were $23.1 million, $18.1 million and
$21.8 million, respectively.
For the year ended December 31, 2000, Nasdaq InterMarket accounted for
approximately 10.6% of trades in stocks listed on the NYSE and
approximately 16.2% of trades in stocks listed on the Amex. All InterMarket
trades are reported and disseminated in real-time to the Consolidated Tape
Association ("CTA"), which is the operating authority for exchange listed
securities information, and as such, Nasdaq shares in the revenues
generated by the CTA. Most trades are reported by two NASD members that are
major wholesale market makers. One ECN currently quotes in Nasdaq
InterMarket; other ECNs report trades through Nasdaq systems to the CTA and
some are planning to begin quoting in Nasdaq InterMarket. NASD members that
trade exchange-listed stocks away from the exchanges account for a
significant amount of InterMarket trading activity.
OTC Bulletin Board. The OTC Bulletin Board is an electronic screen-based
market for securities that currently are eligible for listing 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. Market
makers are billed based on their average number of positions during a
month. A position is defined as any price quotation or indication of
interest entered by a market maker in an security listed on the OTC
Bulletin Board. The average number of positions is determined by the sum of
the total number of quotations for each day in the month divided by the
number of trading days in such month. The monthly fee for participation is
$6.00 per position. There are no fees charged to companies whose securities
are listed on the OTC Bulletin Board. For the years ended December 31,
2000, 1999 and 1998 total revenues from the OTC Bulletin Board were $2.7
million, $3.2 million and $2.6 million, respectively.
Last year, in conjunction with Exchange Registration, the Nasdaq Board of
Directors (the "Nasdaq Board") and the NASD Board of Governors (the "NASD
Board" and, together with the Nasdaq Board, the "Boards"), approved several
rule changes that are designed to enhance the OTC Bulletin Board and permit
Nasdaq to continue to operate it after Exchange Registration. First, the
Boards approved a program for Nasdaq to enter into a listing agreement with
each OTC Bulletin Board issuer and impose new listing standards to ensure
the quality of these issuers. Second, both Boards approved the creation of
an automated order delivery system for the OTC Bulletin Board that would
allow orders to be delivered and executed via NWII. Finally, to accompany
the new listing standards and order delivery system, the Boards approved
enhanced market rules that provide for limit order protection, short
interest reporting, and intraday trading halt authority. Nasdaq plans to
submit to the SEC the appropriate proposed rules and exemption requests
that would allow Nasdaq to continue to operate the OTC Bulletin Board after
Exchange Registration. The SEC has not yet approved the rules or the
exemption request. Therefore, it is not certain whether Nasdaq will
continue to operate the OTC Bulletin Board following Exchange Registration.
If the SEC does not approve the exemption request, these securities could
continue to trade over-the-counter through a non-Nasdaq facility.
Nasdaq's Strategic Initiatives
Nasdaq's strategic initiatives include enhancing its products and services,
pursuing global market expansion through the creation of Nasdaq Japan, Inc.
("Nasdaq Japan") and Nasdaq Europe S.A./N.V. and exploring alliances with
foreign exchanges, competing for listings, competing for trading volume in
exchange-listed securities, and creating a market for listing and trading
single stock futures.
Enhancing Products and Services.
NNMExecution System. The NNM Execution System (also known as
"SuperSOES(sm)") is an improved system for the execution of buy and sell
orders designed to provide automatic execution capability for market makers
and order entry firms and streamline Nasdaq's transaction systems. The NNM
Execution System will combine features of the existing SelectNet and SOES.
Like SOES, the NNM Execution System will permit the automatic execution of
trades against the best price quotations of other market participants in
the market without the need for an agreement to trade from the party
providing the price quotation. The NNM Execution System also eliminates the
usage restrictions of SOES, including the share size restriction. This
system will allow the entry of single orders of up to 999,999 shares as
opposed to the SOES limit of 1,000 shares. In addition, the time delay
between execution of trades with the same market maker at the same price
for a single security will be eliminated.
The NNM Execution System is designed to encourage market participants to
make more shares available for trading. Using the system's reserve size
feature, market makers can enter both a displayed share amount and an
un-displayed "reserve" size number of shares at the same price. Other
market participants see only the displayed number of shares. However, if an
order is routed through the system of a size that would execute more than
all of the displayed quantity of shares, the system will also automatically
execute the remainder against the hidden reserve shares. This capability is
important to market makers as many are reluctant to post a price quotation
for a large number of shares. Such a quotation can cause other traders to
quickly adjust their price quotations knowing that the market maker, or the
market maker's customer, has a large amount of shares to buy or sell. The
reserve size feature allows market makers to limit the price impact of
displaying a large amount of shares while still making these shares
available for trading in the market.
In the NNM Execution System, SelectNet becomes primarily a tool to be used
by market makers to negotiate trades. Market makers will be prohibited from
sending each other SelectNet messages which would obligate the receiving
party to a trade. However, market makers that wish to trade with ECNs will
still have the ability to send SelectNet order messages that would require
an agreement to trade from the ECN using SelectNet prior to execution of
the trade. ECNs will also have the option to use the NNM Execution System
to elect to receive automatic executions against their price quotations,
unlike market makers who are mandated to provide automatic executions
against their price quotation. If ECNs so elect, they are protected from
receiving SelectNet order messages priced and sized in a manner that would
obligate the ECN to a trade in response to the SelectNet order message.
The NNM Execution System's restrictions on the use of SelectNet are
designed to prevent the situation which occurs in the current Nasdaq market
in which a market maker's price quotation may be accessed by both SOES and
SelectNet at the same time, resulting in the automatic execution of the
trade on SOES and the receipt of a SelectNet message obligating the market
maker to trade such shares. The result of this process is that the market
maker becomes obligated to trade a number of shares greater than the number
for which it had made a price quotation. To remedy this problem of the
market maker's liability to two trading systems, the rules of the NNM
Execution System are designed to ensure that all market participants are
obligated to trade only in response to orders received from one system.
Nasdaq believes that by eliminating the potential for unintended trade
obligations, it will encourage market makers to commit more shares to the
market.
The 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. SuperMontage
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. Second, SuperMontage
is intended to increase competition and market transparency. Third,
SuperMontage will provide pre-trade anonymity to market participants using
a Nasdaq system. As such, prior to execution, no one will know the identity
of the firm displaying the order unless such firm reveals its identity.
Anonymous trading can contribute to improved pricing for securities by
reducing the potential market impact of large transactions and transactions
by certain investors whose trading activity, if known, may be more likely
to influence other market activity.
In the January 10 approval order, the SEC imposed certain conditions on
both Nasdaq and the NASD that must be met prior to the implementation of
SuperMontage. These conditions addressed the SEC's concern that
participation in the SuperMontage system would be viewed as involuntary due
to Nasdaq's role as the ESIP. See "-- Securities Information Processor" for
a description of Nasdaq's role as an ESIP. The conditions imposed by the
SEC include that:
o the NASD will offer a quote and trade reporting alternative
that satisfies the SEC's rules;
o NASD quotes disseminated through the ESIP will identify the
alternative trading system or market maker source of the
quote; and
o participation in SuperMontage will be entirely voluntary.
Assuming these conditions can be met and Nasdaq can successfully implement
SuperMontage, Nasdaq will add SuperMontage to the NWII, which will show the
top three price levels: the best bid and offer in Nasdaq, and the two next
best bids and offers. In each case, this display will be accompanied by the
aggregate order size at each price level. Nasdaq market makers and ECNs
will be able to display their orders anonymously at these price levels in
SuperMontage, thus encouraging display of greater trading interest. As
currently envisioned, SuperMontage displays the aggregate trading interest
in a security at the top of the screen by aggregating trading interest of
identified market participants and any anonymous interest that exists in
such security, which is entered into the Nasdaq system. Market participants
will be able to access the best prices in SuperMontage electronically using
enhanced versions of Nasdaq's 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 best price in the market
maker's book/system. This functionality will also assist market
participants with compliance with the Order Handling Rules, which among
other things require the display of customer limit orders priced better
than a Nasdaq market maker's or a specialist's quote or that are for a
larger number of shares at the same price. Other system enhancements will
make it easier for ECNs to participate in automatic execution.
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. Senior officers of Nasdaq have conducted exploratory discussions
with a number of major U.S. and foreign securities exchanges, regarding
cooperation, joint ventures, marketing affiliations, combinations, or other
collaborative activities. Nasdaq anticipates that such discussions will
continue but cannot predict the results of any such discussions.
Nasdaq Japan. In June 1999, a joint venture agreement to capitalize a new
company, Nasdaq Japan Planning Company, Inc. (subsequently renamed Nasdaq
Japan, Inc.) was entered into with SOFTBANK Corp. of Japan, a provider of
information, distribution and infrastructure services in the digital
information industry. Under this joint venture agreement, Nasdaq and
SOFTBANK agreed to jointly operate and provide management support and
technology and services to Nasdaq Japan in its development and
implementation of a new electronic stock market in Japan as a section of
the Osaka Securities Exchange (the "OSE"). The OSE is one of Japan's oldest
securities exchanges, with over 1,200 listed companies, and is Japan's
largest derivatives market. Nasdaq also provides Nasdaq Japan with licenses
to its technology and trademarks. On April 19, 2000, Nasdaq Japan signed a
Business Collaboration Agreement with the OSE to establish Nasdaq Japan
Market as a new market section of the OSE. The Nasdaq Japan Market began
operations on June 19, 2000. In its first phase of operations, prior to its
deployment of Nasdaq/Indigo Markets technology, Nasdaq Japan will recruit
initial public offerings of companies for listing and will trade these
securities on the existing OSE system. As of May 1, 2001, 52 companies are
trading on the interim trading platform with an average monthly share
volume of 5,281,728 shares. The Nasdaq Japan Market operates under the
umbrella of the OSE, which provides regulatory and listing review as well
as clearance and settlement services. In addition, Nasdaq Japan intends to
be competitive in the trading of U.S. listed securities and exchange-traded
funds in Japan, with the trading of the Nasdaq-100 QQQ exchange-traded fund
planned to begin in 2001. Through the first quarter of 2001, each of Nasdaq
and SOFTBANK have made capital contributions of approximately $2.6 million
to Nasdaq Japan.
In October, 2000, Nasdaq Japan's owners approved a private placement
transaction in which Nasdaq Japan sold an approximately 15 percent stake
for approximately $48 million to a group of 13 major Japanese, U.S., and
European brokerages, thereby reducing the ownership interest of Nasdaq
Global 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 invested approximately $12
million to acquire an initial 68% stake in EASDAQ S.A./N.V. ("EASDAQ"),
with an immediate aim to dilute its interest through the introduction of
other strategic partners as shareholders. EASDAQ is a pan-European stock
market for emerging growth companies and is headquartered in Brussels.
Pursuant to the investment agreement with EASDAQ, Nasdaq obtained the right
to appoint a majority of EASDAQ's board of directors, entered into
trademark licensing and consulting agreements with EASDAQ and received from
EASDAQ repayment of a loan made by Nasdaq in the amount of approximately
$2.6 million. In connection with this investment Nasdaq also restructured
EASDAQ into Nasdaq Europe S.A./N.V. with the goal to make Nasdaq Europe a
globally-linked pan-European market.
A variety of firms, representing a cross-section of U.S. and foreign-based
investment banking, financial services and securities firms, have joined
Nasdaq as investors in Nasdaq Europe. Among these firms is Knight Trading
Group, which holds an approximately 8.8% ownership stake in Nasdaq Europe
through its earlier investment in EASDAQ prior to its restructuring into
Nasdaq Europe. As of June 20, 2001, Nasdaq's ownership percentage in Nasdaq
Europe had decreased to 53.5%. Nasdaq expects further key investors to
invest in Nasdaq Europe.
Nasdaq Europe S.A./N.V. has also launched the newly developed European
Trading System ("ETS"). ETS offers functions similar to The Nasdaq Stock
Market while being adaptable to the needs and requirements of the European
market. In addition, Nasdaq Europe S.A./N.V. intends to introduce a system
later this year which will integrate certain functions of the SuperMontage
system customized to European best practices. This market model will
integrate market maker quotes into an anonymous, voluntary limit order book
and provide expanded negotiation facilities and trade reporting. As of June
15, 2001, there were 201 companies listed on Nasdaq Europe and 72 different
market maker firms.
Canadian Alliance. In April 2000, Nasdaq entered into a cooperative
agreement with the Provincial Government of Quebec for the development of a
new securities market within Canada called Nasdaq Canada. To facilitate
this development, the Provincial Government of Quebec has agreed to
undertake the necessary legislative and/or regulatory initiatives to
promote the assimilation of Nasdaq Canada into Quebec, including the
recognition of Nasdaq as a securities exchange within Quebec and the
recognition of Nasdaq-listed securities for trading through Nasdaq Canada
without further regulatory action. Nasdaq Canada will be developed in
stages, and may culminate in the creation of an autonomous pan-Canadian
market. The first stage commenced on November 21, 2000 with the
installation of Nasdaq terminals in 10 Canadian securities firms in
Montreal, Canada and the establishment of the Nasdaq Canada Index which
tracks the market performance of Canadian-listed Nasdaq stocks. These
terminals allow these firms to trade Nasdaq- listed securities directly
through their local broker, including the over 40 Canadian firms previously
listed solely on Nasdaq in the United States. The second stage is scheduled
to commence following the implementation of SuperMontage and is expected to
involve participation by new broker-dealer participants in Canada, trading
in both U.S. and Canadian dollars and the opportunity to list Canadian
companies exclusively on Nasdaq Canada. The planned third stage will result
in the linking of Nasdaq Canada with Nasdaq, Nasdaq Europe and Nasdaq
Japan. The timing of the second and third stages will be dependent on the
success of the alliance's first stage.
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. In the first quarter of 2000, the total number of listings
declined to 4,587. 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 high of 5,556 listings as of December 31,
1996 primarily as a result of Nasdaq imposing more rigorous listing
standards, consolidation of listings due to increased merger and
acquisition activity and issuers transferring their listing to the NYSE.
From 1996 through the first quarter of 2001, 1,821 issuers have been
delisted by Nasdaq for failure to satisfy listing standards, 1,523 issuers
have ceased being listed due to mergers and consolidations and 463 issuers
have transferred their listings to the NYSE. 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. Historically, Nasdaq's communication has focused on potential
issuers and the general investing community. Going forward, Nasdaq will
seek to broaden its marketing efforts to incorporate all constituents
interacting with its business.
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 information services, products, and
programs to Nasdaq-listed companies. Executives of Nasdaq-listed companies
are invited to participate in a variety of programs on a wide range of
topics, such as industry sector specific seminars and investor relation
forums. These executives also have access to Nasdaq Online(sm), a strategic
planning tool provided free of charge to Nasdaq-listed companies. Nasdaq
Online presents market data on all U.S. traded companies and real-time
quotes for Nasdaq-listed stocks, as well as information on institutional
ownership, research coverage and performance ratios. This combination of
online real time data and analytical information, along with a series of
other seminars and programs, is designed to help management of listed
companies make better equity management decisions. Each listed company is
assigned a Nasdaq issuer service director who oversees the listed company's
relationship with Nasdaq.
Competing for Trading Volume in Exchange-Listed Securities.
Competition between InterMarket participants and various exchanges works to
ensure that customers are able to obtain quality trade executions specific
to their needs, and at a reasonable price. A significant amount of investor
self-directed, on-line trading activity in listed securities is today
executed on InterMarket. These orders forgo the exposure of the auction
trading systems of the exchanges in favor of the negotiated execution
services provided by InterMarket participants.
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. Established in 1982, LIFFE is an
electronic exchange which enables its users to manage their risk to foreign
exchange rates and interest rates through the offering of markets for a
range of financial and non-financial derivative instruments. These
instruments include futures and options products on short-term interest
rates, government bonds, equities (including equities in the U.S., the U.K.
and continental Europe), indices and commodity products. In 1998, LIFFE
transformed its market from a floor-based trading system to a screen-based
electronic system through the implementation of its LIFFE CONNECT(TM)
electronic system. The products of the new joint venture are expected to be
traded through the LIFFE CONNECT(TM) electronic system.
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 operating
system for Nasdaq's network, which is described below. This operating system
gives securities traders access to a centralized processing complex, which
provides quotation service, automated trade executions, real-time
reporting, trade negotiations, and clearing. Nasdaq's trading terminals are
now on the desks of approximately 9,000 users. With 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. An application programming interface
allows approximately 2,400 users currently to customize NWII to meet their
own presentation needs. Telecommunications services also operate under
Computer-to-Computer ("CTCI") and handle all the same functions with the
exception of quote updates (i.e. a member firm can use their own computer
to perform the functions). Types of customers include market makers, order
entry firms, ECN's and UTP Plan exchanges. Services are distributed through
sophisticated computers and high-speed telecommunications networks.
Customers are invoiced for the EWNII connection and the respective logins.
For the year ended December 31, 2000, NWII generated revenues of $121.5
million or 14% of total revenue for that year. For the years ended December
31, 1999 and 1998 total revenues from NWII were $87.6 million and $49.3
million respectively.
The Nasdaq Network. Many of Nasdaq's transaction and market information
services are delivered via the EWNII telecommunications network, which was
jointly designed by Nasdaq and WorldCom Inc. Worldcom built the EWNII and
now owns and manages it. Nasdaq leases the network from WorldCom for a
monthly fee.
The EWNII is the infrastructure that carries the vast majority of trading
information and trading services to Nasdaq market participants. Trade
reporting, SOES trades and the distribution of market data to vendors is
accomplished through separate networks, which are now being integrated with
the EWNII. The EWNII employs technology that is designed to ensure delivery
of information to market participants without delay. This technology
provides market participants with simultaneity; that is, absolutely equal
access to the information they need to make trading decisions. Thus,
response times and the ability to enter quotes, make trades, and see
changes in the market is identical for all participants. With simultaneity,
Nasdaq is able to provide the same high level of service to investors and
traders across a wide geographic range, which includes the continental
United States, and parts of Canada. Users connect to the EWNII through NWII
or a NWII modified with the use of an application program interface.
Connections to EWNII use two separate communications lines, so that if
there is a failure on one line, messages are routed through the backup
line. The EWNII data center is located in Trumbull, Connecticut, with a
backup facility in Rockville, Maryland.
The EWNII is presently capable of handling a four billion share trading
day. The architecture of network is designed so that resources can be added
to the infrastructure to allow for higher levels of traffic as Nasdaq
continues to grow. Since the introduction of the 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
Transaction Services. Nasdaq's core trading service is the provision of the
Nasdaq network that provides for the entry and real-time broadcast of
quotes to market makers and ECNs. 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.
To counter this pressure, Nasdaq has looked to enhance its technology and
the services it provides to its members, refine its pricing approach and
increase member awareness of Nasdaq's role as a provider of liquidity in
the United States and internationally. For example, Nasdaq plans to enhance
its order routing and execution services through the implementation of the
NNM Execution System, the addition of Primex, a new price improvement
system, and the introduction of its new price quotation and trading
platform, SuperMontage. Nasdaq has also commenced operations in Europe and
Japan to extend the benefits and lower costs of Nasdaq internationally.
Issuer Services. There are approximately 4,700 companies listed on Nasdaq,
more than any other U.S. equities market. As of December 31, 200, Nasdaq
had the highest percentage of publicly traded technology and service
companies in the U.S. There are more than 480 foreign companies listed on
Nasdaq, more than any other U.S. equities market.
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. 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.
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.
Market 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
UTP Plan that is submitted to and approved by the SEC. 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 the Chicago Stock Exchange and the Cincinnati
Stock Exchange trade Nasdaq securities pursuant to the UTP Plan. For the
years 1998, 1999 and 2000, the Chicago Stock Exchange's share of trading
was 0.15, 1.11% and 2.50%, respectively. The Cincinnati Stock Exchange did
not commence trading under the UTP Plan until 2001. For the three month
period ended March 31, 2001, the Chicago Stock Exchange's share of trading
was 2.66% and the Cincinnati Stock Exchange's share of trading was .0067%.
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 but are not expected to trade a large
number of Nasdaq stocks in the future. In addition, at least two ECNs have
applied for exchange registration and expressed interest in becoming UTP
Plan participants.
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 UTP Plan revenue
generated by the sale of Nasdaq's data products, and their use of Nasdaq's
systems could diminish.
Despite the potential threat, Nasdaq's market share of trade and share
volume remains at 97.5% at present. Additionally, the exchange registration
filings for Pacific/Archipelago and Island have not yet been approved by
the SEC. Amex has not yet formalized its intention to trade Nasdaq
securities through a filing with the SEC. Overall, there is a potential for
a significant erosion in Nasdaq's market share of trading activity, and
thus data revenue; however, there are real impediments to the success of
present and future alternative exchanges in their ability to compete with
Nasdaq in a meaningful way.
Employees
As of December 31, 2000, Nasdaq had approximately 1,200 employees. In
connection with efforts to maximize revenues, reduce costs and improve
organizational efficiency, Nasdaq implemented a 10% reduction in its
workforce on June 27, 2001. None of its employees is subject to collective
bargaining agreements or is represented by a union. Nasdaq considers its
relations with its employees to be good.
The NASD
Organized under the 1938 Maloney Act, the NASD, which operates subject to
the SEC's oversight, is the largest SRO in the United States with a
membership that includes virtually every broker/dealer that engages in
securities business with the U.S. public. The NASD's founding mandate was
to standardize the securities industry's principles and practices, to
promote high standards of commercial honor, to advance just and equitable
principles of trade for investor protection, to adopt and enforce rules of
fair practice, and to foster member observance of federal and state
securities laws.
Nasdaq was founded by the NASD in 1971. NASD Regulation, Inc. ("NASDR"),
was established in 1996 as a separate, independent subsidiary of the NASD.
It was created as part of a restructuring of the NASD, a major feature of
which was to separate the regulation of the broker/dealer professionals and
surveillance of Nasdaq from Nasdaq. NASDR regulates securities markets for
the benefit and protection of the investor. In carrying out this mission,
NASDR has assumed a substantial portion of the NASD's responsibilities of
being the securities industry's largest self-regulator. In 2000, the NASD
formed a new wholly-owned subsidiary called NASD Dispute Resolution Inc.,
("NASD Dispute Resolution") formerly known as the NASD Regulation Office of
Dispute Resolution. NASD Dispute Resolution administers the NASD's
arbitration, mediation and other alternative dispute- resolution services.
In 1998, a newly-formed wholly-owned subsidiary of the NASD acquired the
operations of the American Stock Exchange Inc.
Nasdaq's Relationship to the NASD and its Affiliates
At a special meeting of NASD members held on April 14, 2000, more than a
majority of NASD members approved the Restructuring through a two-phase
private placement of (1) newly-issued shares of Common Stock, and (2) 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 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.
As of May 4, 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).
Nasdaq's legal authority to operate as a stock market is delegated to it by
the NASD under the Delegation Plan. Nasdaq has initiated the process with
the SEC for Exchange Registration by filing an application with the SEC. If
Nasdaq obtains Exchange Registration it will receive its own SRO status,
separate from that of the NASD. As a SRO, Nasdaq will have its own rules
regarding listing, membership, trading and regulation-rules that are
distinct and separate from those administered by the NASD. Broker-dealers
will be able to choose to become members of Nasdaq, in addition to their
other SRO memberships.
Nasdaq is seeking Exchange Registration for a number of reasons. Exchange
Registration allows Nasdaq to separate fully from the NASD, thereby
furthering one of the principal goals of the Restructuring, the strategic
realignment of Nasdaq's ownership from NASD's membership to a broad class
of investor-owners interested in Nasdaq's long-term success. In addition,
separation from the NASD will allow Nasdaq to more easily raise capital for
technology and for operational improvements. Exchange Registration will
also eliminate the disparity of treatment under certain state laws between
securities that are "listed on an exchange" and those that are not.
Nasdaq's domestic and global profile will be enhanced as Nasdaq will become
known as a securities exchange on the same terms as other U.S.
registered-exchange markets allowing Nasdaq to better respond to the
competition it faces. In addition, Exchange Registration will allow Nasdaq
to better compete with European exchanges which have, or plan to, become
publicly-traded companies.
Nasdaq's application for Exchange Registration was published by the SEC for
public comment on June 13, 2001. The comment period lasts for 45 days and
will end on July 30, 2001. In connection with Exchange Registration, the
SEC is conducting a review of Nasdaq's current rules and operations. The
SEC also has requested certain changes be made to the national market
system plans. 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 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. Upon the
conclusion of the comment period, the SEC will review any comment letters
received and then issue an order granting Exchange Registration or begin
proceedings to disapprove the application. The SEC may also extend the
comment period or request that Nasdaq extend their time for review of
Nasdaq's application. Exchange Registration is not expected to occur until
later this year or early next year.
As a result, prior to Exchange Registration, Nasdaq will continue to
operate under the Delegation Plan, under which the NASD has delegated
responsibility for market-operation functions to Nasdaq. Though Nasdaq
exercises primary responsibility for market-related functions, including
market-related rulemaking and interpretations, all actions taken pursuant
to delegated authority by the NASD are subject to review, ratification or
rejection by the NASD Board. As long as the Delegation Plan remains in
effect, the NASD Board will continue to have authority over Nasdaq. The
current structure will continue until Nasdaq is reconstituted as a SRO,
which will become effective upon Exchange Registration.
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. See "Item 7 - Certain Relationships and
Related Transaction - The NASD."
In furtherance of the goals of the Restructuring, the NASD has determined
to sell by June 30, 2002 those shares of Common Stock that it owns (other
than shares underlying outstanding Warrants), subject to market conditions
and the NASD's ability to obtain a fair price. The foregoing shall not
require the NASD to sell shares of Common Stock at a price that is lower
than $13 per share of Common Stock or any higher price that may be obtained
in any significant sale by Nasdaq of Common Stock subsequent to Phase II.
The NASD has also 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 common
stockholders of Nasdaq. In order to enable the NASD to effect the foregoing
sale in a fair and efficient manner, Nasdaq has agreed to provide the NASD
with demand and piggyback registration rights as well as "tag-along" rights
to participate in future private sales by Nasdaq of Common Stock for cash.
See "Recent Transactions." In addition, on May 22, 2001, Robert Glauber,
Chief Executive and President of the NASD, and Hardwick Simmons, Chief
Executive of Nasdaq, issued a joint letter to the members of the NASD
announcing an arrangement between the two companies whereby there will
continue to be a certain overlap between the members of the NASD Board and
the Nasdaq Board only until such time as Nasdaq is granted Exchange
Registration.
Prior to the Restructuring, Nasdaq had access to many support functions of
the NASD, including: cash management and other financial services, real
estate, legal, surveillance, and other regulatory services, information
services, and corporate and administrative services. In connection with the
Restructuring, 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
"--Risk Factors--Nasdaq faces potential conflicts of interest with related
parties" and "--Risk Factors--The intercompany agreements may not be
effected on terms as favorable to Nasdaq as could have been obtained from
unaffiliated third parties" and "Item 7. Certain Relationships and Related
Transactions."
Recent Transactions
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.
Nasdaq's ability to consummate an IPO, and the timing of an IPO, will
depend on a variety of factors including recognition for Nasdaq by the SEC
that it meets the qualifications for Exchange Registration, the progress of
several important technology initiatives (e.g., SuperMontage), and
favorable 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.
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-listed
securities. If there is an increase in the number of market makers or ECNs
that determine they do enough order routing traffic to justify setting up a
proprietary network for their traffic, Nasdaq may be forced to reduce its
fees further or risk losing its share of the order routing business. In
addition, certain system providers link many Nasdaq market makers. These
systems may be able to increase the number of orders executed through their
systems versus the Nasdaq systems. A reduction in the order routing
business could have an adverse effect on Nasdaq's business, financial
condition, and operating results.
The traditional products and services offered by markets are being
unbundled. Historically, Nasdaq has provided listings, execution services,
information services, and regulatory services to the investing public.
Currently, there are many competitors operating in the execution services
market. Nasdaq has not historically implemented pricing strategies that
isolate its various businesses. Due to competition in the execution
services business, as well as Nasdaq's past practice of bundling products
and services, it is uncertain whether Nasdaq will be able to compete
successfully in this business. Furthermore, Nasdaq faces multiple pricing
constraints, including in particular, regulatory constraints, that may
prevent it from competing effectively in certain markets.
Substantial competition could reduce Nasdaq's issuer services revenues.
Nasdaq faces competition for listings from other primary exchanges,
especially from the NYSE. In addition to competition for initial listings,
Nasdaq also competes with the NYSE to maintain listings. In the past, a
number of issuers listed on Nasdaq have left Nasdaq for the NYSE each year.
The largest 50 Nasdaq-listed issuers (based on U.S. market value) accounted
for approximately 51% of total dollar volume traded on Nasdaq for the year
ended December 31, 2000. Therefore, the loss of one or more of these
issuers would result in a significant decrease in revenues from Nasdaq's
issuer services.
ECNs do not currently provide listing venues, although such systems can
register as an exchange and compete with traditional exchanges and Nasdaq
for the execution and market data business. At least two ECNs have applied
to become registered as a national securities exchange. If these new
exchanges are successful in attracting trading volume and do not continue
to use Nasdaq transaction systems, traditional listings will become less
profitable to Nasdaq as they will not provide corresponding revenue from
trade executions and the sale of market data. In addition, if ECNs become
exchanges, they may enter the competition for issuer listings. There can be
no assurances that Nasdaq will be able to maintain or increase its listing
revenues. The reduction in initial listings or the loss of a top issuer
could have an adverse effect on Nasdaq's business, financial condition, and
operating results.
Nasdaq's market information services revenues are threatened by other
exchanges trading Nasdaq stocks.
Current SEC regulations permit national securities exchanges to trade
certain securities that are listed on Nasdaq pursuant to the UTP Plan. If
the UTP Plan participants' share of trades in Nasdaq stocks increases
substantially, Nasdaq's financial condition and operating results could be
adversely affected. In addition, since the allowable costs that are shared
by UTP Plan participants and the fees Nasdaq can charge for data products
are not exclusively set by Nasdaq, Nasdaq's control over its revenue and
cost base under the UTP Plan is limited. Current amendments to the UTP Plan
under negotiation include (i) an increase in the number of the eligible
securities over a one year period from 1,000 to all 4,734 NNM and Nasdaq
SmallCap Market 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 may lose trade reporting revenue if it loses its status as an ESIP.
Under the UTP Plan, Nasdaq collects quotation and last sale information
from competing exchanges (currently the Chicago Stock Exchange and the
Cincinnati Stock Exchange) and consolidates such information with its own.
Nasdaq sells this information for a Tape Fee. Under the revenue sharing
provision of the UTP Plan, Nasdaq is permitted to deduct certain costs
associated with acting as an ESIP from the total amount of Tape Fees
collected. The SEC has stated that as a condition of extending the UTP
Plan, the parties to the UTP Plan must negotiate in good faith to revise
the UTP Plan so that it provides for either (i) a fully viable alternative
ESIP for all Nasdaq securities or a fully viable alternative non-exclusive
SIP. If Nasdaq loses its status as an ESIP under the UTP Plan, the revenues
received from Tape Fees may decrease.
Nasdaq may lose trade reporting revenues if more market participants bypass
the comparison feature of its trade reporting system.
As market participants continue to establish automated trading links with
one another and lock-in transactions externally from Nasdaq, the use of the
ACT comparison function as a percentage of total trading volume will
continue to decrease. This negatively affects revenue, since firms are
using ACT for trade reporting, but not for comparison. Although ACT
comparison revenue actually increased by more than $10 million in fiscal
year 2000 over fiscal year 1999, this increase was due primarily to
increased trading volumes, particularly during the first quarter of 2000 in
OTC Bulletin Board securities.
Certain Congressional and SEC reviews could result in a reduction in data
fees that could reduce Nasdaq's revenues.
The SEC is reviewing concerns by industry members that the present 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
currently maintains multiple computer facilities to provide full service
during system disruptions, and has facilities in place that are expected to
maintain service during a system disruption. Any system failure that causes
an interruption in service or decreases the responsiveness of Nasdaq's
service could impair its reputation, damage its brand name, and negatively
impact its revenues. Nasdaq also relies on a number of third parties for
systems support. Any interruption in these third-party services or 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.
Nasdaq may have difficulty managing its growth.
Over the last several years, Nasdaq has experienced significant growth in
its business and the number of its employees. Nasdaq may not be able to
continue to manage its growth successfully. In an attempt to stimulate
future growth, Nasdaq has undertaken several initiatives to increase its
business, including enhancing existing products, developing new products,
and forming strategic relationships. The increased costs associated with
Nasdaq's initiatives may not be offset by corresponding increases in its
revenues. The growth of Nasdaq's business has required, and will continue
to require, Nasdaq to increase its investment in technology, management
personnel, market regulatory services, and facilities. No assurance can be
made that Nasdaq has made adequate allowances for the costs and risks
associated with this expansion, that its systems, procedures, or controls
will be adequate to support its operations, or that its management will be
able to offer and expand its services successfully. If Nasdaq is unable to
manage its growth effectively, its business, financial condition, and
operating results could be adversely affected.
Nasdaq may need additional funds to support its business plan.
Nasdaq depends on the availability of adequate capital to maintain and
develop its business. Nasdaq believes that its current capital requirements
will be met from internally generated funds and from the funds raised in
connection with the Restructuring. However, based upon a variety of
factors, including the rate of market acceptance of Nasdaq's new products,
the cost of service and technology upgrades, and regulatory costs, Nasdaq's
capital requirements may vary from those currently planned. There can be no
assurance that additional capital will be available on a timely basis, or
on favorable terms or at all.
Nasdaq may not be successful in executing its international strategy.
In order to take advantage of anticipated opportunities that will arise
outside the United States, Nasdaq intends to invest significant resources
in developing strategic partnerships with non-U.S. stock markets. Nasdaq
has had only very limited experience in developing localized versions of
its services and in marketing and operating its services internationally.
To date, Nasdaq's international efforts have not yet achieved
profitability. There can be no assurance that Nasdaq will be able to
succeed in marketing its branded services and developing localized services
in international markets. Nasdaq may experience difficulty in managing its
international operations because of, among other things, competitive
conditions overseas, difficulties in supervising foreign operations,
managing currency risk, established domestic markets, language and cultural
differences, political and economic instability, and changes in regulatory
requirements or the failure to obtain requested regulatory changes and
approvals. Any of the above could have an adverse effect on the success of
Nasdaq's international operations and, consequently, on Nasdaq's business,
financial condition, and operating results. See "Item 1. Business-Nasdaq's
Strategic Initiatives" and "-Pursuing Global Market Expansion."
Extended hours trading may have a negative impact on Nasdaq's business.
Today, market participants, including some ECNs, are trading beyond
traditional market hours (9:30 a.m. to 4:00 p.m., Eastern time). Extending
trading hours may put additional stress on the financial services industry.
Nasdaq has extended the availability of its trade reporting and quotation
systems from 8:00 a.m. until 6:30 p.m. Eastern time. Specifically, the
systems involved include ACT, ACES, CAES/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 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. 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 report trades and disseminate quotations
in exchange listed securities. Any significant delay or failure on the part
of the NASD to build this residual market could also delay the SEC's
approval of Exchange Registration.
There can be no assurance that Exchange Registration will occur or that the
registration process will occur in a timely manner. Because of the nature
of the regulatory process and the variety of market structure issues that
would have to be resolved across all markets, the registration process
could be lengthy. The failure to be approved as an exchange by the SEC may
have negative implications on the ability of Nasdaq to fund its planned
initiatives.
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.
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 report trades and disseminate quotations
in 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
information services revenues, which would adversely affect Nasdaq's
business, financial condition, and operating results.
Nasdaq will not pay cash dividends for the foreseeable future.
Nasdaq anticipates that earnings, if any, will be retained for the
development of its business and that no cash dividends will be declared on
the Common Stock for the foreseeable future.
Provisions of Delaware law and Nasdaq's governing documents may delay or
prevent its takeover.
Nasdaq is organized under the laws of the State of Delaware and was
incorporated in 1979. Certain provisions of Delaware law may have the
effect of delaying or preventing a transaction that would cause a change in
Nasdaq's control. In addition, certain provisions of the Certificate of
Incorporation and Nasdaq's By-Laws (the "By-Laws") may delay, defer, or
prevent this type of transaction, even if Nasdaq's stockholders consider
the transaction to be in their best interests. For example, the Certificate
of Incorporation places limitations on the voting rights of persons, other
than the NASD or any other person as may be approved by the Nasdaq Board
prior to the time such person owns more than 5% of the then outstanding
shares of Common Stock, who otherwise would be entitled to exercise voting
rights in respect of more than 5% of the then outstanding shares of Common
Stock. As a result, third parties are limited from exercising voting
control over Nasdaq. Moreover, it is possible that the SEC might object to
any action of the Nasdaq Board that would permit certain persons from being
exempted from the foregoing restriction on voting power. In addition, in
response to the SEC's concern about a concentration of ownership of Nasdaq,
Nasdaq's Exchange Registration application includes a rule that prohibits
any Nasdaq member or any person associated with a Nasdaq member from
beneficially owning more than five percent of the outstanding shares of
Common Stock. Other provisions make the removal of incumbent directors and
the election of new directors more time consuming and difficult, which may
discourage third parties from attempting to obtain control of Nasdaq, even
if the change in control would be in the best interests of its
stockholders. See "Item 11. Description of Registrant's Securities to be
Registered."
Item 2. Financial Information.
The following table presents summary consolidated financial and operating
data for Nasdaq. The data presented in this table are derived from
"Selected Consolidated Financial Data of Nasdaq" and the consolidated
financial statements and notes thereto which are included elsewhere in this
Registration Statement. You should read those sections for a further
explanation of the financial data summarized here. You should also read the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Nasdaq" section, which describes a number of factors which
have affected Nasdaq's financial results.
Selected Consolidated Financial Data
Year Ended December 31,
------------------------
1996 1997 1998 1999 2000
--------------------------------------------------------------------
(in thousands, except per share data and number of listed companies)
Statement of Income Data:
Revenues:
Transaction services $118,500 $174,741 $ 160,506 $283,652 $395,123
Market information services 99,446 126,436 152,665 186,543 258,251
Issuer services 111,832 113,019 137,344 163,425 184,595
Other 2,452 2,530 308 628 30,040
----------- ----------- ----------- ----------- -----------
Total revenues 332,230 416,726 450,823 634,248 868,009
Expenses:
Compensation and benefits 54,090 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
Interest 136 797 1,962 2,143 2,130
Other 8,995 13,763 14,742 22,666 24,375
----------- ----------- ----------- ----------- -----------
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 100,000,000 100,000,000 100,000,000 100,000,000 112,090,493
outstanding 1
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 62,469 76,755 56,723 134,625 249,320
activities
Net cash used in investing activities (50,726) (123,064) (58,150) (130,657) (286,009)
Net cash provided by financing 21 29,766 156 3,876 288,348
activities
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,
1996 1997 1998 1999 2000
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 20,547 $ 4,025 $ 2,754 10,598 262,257
Working capital 92,953 84,668 122,512 154,372 472,341
Total assets 270,654 353,134 405,885 578,254 1,075,317
Total long term obligations 14,097 41,362 41,248 78,965 71,325
Total stockholders' equity 189,135 229,166 266,255 352,012 764,901
- ----------------------
(1) Gives effect to the June 28, 2000, 49,999-for-one stock dividend
of the shares of Common Stock for years ended 1996-2000.
(2) EBITDA 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, 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, 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,
due to increases in volume. ACT risk management revenue decreased by over
$1 million dollars from fiscal year 1999 to fiscal year 2000, due to
Nasdaq's April 2000 implementation of a $10,000 cap per clearing firm
- -correspondent relationship per month. Risk management revenue will
decrease further in 2001 due to the first full year under the $10,000 cap.
Risk management monthly revenues are stabilized, and are projected to
generate approximately $7 million in 2001 revenue, down from approximately
$13 million in fiscal year 2000. Nasdaq is contemplating a further
clarification to this rule, which would require SEC approval and which
specifies that clearing firms will only be charged ACT risk management for
those correspondents they choose to monitor through ACT risk management.
This means that firms will have the ability to discontinue the use of this
service for certain correspondents and not pay ACT risk management fees,
thus reducing Nasdaq revenue. Nasdaq projects a potential revenue loss of
$1 million dollars due to the implementation of this rule.
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. Transaction
services revenue results primarily from trading volume. Trading volume
continues to be strong during the first quarter of 2001.
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 as new and existing subscribers increased
the demand for terminals, access lines and data. For further information
regarding market information revenues, see the sections in "Business"
entitled "-- Products and Services" and "-- Competition."
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
due to increases in quote and trading volume.
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. Market information services revenue results from trading
volume and the demand for access to the trade and quote related data. As
noted above, trading volume continues to be strong during the first quarter
of 2001.
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. A slowing of IPOs in 2001 could result in lower issuer services
revenues.
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. Other
revenue increased $29.4 million in 2000 compared to 1999 primarily as a
result of Nasdaq 100 trademark and licensing fees of $11.7 million, Nasdaq
Tools revenues of $ 6.8 million, Nasdaq.com advertising revenues of $5.9
million, and MarketSite revenues of $4.2 million. Nasdaq Tools, Nasdaq.com
and the MarketSite had no revenue in 1999.
Direct Expenses
Direct expenses increased $118.6 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 the increase in higher level staff
required to support the business and operational demands created by the
rapid growth of the market during 2000. 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 accounted for a portion
of the increase of $20.8 million, or 31%, increase in salaries as well as
for the $1.8 million, or 122%, increase in recruiting costs. The salaries
increase is comprised of $10 million to maintain the capacity growth issues
in the data center, $6.9 million to manage the system enhancements and
production support from system engineering and $3.9 million for marketing,
legal, sales and retention, and corporate management as the demutualization
staff was being added. Overall compensation also increased due to a $4.7
million, or 18%, increase for incentive compensation, a $4.6 million, or
69%, increase in retirement and savings plan expense and a $3.5 million
increase in other compensation.
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 increased costs for
software licenses and hardware maintenance costs for the operating
environment to accommodate the growth in share volume. Maintenance and
software costs increased $14.4 million for growth in capacity between 1999
and 2000. Help desk and network licenses increased costs by $2.3 million,
hardware maintenance costs increased $5.4 million, the Tandem lease costs
increased $1.3 million, software leases and maintenance costs increased
$3.9 million, and computer supplies and cabling costs increased $1.5
million. Communications and Data costs increased $23.3 million due to
increased EWNII T-1 communications line lease charges for new customers and
upgraded bandwidth or processing speed costs. Nasdaq's total share volume
for the year ended December 31, 2000 increased approximately 63.5% compared
to the year ended December 31, 1999. The complex is capable of processing
four billion shares on a peak day.
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.
The EWNII increase in installations in 1998 resulted in increased recurring
costs in 1999 for the communications lines as customers converted from EWNI
circuits to EWNII T-1 leased lines at nearly double the cost.
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 $249.3 million, primarily due to cash received from
customers of $713.4 million less cash paid to suppliers, employees, and
related parties of $403.8 million and income taxes paid of $101.2 million.
Net cash used in investing activities was $286.0 million for the twelve
months ended December 31, 2000, due in part to capital expenditures to
complete construction of the MarketSite and broadcast facility in Times
Square and the acquisition of Financial Systemware, Inc. In addition,
Nasdaq continued to make capital investments in technology to continue to
support Nasdaq's system capacity needs. The remaining cash used in
investing activities is attributable to purchases of investments with the
proceeds of the Phase I offering that exceeded the sales and maturities of
investments.
Cash provided by financing activities was $288.3 million as of December 31,
2000, primarily due to the net proceeds received from Phase I 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. Also
contributing to cash provided from financing activities was $30.0 million
in capital contributions to Nasdaq Europe Planning Company Limited from the
minority shareholders.
Additionally, in connection with the closing of Phase II on January 18,
2001, Nasdaq yielded net proceeds of approximately $63.7 million. Nasdaq
believes that the liquidity provided by existing cash and cash equivalents,
investments, and cash generated from operations will provide sufficient
capital to meet operating requirements. Nasdaq has generated positive cash
flows annually in each of the five years included in this filing and
believes it will continue to do so in the future to meet both short and
long term operating requirements.
December 31, 1999 compared to December 31, 1998
Cash and cash equivalents and available for sale securities totaled $164.2
million as of December 31, 1999, an increase of $31.6 million from $132.6
million as of December 31, 1998. Working capital increased $33.5 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 100
basis point fluctuation in market interest rates will have a material
effect on the carrying value of Nasdaq's investment portfolio or
outstanding debt, or on the Company's earnings or cash flows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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 adopted SFAS 133 with no transition adjustments
recorded and no impact on the financial statements.
Item 3. Properties.
The following is a description of Nasdaq's material properties as of June
15, 2001.
- ---------------------------------------------------------------------------------------------------------------------
Location Use Size (Approximate, in Type of Possession
square feet)
- ---------------------------------------------------------------------------------------------------------------------
Gaithersberg, Maryland General office space 66,000 Leased by the NASD.
Nasdaq reimburses the NASD
for the amounts due under
the lease
- ---------------------------------------------------------------------------------------------------------------------
New York, New York Location of MarketSite 26,000 Leased by the NASD, which
will be making an
assignment to Nasdaq
- ---------------------------------------------------------------------------------------------------------------------
New York, New York Nasdaq headquarters 78,000 Sublease from the NASD
- ---------------------------------------------------------------------------------------------------------------------
New York, New York General office space 24,000 Leased by Nasdaq
- ---------------------------------------------------------------------------------------------------------------------
Rockville, Maryland Location of Nasdaq data center 110,000 Ownership will be
transferred to Nasdaq by
the NASD in exchange for
the transfer by Nasdaq of
a 58,000 s.f. office
building to the NASD
- ---------------------------------------------------------------------------------------------------------------------
Rockville, Maryland General office space 78,000 Leased by Nasdaq effective
October, 2001
- ---------------------------------------------------------------------------------------------------------------------
Trumbull, Connecticut Location for Nasdaq's principal 162,000 Owned by Nasdaq
technology services, systems
engineering and market operations
- ---------------------------------------------------------------------------------------------------------------------
Trumbull, Connecticut General office space 101,000 (two locations) Leased by Nasdaq
- ---------------------------------------------------------------------------------------------------------------------
Washington, D.C. General office space 48,000 (three Occupied pursuant to a
locations) shared facilities
agreement with the NASD
- ---------------------------------------------------------------------------------------------------------------------
In addition to the above, Nasdaq leases administrative and sales facilities
in Menlo Park, California, London, England, Sao Paulo, Brazil, Montreal,
Canada and Shanghai, China. Nasdaq's Chicago operations will sublease space
from the NASD.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the beneficial ownership of Nasdaq's Common
Stock by all persons who are beneficial owners of more than five percent of
the Common Stock and the beneficial ownership of Nasdaq's Common Stock and
Nasdaq Japan's common shares by (1) each director, (2) Nasdaq's Chief
Executive Officer ("CEO") and the four most highly compensated executive
officers other than the CEO, who were serving as executive officers at the
end of 2000, and (3) all directors and executive officers as a group.
Except as otherwise indicated, Nasdaq believes that the beneficial owners
listed below, based on information furnished by such owners, will have sole
investment and voting power with respect to such shares, subject to
community property laws where applicable. Unless otherwise indicated, the
business address of such persons is One Liberty Plaza, New York, New York,
10006. As of 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.
Common Shares of
Common Stock Percent Nasdaq Japan Percent
Name of beneficial owner Beneficially Owned of Class Beneficially Owned of Class
- ------------------------------------ ----------------------- ------------ ----------------------- ------------
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, CA
94111
Dr. Josef Ackermann............ -(3) - - -
H. Furlong Baldwin............. - - - -
Frank E. Baxter................ -(4) - - -
Alfred R. Berkeley, III........ - - - -
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
1,522,300 shares of Common Stock. Dr. Ackermann disclaims beneficial
ownership of such shares.
(4) Mr. Baxter is the Chairman of the Jefferies Group, Inc. 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 shares of Common Stock owned by
Romano Brothers & Co. Mr. Romano is the President and majority stockholder
of Romano Brothers & Co.
(12) Mr. Sodhani is an officer of Intel Corporation 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 61 CEO, Director Class 1
Dr. Josef Ackermann 53 Director Class 2
H. Furlong Baldwin 69 Director Class 2
Alfred R. Berkeley, III 56 Vice Chairman
Frank E. Baxter 64 Director Class 1
Michael Casey 55 Director Class 3
Michael W. Clark 41 Director Class 1
William S. Cohen 60 Director Class 1
F. Warren Hellman 66 Director Class 2
John D. Markese 55 Director Class 3
E. Stanley O'Neal 49 Director Class 3
Vikram S. Pandit 45 Director Class 3
Kenneth D. Pasternak 47 Director Class 1
David S. Pottruck 52 Director Class 3
Arthur Rock 74 Director Class 3
Richard C. Romano 68 Director Class 2
Arvind Sodhani 47 Director Class 1
Sir Martin Sorrell 56 Director Class 2
Richard G. Ketchum 50 President
Gregor S. Bailar 38 Executive Vice President--Operations and Technology and
Chief Information Officer
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 39 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, Mercantile Bankshares Corporation,
Constellation Energy Group, CSX Industries, Offitbank, Wills Group, and The
St. Paul Companies.
Alfred R. Berkeley III, 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 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/over-the-counter securities market maker, and its President from
1995 to 1999. Prior to Knight, Mr. Pasternak served as Senior Vice
President, Limited Partner, and Trading Room Manager for Spear Leeds &
Kellogg/Troster Singer from 1979 until 1994. Mr. Pasternak serves on the
NASD Board and on the Advisory Committee of BRASS Utility, LLC (BRUT).
David S. Pottruck, an Industry Director, was elected to the Nasdaq Board in
July 2000. Mr. Pottruck has been a member of the NASD Board since 2000. Mr.
Pottruck is President and Co-Chief Executive Officer and a member of the
board of directors of The Charles Schwab Corporation, a holding company
whose subsidiaries engage in securities brokerage and financial services.
Mr. Pottruck joined The Charles Schwab Corporation in 1984 and became
President in 1992. Mr. Pottruck serves on the board of directors of Intel
Corporation, McKesson HBOC Inc., Dovebid, and the U.S. Ski and Snowboard
Team Foundation. Mr. Pottruck is also a trustee of the University of
Pennsylvania.
Arthur Rock, a Non-Industry Director, was elected to the Nasdaq Board in
July 2000. Mr. Rock has been a member of the NASD Board since 1998. Mr.
Rock is Principal of Arthur Rock & Co., a venture capital firm in San
Francisco, California he founded in 1969. Mr. Rock is currently a Director
Emeritus of Intel Corporation and serves on the board of directors of
Echelon Corporation.
Richard C. Romano, an Industry Director, was elected to the Nasdaq Board in
July 2000. Mr. Romano has been President of Romano Brothers & Company, a
securities broker dealer, since 1964. Mr. Romano is Vice Chairman of the
NASD Small Firm Advisory Board.
Arvind Sodhani, a Non-Industry Director, was elected to the Nasdaq Board in
1997. From July 2000 to December 2000, Mr. Sodhani served as a non-voting
member of the Nasdaq Board. Mr. Sodhani is Vice President and Treasurer of
Intel Corporation, a semiconductor manufacturer of chips and computer
networking products. Mr. Sodhani joined Intel in 1981 and became a Vice
President in 1990.
Sir Martin Sorrell, a Non-Industry Director, was elected to the Nasdaq
Board in January 2001. Sir Martin is a founder and, since 1986, has been
Group Chief Officer of WPP Group plc, a global communication services
organization. Prior to this position, Sir Martin was the Group Finance
Director of Saatchi & Saatchi Company, PLC.
Richard G. Ketchum became President of Nasdaq in July 2000. Mr. Ketchum is
responsible for all aspects of Nasdaq's operations, including the
development and formulation of legal, regulatory, and market policies, as
well as international initiatives. Prior to his current position, Mr.
Ketchum served as President of the NASD since 1998, COO of the NASD since
1993 and Executive Vice President of the NASD since 1991. 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.
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
Annual Compensation ---------------------------------------
---------------------------------- Awards Payouts
---------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All Other
Position Year Salary Bonus(1) Compensation Award(s) Options/ SARs Payouts Compensation
(a) (b) ($) (c) ($) (d) Awards ($)(e) ($)(f) (#)(g) ($)(h) ($)(2)(i)
- ----------------------------------------------------------------------------------------------------------------------------------
Frank G. Zarb, 2000 1,333,333 6,000,000 441,055(4) - - - 17,892
Chairman,(3) Nasdaq
- ----------------------------------------------------------------------------------------------------------------------------------
Alfred R. Berkeley, III, 2000 522,500 650,000 - - - - 13,405
Vice Chairman, Nasdaq
- ----------------------------------------------------------------------------------------------------------------------------------
Richard G. Ketchum, 2000 522,500 1,750,000 - - - - 13,405
President, Nasdaq
- ----------------------------------------------------------------------------------------------------------------------------------
John L. Hilley, Executive 2000 450,000 950,000 408,720 - - - 13,085
Vice President, Nasdaq
and Chairman and Chief
Executive Officer, Nasdaq
International
- ----------------------------------------------------------------------------------------------------------------------------------
J. Patrick Campbell, 2000 409,000 750,000 - - - - 12,764
Executive Vice President,
Chief Operation Officer,
and President, Nasdaq
U.S. Markets
- ----------------------------------------------------------------------------------------------------------------------------------
------------------
(1) Includes $800,000, $130,000, $950,000, $390,000 and $270,000 with
respect to Messrs. Zarb, Berkeley, Ketchum, Hilley and Campbell,
respectively, which amounts will be paid only if the individuals remain
employed by Nasdaq on December 31, 2002 or in the event of their prior
retirement, permanent disability, death or involuntary termination without
cause.
(2) Represents Nasdaq contributions to 401(k) plan and payment in
respect of a forgiveness of loan in the amount of $7,692 for Mr. Zarb;
$3,205 for each of Messrs. Berkeley and Ketchum; $2,885 for Mr. Hilley; and
$2,564 for Mr. Campbell.
(3) Mr. Zarb served as the CEO during the fiscal year ended December
31, 2000 and until February 1, 2001.
(4) Includes $221,735 in respect of the purchase of Mr. Zarb's
residence.
Employment Agreements
The NASD and Nasdaq are parties to an employment agreement with Frank Zarb
(the "Zarb Agreement"). The Zarb Agreement had an initial term of three
years commencing on February 24, 1997 (the "Initial Term") and continues
for an additional period of two years immediately following the Initial
Term (the "Additional Term," the Initial Term and the Additional Term
collectively, referred to as the "Term"). The Zarb Agreement provides for
(i) an annual base salary of $1,200,000 from the commencement of the
Initial Term through October 31, 2000 and $2,000,000 during the period
commencing on November 1, 2000 through the remainder of the Term and (ii)
incentive compensation as the Management Compensation Committee of the NASD
may award in its discretion, provided that the amount of such compensation
for each full year of service during the Term may not be not less than 50%
of Mr. Zarb's base salary for such year, and provided further that such
compensation for the second year of the Additional Term may not be less
than $4,000,000. Under the Zarb Agreement, during the first year of the
Additional Term, the aggregate annual base salary and incentive
compensation paid to Mr. Zarb by the NASD may not be less than the
aggregate annual amount paid to Mr. Zarb for the second or third year of
the Initial Term, whichever was greater and, during the second year of the
Additional Term, the aggregate annual base salary and incentive
compensation paid to Mr. Zarb by the NASD may not be less than the
aggregate annual amount paid to Mr. Zarb for the third year of the Initial
Term or the first year of the Additional Term, whichever was greater. Under
the terms of the Zarb Agreement, Nasdaq will (1) fully vest all stock
options granted to Mr. Zarb upon the earlier of (x) the termination of the
Term or (y) Zarb's relinquishment of his position and duties under the
circumstances set forth in the Zarb Agreement, and shall permit the
exercise of the options during the three month period thereafter for
incentive stock options and during the five year period thereafter for all
other stock options and (2) cause all restrictions on any restricted stock
awarded to Mr. Zarb by Nasdaq to lapse upon the earlier of (i) the
termination of the Term or (ii) Zarb's relinquishment of his position and
duties under the circumstances set forth in the Zarb Agreement.
Under the terms of the Zarb Agreement, Mr. Zarb became fully vested in his
benefits under the NASD Supplemental Executive Retirement Plan upon the
completion of the Initial Term. Under the Zarb Agreement, on February 24,
2002 and for a period of five years thereafter, unless Mr. Zarb terminates
his employment earlier (other than for relinquishment of his position under
the circumstances set forth in the Zarb Agreement), Mr. Zarb will be
entitled to an annual consulting fee of $100,000 and certain fringe
benefits and perquisites, provided that Mr. Zarb makes himself available to
provide consulting services to the CEO of the NASD during such period and
does not commence employment with another employer or recommence employment
with the NASD during such period.
Mr. Zarb's employment may be terminated due to (i) death or disability (ii)
by the NASD for "cause" or (iii) by Mr. Zarb for "good reason" upon
thirty-days written notice. If Mr. Zarb terminates his employment for "good
reason" or if the NASD terminates Mr. Zarb's employment other than for
cause, Mr. Zarb is entitled to (1) a cash payment equal to the product of
(x) the sum of the minimum incentive compensation and base salary described
above multiplied by (y) the remaining number of full and partial months in
the Term, (2) the retirement benefits Mr. Zarb would have been entitled to
had he completed the Term and (3) continuation of certain other benefits.
Nasdaq has entered into an employment agreement (the "Employment
Agreements") with each of Richard G. Ketchum, J. Patrick Campbell and John
L. Hilley (each an "Executive" collectively, the "Executives"). The term of
the Employment Agreements commenced as of December 29, 2000 and will
continue until December 31, 2003 with automatic one-year renewals, unless
either party, at least six months prior to the expiration of the term,
gives a notice of its intent not to renew the term.
The Employment Agreements with Messrs. Ketchum and Campbell provide for an
annual salary at a rate not less than the rate of annual salary in effect
as of the effective date. Mr. Hilley's Employment Agreement provides for an
annual salary at a rate not less than the rate of annual salary in effect
for 1999. The Employment Agreements with Messrs. Ketchum and Campbell
provide for guaranteed incentive compensation for each year during the term
in an amount equal to 100% of base salary as in effect on December 31 of
the preceding year.
Under the terms of the Employment Agreements, the Executives will be fully
vested in their supplemental retirement benefits (the "SERP Benefit") under
Nasdaq's Supplemental Retirement Plan, upon the attainment of age 55 (53 in
the case of Mr. Ketchum) while employed and completion of five years of
service or if the Executives' employment with Nasdaq terminates (i) due to
death or disability (ii) by Nasdaq without "cause" or (iii) by the
Executive for "good reason." With respect to Mr. Hilley, the final average
compensation for purposes of determining SERP benefits will be deemed to be
the sum of (a) one-half of his annual salary and (b) one-third of one-half
of his annual salary. The Executives are also entitled to receive equity
awards under Nasdaq's equity plans and other fringe benefits. Under the
terms of the Employment Agreement, each Executive is entitled to receive a
payment in an amount equal to two times the Executive's then effective base
salary (the "Stay Bonus") if the Executive is (i) employed by Nasdaq as of
August 9, 2003, (ii) if the Executive's employment is terminated due to
death or disability or (iii) if the Executive terminates employment for
"good reason" or Nasdaq terminates the Executive's employment without
"cause."
If the Executive's employment is terminated without "cause" or if the
Executive terminates employment for "good reason," Nasdaq is obligated to
pay to the Executive (i) the Stay Bonus if not previously paid; (ii) a pro
rata portion of the incentive compensation for the year of termination; and
(iii) continuation of base salary and incentive compensation until the
later of (x) the end of the term of the Employment Agreement or (y) 24
months from the date of such termination of employment. If the Executive
becomes subject to any "golden parachute" excise tax, Nasdaq is obligated
to make additional payments to the Executive to offset the effect of such
tax, provided that the Executive agrees to be subject to certain
restrictive covenants relating to non-competition, non-solicitation, non-
disparagement and confidentiality.
PENSION PLAN TABLE
Nasdaq's executive officers participate in Nasdaq's qualified and
supplemental defined benefit pensions plans. Under these plans executive
officers earn a benefit expressed as an annual annuity equal to 6% of their
final average compensation for each year of service. Average annual
compensation is the average annual salary plus one-third of the annual
bonus for the highest five-year period of service. The estimated credited
years of service for Mr. Zarb is 3.85 years, Mr. Berkeley is 4.58 years,
Mr. Ketchum is 9.67 years, Mr. Hilley is 2.85 years, and Mr. Campbell is
3.97 years. The following table sets forth the benefit payable under the
plan for various levels of remuneration and years of service. Such benefits
are not reduced by benefits received under social security or other
offsets.
- --------------------------------------------------------------------------------------------------------------------
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, 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, issuers with securities quoted on Nasdaq, institutional
investment firms and providers of technology services to Nasdaq. The number
of shares of Common Stock offered in both Phases I and II to each category
of investor was based upon a variety of factors, including the offeree's
contributions to Nasdaq's growth. The shares of Common Stock sold by Nasdaq
in Phase I and Phase II were issued to "accredited investors" in private
transactions exempt under Regulation D of the Securities Act.
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
provisions, if any, and the number of shares constituting any series or the
designation of such series. The issuance of preferred stock could have the
effect of decreasing the market price of the Common Stock and could
adversely affect the voting and other rights of the holders of Common
Stock.
Certain Provisions of the Certificate of Incorporation and By-Laws
Some provisions of the Certificate of Incorporation and By-Laws, which
provisions are summarized above and in the following paragraphs, may be
deemed to have an anti-takeover effect and may delay, defer, or prevent a
tender offer or takeover attempt that a stockholder might consider in its
best interest, including those attempts that might result in a premium over
the market price for the shares held by stockholders.
Classified Board of Directors
The Nasdaq Board is divided into three classes, with one class to be
elected each year to serve a three-year term. As a result, approximately
one-third of the Nasdaq Board will be elected each year. These provisions,
when coupled with the provision limiting the voting rights of certain
persons, other than the NASD, and the provision authorizing the Nasdaq
Board to fill vacant directorships or increase the size of the Nasdaq
Board, may prevent a stockholder from removing incumbent directors and
simultaneously gaining control of the Nasdaq Board by filling the vacancies
created by such removal with its own nominees. In addition, stockholders of
Nasdaq can only remove directors for cause with an affirmative vote of the
holders of not less than 66 2/3% of the outstanding shares of capital stock
of Nasdaq eligible to vote for directors.
Frank E. Baxter, Michael W. Clark, William S. Cohen, Kenneth D. Pasternak,
Hardwick Simmons and Arvind Sodhani serve as Class 1 directors whose terms
expire at the 2004 annual meeting of stockholders; Dr. Josef Ackermann, H.
Furlong Baldwin, F. Warren Hellman, Richard C. Romano, Sir Martin Sorrell,
and Frank G. Zarb serve as Class 2 directors whose terms expire at the 2002
annual meeting of stockholders and; Michael Casey, John D. Markese, E.
Stanley O'Neal, Vikram S. Pandit, David S. Pottruck, and Arthur Rock serve
as Class 3 directors whose terms expire at the 2003 annual meeting of
stockholders.
Pursuant to the Certificate of Incorporation and the By-Laws, the Nasdaq
Board, at its discretion, is authorized to fix the number of directors
constituting the Nasdaq Board. The number of voting directors on the Nasdaq
Board is currently fixed at 18.
Pursuant to the By-Laws, the number of Non-Industry Directors (as defined
below), including at least one Public Director (as defined below) and at
least two representatives of Nasdaq- listed companies (an "Issuer
Representative"), is required to equal or exceed the number of Industry
Directors (as defined below), unless the Nasdaq Board consists of 9 or
fewer directors. In such case only one director is required to be an Issuer
Representative.
If a director position becomes vacant, whether because of death,
disability, disqualification, removal, or resignation, Nasdaq's Nominating
Committee will nominate, and the Nasdaq Board will elect by majority vote,
a person satisfying the classification (Industry, Non- Industry, or Public
Director), if applicable, for the directorship to fill such vacancy, except
that if the remaining term is not more than six months, no replacement is
required.
The following is a general description of Nasdaq's director
classifications:
o Industry Director means a Director (excluding any two
officers of Nasdaq, selected at the sole discretion of the
Nasdaq Board, amongst those officers who may be serving as
directors (the "Staff Directors")) who (i) has served in the
prior three years as an officer, director, or employee of a
broker or dealer, excluding an outside director or a director
not engaged in the day-to-day management of a broker or
dealer; (ii) is an officer, director (excluding an outside
director), or employee of an entity that owns more than 10
percent of the equity of a broker or dealer, and the broker
or dealer accounts for more than five percent of the gross
revenues received by the consolidated entity; (iii) owns more
than five percent of the equity securities of any broker or
dealer, whose investments in brokers or dealers exceed 10
percent of his or her net worth, or whose ownership interest
otherwise permits him or her to be engaged in the day-to-day
management of the broker or dealer; (iv) provides
professional services to brokers or dealers, and such
services constitute 20 percent or more of the professional
revenues received by the director or member or 20 percent or
more of the gross revenues received by the director's or
member's firm or partnership; (v) provides professional
services to a director, officer, or employee of a broker,
dealer, or corporation that owns 50 percent or more of the
voting stock of a broker or dealer, and such services relate
to the director's, officer's, or employee's professional
capacity and constitute 20 percent or more of the
professional revenues received by the director or 20 percent
or more of the gross revenues received by the director's or
member's firm or partnership; or (vi) has a consulting or
employment relationship with or provides professional
services to the NASD, NASDR, Nasdaq, or Amex or has had any
such relationship or provided such services at any time
within the prior three years.
o Non-Industry Director means a Director (excluding the Staff
Directors) who is (i) a Public Director; (ii) an officer or
employee of an issuer of securities listed on The Nasdaq
Stock Market, or traded in the over-the-counter market; or
(iii) any other individual who would not be an Industry
Director.
o Public Director means a Director who has no material business
relationship with a broker or dealer, the NASD, NASDR, or
Nasdaq.
Advance Notice Requirements for Stockholder Proposals and Directors Nominations
The By-Laws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at Nasdaq's principal executive offices not less than
90 nor more than 120 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, that in the event that
the annual meeting is called for a date that is not within 30 days before
or 70 days after such anniversary date, notice by the stockholder in order
to be timely must be received not earlier than 120 days prior to the
meeting and not later than the later of 90 days prior to the meeting and
the close of business on the 10th day following the date on which notice of
the date of the annual meeting was first made public. In the case of a
special meeting of stockholders called for the purpose of electing
directors, notice by the stockholder in order to be timely must be received
not earlier than 120 days prior to the meeting and later than the later of
90 days prior to the meeting and the close of business on the 10th day
following the day on which public disclosure of the date of the special
meeting and Nasdaq's nominees was first made. In addition, the By-Laws
specify certain requirements as to the form and content of a stockholder's
notice. These provisions may preclude stockholders from bringing matters
before an annual meeting of stockholders or from making nominations for
directors at an annual or special meeting of stockholders.
Stockholder Action; Special Meeting of Stockholders
The Certificate of Incorporation provides that stockholders are not
entitled to act by written consent in lieu of a meeting. Delaware law vests
the board of directors of a Delaware corporation with the authority to call
special meetings of stockholders and permits the corporation to authorize
in its certificate of incorporation or by-laws other persons to also have
such authority. The Certificate of Incorporation and By-Laws do not vest
any other persons with such authority.
Amendments; Supermajority Vote Requirements
The General Corporation Law of the State of Delaware provides generally
that the affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporation's certificate of
incorporation, unless a corporation's certificate of incorporation requires
a greater percentage. The Certificate of Incorporation imposes
supermajority stockholder vote (66%) requirements in connection with
stockholder amendments to the By- Laws and in connection with the amendment
of certain provisions of the Certificate of Incorporation, including those
provisions of the Certificate of Incorporation relating to the limitations
on voting rights of certain persons, the classified board of directors,
removal of directors, and prohibitions on stockholder action by written
consent.
Authorized But Unissued Shares
The authorized but unissued shares of Common Stock and preferred stock will
be available for future issuance without stockholder approval. These
additional shares may be utilized for a variety of corporate purposes,
including future public or private offerings to raise additional capital,
corporate acquisitions, and employee benefit plans. The existence of
authorized but unissued shares of Common Stock and preferred stock could
render more difficult, or discourage an attempt to obtain control of Nasdaq
by means of a proxy contest, tender offer, merger or otherwise.
Transfer Restrictions on Common Stock
The shares of Common Stock cannot be, directly or indirectly, offered,
sold, gifted, pledged, assigned, transferred, or otherwise disposed of
(each, for the purposes hereof, a "Transfer") except subject to all
applicable laws and:
(1) with the prior written consent of Nasdaq; or
(2) until the earlier of (i) the date on which a registration
statement filed with the SEC in connection with an initial public
offering of shares of Common Stock is declared effective (the
"Effective Date"), or (ii) the expiration of two years following
June 28, 2000 if a registration statement has not been filed with
the SEC in connection with an initial public offering of shares of
Common Stock during such two-year period; provided, however, that
Nasdaq may elect, in its sole discretion, to further restrict the
Transferability of any shares of Common Stock including, without
limitation, the shares of Common Stock purchased upon exercise of
any Warrants, for a period of 180 days following the Effective
Date by giving written notice of such election to holders of
Common Stock at least 10 days prior to the Effective Date; or
(3) to a Majority Affiliate. Any Transfer to a Majority Affiliate for
consideration will require that the transferor deliver to Nasdaq,
an opinion of the transferor's counsel to the effect that the
Transfer of securities by the transferor to a Majority Affiliate
(A) complies with the transfer restriction provisions set forth
herein and (B) does not require registration under the Securities
Act or registration or qualification under any applicable state
securities laws. Any Transfer to a Majority Affiliate without
consideration will require the transferor to make a written
representation to Nasdaq that the Transfer complies with the
provisions set forth in this section and was made without
consideration.
The following terms are defined as set forth below:
"Affiliate" means, with respect to any specified Person, any other
Person who, directly or indirectly, owns or controls, is under common
ownership or control with, or is owned or controlled by, such specified
Person.
"Majority Affiliate" of any Person means an Affiliate of such
Person: (a) a majority of the voting stock or beneficial ownership of which
is owned by such Person, or by any Person who, directly or indirectly, owns
a majority of the voting stock or beneficial ownership of such Person; (b)
who, directly or indirectly, owns a majority of the voting stock or
beneficial ownership of such Person; and (c) any Majority Affiliate of any
Affiliate described in clause (a) or clause (b) above.
"Person" means any individual, company, limited liability company,
corporation, trust, estate, association, nominee, or other entity.
Delaware Business Combination Statute
Nasdaq is organized under Delaware law.
Delaware law generally prohibits a publicly held or widely held corporation
from engaging in a "business combination" with an "interested stockholder"
for three years after the stockholder becomes an interested stockholder. An
"interested stockholder" is a person who directly or indirectly owns 15% or
more of the corporation's outstanding voting stock. A "business
combination" includes a merger, asset sale or other transaction that
results in a financial benefit to the interested stockholder. However,
Delaware law does not prohibit these business combinations if:
(1) before the stockholder becomes an interested stockholder the
corporation's board approved either the business combination or
the transaction that resulted in the stockholder becoming an
interested stockholder;
(2) after the transaction that results in the stockholder becoming an
interested stockholder, the interested stockholder owns at least
85% of the corporation's outstanding voting stock (excluding
certain shares); or
(3) the corporation's board approves the business combination and the
holders of at least two-thirds of the corporation's outstanding
voting stock that the interested stockholder does not own
authorize the business combination at a meeting of stockholders.
Item 12. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and any corporate agents in terms
sufficiently broad to indemnify such person under certain circumstances for
liabilities, including reimbursement for expenses, incurred arising under
the Securities Act. The Certificate of Incorporation and By-Laws provide
that Nasdaq shall indemnify its directors, officers, employees, and members
of the Nasdaq Listing and Hearing Review Council to the fullest extent
permitted by Delaware law. Nasdaq, in its discretion, may indemnify its
agents to the fullest extent and under the circumstances permitted by the
Delaware General Corporation Law. The directors and officers of Nasdaq are
covered by insurance policies indemnifying them against certain
liabilities, including certain liabilities arising under the Securities
Act, which might be incurred by them in such capacities and against which
they may not be indemnified by Nasdaq.
Item 13. Financial Statements and Supplementary Data.
The following table presents selected quarterly financial data for Nasdaq.
The data presented in this table are derived from "Selected Consolidated
Financial Data of Nasdaq" and the consolidated financial statements and
notes thereto which are included elsewhere in this Registration Statement.
You should read those sections for a further explanation of the financial
data summarized here. You should also read the "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Nasdaq"
section, which describes a number of factors which have affected Nasdaq's
financial results. The consolidated financial statements are as set forth
in the "Index to Consolidated Financial Statements" on page F-1.
Selected Quarterly Financial Data
(in thousands, except EPS information)
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1999 1999 1999 1999 Total 1999
Revenues $133,860 $152,833 $169,136 $178,419 $634,248
Total expenses 93,552 108,610 122,751 176,966 501,879
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. 2 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: June 29, 2001
The Nasdaq Stock Market, Inc.
Notes to the Consolidated Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following audited, and consolidated financial statements of The Nasdaq
Stock Market, Inc. and its subsidiaries are presented herein on the page
indicated:
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets.................................................F-3
Consolidated Statements of Income...........................................F-5
Consolidated Statements of Changes in Stockholders' Equity..................F-6
Consolidated Statements of Cash Flows.......................................F-7
Notes to Consolidated Financial Statements..................................F-8
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Nasdaq Stock Market, Inc.
We have audited the accompanying consolidated balance
sheets of The Nasdaq Stock Market, Inc. ("Nasdaq") (a majority owned
subsidiary of the National Association of Securities Dealers, Inc.) as of
December 31, 2000 and 1999, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These consolidated
financial statements are the responsibility of Nasdaq's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of The Nasdaq Stock Market, Inc. at
December 31, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 3 to the consolidated financial
statements, effective January 1, 1999, Nasdaq adopted Statement of Position
98-1 "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use."
Ernst & Young LLP
Washington, D.C.
January 26, 2001
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
-------------------------------
2000 1999
-------------------------------
Assets
Current assets:
Cash and cash equivalents $ 262,257 $ 10,598
Investments:
Available-for-sale, at fair value 232,090 153,566
Held-to-maturity, at amortized cost 21,967 10,697
Receivables, net 172,660 112,403
Receivables from related parties 8,250 7,168
Deferred tax asset 5,763 5,213
Other current assets 14,869 12,701
-------------------------------
Total current assets 717,856 312,346
Investments:
Held-to-maturity, at amortized cost 6,612 17,720
Property and equipment:
Land, buildings and improvements 80,727 56,173
Data processing equipment and software 370,066 246,999
Furniture, equipment and leasehold improvements 134,638 101,658
-------------------------------
585,431 404,830
Less accumulated depreciation and amortization (252,380) (192,719)
-------------------------------
Total property and equipment, net 333,051 212,111
Investment in warrants, at cost - 33,480
Other assets 17,798 2,597
-------------------------------
Total assets $ 1,075,317 $ 578,254
===============================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
2000 1999
------------------------------------
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 117,867 $ 68,585
Accrued personnel costs 37,273 30,505
Deferred revenue 6,068 9,787
Other accrued liabilities 29,306 17,839
Due to banks 13,876 8,819
Payables to related parties 19,158 11,742
------------------------------------
Total current liabilities 223,548 147,277
Long-term debt 25,000 25,000
Accrued pension costs 10,390 7,073
Non-current deferred tax liability, net 26,782 10,928
Deferred revenue, investment in warrants, at - 33,480
cost
Other liabilities 9,153 2,484
------------------------------------
Total long-term liabilities 71,325 78,965
Total liabilities 294,873 226,242
Minority interests 15,543 -
Stockholders' Equity
Common stock, $.01 par value, 300,000,000
authorized, 123,663,746 issued and
outstanding 1,237 1,000
Additional paid-in capital 265,603 149
Unrealized gains on available-for-sale
investments, net of tax 321 1,742
Foreign currency translation, net of
minority interests of ($1,185) in 2000 (1,508) -
Retained earnings 499,248 349,121
------------------------------------
Total stockholders' equity 764,901 352,012
------------------------------------
Total liabilities, minority interest and $ 1,075,317 $ 578,254
stockholders' equity
====================================
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Income
(In thousands, except share amounts)
Years ended December 31,
2000 1999 1998
-------------------------------------------------------
Revenue
Transaction services $ 395,123 $ 283,652 $ 160,506
Market information services 258,251 186,543 152,665
Issuer services 184,595 163,425 137,344
Other 30,040 628 308
-------------------------------------------------------
Total revenue 868,009 634,248 450,823
-------------------------------------------------------
Expenses
Compensation and benefits 133,496 98,129 78,565
Marketing and advertising 45,908 62,790 42,483
Depreciation and amortization 65,645 43,696 34,984
Professional and contract services 61,483 35,282 35,127
Computer operations and data
communications 138,228 100,493 72,111
Travel, meetings and training 12,113 10,230 7,750
Occupancy 14,766 6,591 5,354
Publications, supplies and postage 7,181 4,670 5,208
Interest 2,130 2,143 1,962
Other 24,375 22,666 14,742
-------------------------------------------------------
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)
Number of Accumulated
Additional Other
Common Shares Common Paid in Retained Comprehensive
Outstanding1 Stock1 Capital1 Earnings Income (Loss) Total
---------------------------------------------------------------------------------------
Balance, January 1, 1998 100,000,000 1,000 $ 149 $ 228,017 - $229,166
Net income - - - 34,955 - 34,955
Unrealized gains on - - - - $ 2,020 2,020
available-for-sale investments, net
of tax of $1,088
------------
Comprehensive income - - - - - 36,975
---------------------------------------------------------------------------------------
Balance, December 31, 1998 100,000,000 1,000 149 262,972 2,020 266,141
Net income - - - 86,149 - 86,149
Unrealized losses on
available-for-sale investments, net
of tax of $(149) - - - - (278) (278)
-------------
Comprehensive income - - - - - 85,871
----------------------------------------------------------------------------------------
Balance, December 31, 1999 100,000,000 1,000 149 349,121 1,742 352,012
Net income - - - 150,127 - 150,127
Unrealized losses on
available-for-sale investments, net
of tax of $(765) - - - - (1,421) (1,421)
Foreign currency translation, net
of Minority interests of
$(1,185) - - - - (1,508) (1,508)
-------------
Comprehensive income - - - - - 147,198
Capital contribution - - 30,000 - - 30,000
Minority interest resulting from
original share of equity in Nasdaq
Europe - - (17,600) - - (17,600)
Net proceeds from Phase I offering 23,663,746 $ 237 253,054 - - 253,291
========================================================================================
Balance, December 31, 2000 123,663,746 $ 1,237 $ 265,603 $ 499,248 $ (1,187) $ 764,901
========================================================================================
See accompanying notes to consolidated financial statements.
- -------------------
1 Gives effect to the June 28, 2000 49,999-for-one stock dividend of
the shares of Common Stock for years December 31, 1998 and 1999.
The Nasdaq Stock Market, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
2000 1999 1998
-----------------------------------------------------
Cash flow from operating activities
Cash received from customers $ 713,408 $ 527,946 $ 400,918
Cash paid to suppliers and employees (281,601) (248,173) (212,006)
Cash paid to related parties, net (122,188) (104,761) (109,563)
Income taxes paid (101,171) (49,992) (24,131)
Interest received, net 19,624 10,320 7,699
Other 21,248 (715) (6,194)
-----------------------------------------------------
Cash provided by operating activities 249,320 134,625 56,723
Cash flow from investing activities
Proceeds from redemptions of
available-for-sale investments 154,931 107,328 -
Purchases of available-for-sale investments (237,241) (131,291) -
Proceeds from maturities of held-to-maturity
investments 10,811 30,743 100,845
Purchases of held-to-maturity investments (10,973) (30,990) (129,624)
Purchases of property and equipment (189,666) (110,489) (39,729)
Proceeds from sales of property and
equipment 3,108 4,042 10,358
-----------------------------------------------------
Cash used in investing activities (286,009) (130,657) (58,150)
Cash flow from financing activities
Increase in due to banks 5,057 3,876 156
Proceeds from Phase I private placement
offering 253,291 - -
Contributions from minority shareholders 30,000 - -
-----------------------------------------------------
Cash provided by financing activities 288,348 3,876 156
Increase (decrease) in cash and cash
equivalents 251,659 7,844 (1,271)
Cash and cash equivalents at beginning of
period 10,598 2,754 4,025
-----------------------------------------------------
Cash and cash equivalents at end of period $ 262,257 $ 10,598 $ 2,754
=====================================================
Reconciliation of net income to cash provided
by operating activities
Net income $ 150,127 $ 86,149 $ 34,955
Depreciation and amortization 65,645 43,696 34,984
Minority interests in earnings (872) - -
Increase in receivables, net (59,885) (39,897) (18,762)
(Increase) decrease in receivables from
related parties (1,082) 2,497 (6,670)
Increase in other current assets (2,168) (6,521) (380)
Increase in deferred tax asset (550) (1,316) -
Decrease (increase) in other assets 1,265 4,866 (4,688)
Increase in accounts payable and accrued
expenses 49,256 18,815 7,607
Increase in accrued personnel costs 6,685 9,660 3,966
(Decrease) increase in deferred revenue (3,719) 1,413 2,758
Increase in other accrued liabilities 11,362 2,569 9,545
Increase (decrease) in payables to related
parties 7,416 7,931 (2,052)
Increase (decrease) in accrued pension costs 3,139 2,507 (3,414)
Increase in non-current deferred tax
liability, net 15,854 2,770 -
Increase (decrease) in other liabilities 6,847 (514) (1,126)
-----------------------------------------------------
Cash provided by operating activities $ 249,320 $ 134,625 $ 56,723
See accompanying notes to consolidated financial statements.
The Nasdaq Stock Market, Inc.
Notes to the Consolidated Financial Statements
1. Organization and Nature of Operations
The Nasdaq Stock Market, Inc. ("Nasdaq") is the parent company of Nasdaq
Global Holdings ("Nasdaq Global"); Quadsan Enterprises, Inc. ("Quadsan");
Nasdaq Tools, Inc. ("Nasdaq Tools"); Nasdaq Investment Product Services,
Inc. ("NIPS"); and Nasdaq International Market Initiatives, Inc. ("NIMI");
collectively referred to as Nasdaq. These entities are wholly owned by
Nasdaq. Nasdaq is a majority owned subsidiary of the National Association
of Securities Dealers, Inc. (the "NASD").
At a special meeting of the NASD members held on April 14, 2000, more than
a majority of NASD members approved a plan to broaden the ownership in
Nasdaq through a two-phase private placement of (1) newly-issued shares of
Common Stock, and (2) Common Stock and Warrants to purchase shares of
Common Stock owned by the NASD (the "Restructuring"), to 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 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 operates in one segment as defined in the Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). Nasdaq uses a multiple market maker
system to operate an electronic, screen-based equity market. Nasdaq's
principal business products are price discovery and trading services,
listing of issues, and the sale of related data and information. The
majority of this business is transacted with listed companies, market data
vendors and firms in the broker/dealer industry within the United States.
Nasdaq Global, which is incorporated in Switzerland, is the holding company
for Nasdaq's investments in Nasdaq Europe Planning Company Limited, Nasdaq
Europe 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
NASD formed a joint venture, NASDAQ Europe, in February 2000 with Softbank,
Vivendi, and Epartners, whereby each partner contributed $10 million in
cash. NASD contributed $10 million cash, licensing of its brand and
provided technology expertise and management leadership in exchange for a
56% interest in this venture. As part of the restructuring, the NASD's
ownership interest in Nasdaq Europe was transferred to Nasdaq Global
Holdings.
NASDAQ Europe was treated as a consolidated entity in the NASDAQ and NASD
financial statements.
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 of $6.5 million recorded as a
result of the acquisition is being amortized on a straight-line basis over
five years. Additionally, the Nasdaq Tools principals, the sellers, will
collectively be paid $25.0 million. Of this amount, $10.0 million was paid
upon closing and is being recognized as expense on a straight-line basis
over five years. Five cash payments of $3.0 million each will be paid over
the five years following closing, contingent upon the continued employment
and development efforts of the Nasdaq Tools principals. The unamortized
goodwill and other intangible assets related to the acquisition of Nasdaq
Tools are $5.4 million and $8.3 million, respectively, as of December 31,
2000 and are included in other assets in the consolidated balance sheets.
In October 2000, Nasdaq Japan sold an approximately 15 percent stake for
approximately $48 million to a group of 13 major Japanese, U.S. and
European brokerages, thereby reducing Nasdaq Global's interest to
approximately 39.1 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 non-majority owned investees are
accounted for under the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand cash and all non-restricted
investments purchased with a remaining maturity of three months or less at
the time of purchase. Such investments included in cash and cash
equivalents in the consolidated balance sheets were $218.5 million and $7.1
million at December 31, 2000 and 1999, respectively.
Investments
Under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
management determines the appropriate classification of investments at the
time of purchase. Investments for which Nasdaq does not have the intent or
ability to hold to maturity are classified as "available-for-sale" and are
carried at fair market value, with the unrealized gains and losses, net of
tax, reported as a separate component of stockholders' equity. Investments
for which Nasdaq has the intent and ability to hold to maturity are
classified as "held-to-maturity" and are carried at amortized cost. The
amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion
of discounts and is included in interest income and interest expense as
appropriate. Realized gains and losses on sales of securities are included
in earnings using the specific identification method.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost, that is deemed to be other than temporary, results in
a reduction in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
Receivables, Net
Nasdaq's receivables are concentrated with NASD member firms, market data
vendors and Nasdaq issuers. Receivables are shown net of reserves for
uncollectable accounts. Reserves are calculated based on the age and source
of the underlying receivable and are tied to past collections experience.
Total reserves netted against receivables in the consolidated balance
sheets were $5.4 million and $3.0 million at December 31, 2000 and 1999,
respectively.
3. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Equipment acquired under capital leases is recorded at the lower of fair
market value or the present value of future lease payments. Depreciation
and amortization are provided on the straight-line method. Estimated useful
lives generally range from 10 years to 40 years for buildings and
improvements, 2 years to 5 years for data processing equipment and
software, and 5 years to 10 years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the lesser
of the useful life of the improvement or the term of the applicable lease.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that long-lived assets
or other assets may be impaired, such as obsolescence, an evaluation of
recoverability would be performed. If an evaluation 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.
On a monthly basis, Nasdaq accrues the gross CQA/CTA revenue based on the
prior quarter's actual revenue and the actual Nasdaq trades in NYSE and
Amex stocks for the month. 40% of the estimate is accrued towards the
revenue sharing arrangement with the market participants. On a quarterly
basis, revenues are adjusted to reflect the actual payments received.
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.
3. Summary of Significant Accounting Policies (continued)
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:
Available-for-Sale Securities
---------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
---------------------------------------------------------------
December 31, 2000
U.S. Treasury securities and
obligations of U.S. government
agencies 109,350 542 59 109,833
Obligations of states and political
subdivisions 43,664 55 954 42,765
Asset-backed securities 52,846 202 513 52,535
U.S. corporate securities 6,018 61 90 5,988
Other debt securities 649 9 - 658
---------------------------------------------------------------
Total debt securities 212,527 869 1,616 211,780
Equity securities 19,069 3,584 2,343 20,310
---------------------------------------------------------------
231,596 4,453 3,959 232,090
===============================================================
Following is a summary of investments classified as held to maturity which
are carried at amortized cost as of December 31, 2000:
Held-to-Maturity Securities
---------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
---------------------------------------------------------------
December 31, 2000
U.S. Treasury securities and
obligations of U.S. government
agencies 28,579 45 32 28,592
Obligations of states and political
subdivisions - - - -
Asset-backed securities - - - -
U.S. corporate securities - - - -
Other debt securities - - - -
---------------------------------------------------------------
Total debt securities 28,579 45 32 28,592
Equity securities
---------------------------------------------------------------
28,579 45 32 28,592
===============================================================
Following is a summary of investments classified as available for sale which
are carried at fair value as of December 31, 1999:
Available-for-Sale Securities
---------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
---------------------------------------------------------------
December 31, 1999
U.S. Treasury securities and
obligations of U.S. government
agencies 68,751 135 487 68,399
Obligations of states and political
subdivisions 37,140 - 792 36,348
Asset-backed securities 16,814 1 657 16,158
U.S. corporate securities 9,055 1 164 8,892
Other debt securities - - - -
---------------------------------------------------------------
Total debt securities 131,760 137 2,100 129,797
Equity securities 19,125 5,642 998 23,769
---------------------------------------------------------------
150,885 5,779 3,098 153,566
===============================================================
Following is a summary of investments classified as held to maturity which are
carried at amortized cost as of December 31, 1999:
Held-to-Maturity Securities
---------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
---------------------------------------------------------------
December 31, 1999
U.S. Treasury securities and
obligations of U.S. government
agencies 28,417 7 617 27,807
Obligations of states and political
subdivisions - - - -
Asset-backed securities - - - -
U.S. corporate securities - - - -
Other debt securities - - - -
---------------------------------------------------------------
Total debt securities 28,417 7 617 27,807
Equity securities
---------------------------------------------------------------
28,417 7 617 27,807
===============================================================
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.
During the years ended December 31, 2000, and 1999, debt and marketable
equity available-for-sale securities with a fair value at the date of sale
of $72.7 million and $145.6 million, respectively, were sold. The gross
realized gains on such sales totaled $2.8 million and $830,000,
respectively, and the gross realized losses totaled $955,000 and $998,000,
respectively. The net adjustment to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of
shareholders' equity totaled $(224,000) and $3.0 million, respectively.
During the years ended December 31, 2000, and 1999, debt and marketable
equity available-for-sale securities with a fair value at the date of sale
of $72.7 million and $145.6 million, respectively, were sold. The gross
realized gains on such sales totaled $2.8 million and $830,000,
respectively, and the gross realized losses totaled $955,000 and $998,000,
respectively. The net adjustment to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of
shareholders' equity totaled $(224,000) and $3.0 million, respectively.
Nasdaq accounts for investments under Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Management thereby determines the appropriate
classification of investments at the time of purchase. Investments for
which Nasdaq does not have the intent or ability to hold to maturity are
classified as "available-for-sale" and are carried at fair market value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Investments for which Nasdaq has the
intent and ability to hold to maturity are classified as "held-to-maturity"
and are carried at amortized cost. The amortized cost of debt securities
classified as held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts and is included in
interest income and interest expense as appropriate. Realized gains and
losses on sales of securities are included in earnings using the specific
identification method. A decline in the market value of any
available-for-sale or held-to-maturity security below cost, that is deemed
to be other than temporary, results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a new cost basis for
the security is established.
5. Fair Value of Financial Instruments
Nasdaq considers cash and cash equivalents, accounts receivable,
investments, investments in subsidiaries, accounts payable and accrued
expenses, due to banks, and long-term debt to be its financial instruments.
The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable, investments, accounts payable and accrued
expenses, and due to banks closely approximate their fair values. The
approximate fair value of Nasdaq's long-term debt was estimated using a
discounted cash flow analysis, based on Nasdaq's assumed incremental
borrowing rates for similar types of borrowing arrangements. This analysis
indicates that the fair value of Nasdaq's long-term debt at December 31,
2000 and 1999 approximates its carrying amount. The fair value of its
investments in subsidiaries is not determinable since these investments do
not have quoted market prices.
6. Long-Term Debt
In May 1997, Nasdaq entered into a $25.0 million note payable with a
financial institution (the "Lender"). Principal payments are scheduled to
begin in 2007 and continue in equal monthly installments until maturity in
2012. The note requires monthly interest payments through May 2007 at an
annual rate of 7.41%. After May 2007, Nasdaq will incur interest equal to
the Lender's cost of funds rate, as defined in the agreement, plus .5%.
Interest expensed and paid under the agreement totaled approximately $1.9
million for each of the years ended December 31, 2000, 1999 and 1998.
7. Income Taxes
The income tax provision includes the following amounts:
Years Ended December 31,
2000 1999 1998
-----------------------------------------------------
Current income taxes:
Federal $ 75,727 $ 46,482 $ 22,930
State 14,208 11,599 5,196
-----------------------------------------------------
Total current income taxes 89,935 58,081 28,126
Deferred income taxes:
Federal 12,081 273 (1,695)
State 3,002 67 (421)
-----------------------------------------------------
Total deferred income taxes 15,083 340 (2,116)
-----------------------------------------------------
Total provision for income taxes $ 105,018 $ 58,421 $ 26,010
-----------------------------------------------------
Income taxes paid during the periods $ 101,171 $ 49,992 $ 24,131
7. Income Taxes (continued)
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.
8. Employee Benefits (continued)
The following table sets forth the plans' funded status and amounts
recognized in the Nasdaq balance sheets of December 31:
Pension Benefits
2000 1999
------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 39,773 $ 33,184
Service cost 4,543 3,304
Interest cost 3,246 2,448
Actuarial losses 5,488 7,363
Benefits paid (1,988) (2,246)
(Gain) loss due to change in discount rate 2,605 (4,280)
------------------------------------
Benefit obligation at end of year $ 53,667 $ 39,773
------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 28,312 $ 22,801
Actual return on plan assets 2,058 5,276
Company contributions 3,082 2,480
Benefits paid (1,988) (2,245)
------------------------------------
Fair value of plan assets at end of year $ 31,464 $ 28,312
------------------------------------
Funded status of the plan (underfunded) $ (22,203) (11,461)
Unrecognized net actuarial gain 8,393 1,444
Unrecognized prior service cost 906 976
Unrecognized transition obligation/(asset) (390) (447)
------------------------------------
Accrued benefit cost $ (13,294) $ (9,488)
====================================
As of December 31, 2000 and 1999, $2.9 million and $2.4, respectively, of
the accrued pension liability is carried as current in the accounts payable
and accrued expenses line of the consolidated balance sheets.
Pension Benefits
2000 1999
------------------------------------
Weighted-average assumptions as of December 31
Discount rate 7.5% 8.0%
Expected return on plan assets 9.0 9.0
Rate of compensation increase 5.2 5.3
8. Employee Benefits (continued)
Pension Benefits
2000 1999 1998
-----------------------------------------------------
Components of net periodic benefit cost
Service cost $ 4,543 $ 3,304 $ 2,817
Interest cost 3,246 2,448 2,039
Expected return on plan assets (2,533) (2,261) (1,693)
Amortization of unrecognized transition asset (57) (57) (57)
Recognized net actuarial loss 145 101 65
Prior service cost recognized 131 133 131
Curtailment/settlement loss recognized 1,296 - -
-----------------------------------------------------
Benefit cost $ 6,771 $ 3,668 $ 3,302
=====================================================
Nasdaq also participates in a voluntary savings plan for eligible employees
of the NASD and its subsidiaries. Employees are immediately eligible to
make contributions to the plan and are also eligible for an employer
contribution match at an amount equal to 100% of the first 4% of eligible
employee contributions. Eligible plan participants may also receive an
additional discretionary match from Nasdaq. Savings plan expense for the
years ended December 31, 2000, 1999, 1998 was $3.7 million, $2.9 million,
and $2.0 million, respectively. The expense included a discretionary match
authorized by the NASD Board of Governors 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:
9. Leases (continued)
Year ending December 31:
2001 $ 13,455
2002 16,034
2003 16,047
2004 16,376
2005 16,234
Remaining years 126,259
--------------------
Total minimum lease payments $ 204,405
====================
Future minimum lease payments under noncancellable capital leases with
initial or remaining terms of one year or more consisted of the following
at December 31, 2000:
Year ending December 31:
2001 $ 6,462
2002 6,462
2003 3,231
2004 -
2005 -
Remaining years -
--------------------
Total minimum lease payments $ 16,155
====================
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
10. Warrants (continued)
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. The WorldCom
contract is for $600 million but the only guarantee is to utilize the
service to $300 million. In 1997 Nasdaq paid an $8 million deposit fee in
relation to this contract, of which $4 million will be returned from WorldCom
if Nasdaq uses $350 million of the CTCI and EWNII network services. If
Nasdaq achieves $400 million of usage, the full $8 million will be returned.
In 1997, Nasdaq fully reserved for this deposit in the event that the Company
did not reach the $350 million utilization of network services. There was
a possibility at the end of 2000 that if SuperMontage stayed on schedule,
Nasdaq would change network configurations altogether due to the volume,
capacity and cost issues. The deposit continues to be fully reserved due to
the unknown utilization of the network to the $350 million level.
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.
12. Related Party Transactions (continued)
Surveillance Charge from NASDR
NASDR incurs costs associated with surveillance monitoring, legal and
enforcement activities related to the regulation of Nasdaq. These costs are
charged to Nasdaq based upon the NASD management's estimated percentage of
costs incurred by each NASDR department that are attributable directly to
Nasdaq market surveillance. The following table represents Nasdaq
management's estimate of the costs charged by NASDR to Nasdaq:
December 31,
-----------------------------------------------
2000 1999 1998
------------- ------------ -------------
Compensation $ 32,018 $ 32,529 $ 29,894
Professional and contract services 27,110 20,000 16,193
Occupancy 399 1,687 1,945
Publications, supplies and postage 2,924 1,661 1,744
Computer ops. and data comm. 5,010 3,430 2,503
Depreciation 8,435 3,831 3,205
Travel, meetings and training 2,848 1,841 1,670
Other 1,106 150 192
-----------------------------------------------
Total $ 79,850 $ 65,129 $ 57,346
===============================================
On June 28, 2000 Nasdaq entered into a Regulatory Services Agreement with
NASDR (the "Regulatory Services Agreement"). Under the terms of this
agreement, NASDR will provide Nasdaq regulatory services and related
administrative functions necessary for NASDR's performance of such
services. Through December 31, 2000, NASDR's fees charged to Nasdaq will
reflect NASDR's cost of furnishing the services. After December 31, 2000,
pricing will be determined on a "cost-plus basis" for each service. The
initial term of the Regulatory Services Agreement expires on June 28, 2010.
Nasdaq is subject to termination fees, payable to NASDR, if it terminates
its receipt of services under the agreement for convenience.
Support Charge from the NASD
The NASD provides various administrative services to Nasdaq including legal
assistance, accounting and managerial services. It is the NASD's policy to
charge these expenses and other operating costs to Nasdaq based upon usage
percentages determined by management of the NASD and Nasdaq. Additionally,
the NASD incurs certain costs related to the development and maintenance of
technology for Nasdaq. Technology development costs are allocated directly
to Nasdaq based upon specific projects requested by Nasdaq. Technology
maintenance costs are allocated based upon Nasdaq's share of computer
usage. The following table represents Nasdaq management's estimate of the
composition of costs charged by the NASD to Nasdaq:
12. Related Party Transactions (continued)
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
will be released from the Voting Trust Agreement upon Exchange
Registration. The shares of Common Stock purchased upon a valid exercise of
a Warrant tranche after Exchange Registration will not be subject to the
Voting Trust Agreement.
There are 30,000,000 shares of preferred stock authorized, and none issued
and outstanding.
The following table sets forth the computation of basic earnings per share.
December 31,
---------------------------------------------------
2000 1999 1998
--------------- --------------- -------------
Numerator for basic earnings per share $ 150,127 $ 86,149 $ 34,955
Denominator for basic weighted average shares 112,090,493 100,000,000 100,000,000
Basic earnings per share $ 1.34 $ 0.86 $ 0.35
Diluted earnings per share is the same as basic earnings per share for all
periods presented as there were no dilutive potential common shares
outstanding during the periods presented.
14. Subsequent Events (Unaudited)
Phase II Private Placement
Phase II closed on January 18, 2001 with Nasdaq selling approximately 5.0
million shares, yielding net proceeds of approximately $63.7 million.
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 under the purchase method of
accounting, resulting in the recording of goodwill of approximately $4.9
million.
Hellman & Friedman
On May 3, 2001, Nasdaq issued and sold $240.0 million in aggregate
principal amount of its 4% convertible subordinated debentures due 2006
(the "Subordinated Debentures") to Hellman & Friedman Capital Partners IV,
L.P. and certain of its affiliated limited partnerships (collectively,
"Hellman & Friedman"). The annual 4% coupon will be payable in arrears in
cash and the Subordinated Debentures will be convertible at any time into
shares of Common Stock at $20.00 per share.
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.
14. Subsequent Events (Unaudited)(continued)
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.
Stock-Based Awards to Officers and Employees
As of February 14, 2001 Nasdaq granted 9.6 million stock options and
approximately 534,000 shares of restricted stock to certain employees and
officers pursuant to its Equity Incentive Plan. Nasdaq grants stock options
with an exercise price equal to the fair market value of the stock at the
date of the grant. Nasdaq accounts for stock option grants in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB Nop. 25") and accordingly, recognizes no
compensation expense related to such grants.
Restricted stock awards are awarded in the name of the employee or officer
at fair value at the date of the grant. The awards contain restrictions on
sales and transfers, and are subject to a five year vesting period. The
534,000 shares of restricted stock were awarded at a fair value of $13.00
per share, and are being expensed over the vesting period. Approximately
$171,000 was recorded as compensation expense in the first quarter related
to these awards.
EXHIBIT INDEX
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of The Nasdaq Stock Market,
Inc.(+)
3.2 By-Laws of The Nasdaq Stock Market, Inc.(+)
4.1 Form of Common Stock certificate.(+)
7A Qualitative Disclosure about market risk (incorporated herein by
reference to "Item 2. Financial Information" of this Form 10).
9.1 Voting Trust Agreement dated June 28, 2000, among The Nasdaq Stock
Market, Inc., the National Association of Securities Dealers, Inc.
and The Bank of New York.(+)
9.2 First Amendment to the Voting Trust Agreement, dated as of January
18, 2001, among The Nasdaq Stock Market, Inc., the National
Association of Securities Dealers, Inc. and The Bank of New
York.(+)
10.1 Network Service Agreement, dated November 19, 1997, between MCI
Telecommunications Corporation and The Nasdaq Stock Market,
Inc.*(+)
10.2 Consolidated Agreement, between Unisys Corporation and The Nasdaq
Stock Market, Inc.*(+)
10.3 Network User License Agreement, dated November 30, 1993, between
Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.4 Software License and Services Agreement, dated November 31, 1993,
between Oracle Corporation and The Nasdaq Stock Market, Inc.*(+)
10.5 Regulatory Services Agreement, dated June 28, 2000, between NASD
Regulation, Inc. and The Nasdaq Stock Market, Inc.*(+)
10.6 Separation and Common Services Agreement, dated as of June 28,
2000, between the National Association of Securities Dealers, Inc.
and The Nasdaq Stock Market, Inc.(+)
10.7 The Nasdaq Stock Market, Inc. Employee Stock Purchase Plan.(+)
10.8 The Nasdaq Stock Market, Inc. Equity Incentive Plan.(+)
10.9 Securities Purchase Agreement, dated as of March 23, 2001, among
The Nasdaq Stock Market, Inc., Hellman & Friedman Capital Partners
IV, L.P. and the other purchasers listed in the signature pages
thereto.(+)
10.9.1 Securityholders Agreement, dated as of May 3, 2001, among The
Nasdaq Stock Market, Inc., Hellman & Friedman Capital Partners IV,
L.P., and the other securityholders listed on the signature pages
thereto.
10.10 Purchase and Sale Agreement, dated March 23, 2001, by and between
the National Association of Securities Dealers, Inc. and The
Nasdaq Stock Market, Inc.(+)
10.11 Employment Agreement between the National Association of
Securities Dealers, Inc. and Frank G. Zarb effective on February
24, 1997.(+)
10.12 Instrument of Amendment, dated March 18, 1998, to Employment
Agreement between National Association of Securities Dealers, Inc.
and Frank G. Zarb, effective on February 24, 1997.(+)
10.13 Instrument of Amendment, dated as of August 20, 1999, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998.(+)
10.14 Instrument of Amendment, dated March 30, 2000, to Employment
Agreement between National Association of Securities Dealers, Inc.
and Frank G. Zarb, effective on February 24, 1997, as amended
effective March 18, 1998, and subsequently amended in May,
1999.(+)
10.15 Instrument of Amendment, effective as of July 27, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000.(+)
10.16 Instrument of Amendment, effective as of November 1, 2000, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as amended effective March 18, 1998, and subsequently amended in
May, 1999, and subsequently amended on March 30, 2000, and as of
July 27, 2000.(+)
10.17 Instrument of Amendment, effective as of April 25, 2001, to
Employment Agreement between National Association of Securities
Dealers, Inc. and Frank G. Zarb, effective on February 24, 1997,
as subsequently amended effective March 18, 1998, August 20, 1999,
March 30, 2000, July 27, 2000 and November 1, 2000.(+)
10.18 Employment Agreement by and between The Nasdaq Stock Market, Inc.
and J. Patrick Campbell, affective as of December 29, 2000.(+)
10.19 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.
