UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 October 28, 2002 (October 28, 2002) ------------------------------------------------ Date of Report (Date of Earliest Event Reported) The Nasdaq Stock Market, Inc. ------------------------------------------------ (Exact Name of Registrant as Specified in Charter) Delaware 000-32651 52-1165937 - ---------------------------- ---------------- ------------------- (State or Other Jurisdiction (Commission File (IRS Employer of Incorporation File Number) Identification No.) One Liberty Plaza New York, New York 10006 --------------------------------------------------- (Address of Principal Executive Offices and Zip Code) (866) 745-1825 --------------------------------------------------- (Registrant's Telephone Number, Including Area Code) N/A -------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) THE NASDAQ STOCK MARKET, INC. FORM 8-K INDEX ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS Financial Statements None. Pro Forma Financial Information None. Exhibits: ITEM 9. REGULATION FD DISCLOSURE The Nasdaq Stock Market, Inc. ("Nasdaq") issued a press release, dated October 28, 2002, in the form attached hereto as Exhibit 99.1. The press release contains financial information for Nasdaq for the quarter ended September 30, 2002, and certain forward-looking statements concerning Nasdaq. The information in this Form 8-K, including the exhibit, is being "furnished" pursuant to Item 9 and shall not be deemed "filed" with the Securities and Exchange Commission nor incorporated by reference into any registration statement filed by Nasdaq under the Securities Act of 1933.
EXHIBIT PAGE NUMBER IN NO. DESCRIPTION FILING - ------- --------------------------------------------- -------------- 99.1 Press Release, dated October 28, 2002 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: October 28, 2002 THE NASDAQ STOCK MARKET, INC. By: /s/ David P. Warren ---------------------------- David P. Warren Executive Vice President and Chief Financial Officer
NASDAQ PRESS RELEASE The Nasdaq Stock Market Inc. 4 Times Square New York, New York 10036
FOR RELEASE: Monday, October 28, 2002 MEDIA CONTACTS: Bethany Sherman (212) 768-2699 Scott Peterson (301) 978-4873 INVESTOR CONTACTS: Paul Warburg (212) 768-2540 O'Hara Macken (212) 768-2564 NASDAQ REPORTS THIRD QUARTER 2002 RESULTS NEW YORK, NY-- The Nasdaq Stock Market, Inc., (OTCBB:NDAQ) The world's largest electronic stock market, today reported third quarter results for the period ending September 30, 2002. Significant Developments: o SEC approval to launch SuperMontage-SM- o Streamlined Cost Structure "Nasdaq achieved its major milestone in the third quarter, the approval to launch SuperMontage," noted Wick Simmons, chairman and chief executive officer. "SuperMontage is the cornerstone of Nasdaq's set of advanced trading solutions and tools aimed at maximizing efficiency and transparency for investors. It will prove to be the fastest, fairest, deepest equities trading system on the planet, electronic or otherwise. It offers investors their best opportunity to achieve their own `best execution'. In combination with our continuing focus on costs, we believe SuperMontage represents the foundation on which Nasdaq will deliver superior returns to shareholders." NET INCOME In a difficult revenue environment Nasdaq continued to streamline its cost structure, focusing on fundamental business operations and completing its separation from the National Association of Securities Dealers, Inc. (NASD): o Net income for the quarter was $12.7 million as compared to $7.9 million in the third quarter of 2001, an increase of 60.8%. o Basic and diluted earnings per share were $0.13 versus $0.07 in the comparable period in 2001. o Total expenses for the quarter were $173.6 million compared to $190.9 million, a 9.1% improvement over the third quarter of 2001. o Net income margin for the quarter expanded to 6.4%, versus 4.0% in the third quarter of 2001.REVENUE Nasdaq's third quarter revenue reflects a continuation of the difficult market conditions and increased competition experienced for the past year: o Revenue for the quarter was $199.1 million, relatively flat compared to third quarter of 2001. EBITDA(1) Nasdaq operating performance remained strong: o EBITDA was $50.6 million versus $29.6 million in the same period last year, an increase of 70.9%. INITIATIVES Nasdaq's launch of SuperMontage on October 14, 2002 and the recent introduction of a series of complimentary products demonstrate the Company's fulfillment of a key strategic initiative aimed at improving investor confidence and trading effectiveness. Nasdaq's set of advanced trading solutions and tools includes: PRICE DISCOVERY AND EXECUTION PRODUCTS DESIGNED TO IMPROVE SPEED AND EFFICIENCY FOR INVESTORS: o SuperMontage - Launched October 14, 2002 is the next generation order display and execution system enabling sell-side firms to list multiple quotes/orders for the same security and the creation of a central trading book for Nasdaq securities. o Primex-TM- - An electronic auction system designed to increase price improvement and interaction among market participants. The functionality of Primex is planned to expand to take full advantage of Nasdaq's new SuperMontage trading platform. o Liquidity Tracker-SM- - An automated intelligent order routing system, which directs orders to market makers whose recent trading activity suggests a willingness to fill new orders, is scheduled to launch in the fourth quarter. ENHANCED INFORMATION PRODUCTS DESIGNED TO GIVE INVESTORS A WINDOW INTO THE MARKET- The ViewSuite-SM-: o DepthView-SM- - Provides the aggregate size of all quotes and orders at each of the top five price levels in SuperMontage, providing users the ability to analyze liquidity trends within Nasdaq securities. o PowerView-SM- - Combines the current Level 2 Service, which provides the best bid and ask price from each Nasdaq market participant, and DepthView enabling users to see all of the interest within a security as well as unprecedented market depth o TotalView-SM- - Includes the features of PowerView as well as the detailed, attributed quote and order data that comprises DepthView, providing users the ability to track order flow, pockets of liquidity and analyze trends in liquidity to the participant level. - ------------- (1) EBITDA throughout this release is defined as earnings before interest, taxes, depreciation, amortization and minority interests. BUSINESS LINE RESULTS TRANSACTION SERVICES Transaction services revenue was $93.9 million in the third quarter versus $86.2 million for the same period a year ago, an increase of 8.9%. o Execution services revenue increased 51.2% to $37.8 million due to revised pricing for SuperSoes-SM-, including the introduction of new, incremental fees associated with quote updates in Nasdaq systems. o Trade reporting revenue increased 7.0% to $19.9 million primarily due to increased trading volumes associated with a major issuer that was subsequently de-listed from The Nasdaq Stock Market(R). o Access services revenue decreased 15.4% to $34.6 million primarily due to cost saving initiatives among Nasdaq's market participants and the consolidation of major trading firms, which resulted in fewer subscriber log-ons to Nasdaq systems. Underlying this performance during the quarter was: o Average daily share volume in Nasdaq-traded securities increased 5.3% to 1.7 billion shares versus third quarter 2001. o Average daily trade volume increased 13.5% to 2.3 million trades versus the comparable period a year ago. o Nasdaq's share of trades executed in its systems fell to 28.6% from 39.3% in the third quarter of 2002 and to 32.6% from 39.0% in the nine-months year-to-date compared with the same period in 2001. o Nasdaq's share of volume executed in its systems fell to 23.17% from 29.24% in the third quarter of 2002 and to 27.89% from 28.01% in the nine-months year-to-date compared with the same period in 2001. SuperMontage successfully completed its development cycle and all Nasdaq-listed securities are in the process of being phased into the system. o SuperMontage began trading 32 test securities on July 29, 2002. o The Securities and Exchange Commission, on August 28, 2002, granted Nasdaq unconditional approval to begin live trading on the new platform. o On October 14, 2002, to ensure all market participants were prepared for the implementation, Nasdaq successfully introduced five securities into the SuperMontage trading environment. o Nasdaq plans to have all Nasdaq-listed securities in SuperMontage by year-end. o Currently, there are 104 Nasdaq-listed securities trading in SuperMontage. Nasdaq successfully launched SuperMontage Europe on October 7, 2002. The open architecture design enables local access to a European market, supporting diverse European business models and trading practices. SuperMontage Europe is based on the same principles as SuperMontage U.S., but has been customized to European best practices. "We are proud of our ability to conceive, develop and deliver new innovative products to traders and investors. Although too early to assess its long-term impact, we are pleased with the early successes of SuperMontage and the opportunity that it offers participants in the equity markets," said Rick Ketchum, deputy chairman and president. "We will continue to work closely with our customers to ensure the successful rollout of all Nasdaq-listed securities in the trading platform and will explore new ways in which to serve the investment community." Nasdaq Transaction Services derives revenue primarily from transactions associated with SuperSoes, SelectNet-SM-, SOES-SM-, trade reporting fees associated with ACT, and system access fees. MARKET INFORMATION SERVICES Market Information Services revenue declined 15.6% to $49.1 million during the quarter from $58.2 million in the same period last year. o Nasdaq's Level 1 revenue decreased 10.6% to $34.4 million. Nasdaq Quotation Dissemination Service (NQDS) revenue decreased 19.8% to $8.5 million. These decreases are primarily due to declines in professional and non-professional subscriptions. o Nasdaq shared with its participants a larger portion of revenue Nasdaq receives as part of the Unlisted Trading Privileges Plan. This increase in revenue sharing is primarily due to trade reporting activity by a regional exchange, which became an active participant in the first quarter, 2002. o Nasdaq InterMarket Tape revenue increased 27.3% to $8.4 million primarily due to an increase in the total InterMarket transactions reported in exchange listed securities. Nasdaq is rolling out the ViewSuite of data products and Liquidity Tracker in the fourth quarter of 2002. These products are designed to increase market transparency and maximize trading efficiency for Nasdaq traders and investors. Market Information Services derives revenue primarily from Level 1 and Nasdaq Quotation Dissemination Service (NQDS) data, and receipt of CQA/CTA tape revenue for trades processed through the Nasdaq InterMarket. CORPORATE CLIENT GROUP SERVICES Corporate Client Group services revenue increased 12.2% to $44.2 million for the third quarter, from $39.4 million in the third quarter of 2001. o Annual renewal fee revenue increased 24.5% to $25.9 million in the quarter primarily due to a fee increase implemented at the beginning of 2002. o Listing of additional shares revenue increased 5.6% to $9.4 million. There were 15 secondary offerings in the quarter as compared to 32 in the third quarter of 2001. Year-to-date secondary offerings were relatively flat compared to year-ago levels, totaling 116. o Initial listing revenue declined 12.5% to $8.4 million reflecting continued weakness in the IPO market. During the third quarter, there were six initial public offerings on Nasdaq versus 11 in the same period last year. Year-to-date, initial public offerings total 35, relatively flat with prior year and below historical averages. In June 2002, the Corporate Client Group launched its Market Intelligence Desk. This new service redefines Nasdaq's Corporate Client Group offering by providing listed companies with a centralized point-of-contact for detailed information regarding their stocks' trading activity, news coverage and analyst opinion revisions. The Market Intelligence Desk is now tracking all Nasdaq-listed companies. Corporate Client Group services revenue is primarily earned through initial listing fees, fees associated with the listing of additional shares, and annual renewal fees for companies listed on Nasdaq. Initial listing fees and fees associated with the listing of additional shares are amortized over six-year and four-year periods, respectively, in accordance with the adoption of SEC Staff Accounting Bulletin 101, applied retroactively as of January 1, 2000. OTHER Other revenue was $11.9 million for the third quarter versus $13.9 million a year ago, a decrease of 14.4%. The decrease is primarily due to the decline in trademark licensing revenue related to the Nasdaq-100 Trust occurring outside the Nasdaq InterMarket. The decline in trademark revenue is effectively offset by higher tape revenue received by Nasdaq InterMarket, reflected in Market Information Services, as a result of its increased market share. Nasdaq generates revenue related to the licensing of the Nasdaq-100 Index(R) for financial products such as the exchange-traded fund, QQQ. The Index, launched in 1985, includes the 100 largest non-financial stocks traded on The Nasdaq Stock Market. The Nasdaq-100 Index has become the basis for a wide variety of financial instruments, including futures contracts, mutual funds, index options, structured products and an exchange traded fund (QQQ). Nasdaq also generates revenue from Nasdaq.com and advertising revenue from the MarketSite tower. EXPENSES Total expenses were $173.6 million in the third quarter versus $190.9 million a year ago, an improvement of 9.1%. Nasdaq continues to target cost control while advancing its separation from the NASD. The operational and administrative separation of Nasdaq from the NASD is scheduled to be substantially complete in the fourth quarter of 2002. DIRECT EXPENSES Direct expenses decreased 8.4% to $152.5 million in the third quarter of 2002 from $166.5 million in the third quarter of 2001. Nasdaq continued to benefit from initiatives taken to reduce fundamental costs required to run the business, namely: o Professional and contract services improved 24.5% to $17.3 million due to a decrease in development costs associated with SuperMontage and Primex and less reliance on outside contractors with regard to Nasdaq's self-sufficiency efforts related to the separation from the NASD partially offset by an increase in costs associated with Nasdaq's global expansion strategy. o Computer operations and telecommunications improved 19.6% to $35.3 million due to the renegotiation of key contracts. o Other expense improved 80.6% to $2.0 million primarily due to reduced losses from international operations. o Continued attention to headcount, which is expected to result in further reduction in the fourth quarter. Offsetting these efficiencies were: o Compensation and benefits increased 13.2% to $51.3 million reflecting increased headcount related to self-sufficiency as well as additional benefit obligations. o Depreciation and amortization increased 9.6% to $25.1 million due to capacity and technology infrastructure improvements required to support market activity and new initiatives. o Occupancy increased 17.2% to $7.5 million as part of Nasdaq's separation from the NASD, previously recorded in Support Costs from Related Parties. SUPPORT COSTS FROM RELATED PARTIES Support Costs from Related Parties decreased 13.5% to $21.1 million from $24.4 million. Two factors contribute to Nasdaq's support costs: o The first is related to the regulatory role that NASD performs in The Nasdaq Stock Market, Inc. o The second is related to the support functions that the NASD has traditionally provided Nasdaq. The improvement during the quarter is due to Nasdaq's decreased reliance on the NASD for administrative support functions as Nasdaq continues to develop its independent infrastructure. "Nasdaq continues to take aggressive action to control the fundamental costs to run the business," said David Warren, chief financial officer. "We continue to explore new initiatives designed to drive additional cost out of our business and create greater operating leverage." NET INCOME AND EARNINGS PER SHARE Net income for the quarter was $12.7 million versus $7.9 million a year ago, an increase of 60.8%. Basic and diluted earnings per share were $0.13 versus $0.07 in the third quarter 2001, an increase of 86% reflecting higher net income as well as the accretive impact of the repurchase of 33.8 million shares from the NASD in the first quarter of 2002. CONCLUSION "While Nasdaq continues to identify ways to operate more efficiently as an independent company, the focus of our efforts is on the evolution of the equity markets and the needs of investors," noted Mr. Simmons. "Investors are now able to benefit from a variety of Nasdaq solutions and tools designed to provide them with better executions and increased market transparency. The combination of Primex with SuperMontage and Liquidity Tracker gives investors superior price discovery, order routing and execution capabilities. The ViewSuite of data products provides investors with more powerful tools for making better, more informed, trading decisions. These initiatives are not only the future of Nasdaq's business, but are the future expectations of all investors in an open equity marketplace and we want to be there first." YEAR-TO-DATE FINANCIAL SUMMARY Revenue for the nine-month period ending September 30, 2002 was $615.6 million, down 4.1% from $641.8 million for the comparable period in 2001. Total expenses declined 4.2% to $536.5 million from $560.2 million. Net income declined to $42.8 million, or 20.3%, from $53.7 million for the first nine-month period versus prior year. Basic earnings per share was $0.42 and diluted earnings per share was $0.40. This compares to both basic and diluted earnings per share for the same comparable period a year ago of $0.45 and $0.44, respectively. Nasdaq is the world's largest electronic stock market. With approximately 4,000 companies, Nasdaq lists more companies and, on average, trades more shares per day than any other U.S. market. Over the past five years, Nasdaq has outpaced all other U.S. markets in totals of listing IPOs. It is also home to category-defining companies that are leaders across all areas of business including technology, retail, communications, financial services, media and biotechnology industries. Nasdaq is a key driver of capital formation. For more information about Nasdaq, visit the Nasdaq Web site at WWW.NASDAQ.COM or the Nasdaq Newsroom-SM- at WWW.NASDAQNEWS.COM. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The matters described herein may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks, uncertainties or other factors beyond the control of The Nasdaq Stock Market, Inc. (the "Company"), which could cause actual results to differ materially from historical results, performance or other expectations and from any opinions or statements expressed or implied with respect to future periods. These factors include, but are not limited to, the Company's ability to implement its strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors detailed in the Company's annual report on Form 10-K, as amended, and periodic reports filed with the U.S. Securities and Exchange Commission. We undertake no obligation to release any revisions to any forward-looking statements. ### THE NASDAQ STOCK MARKET, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ---------------------- SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 30, 2002 30, 2001 30, 2002 30, 2001 --------- --------- --------- --------- REVENUES Transaction Services $ 93,854 $ 86,198 $ 303,870 $ 311,051 Market Information Services 49,092 58,255 150,863 176,925 Corporate Client Group Services 44,248 39,378 132,115 116,463 Other 11,894 13,877 28,795 37,342 --------- --------- --------- --------- Total revenues 199,088 197,708 615,643 641,781 --------- --------- --------- --------- EXPENSES Compensation and benefits 51,322 45,322 142,434 131,131 Marketing and advertising 6,121 5,948 14,159 17,597 Depreciation and amortization 25,130 22,894 75,228 65,558 Professional and contract services 17,237 22,858 49,270 54,424 Computer operations and data communications 35,284 43,927 113,163 131,875 Provision for bad debts 2,496 1,457 9,004 14,460 Travel, meetings, and training 2,710 3,715 9,438 11,193 Occupancy 7,454 6,404 24,427 19,866 Publications, supplies, and postage 2,733 2,884 7,772 8,538 Nasdaq Japan impairment loss -- -- 15,208 -- Disaster related -- 843 -- 843 Other 2,025 10,289 19,942 28,594 --------- --------- --------- --------- Total direct expenses 152,512 166,541 480,045 484,079 --------- --------- --------- --------- Support costs from related parties, net 21,102 24,413 56,453 76,121 --------- --------- --------- --------- Total expenses 173,614 190,954 536,498 560,200 --------- --------- --------- --------- Net operating income 25,474 6,754 79,145 81,581 Interest income 2,829 6,672 9,301 16,649 Interest expense (6,319) (2,997) (13,448) (5,447) Minority interests 2,953 3,252 8,551 5,234 --------- --------- --------- --------- Net income before taxes 24,937 13,681 83,549 98,017 Provision for income taxes (12,226) (5,736) (40,741) (44,297) --------- --------- --------- --------- Net income $ 12,711 $ 7,945 $ 42,808 $ 53,720 ========= ========= ========= ========= Net income applicable to common stockholders: Net income $ 12,711 $ 7,945 $ 42,808 $ 53,720 Accretion of preferred stock dividends 2,441 -- 7,323 -- --------- --------- --------- --------- Net income applicable to common stockholders $ 10,270 $ 7,945 $ 35,485 $ 53,720 ========= ========= ========= ========= Basic earnings per common share $ 0.13 $ 0.07 $ 0.42 $ 0.45 ========= ========= ========= ========= Diluted earnings per common share $ 0.13 $ 0.07 $ 0.40 $ 0.44 ========= ========= ========= ========= THE NASDAQ STOCK MARKET, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER DECEMBER 30, 31, 2002 2001 ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 274,170 $ 293,731 Investments: Available-for-sale, at fair value 184,503 228,029 Held-to-maturity, at amortized cost 15,653 -- Receivables, net 174,017 194,040 Receivables from related parties 12,135 34,953 Deferred tax asset 50,824 51,170 Other current assets 10,239 13,249 ----------- ----------- Total current assets 721,541 815,172 Investments: Held-to-maturity, at amortized cost 12,821 28,569 Property and equipment: Land, buildings, and improvements 93,038 88,861 Data processing equipment and software 484,089 441,928 Furniture, equipment, and leasehold improvements 181,861 184,572 ----------- ----------- 758,988 715,361 Less accumulated depreciation and amortization (399,796) (336,528) ----------- ----------- Total property and equipment, net 359,192 378,833 Non-current deferred tax asset 73,163 74,987 Goodwill 10,138 10,138 Other intangible assets 7,437 9,331 Other assets 7,262 9,221 ----------- ----------- Total assets $ 1,191,554 $ 1,326,251 =========== =========== THE NASDAQ STOCK MARKET, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER DECEMBER 30, 31, 2002 2001 ----------- ----------- (UNAUDITED) LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 89,824 $ 123,136 Accrued personnel costs 36,553 43,744 Deferred revenue 90,785 65,366 Other accrued liabilities 35,866 47,296 Current obligation under capital lease 4,048 4,454 Payables to related parties 24,623 9,556 ----------- ----------- Total current liabilities 281,699 293,552 Long-term debt: Senior notes 200,122 48,548 Subordinated notes 240,000 240,000 Non-current obligation under capital lease 9,046 12,125 Accrued pension costs 24,853 24,064 Non-current deferred tax liability 50,772 41,981 Non-current deferred revenue 108,666 121,687 Other liabilities 13,016 20,529 ----------- ----------- Total long-term liabilities 646,475 508,934 Total liabilities 928,174 802,486 Minority interests (2,654) 5,377 STOCKHOLDERS' EQUITY Common stock, $.01 par value, 300,000,000 authorized, shares issued: 130,435,967 at September 30, 2002 and 130,161,823 at December 31, 2001; shares outstanding: 78,183,754 at September 30, 2002 and 111,700,285 at December 31, 2001 1,304 1,302 Preferred stock, 30,000,000 authorized, Series A: 1,338,402 shares issued and outstanding; Series B: 1 share issued and outstanding 131,399 -- Additional paid-in capital 357,996 348,457 Common stock in treasury, at cost: 52,252,213 at September 30, 2002 and 18,461,538 shares at December 31, 2001 (669,454) (240,000) Accumulated other comprehensive income (6,287) (6,976) Deferred stock compensation (2,370) (3,350) Common stock issuable 5,071 6,065 Retained earnings 448,375 412,890 ----------- ----------- Total stockholders' equity 266,034 518,388 ----------- ----------- Total liabilities, minority interests, and stockholders' equity $ 1,191,554 $ 1,326,251 =========== ===========