UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

Commission file number 0-32651

THE NASDAQ STOCK MARKET, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

(212) 401-8700

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes x    No o

As of July 31, 2004, 78,618,387 shares of the Registrant’s common stock, par value $0.01 per share (“Common Stock”), were outstanding.

 

The Nasdaq Stock Market, Inc.
Form 10-Q
For the Quarter Ended June 30, 2004
INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements—(unaudited)		1
Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2004 and 2003		1
Condensed Consolidated Balance Sheets—June 30, 2004 and December 31, 2003		2
Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2004 and 2003		3
Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 4. Controls and Procedures		33
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders		34
Item 6. Exhibits and Reports on Form 8-K		35
SIGNATURES		36

 

i

 

Forward-looking statements in this Quarterly Report on Form 10-Q are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, The Nasdaq Stock Market, Inc.’s (“Nasdaq”) ability to implement its strategic initiatives, economic, political, and market conditions and fluctuations, government and industry regulation, interest rate risk, United States and global competition and other factors that are more fully described under the caption “Item 1. Business—Risk Factors” in The Nasdaq Stock Market, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of June 30, 2004. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events, or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

ii

The Nasdaq Stock Market, Inc.
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

The Nasdaq Stock Market, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share amounts)

		Three months ended June 30,						Six months ended June 30,
		2004			2003			2004			2003
Revenues
Market Services		$	68,931		$	96,135		$	145,056		$	207,686
Issuer Services		51,056			51,386			103,290			102,088
Other		26			53			71			161
Total revenues		120,013			147,574			248,417			309,935
Expenses
Compensation and benefits		36,921			46,640			74,330			92,294
Marketing and advertising		3,537			5,352			6,177			10,271
Depreciation and amortization		16,510			25,111			36,126			47,887
Professional and contract services		4,684			8,870			9,913			21,575
Computer operations and data communications		27,427			29,308			58,630			60,792
Provision for bad debts		406			1,516			549			1,584
Occupancy		6,888			7,729			14,180			15,530
General and administrative		3,313			8,472			8,172			18,140
Total direct expenses		99,686			132,998			208,077			268,073
Elimination of non-core product lines, initiatives and severance		—			45,748			—			45,748
Nasdaq Japan impairment loss		—			(5,000		)	—			(5,000		)
Support costs from related parties, net		11,764			15,776			23,173			32,970
Total expenses		111,450			189,522			231,250			341,791
Operating income (loss)		8,563			(41,948		)	17,167			(31,856		)
Interest income		1,665			2,606			3,059			5,372
Interest expense		(2,867		)	(5,222		)	(5,740		)	(10,452		)
Operating income (loss) from continuing operations before income taxes		7,361			(44,564		)	14,486			(36,936		)
(Provision) benefit for income taxes		(2,576		)	12,182			(5,070		)	10,374
Net income (loss) from continuing operations		$	4,785		$	(32,382	)	$	9,416		$	(26,562	)
Loss from discontinued operations, net of tax		—			(16,626		)	—			(19,880		)
Net income (loss)		$	4,785		$	(49,008	)	$	9,416		$	(46,442	)
Net income (loss) applicable to common stockholders:
Net income (loss)		$	4,785		$	(49,008	)	$	9,416		$	(46,442	)
Preferred stock dividends declared		(3,547		)	(2,544		)	(6,346		)	(3,194		)
Net income (loss) applicable to common stockholders		$	1,238		$	(51,552	)	$	3,070		$	(49,636	)
Basic and diluted net earnings (loss) per share:
Continuing operations		$	0.02		$	(0.45	)	$	0.04		$	(0.38	)
Discontinued operations		—			(0.21		)	—			(0.25		)
Total basic and diluted net earnings (loss) per share		$	0.02		$	(0.66	)	$	0.04		$	(0.63	)

 

See accompanying notes.

1

The Nasdaq Stock Market, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and par value amounts)

		June 30, 2004					December 31, 2003
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents			$	222,385				$	148,929
Investments:
Available-for-sale, at fair value			192,327					185,704
Held-to-maturity, at amortized cost			8,599					23,765
Receivables, net			74,192					111,405
Receivables from related parties			28					7,731
Deferred tax asset			37,202					40,460
Other current assets			11,512					11,623
Total current assets			546,245					529,617
Investments:
Held-to-maturity, at amortized cost			21,967					4,506
Property and equipment:
Land, buildings and improvements			96,760					96,578
Data processing equipment and software			347,937					346,928
Furniture, equipment and leasehold improvements			161,716					168,478
			606,413					611,984
Less: accumulated depreciation and amortization			(391,787		)			(369,041		)
Total property and equipment, net			214,626					242,943
Non-current deferred tax asset			69,944					72,079
Other intangible assets			812					871
Other assets			1,491					1,238
Total assets			$	855,085				$	851,254
Liabilities
Current liabilities:
Accounts payable and accrued expenses			$	22,669				$	29,959
Accrued personnel costs			33,718					48,817
Deferred revenue			105,856					59,739
Other accrued liabilities			75,888					75,951
Current obligation under capital lease			—					1,607
Payables to related parties			8,181					21,558
Total current liabilities			246,312					237,631
Senior notes			25,000					25,000
Subordinated notes			240,000					240,000
Accrued pension costs			22,142					26,831
Non-current deferred tax liability			40,907					40,917
Non-current deferred revenue			88,254					84,703
Other liabilities			30,049					35,476
Total liabilities			692,664					690,558
Stockholders’ equity
Common stock, $0.01 par value, 300,000,000 authorized, shares issued: 130,652,891 at June 30, 2004 and 130,611,221 at December 31, 2003; shares outstanding: 78,618,387 at June 30, 2004 and 78,483,919 at December 31, 2003			1,306					1,306
Preferred stock, 30,000,000 authorized, Series A: 1,338,402 shares issued and outstanding; Series B: 1 share issued and outstanding			133,840					133,840
Additional paid-in capital			358,615					358,923
Common stock in treasury, at cost: 52,034,504 at June 30, 2004 and 52,127,302 shares at December 31, 2003			(666,542		)			(667,765		)
Accumulated other comprehensive (loss) income			(1,645		)			86
Deferred stock compensation			(1,571		)			(1,102		)
Common stock issuable			2,821					2,881
Retained earnings			335,597					332,527
Total stockholders’ equity			162,421					160,696
Total liabilities and stockholders’ equity			$	855,085				$	851,254

 

 

See accompanying notes.

2

The Nasdaq Stock Market, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

		Six months ended June 30,
		2004			2003
Reconciliation of net income (loss) to cash provided by operating activities
Net income (loss)		$	9,416		$	(46,442	)
Net loss from discontinued operations		—			(19,880		)
Net income (loss) from continuing operations		$	9,416		$	(26,562	)
Non-cash items included in net income (loss):
Depreciation and amortization		36,126			47,887
Amortization of restricted stock awards		227			289
Provision for bad debts		549			1,584
Loss from equity method affiliates		—			1,196
Deferred taxes		6,060			1,361
Elimination of non-core product lines, initiatives and severance		—			45,748
Nasdaq Japan impairment loss		—			(5,000		)
Other non-cash items included in net income		4,399			11,592
Net change in:
Receivables, net		36,664			20,368
Receivables from related parties		7,703			3,014
Other current assets		111			(6,949		)
Other assets		(405		)	9,003
Accounts payable and accrued expenses		(7,290		)	(23,968		)
Accrued personnel costs		(15,099		)	(13,142		)
Deferred revenue		49,668			30,561
Other accrued liabilities		366			12,344
Obligation under capital leases		(1,607		)	(1,737		)
Payables to related parties		(13,377		)	(737		)
Accrued pension costs		(4,689		)	6,974
Other liabilities		(5,427		)	5,371
Cash provided by continuing operations		103,395			119,197
Cash used in discontinued operations		—			(18,726		)
Cash provided by operating activities		103,395			100,471
Cash flow from investing activities
Proceeds from redemptions of available-for-sale investments		142,464			66,538
Purchases of available-for-sale investments		(154,008		)	(77,853		)
Proceeds from maturities of held-to-maturity investments		19,728			7,000
Purchases of held-to-maturity investments		(21,958		)	(6,923		)
Capital contribution to Nasdaq LIFFE joint venture		—			(2,500		)
Purchases of property and equipment		(10,096		)	(22,781		)
Proceeds from sales of property and equipment		247			42
Cash used in investing activities		(23,623		)	(36,477		)
Cash flow from financing activities
Payments for treasury stock purchases		(84		)	(147		)
Issuances of common stock		380			640
Preferred stock dividends		(6,346		)	(3,194		)
Contribution to NASD		(266		)	(52		)
Cash used in financing activities		(6,316		)	(2,753		)
Increase in cash and cash equivalents		73,456			61,241
Cash and cash equivalents at beginning of period		148,929			201,463
Cash and cash equivalents at end of period		$	222,385		$	262,704
Supplemental Disclosure of Non-Cash Flow Activities
Cash paid for (received):
Interest		$	5,742		$	10,109
Income tax refund, net of taxes paid		$	(37,018	)	$	(12,286	)

 

See accompanying notes.

3

The Nasdaq Stock Market, Inc.
Notes to Condensed Consolidated Financial Statements

1.   Organization and Nature of Operations

Nasdaq^® operates The Nasdaq Stock Market^®, the largest electronic screen-based equity securities market in the United States. Nasdaq is a majority-owned subsidiary of the National Association of Securities Dealers, Inc. (the “NASD”). Nasdaq is the parent company of Nasdaq Global Holdings (“Nasdaq Global^®”); Nasdaq Financial Products Services, Inc. (“Nasdaq Financial Products”); Nasdaq International Market Initiatives, Inc. (“NIMI^SM”); Nasdaq Europe Planning Company, Limited (“Nasdaq Europe Planning^®”); Nasdaq International, Ltd. (“Nasdaq International^SM”); Nasdaq Canada, Inc. (“Nasdaq Canada^®”); and Nasdaq Technology Services, LLC (“Nasdaq Technology”), collectively referred to as “Nasdaq.” These entities are wholly-owned by Nasdaq. Nasdaq Global, which is incorporated in Switzerland and served as a holding company for several corporations incorporated internationally, is in the process of a liquidation that is expected to be completed by the end of 2004. Nasdaq also has determined to dissolve or otherwise wind-down Nasdaq Europe Planning, which was formed to expand Nasdaq into the European community and is currently inactive. NIMI is an entity that employed Nasdaq’s expatriates assigned to Nasdaq’s international subsidiaries. Nasdaq International is a London-based marketing company. Nasdaq Financial Products is the sponsor of the Nasdaq-100 Trust^SM. Nasdaq Financial Product Services (Ireland) Limited (“Nasdaq Ireland”) is a wholly-owned subsidiary of Nasdaq Financial Products. Nasdaq Ireland is the manager of The Nasdaq ETF Funds plc. Nasdaq Canada is an extension of Nasdaq’s North American trading platform within Canada, which has received regulatory approval to provide trading access in two provinces, Quebec and British Columbia. Nasdaq Technology is a company established in 2004 to provide software, hosting and disaster recovery services.

On October 31, 2003, Quadsan Enterprises, Inc. (“Quadsan”), previously a wholly-owned subsidiary of Nasdaq that provided investment management services to Nasdaq, was merged with and into Nasdaq. Prior to December 18, 2003, Nasdaq owned a 63.0% interest in Nasdaq Europe S.A./N.V. (“Nasdaq Europe^SM”), which had previously operated an equity market licensed in Brussels, Belgium. On December 18, 2003, Nasdaq transferred its interest in Nasdaq Europe to a third party. See “Strategic Review,” of Note 2, “Significant Transactions,” for further discussion.

In 2003, Nasdaq changed its organizational structure from operating in one segment to operating in two segments. Under the new structure, Nasdaq’s Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS 131”). Nasdaq’s two segments are managed and operated as strategic business units and organized by products and services. Reportable segments are Market Services and Issuer Services. In March 2004, Nasdaq rebranded its execution services and trade reporting services—Automated Confirmation Transaction Service^SM (“ACT^SM”) as the Nasdaq Market Center^SM, which is within the Market Services segment. The Nasdaq Market Center includes Nasdaq’s quoting, trading and trade reporting services for both Nasdaq-listed and exchange-listed securities. Revenues from execution systems previously known as SuperMontage^® and Computer Assisted Execution System^SM (“CAES^SM”) and revenues from the system previously known as ACT are included in the Nasdaq Market Center. Beginning with the quarter ended June 30, 2004 revenues from Access Services, Advanced Computer Execution Systems (“ACES”) and Nasdaq InterMarket (revenues derived from the sale of tape data (Tape Fee revenues) for securities listed on the New York Stock Exchange (“NYSE”) and the American Stock Exchange (“Amex”)) were also included with Nasdaq Market Center revenues as these products and services are considered transaction-based services. In addition, revenues from Nasdaq’s Level 1 Service, the Nasdaq Quotation Dissemination Service^SM (“NQDS^SM”), TotalView^SM and Mutual Fund Quotation Service^SM (“MFQS^SM”) were rebranded as Nasdaq

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Market Services Subscription revenues as these products and services are considered subscription-based services. Revenues from SuperMontage, CAES, ACT, Access Services and ACES were previously reported as Transaction Services and revenues from Nasdaq InterMarket, Level 1 Service, NQDS, TotalView and MFQS were previously reported as Market Information Services both within the Market Services segment. See Note 9, “Segments,” for further discussion.

All material intercompany accounts and transactions have been eliminated in consolidation. Nasdaq’s financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to the Form 10-Q and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain footnote disclosures, which are normally required under accounting principles generally accepted in the United States (“GAAP”), have been omitted. It is recommended that these financial statements be read in conjunction with the Consolidated Financial Statements included in Nasdaq’s Annual Report filed on Form 10-K for the year ended December 31, 2003.

The nature of Nasdaq’s business is such that the results of any interim period may vary significantly from quarter to quarter and may not be indicative of the results to be expected for the fiscal year. Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation.

2.   Significant Transactions

Acquisition of Brut

On May 25, 2004, Nasdaq announced it entered into a definitive agreement to acquire Brut LLC (“Brut”), the owner and operator of the Brut electronic communication network (“ECN”), and affiliated entities for a total consideration of $190.0 million in cash, from SunGard Data Systems Inc. (“SunGard”). Nasdaq intends to finance the purchase from available cash and investments, which totaled $445.3 million as of June 30, 2004. The board of directors of each company has approved the transaction, which is expected to close during the third quarter of 2004, subject to customary closing conditions and regulatory approvals. On July 19, 2004, Nasdaq was notified that the Department of Justice completed its review of the proposed transaction without raising objections, satisfying one of the regulatory conditions to closing.

The Brut acquisition is intended to enhance Nasdaq’s systems by providing Nasdaq with the ability to route orders via an internal broker-dealer to multiple pools of liquidity in keeping with changes of the National Market System proposed by the SEC in Regulation NMS and to improve Financial Information Exchange (“FIX”) connectivity. FIX is an industry protocol for communicating securities transactions.

In addition to, and conditioned upon completion of the acquisition, Nasdaq and SunGard will enter into hosting and multi-year processing agreements for SunGard to provide real-time order-to-settlement securities processing system for trades on The Nasdaq Stock Market.

Reduction in Force

During the three and six months ended June 30, 2004, 24 and 45 positions, respectively, were eliminated associated with staff reduction plans and Nasdaq recorded charges of $1.2 million and $2.8 million, respectively, for severance and outplacement costs. Nasdaq paid approximately $1.1 million and $1.3 million during the three and six months ended June 30, 2004, respectively, for these severance and outplacement costs from the staff reduction plans. Nasdaq expects to pay the remainder of the severance and outplacement costs by the end of the third quarter of 2005. Total headcount decreased from 956 employees at December 31, 2003 to 870 employees at June 30, 2004.

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Technology Migration

As a result of a continued review of its technology infrastructure, Nasdaq shortened the estimated useful life of certain assets and operating leases associated with its quoting platform and its trading and quoting network as it migrates to lower cost operating environments which resulted in incremental depreciation and amortization expense. The incremental depreciation and amortization expense associated with these assets and operating leases is expected to be approximately $16.0 million this year. During the three and six months ended June 30, 2004, $4.8 million and $11.9 million, respectively, were recorded.

Strategic Review

During the second quarter of 2003, Nasdaq announced the results of a strategic review of its operations designed to position Nasdaq for improved profitability and growth. The strategic review included the elimination of non-core products and initiatives and resulted in a reduction in Nasdaq’s workforce. For the three and six months ended June 30, 2003, a pre-tax charge to earnings of $59.8 million was recorded. The net impact to Nasdaq was a pre-tax charge of $57.8 million. The difference represented costs absorbed by minority shareholders of Nasdaq Europe. Additional charges were recorded in the third and fourth quarters of 2003 marking the completion of the charges associated with Nasdaq’s strategic review. The charge of $59.8 million included $45.7 million from continuing operations and $14.1 million from discontinued operations related to Nasdaq Europe. See Note 3, “Discontinued Operations,” for further discussion. The charge was primarily recorded to Property and equipment, Goodwill, Other intangible assets, Other accrued liabilities and Accrued personnel costs on the Condensed Consolidated Balance Sheets.

The following table summarizes the strategic review charge included in the Condensed Consolidated Statements of Income:

		Three and Six Months Ended June 30, 2003
		(in millions)
Continuing Operations
Non-Core Product Lines and Initiatives:
Impairment of capitalized software and fixed assets			$	7.8
Impairment of goodwill and intangible assets			6.0
Contract cancellations			2.0
Other exit costs			9.2
Total non-core product lines and initiatives			25.0
Severance and benefit costs			20.7
Total continuing operations strategic review charge			$	45.7
Discontinued Operations
Severance and benefit costs			$	1.8
Impairment of goodwill			8.1
Other exit costs including contract cancellations			4.2
Total discontinued operations strategic review charge			$	14.1
Total strategic review charge			$	59.8

 

Continuing Operations

Non-core product lines and initiatives included in the strategic review were:

·       Primex—Primex was an electronic auction system. Nasdaq ended its exclusive rights agreement with Primex Trading N.A., L.L.C. on December 31, 2003 and ceased offering Primex effective January 16, 2004. A charge was recorded for Primex in the fourth quarter of 2003.

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·       Nasdaq Tools—Nasdaq Tools was an order management system that ran on the Nasdaq Application Programming Interface using the Nasdaq Workstation II^® and was wound-down throughout 2003. Nasdaq Tools was a previously wholly-owned subsidiary of Nasdaq and was merged with and into Nasdaq on July 31, 2002.

·       Nasdaq LIFFE Markets, LLC (“NQLX”)—NQLX was a joint venture with the London International Financial Futures Exchange (“LIFFE”) to create a market for single stock futures and other futures products. On July 24, 2003, Nasdaq redeemed its interest in the NQLX joint venture and transferred its ownership interest to LIFFE. LIFFE assumed financial and management responsibility for NQLX. This change did not have any impact on the operation of NQLX, but usage of the Nasdaq brand by the company ceased.

·       The Bulletin Board Exchange (“BBX”)—BBX was a proposed platform for companies not eligible for The Nasdaq SmallCap Market^SM to raise equity capital and increase the visibility of their stock. The Over the Counter Bulletin Board^® (“OTCBB”) continues its existing operations.

·       Liquidity Tracker—Liquidity Tracker was an automated order routing system designed to allow traders to direct orders to specific market makers based on recent trading activity. Liquidity Tracker ceased operations as of June 30, 2003.

·       MarketSite^® Tower—MarketSite Tower is located at Nasdaq’s Times Square, New York location. The video wall portion of the Tower was deemed impaired and a corresponding charge was recorded in the fourth quarter of 2003.

The charge related to the elimination of the above non-core products and initiatives was approximately $25.0 million for the three and six months ended June 30, 2003. Included in the charge was the reduction of Nasdaq’s investment in NQLX of $6.3 million due to the redemption of Nasdaq’s interest in the NQLX joint venture, the impairment of goodwill of $4.1 million associated with Nasdaq Tools, the impairment of certain intangible assets of  $1.9 million, impairment of various capitalized software and fixed assets of $7.8 million, contract cancellations of $2.0 million and other costs of $2.9 million.

In addition, the charge from continuing operations recorded in the three and six months ended June 30, 2003 included severance costs of $20.7 million. The severance costs included $4.3 million related to the reductions in force of 110 employees. The remaining $16.4 million of severance costs related to the fulfillment of employment contracts and obligations associated with the retirement and departure of certain members of senior management. Total headcount was 1,108 as of June 30, 2003 versus 1,227 as of December 31, 2002. Nasdaq recorded an additional $11.7 million in severance costs in the second half of 2003 as a part of the strategic review. Also as a part of the strategic review, in the third quarter of 2003, Nasdaq incurred a loss on early extinguishment of long-term debt of $13.2 million. The extinguishment of debt costs related to the redemption of  $150.0 million in aggregate principal amount of Nasdaq’s 5.83% Senior Notes due 2007 (the “Senior Notes”). In conjunction with its strategic review, Nasdaq reassessed its capital needs and determined that it no longer needed the liquidity of the Senior Notes. See Long-term debt section below for further discussion.

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The following table summarizes the strategic review accrual activity from December 31, 2003 through June 30, 2004. These accruals are recorded to Other accrued liabilities and Accrued personnel costs in the current liabilities section and to Other liabilities in the non-current liabilities section of the Condensed Consolidated Balance Sheets. Nasdaq expects to fund the majority of these reserves by the end of 2004, except for a $4.6 million contract payment that is due January 2006.

		Severance for U.S. Employees					Products & Other					Total
		(in millions)
Accrued liabilities associated with the strategic review as of December 31, 2003			$	16.4				$	10.7			$	27.1
Cash payments			(7.3		)			(9.1		)		(16.4		)
Accrued liabilities associated with the strategic review as of June 30, 2004			$	9.1				$	1.6			$	10.7

 

Discontinued Operations

Discontinued operations included in the strategic review were:

·       Nasdaq Europe—Nasdaq Europe was a pan-European stock market licensed in Belgium. See below for complete discussion of the wind-down and eventual transfer of shares of Nasdaq Europe.

·       IndigoMarkets Ltd. (“IndigoMarkets”)—IndigoMarkets was a joint venture with SSI Limited (“SSI”) to develop international trading platforms. On September 30, 2003, Nasdaq Global sold its interest in the joint venture to SSI and recognized a gain on the sale of approximately $0.6 million.

Europe

As a result of the strategic review, Nasdaq supported the closing of the market operated by Nasdaq Europe, in which Nasdaq owned a 63.0% interest through December 18, 2003. At an Extraordinary General Meeting held on June 26, 2003, the shareholders of Nasdaq Europe voted to discontinue operations of the market and, as a result, market operations were wound-down pursuant to a Transition Plan approved by the Belgian Banking and Finance Commission. During the third quarter of 2003, the losses incurred by Nasdaq Europe exceeded the minority shareholders’ interests. Therefore, once the minority shareholders reached this point, Nasdaq absorbed 100.0% of Nasdaq Europe’s losses and strategic review charges.

As Nasdaq Europe was winding-down its market operations, Nasdaq reached an agreement to transfer all of Nasdaq’s shares in Nasdaq Europe to one of that company’s original investors; the cash consideration for the transaction was nominal. The transfer of Nasdaq’s shares of Nasdaq Europe was completed on December 18, 2003. The entity ceased using the Nasdaq Europe name after the transaction. As part of the transaction, Nasdaq Europe’s new owner committed to seek to restructure that company’s obligations and, in that context, to request from certain major creditors releases of any claims they might have against Nasdaq Europe’s former directors, officers and shareholders (if such claims are related to Nasdaq’s prior ownership interest in Nasdaq Europe). At the time of the transfer, Nasdaq Europe had approximately $12 million of external debt and accrued interest. Nasdaq has recorded liabilities that management continues to believe are sufficient to satisfy any potential claims against Nasdaq.

Also, as part of Nasdaq’s strategic review, during the third quarter of 2003, Nasdaq supported Nasdaq Europe’s position in favor of the decision of the shareholders of Nasdaq Deutschland AG (“Nasdaq Deutschland”), a German exchange in which Nasdaq Europe had a 50.0% interest, to suspend that company’s trading operations effective August 29, 2003. Nasdaq Europe transferred all of its shares in Nasdaq Deutschland to one of the other shareholders, BWB Holding AG, as of August 29, 2003.

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The charge related to the orderly wind-down and liquidation of market operations in Belgium was approximately $14.1 million (excluding the minority interest benefit of $2.0 million) for the three and six months ended June 30, 2003 and included the impairment of goodwill of $8.1 million, severance costs of $1.8 million and other costs including contract cancellations of $4.2 million.

In October 2002, Nasdaq Europe’s strategic investors committed to converting the majority of Nasdaq Europe’s external debt to equity. The conversion was formally approved by Nasdaq Europe’s Board of Directors in March 2003. On May 26, 2003 the strategic investors converted approximately $17.9 million or 63.3% of Nasdaq Europe’s external debt to equity ($51.5 million or 83.2% including intercompany debt with Nasdaq). After the conversion, Nasdaq had a 63.0% ownership interest in Nasdaq Europe.

Long-term Debt

On September 30, 2003, Nasdaq redeemed $150.0 million of its Senior Notes. In conjunction with its strategic review, Nasdaq reassessed its capital needs and determined that it no longer needed the liquidity of the Senior Notes. Nasdaq paid the holders of the Senior Notes $150.0 million in outstanding principal amount, accrued interest of $1.2 million and an aggregate make-whole payment of approximately $12.6 million (representing the net present value of future payments). The repayment amounts reflected the terms of the Senior Notes, except that the parties agreed to a reduced make-whole amount equal to the excess of the discounted value of the remaining scheduled payments discounted at a factor equal to 100 basis points over the yield to maturity of United States Treasury securities having a maturity equal to the remaining average life of the redeemed amount. This represented a renegotiation of the 50 basis points over the yield to maturity required by the terms of the Senior Notes. Nasdaq recorded a $13.2 million pre-tax charge in the third quarter of 2003 related to the redemption of the Senior Notes. This charge included the make-whole payment and capitalized costs related to the issuance of the Senior Notes. Nasdaq used funds from available cash and investments to finance the redemption.

Nasdaq Member Revenue Sharing

In August 2003, Nasdaq implemented the Nasdaq General Revenue Sharing Program, which like the General Revenue Sharing Program of The National Stock Exchange, a regional stock exchange, shares operating revenue from multiple business lines in addition to Tape Fee revenue. The new program shares operating revenue, which is interpreted to mean net revenue after expenses from all services that derive revenue from member trading and trade-reporting activity in Nasdaq-listed securities. As such, the program is designed to provide an incentive for quoting market participants to send orders and report trades to the Nasdaq Market Center. Nasdaq did not share any revenues during 2003 under the General Revenue Sharing Program. For the three and six months ended June 30, 2004, Nasdaq shared approximately $5.2 million and $11.0 million, respectively, under this new program which is shown net within Market Services revenues. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Market Services, for further discussion.

Nasdaq Japan

During the second quarter of 2002, Nasdaq recognized an other-than-temporary impairment charge on its equity investment in Nasdaq Japan^®. Nasdaq recognized this impairment as a result of the depressed level of market activity in Japan, combined with the suspension of Nasdaq Japan’s hybrid trading system due to the inability to gain exchange approval of market rules and industry participation. The net impact of the other-than-temporary impairment on Nasdaq’s pre-tax income was $15.2 million.

On August 16, 2002, the Board of Directors of Nasdaq Japan voted to take the company to dormant status, effectively ceasing operations. Nasdaq Japan entered into liquidation status in late November 2002 and was completely dissolved by the end of May 2003. During the second quarter of 2003, Nasdaq reversed

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$5.0 million of the reserves related to Nasdaq Japan due to favorable contract negotiations and lower legal costs resulting from the complete liquidation of Nasdaq Japan.

3.   Discontinued Operations

On September 30, 2003, Nasdaq Global sold its interest in IndigoMarkets to its partner, SSI, and recognized a gain of approximately $0.6 million on the sale. In addition, on December 18, 2003, Nasdaq transferred its interest in Nasdaq Europe to one of that company’s original investors for nominal cash consideration. See “Strategic Review,” of Note 2, “Significant Transactions,” for further discussion.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), both Nasdaq Europe and IndigoMarkets are reflected as discontinued operations for the three and six months ended June 30, 2003. As discontinued operations, the revenues, costs and expenses and cash flows of Nasdaq Europe and IndigoMarkets have been excluded from the respective captions in the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows, and have been presented separately as “Loss from discontinued operations” and as “Cash used in discontinued operations,” respectively. There were no assets and liabilities of Nasdaq Europe and IndigoMarkets at December 31, 2003.

The following table presents condensed, combined results of operations for Nasdaq Europe and IndigoMarkets.

		Three Months Ended June 30, 2003					Six Months Ended June 30, 2003
		(in millions)
Revenues			$	3.8				$	7.3
Pre-tax loss			(17.7		)			(20.9		)
Benefit for income taxes			1.1					1.0
Loss from discontinued operations			$	(16.6	)			$	(19.9	)

 

The remainder of the notes to the condensed consolidated financial statements reflects results from continuing operations, unless otherwise noted.

4.   Deferred Revenue

Nasdaq’s deferred revenue as of June 30, 2004 related to Corporate Client Group fees will be recognized in the following years:

		Initial			LAS			Annual and Other					Total
		(in thousands)
Fiscal year ended:
2004		$	14,916		$	16,861			$	45,580			$	77,357
2005		24,904			27,157				—				52,061
2006		14,710			16,800				—				31,510
2007		9,688			10,529				—				20,217
2008 and thereafter		11,252			1,713				—				12,965
		$	75,470		$	73,060			$	45,580			$	194,110

 

Nasdaq’s deferred revenue for the six months ended June 30, 2004 and 2003 is reflected in the following tables. The additions reflect Corporate Client Group revenues charged during the period while the amortization reflects Corporate Client Group revenues recognized during the period in accordance with GAAP. Nasdaq recognizes revenue related to Initial listing fees and Listing of additional shares

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(“LAS”) fees on a straight-line basis over estimated service periods, which are six and four years, respectively.

		Initial			LAS			Annual and  Other					Total
		(in thousands)
Balance at January 1, 2004		$	78,485		$	65,957			$	—			$	144,442
Additions		12,691			25,572				93,060				131,323
Amortization		(15,706		)	(18,469		)		(47,480		)		(81,655		)
Balance at June 30, 2004		$	75,470		$	73,060			$	45,580			$	194,110

 

		Initial			LAS			Annual and  Other					Total
		(in thousands)
Balance at January 1, 2003		$	93,857		$	72,841			$	—			$	166,698
Additions		6,847			12,175				95,431				114,453
Amortization		(16,290		)	(18,659		)		(48,942		)		(83,891		)
Balance at June 30, 2003		$	84,414		$	66,357			$	46,489			$	197,260

 

5.   Long-term Debt

Nasdaq had $265.0 million of outstanding long-term debt ($25.0 million of senior notes and $240.0 million of subordinated notes) at June 30, 2004. Debt is scheduled to begin to mature in May 2006.

Long-term subordinated notes represent $240.0 million of 4.0% convertible subordinated notes due 2006 (the “Subordinated Notes”) issued and sold to Hellman & Friedman Capital Partners IV, L.P. and certain of its affiliated limited partnerships (collectively, “Hellman & Friedman”) during 2001. The annual 4.0% coupon is payable quarterly in arrears in cash and the Subordinated Notes are convertible at any time into an aggregate of 12.0 million shares of Common Stock at $20.00 per share, subject to adjustment, in general, for any stock split, dividend, combination, recapitalization or other similar event. On an as-converted basis as of June 30, 2004, Hellman & Friedman owned an approximate 13.8% equity interest in Nasdaq as a result of its ownership of the Subordinated Notes and 500,000 shares of Common Stock.

On September 30, 2003, Nasdaq redeemed the $150.0 million outstanding principal amount of the Senior Notes. Under the terms of the Senior Notes, Nasdaq paid the holders of the Senior Notes $150.0 million in outstanding principal amount, accrued interest of $1.2 million and an aggregate make-whole payment of approximately $12.6 million (representing the net present value of future payments). Nasdaq recorded a $13.2 million pre-tax charge in the third quarter of 2003 related to the redemption of the Senior Notes. This charge included the make-whole payment and capitalized costs related to the issuance of the Senior Notes. Nasdaq used funds from available cash and investments to finance the redemption. See “Long-term Debt” of Note 2, “Significant Transactions,” for further discussion.

6.   Employee Benefits

Nasdaq is a participating employer in a noncontributory, defined-benefit pension plan that the NASD sponsors for the benefit of its eligible employees and the eligible employees of its subsidiaries. As of January 1, 2004, the benefits are primarily based on years of service and the employees’ career-average salary during employment, subject to a phase-in period. Prior to 2004, the benefits were primarily based on years of service and the employees’ average salary during the highest 60 consecutive months of employment.

Until November 1, 2003, Nasdaq participated in a Supplemental Executive Retirement Plan (“SERP”) that was maintained by the NASD for certain senior executives. On November 1, 2003, Nasdaq formed its own SERP and transferred all amounts to this new plan. Also during 2003, Nasdaq changed the

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accrual of benefits from age 65 to the later of age 55 or 10 years of service, except in the case of an executive who has a contract with a SERP provision, then benefits are accrued in accordance with the contract terms.

The following table sets forth the combined plans’ amounts recognized:

		Three months ended June 30,						Six months ended June 30,
		2004			2003(1)			2004			2003(1)
		(in thousands)
Components of net periodic benefit cost
Service cost		$	1,458		$	3,864		$	3,192		$	5,768
Interest cost		1,101			1,661			2,269			2,919
Expected return on plan assets		(732		)	(765		)	(1,504		)	(1,490		)
Recognized net actuarial loss		285			589			582			860
Prior service cost recognized		(85		)	4,907			(150		)	5,002
Amortization of unrecognized transition asset		(14		)	(14		)	(28		)	(29		)
Settlement loss recognized		189			1,487			181			1,487
Benefit cost		$	2,202		$	11,729		$	4,542		$	14,517

⁽¹⁾                 Includes strategic review amounts related to the fulfillment of employment SERP contracts and obligations associated with the retirement and departure of certain members of senior management.

Nasdaq previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $10.6 million to the pension plan in 2004 for the 2003 and 2004 plan years. In June 2004, Nasdaq contributed $6.0 million to fund its plan for the 2003 plan year. As a result of the passage of the Pension Funding Equity Act of 2004, signed into law on April 10, 2004, Nasdaq is now exempt from required quarterly contributions for the 2004 plan year and will fund the 2004 plan year in 2005.

7.   Stock-Based Compensation

In the first quarter of 2003, Nasdaq adopted SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). SFAS 148 amends the disclosure requirements of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) and requires disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

Nasdaq grants stock options with an exercise price equal to the estimated fair value of the Common Stock on the date of the grant. Nasdaq accounts for stock options in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly recognizes no compensation expense related to such grants.

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Pro forma information regarding net income and earnings per share is required under SFAS 148 and has been determined as if Nasdaq had accounted for all stock options based on a fair value method. The fair value of each stock option grant was estimated at the date of grant using the Black-Scholes valuation model. Pro forma net income includes the amortization of the fair value of stock options over the vesting period. The pro forma information for the three and six months ended June 30, 2004 and 2003 is as follows:

		Three months ended June 30,						Six months ended June 30,
		2004			2003			2004			2003
		(in thousands, except per share amounts)
Reported net income (loss) from continuing operations		$	4,785		$	(32,382	)	$	9,416		$	(26,562	)
Stock-based compensation cost (net of tax of $580, $1,724, $1,160 and $3,225, respectively)		(898		)	(2,671		)	(1,797		)	(4,997		)
Pro forma net income (loss)		$	3,887		$	(35,053	)	$	7,619		$	(31,559	)
Reported basic and diluted earnings (loss) per share		$	0.02		$	(0.45	)	$	0.04		$	(0.38	)
Pro forma basic and diluted earnings (loss) per share		$	0.00		$	(0.48	)	$	0.02		$	(0.44	)

 

8.   Comprehensive Income

Comprehensive income is calculated in accordance with SFAS No. 130, “Reporting Comprehensive Income.”  Comprehensive income is composed of net income and other comprehensive income, which includes the after-tax change in unrealized gains and losses on available-for-sale securities, minimum pension liability and foreign currency translation adjustments.

The following table outlines the changes in other comprehensive income for the three and six months ended June 30, 2004 and 2003:

		Three months ended June 30,						Six months ended June 30,
		2004			2003			2004			2003
		(in thousands)
Net income (loss)		$	4,785		$	(32,382	)	$	9,416		$	(26,562	)
Unrealized (losses) gains on available-for-sale securities		(1,552		)	549			(1,704		)	562
Foreign currency translation adjustment		26			5,135			(27		)	4,044
Total comprehensive income (loss)		$	3,259		$	(26,698	)	$	7,685		$	(21,956	)

 

9.   Segments

In 2003, Nasdaq changed its organizational structure from operating under one segment to operating under two segments. Under the new structure, Nasdaq’s Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS 131. Nasdaq’s two segments are managed and operated as strategic business units and organized by products and services. Reportable segments are Market Services and Issuer Services.

Market Services includes collecting, processing and disseminating price quotes of Nasdaq-listed securities, the routing and execution of buy and sell orders for Nasdaq-listed and exchange-listed securities and transaction reporting services. Market Services also provides price quotes and trade information to data vendors, who in turn sell the information to the public. Market participants in The Nasdaq Stock Market, consisting of market makers, ECNs, registered stock exchanges and order entry firms, are users of

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Nasdaq’s Market Services. In March 2004, Nasdaq rebranded its execution services and ACT services as the Nasdaq Market Center, which is within the Market Services segment. The Nasdaq Market Center includes Nasdaq’s quoting, trading and trade reporting services for both Nasdaq-listed and exchange-listed securities. Revenues from execution systems previously known as SuperMontage and CAES and revenues from the system previously known as ACT are included in the Nasdaq Market Center. Beginning with the quarter ended June 30, 2004 revenues from Access Services, ACES and Nasdaq InterMarket (revenues derived from the sale of tape data for securities listed in the NYSE and the Amex) were also included with Nasdaq Market Center revenues as these products and services are considered transaction-based services. In addition, revenues from Nasdaq’s Level 1 Service, NQDS, TotalView and MFQS were rebranded as Nasdaq Market Services Subscription revenues as these products and services are considered subscription-based services. Revenues from SuperMontage, CAES, ACT, Access Services and ACES were previously reported as Transaction Services and revenues from Nasdaq InterMarket, Level 1 Service, NQDS, TotalView and MFQS were previously reported as Market Information Services both within the Market Services segment.

Issuer Services includes the Corporate Client Group and Nasdaq Financial Products. The Corporate Client Group provides customer services and information products to Nasdaq-listed companies and is responsible for obtaining new listings on The Nasdaq Stock Market. Nasdaq Financial Products is responsible for introducing products that extend and enhance the Nasdaq brand. Nasdaq Financial Products oversees the development and marketing of new Nasdaq financial products and associated derivatives, the licensing and listing of third-party structured products and the listing of third-party sponsored exchange traded funds.

Nasdaq evaluates the performance of its segments based on several factors, of which the primary financial measure is pre-tax income. Results of individual businesses are presented based on Nasdaq’s management accounting practices and Nasdaq’s current management structure. Certain charges are allocated to corporate items in Nasdaq’s management reports based on the decision that those activities should not be used to evaluate the segment’s operating performance.  These charges primarily include all activities and exit costs related to elimination of Nasdaq’s non-core products and other initiatives as well as Nasdaq Japan.

The following tables present certain information regarding these operating segments for each of the three and six months then ended June 30, 2004 and 2003.

		Market  Services			Issuer  Services			Corporate Items and Eliminations					Consolidated
		(in thousands)
Three months ended June 30, 2004
Revenues		$	68,931		$	51,056			$	26				$	120,013
Pre-tax (loss) income		(11,714		)	20,376				(1,301		)			7,361
Three months ended June 30, 2003
Revenues		$	96,135		$	51,386			$	53				$	147,574
Pre-tax (loss) income		(114		)	9,848				(54,298		)			(44,564		)
Six months ended June 30, 2004
Revenues		$	145,056		$	103,290			$	71				$	248,417
Pre-tax (loss) income		(22,731		)	39,772				(2,555		)			14,486
Six months ended June 30, 2003
Revenues		$	207,686		$	102,088			$	161				$	309,935
Pre-tax income (loss)		7,680			22,790				(67,406		)			(36,936		)

 

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10.   Commitments and Contingencies

Acquisition of Brut

On May 25, 2004, Nasdaq announced it entered into a definitive agreement to acquire Brut, the owner and operator of the Brut ECN, and affiliated entities for a total consideration of $190.0 million in cash, from SunGard. Nasdaq intends to finance the purchase from available cash and investments, which totaled $445.3 million as of June 30, 2004. The board of directors of each company has approved the transaction, which is expected to close during the third quarter of 2004, subject to customary closing conditions and regulatory approvals.

Nasdaq Europe

As a result of the transfer of Nasdaq’s shares of Nasdaq Europe, Nasdaq Europe’s new owner committed to seek to restructure that company’s obligations and, in that context, to request from certain major creditors releases of any claims they might have against Nasdaq Europe’s former directors, officers and shareholders (if such claims are related to Nasdaq’s prior ownership interest in Nasdaq Europe). At the time of the transfer, Nasdaq Europe had approximately $12 million of external debt and accrued interest. Nasdaq has recorded liabilities that management continues to believe are sufficient to satisfy any potential claims against Nasdaq.

Nasdaq Insurance Agency

In December 2002, Nasdaq purchased the NASD’s 50.0% interest in the NASD Insurance Agency (subsequently renamed the Nasdaq Insurance Agency, LLC (“NIA”)). Nasdaq’s consideration for the NASD’s 50.0% interest consisted of an upfront payment of $0.5 million and up to $5.1 million based on NIA’s stream of contingent cash flow through 2011. Nasdaq will pay the NASD up to: (a) 20% of NIA’s cash flows until Nasdaq has paid the NASD $2.3 million from cash flows; (b) 10% of NIA’s cash flows until Nasdaq has paid the NASD a cumulative amount of $3.0 million from cash flows; (c) 5% of NIA’s cash flows until the earlier to occur of Nasdaq paying the NASD the full cumulative amount of $5.1 million from cash flows or December 31, 2011. As of June 30, 2004, Nasdaq recorded a $0.40 million dividend to the NASD for the NIA’s cash flows. The dividend was reflected as a reduction in Additional paid-in capital on Nasdaq’s Condensed Consolidated Balance Sheets.

Amex Technology Separation

During 2001, Nasdaq agreed to fund a portion of the necessary expenses related to the separation of software, hardware and data under a plan to transition technology applications and support from Nasdaq to the Amex. The NASD originally integrated certain Nasdaq and Amex technology subsequent to the 1998 acquisition of Amex by the NASD. The total estimated cost of the separation had been established at a maximum of $29.0 million, and was shared evenly between Nasdaq and the NASD. In 2002 and 2001, Nasdaq accrued $5.3 million and $9.2 million, respectively, under this commitment, fulfilling its commitment. As of June 30, 2004, the entire $14.5 million commitment had been paid to Amex.

MCI

Nasdaq entered into a six-year $600.0 million contract with MCI WorldCom Communications, Inc., formerly, WorldCom, Inc., (“MCI”) in 1997 to replace the data network that connected Nasdaq’s market facilities to market participants. In June 2002, an amendment to the original contract was negotiated with MCI after the minimum usage level was achieved based on the original contract. The amended contract superseded the terms of the existing contract and was for $182.0 million over three years commencing in June 2002. The three-year contract included fixed and variable cost components for two years and permitted Nasdaq to terminate the contract under certain circumstances after the second year. On

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January 30, 2004, Nasdaq and MCI entered into a new global services agreement (the “GSA”) terminating the then current agreement effective May 31, 2004. The GSA, which expires on December 31, 2005, requires usage charges for certain GSA services to be at least $20.0 million during the period from June 1, 2004 to December 31, 2004 and $20.0 million in 2005.

General Litigation

Nasdaq may be subject to claims arising out of the conduct of its business. Currently, there are certain legal proceedings pending against Nasdaq. Nasdaq believes, based upon the opinion of counsel, that any liabilities or settlements arising from these proceedings will not have a material effect on the financial position or results of operations of Nasdaq. Management is not aware of any unasserted claims or assessments that would have a material adverse effect on the financial position and the results of operations of Nasdaq.

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11.   Capital Stock and Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share.

		Three months ended June 30,						Six months ended June 30,
		2004			2003			2004			2003
		(in thousands, except per share amounts)
Numerator:
Net income (loss) applicable to common stockholders:
Net income (loss)		$	4,785		$	(49,008	)	$	9,416		$	(46,442	)
Loss from discontinued operations		—			(16,626		)	—			(19,880		)
Net income (loss) from continuing operations		4,785			(32,382		)	9,416			(26,562		)
Preferred stock dividends declared(1)		(3,547		)	(2,544		)	(6,346		)	(3,194		)
Net income (loss) applicable to common stockholders from continuing operations for basic and diluted earnings per share		1,238			(34,926		)	3,070			$	(29,756	)
Loss from discontinued operations for basic and diluted earnings per share		—			(16,626		)	—			(19,880		)
Net income (loss) available to common stockholders for basic and diluted earnings per share		$	1,238		$	(51,552	)	$	3,070		$	(49,636	)
Denominator:
Weighted average common shares for basic earnings per share		78,535,265			78,343,276			78,517,998			78,323,898
Weighted-average affect of dilutive securities:
Employee stock options		289,006			—			403,998			—
Employee restricted stock		116,989			—			130,824			—
Denominator for diluted earnings per share		78,941,260			78,343,276			79,052,820			78,323,898
Basic and diluted net earnings (loss) per share:
Continuing operations		$	0.02		$	(0.45	)	$	0.04		$	(0.38	)
Discontinued operations		—			(0.21		)	—			(0.25		)
Total basic and diluted net earnings (loss) per share		$	0.02		$	(0.66	)	$	0.04		$	(0.63	)

⁽¹⁾                 Dividends payable to the NASD as a holder of Nasdaq’s Series A Preferred Stock began accruing in March 2003. The Series A Preferred Stock carried a 7.6% dividend rate for the year commencing March 2003 and carries a 10.6% dividend rate in all subsequent years. The NASD is entitled to receive cash dividends when, as and if declared by Nasdaq’s Board of Directors out of the funds legally available. For the quarter ended June 2003 and for all remaining quarters in 2003, the dividend declared was approximately $2.5 million. For the quarter ended June 30, 2004 and for all future quarters the dividend declared will be approximately $3.5 million. For the six months ended June 30, 2004, the dividend paid totaled $6.3 million.

Options to purchase 13,685,559 shares of Common Stock, 12,000,000 shares underlying Subordinated Notes and 239,824 shares underlying warrants issued by Nasdaq were outstanding at June 30, 2004. For the

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three and six months ended June 30, 2004, 2,150,000 and 2,250,000 of the options outstanding, respectively, were included in the computation of diluted earnings per share, on a weighted average basis, as their inclusion was dilutive. The remaining options, all the shares underlying the warrants issued by Nasdaq and the 12,000,000 shares underlying Subordinated Notes outstanding were considered antidilutive and were properly excluded.

12.   Subsequent Events

Real Estate

In July 2004, Nasdaq made a decision to consolidate space in leased real estate facilities and expects to record charges associated with this action of approximately $22.0 million to $24.0 million in the remainder of 2004.

Introduction of QIX

Nasdaq intends to introduce a more streamlined and efficient protocol, QIX, during the first quarter of 2005. QIX is a proprietary protocol for submitting transactions to the Nasdaq Market Center. This initiative will result in Nasdaq discontinuing support for the Nasdaq Workstation II and the Application Program Interface connectivity via the Service Delivery Platform by the fourth quarter of 2005. This initiative is expected to have an immaterial impact on Nasdaq’s operating results.

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